Income From Business or Profession

INCOME FROM BUSINESS AND PROFSSION
A Project Submitted to
University of Mumbai for partial completion of the

degree of Master in Commerce
Under the Faculty of Commerce
By
AAKASH GAJANAN BORLE
Under the Guidance of
MEHER DANTRA
R A Podar College of Commerce & Economics
Matunga (East) Mumbai 400019
October 2018
1
INCOME FROM BUSINESS AND PROFSSION
A Project Submitted to
University of Mumbai for partial completion of the

degree of Master in Commerce
Under the Faculty of Commerce
By
AAKASH GAJANAN BORLE
Under the Guidance of
MEHER DANTRA
R A Podar College of Commerce & Economics
Matunga (East) Mumbai 400019
October 2018
2
S.P. MANDALI’S
R. A. PODAR COLLEGE OF COMMERCE AND

ECONOMICS
MATUNGA, MUMBAI-400 019.
Certificate
This is to certify that Mr AAKASH GAJANAN BORLE has worked
and duly completed his Project Work for the degree of Master in
Commerce under the Faculty of Commerce in the subject of Direct
Taxation and his project is entitled, “ Income from Business and
Profession” under my supervision.
I further certify that the entire work has been done by the learner under
my guidance and that no part of it has been submitted previously for any
Degree or Diploma of any University.
It is her/ his own work and facts reported by her/his personal findings and
investigations.
Project Guide/Internal Examiner External Examiner

Prof. Mrs Meher Dantra Prof.________________________
Dr. (Mrs.) Vinita Pimpale Dr. (Mrs.) Shobana Vasudevan
Course Co-ordinator Principal
Date: Seal of the College
3
P. MANDALI’S
R. A. PODAR COLLEGE OF COMMERCE AND

ECONOMICS
MATUNGA, MUMBAI-400 019.
Declaration by learner
I, the undersigned Mr. AAKASH GAJANAN BORLE declare that the
work embodied in this project work hereby, titled “INCOME FROM
BUSINESS AND PROFESSION”, forms my own contribution to the
research work carried out under the guidance of MEHER DANTRA is a
result of my own research work and has not been previously submitted to
any other University for any other Degree/ Diploma to this or any other
University.
Wherever reference has been made to previous works of others, it has been
clearly indicated as such and included in the bibliography.
I, here by further declare that all information of this document has been
obtained and presented in accordance with academic rules and ethical
conduct.
Name of the learner: AAKASH GAJANAN BORLE
Signature: _________________________________
Certified by
Name of the Guiding Teacher: MEHER DANTRA
Signature: __________________________________
4
Acknowledgment
To list who all have helped me is difficult because they are so numerous and
the depth is so enormous.
I would like to acknowledge the following as being idealistic channels and

fresh dimensions in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me

chance to do this project.
I would like to thank my Principal, Dr. Mrs. Shobana Vasudevan for

providing the necessary facilities required for completion of this project.
I take this opportunity to thank our Coordinator Dr. Mrs. Vinita Pimpale,
for her moral support and guidance.
I would also like to express my sincere gratitude towards my project

Meher Dantra whose guidance and care made the project successful.
I would like to thank my College Library, for having provided various

reference books and magazines related to my project.
Lastly, I would like to thank each and every person who directly or indirectly
helped me in the completion of the project especially my Parents and
Peers who supported me throughout my project.
Signature of the Student
5
Index
Chapter No. Title of the Chapter Page No.
1 Introduction
1.1 Meaning of business and profession
1.2 Valuation of Inventory

1.3 Legal Business & Illegal Business.
1.4 Deductions
1.5 Depreciation
1.6 Assets owned by assessee
1.7 Interest on money borrowed
1.8 Calculation of depreciation
1.9 Additional Depreciation
1.10 Unabsorbed Depreciation
1.11 Disallowance
1.12 Payment to specified person
1.13 Deemed Business Income
1.14 Maintenance of Books of Accounts
2 Research Methodology
2.1 Objectives
2.2 Hypothesis
2.3 Focus
2.4 Need for study
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2.5 Scope of study
2.6 Limitation of Study
3 Review of Literature
4 Conclusion
5 Bibliography
7
INTRODUCTION
INCOME FROM BUSINESS OR PROFESSION
Business or Profession
Business Profession
Defined u/s 2(13) Defined u/s 2(36)
Business [Sec.2.(13)]:
Business includes trade Commerce to manufacture &any adventure or concern in

nature of trade, commerce or manufacture.
Trade:-
Buying and Selling Goods.
Commerce:
Large scale buying and selling of goods
Manufacture:
Definition of "manufacture"[Sec. 2(29BA)]
A new clause (29BA) has been inserted in section 2 so as to define the expression
"manufacture". The term "manufacture" with its grammatical variations would mean
(I) a change in a non-living physical object (or article or thing) having a different
name, character and use or
(ii) bringing into existence of a new and distinct object (or article or thing) with a
different chemical composition or integral structure.
Salient features- The following are the salient features of the definition-
(1) The definition is not applicable in the case of a living physical object.
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(2) Because of manufacture there should be a change in a non-living physical object
or article or thing.
(3) The process of manufacture should result in transformation of the object or article
or thing into a new and distinct object or article or thing. It should have a different
name, character and use. Alternatively it should bring into existence a new and
distinct object (or article or thing) with a different chemical composition or integral
structure.
(4) Moreover, if the process causes any chemical change then it would amount to
manufacture, even if the item produced is not regarded as a commercially new and
distinct commodity.
Any advantage or concern in nature of Trade, Commerce, or Manufacture:
Adventure:One time and not regular activity. Any transaction which is not regular
but has feature of trade, commerce and manufacture then it is regarded as business.
E.g. Buying and Selling of Marbles.
Profession : [Sec. 2(36)]:
Profession include vocation.
Vocation: For which generally major part of life is spent.
Q. Whether profit objective is compulsory regarding activity as Business or

Profession?
Ans. No.If non-profit objective then also can be regarded as business or profession.
As such whether it is IFB or P or V, all are charged to tax under head IFB or P.
So segregation as B or P or V is of no use.
Section 28: Charging section:
[These are not Subsections as per Act]
Following incomes are chargeable under the head income from Business or
Profession.
(1) Any profit or gain from carrying on business by Assessee during Previous year.
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(2) Any amount due to or received by Assessee for the following.
(a) Any compensation by any person, who is managing any Indian or any other
company substantially, for change in terms & conditions of contract or
termination of contract.
(b) Any compensation by any person, who is holding any agency of other person
for change in terms & conditions of contract of Agency or its Termination.
(c) Any compensation received by any person for vesting, with Government or any
organisation owned by Government, any asset or business owned by Assessee.
(3) Any amount received by any Trade or professional association or similar

association for providing specific services to its members.
(4) Any of the following export Incentive.
(a) Profit on sale of Import License.
(b) Cash subsidy from Government.
(c) Any duty drawback received.
(d) Transfer of any duty entitlement passbook or similar passbook.
(5)Value of any perquisite received by any person for carrying on business or

profession.
(6) Any salary, remuneration, interest, etc. received by any partner from partnership
firm in which he is partner.
(7) Any amount or compensation received for
(a) Not carrying on any activity or business or part of it.

(with effect from the assessment year 2017-18) the non-compete fee
received/receivable (which are recurring in nature) in relation to not
carryingout any profession also included in this section.
(b) Not sharing any patent, know-how, copyright trademark, franchise, and
license. etc. with other person which can assist in production or manufacturing
of goods.
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Following shall not be covered in above.
(a) Any amount received for transfer of know-how, patent, copyright, trademark. etc.
as this is charged under the head income from capital Gain.
(b) Any amount received from any association approved by central Government for
saving Ozone Layer.
As per this clause profit/gain from business which is carried on by Assessee during
P.Y. will be charged to tax.
(8) Generally in Income Tax, capital receipts are charged to tax if specifically covered
in Act. If capital receipts are not covered then they are not charged to tax. Generally
all capital receipts are specified in chapter of Capital Gain. But in all chapters, there
are certain receipts which are covered in their charging section and so will be charged
under that head.
E. g. : In case of salary, any amount received for change in terms and conditions of
employment are charged to tax as profit in lieu of salary. Similarly, in clause (2) there
are three situations where compensation received is charged to tax under the Head
IFB/P.
(9) Generally, income of mutual Concern is not taxable because in mutual concern
there is identity of contributory and beneficiary i. e. benefit is taken by person who
has contributed. Similarly, Trade Associations received income by way of
contribution from its members and so, such contributions are not regarded as income.
But, if Association provide any specific service to its members and receive any
amount for the same then such amount shall be regarded as Income. If literal
interpretation is taken then, only amount received by trade association or similar
association for providing specific service shall be charged to tax, and this provision
shall not be applicable for social club or social associations formed.
(10) Any amount received as Cash subsidy is regarded as business Income i. e.
credited to P & L A/C similarly any duty drawback receipt or any profit on sale of
import License Receipt or any amount received in transfer of duty entitlement
passbook is credited to P & L A/C as it is regarded as BI.
(11) As per this clause if Assesses has received any perquisites for carrying on any
profession or business then value of such perquisites shall be charged to tax under the
Head B/P. But if perquisites are not related to carrying out of B/P then it will not be
charged to tax under the head income from B/P.
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E. g. If a doctor has done the treatment of the patient and patient has paid Rs. 5
Lacs(full) for treatment and thereafter pays Rs. 40000 as a Gift to doctor then it shall
not be charged to tax under the head B/P (If you can tax under any other Head can do
so). But suppose in above example if patient has paid Rs. 3 lacs = jewellery worth
Rs. 2 lacs against fees then in that case value of jewellery shall be regarded as
Business income.
(12) Any remuneration, salary etc. received from partner from partnership firm is in
nature of distribution of profits and so will be charged to tax under the head income
from B/P.
(13) As per this clause, if any person not agree to carry on any particular activity and
for that has received some amount then such amount shall be charged to tax
e. g.:-X Ltd paid Rs. 5 Lacs to Y Ltd for not carrying on business for 2 years than this
amount in nature of non-competitionfees and so will be charged to tax as IFB/P.
Similarly if any person has agreed with other person that he will not share the patent
or trade mark for some amount then it shall be regarded as BI. If patent, trademark
copyright etc. is transferred then it shall be charged to tax under the income from
capital Gain.
(14) If where any amount is received under keyman insurance policy then it shall be
regarded as BI.
as per explanation to sec.28, if there is any income from speculative business then it
should be kept separate i.e. it cannot be included in Income of other business.
Sec. 145A:- Valuation of Inventory:

As per this section, valuation of purchase, sale and inventory should be based on
following.
(1) Method of Accounting regularly followed by Assessee.
(2) It shall include all taxes , duties, cess etc. paid to bring the inventory to present
position, whether credit is to be received or not. This is not Accordance with AS-2.
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As per IT Act As per AS - 2
Trading and Profit & Loss A/c Trading and Profit & Loss A/c
To Purchase 20000 To
(1000x Rs.20) Purchases
(1000x 20)
To Tax, Duty 2000 By closing 2200 20000
etc.(to be Stock
(+)Tax 2000
received (100x 20) +
refund) (2000x100) 22000
/1000
(-)Credit 2000 20000 By 2000
Closing
Stock
(100x20)
By Duty 2000
Drawback
W.E.F. A Y 2010-11interest received on compensation or enhanced compensation
shall be deemed to be income of P Y in which it is received (Refer IFOS).
Computation of income from Business or Profession [Sec.29]
As per this section, Income from B/P should be computed after allowing deductions
under sec 30 or 37. Further, other sections specified also be considered while
computing Income from B/P.
Legal Business & Illegal Business.
As per one of the judgement if Assessee is carrying on any illegal business then also
he can compute his income after allowing necessary deductions and file return of
Income. But as on today, there is explanation to Sec 37(1) which says that any
expenditure incurred in relation to any activity which is prohibited by any law shall
not be allowed as deduction and so, as on today, many of such expenses are not
allowed as deductions.
Deductions:
Deductions under Business or profession are mainly of 2 categories.
(1) Specific deduction [Sec.30 to 35E]
(2) Other deductions [Sec.36(1)]
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Besides above deductions, there is general deduction u/s 37(1) which allow all
expenses incurred for business & profession during previous year and not covered n
any of the previous sections.
All deductions are allowed for expenses paid during P Y. "Paid" word has been
defined in sec 43(2). As per this section paid means either actually paid or incurred as
per method of accounting regularly followed by Assessee.
Section 30:- Rent, Rates, Taxes, Insurance& Repairs for Building.
As per this section, following are allowed as deduction, in respect of building.

(i) Any rent paid by tenant
(ii) Any taxes paid to local Authority, in relation to building, is allowed as deduction
on actual payment basis.(i.e. subject to Sec.4 3B)
(iii) Any amount of current repairs incurred during the previous year by the owner of
building. Where tenant has agreed to bear the cost of repairs then amount incurred by
such tenants.
As per explanation to sec 30, Repairs to building which is of capital nature shall not
be allowed as deduction under this section.
Rent:-
Generally rent indicates the amount periodically paid for using asset by person other
than owner of the asset.
 If Assessee has paid any rent for the period when business is temporarily
discontinued then also it is allowed as deduction.
 If rent is paid after business is closed then no deduction shall be allowed as
there is no business income at all.
Repairs:-
Owner of asset is allowed deduction of current repairs. Current repairs are those
repairs which are incurred as & and when required to maintain asset. Current repairs
are not equal to accumulated repairs. As per one of case law if repairs are not carried
as &when required then it get accumulated and amount of expenditure incurred
thereafter is in nature of accumulated repairs & will be allowed as deduction u/s
37(1).
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In case of tenant repairs incurred by tenant is allowed as deduction but if tenant has
incurred repairs of capital nature than deduction is allowed by way of depreciation on
such expenditure and for that part of capital expenditure tenant is regarded as an
owner as per explanation to sec 32.
Section 31:- Repairs and Insurance for Plant and Machinery and Furniture and
Fixtures.
As per this section, if Assessee incurs any expenditure by way of current repairs ant
insurance for plant and machinery furniture and fixtures, then deduction is allowed
under this section.
Rent paid for P & M & Furniture & Fixtures is not covered under this section but is
allowed as deduction u/s 37(1).
Current repairs same as explained in sec 30.
Sec. 32:- Depreciation:
Deduction by way of depreciation shall be allowed on assets being, building, P & M,
furniture & Fixtures& Intangible asset, owned by Assessee (Whether wholly or
partly) used for business or profession of Assessee at such rate or rates as specified in
schedule to Income Tax Act by WDV method and by block of assets system.
[Except in case of company engaged in Generation or Generation & distribution of
electricity which are allowed Depreciation by SLM]
Depreciation is Allowed on Assets
Tangible Intangible
 Knowhow
 Copy right
 Trade mark
 Patent
Building Plant & Furniture &  Franchise
Machinery Fixture
 License etc.
All Intangible assets

As such Defined u/s under one block & rate
Not defined
not defined 43(3) of Depreciation @ 25%
under IT Act
Under IT
Act Depreciation for
Asset Acquired on
or After 01/04/1998
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Building:-
As such building is not defined under IT Act but it generally includes any super
structure on land. E.g. Stadiums are also covered under building. No depreciation is
allowed on land.
Where cost of land and building is consolidated cost and segregation of cost of L & B
is not possible then depreciation is allowed on full cost, but if segregation is possible
then no deduction shall be allowed on cost of land.
Plant:-
Plant has been defined u/s 43(3) and it shall include ships, books, vehicle, scientific
Apparatus & surgical equipments, but it shall not include tea bushes, live stock and
any asset which is building Furniture & Fixtures.
From the above definition we find that the plant includes those assets which are
necessary for carrying on business or profession. Earlier in one of the case, building
which was specially constructed for hospital was allowed as plant and in many other
judgement Building which was a part of plant was allowed as plant. From A Y
2004-05, it has been specified that plant shall not include building and furniture &
fixture. Therefore, as on today, no building and furniture & fixture can be claimed as
plant.
In plant and machinery, plant indicates a group of asset or machines or unit of

machine. Machine indicates a part of plant or an individual equipment used in plant.
Furniture & Fixture:
As such in Income Tax Act only Furniture word is specified but its rule and schedule
indicates that it also include fitting. Generally, furniture and fixtures indicate asset
which are for convenience of carrying on business. also if asset is depreciable and it
cannot be regarded as building, P & M then generally it is classified as Furniture &
Fixtures.
Assets Owned by Assessee:
As per Sec. 32, depreciation is allowed on asset owned by Assessee.
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As per many judgement, Assessee is said to be owner if he excludes others from using
assets (exclusive right of any particular person).
It is not necessary that owner is only registered Owner. In case of Mysore Minerals,
Supreme court has said Assessee can be owner as per Sec. 53A of TOPA i.e. have
possession of assets and had paid consideration also but is not registered owner. It is
also clarified that there can be not more than 1 owner. Both (Registered OR 53A of
TOPA) cannot claim depreciation.
As per provisions of Sec.32, if any lease has incurred any capital expenditure, than for
that part of expenditure, such tenant shall be regarded as owner and will be allowed
depreciation on that part. If agreement of tenancy is terminated before due date than
unamortized amount shall be allowed as deduction fully in the P. Y. in which
agreement is terminated.
As per circular of CBDT, if any Assessee has purchased asset on instalment system,
then would be allowed deduction by way of depreciation on the cost of asset. If asset
is purchased on hire purchase, then depreciation shall be allowed to H.P. buyer on
cash price asset. In subsequent years segregation shall be made of amount paid into
capital amount and interest charged. Interest charged shall be allowed as deduction
and capital amount shall be capitalized.
Asset can be owned wholly or partly. As on now, as per provision of sec 32, if any
Assessee is owner of any asset partly then he shall be allowed depreciation on that
part of asset only.
Depreciation is allowed if asset is used by Assessee for the purpose of business &
profession. Use of asset can be actual use of asset or passive use.
Written Down Value (WDV) :
Defined u/s 43(6),WDV is to be calculated in following manner.
WDV of Block of Asset at the beginning of P Y xxx
Add:- Actual cost of asset acquired and put to use during P. Y. by Assessee xxx
Less : Money payable in respect of assets sold, destroyed, demolished or
discarded during the P. Y. (xxx)

WDV for Depreciation xxx
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Case-1 Case-2 Case-3 Case-4 Case-5
No. Amt No. Amt No. Amt No. Amt No. Amt
Opening 2 250000 2 250000 2 250000 2 250000 2 (250000)
WDV
(+) Actual
cost of Assets
Acquisition & 1 130000 1 1300000 1 1300000 1 1300000 1 1300000
put to use (1/12 of
PY)
(-) Money 1 (180000) 1 (500000) 3 (500000) 3 (280000) 1 (280000)
payable.... (1/7 of
[Not acquired during the
PY)
previous year]
Closing WDV 2 200000 2 (120000) - (120000) - NIL 2 100000
No Gain NIL NIL STCL- No
/Loss STCG- STCG- 100000 Gain
120000 120000 Block /Loss
Block is Block is is Not Block
alive Not alive alive is alive
Calculation of WDV in cases of slump sale:-
Slump sale defined u/s 2 (42C)-where any undertaking or units of Business is

transferred for a lump sum consideration without assigning value to individual assets
then it is known as Slump sale.
Calculation on Gain/Loss of such sale is specified in chapter of Capital Gain.
In this we have to only remove value of asset transferred under slump sale from the
books i.e. WDV so that correct depreciation can be calculated.
Block of Asset system came from A. Y. 1988/89 upto 1987-88 no block of asset
system.
Opening WDV XXX
(+) Actual cost........ XX
(-) Money payable..... (XX)
Balance XXX
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(-) Value of Asset transferred in slump sale
Cost of Asset XXX
(-) Depn upto 1987-88

(without block of Asset) (XX)
(-)Depn upto 1988-89
(with block of Assets) (XX) XX
WDV of Asset for Depreciation
(As if only this Asset was in BOA)
Case-1 Case-2 Case-3

Op WDV 200,000 200,000 200,000
(+) Actual cost 400,000 400,000 400,000
(-) Money Payable (300,000) (300,000) (700,000)
(Other than slump sale)
Balance 300,000 300,000 100,000

NIL
STCG-
100,000
(-) Value of Assets transferred in
slump sale (100,000) (450,000) (150,000)
300,000 NIL
WDV of Assets for Depreciation 200,000 NIL NIL

No Gain
No Loss
Money Payable:
Money payable include in respect of asset, being building, P & M, F & F any amount
by any of Insurance, Salvage, Compensation or sale proceed.
As per Supreme Court judgement it shall include only consideration which can be
evaluated in terms of money.
Actual Cost:
As per Sec. 43(1), actual cost include all the expenses incurred to bring the asset to
present position as reduced by any amount of cost paid by any other person. Where an
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Assessee incurs any expenditure for acquisition of any Asset in respect of which a
payment (or aggregate of payments made to a person in a day), otherwise than by an
account payee cheque/draft/use of electronic clearing system through a bank account,
exceeds Rs. 10,000, such payment shall be ignored for the purposes of determination
of "actual cost".
As per Supreme Court judgements cost of asset is to be interpreted by taking
accounting principal in into consideration which no normal person can misunderstand.
Therefore, if Assessee has incurred any installation charges, freight, etc., it shall also
be included in the cost of assets.
Where any money has been borrowed for purchase of asset, then interest on such
money borrowed upto date of put to use shall be capitalized.
As per explanation to sec.36 (1) (iii) where any person has borrowed money for
purchase of asset then interest upto date of put to use shall not allowed as deduction.
Thus, if asset has been purchased for extension of business or not and loan has been
taken, then has to be compulsorily capitalized.
Where any capital asset in respect of which deduction allowed under section 35AD is
deemed to be a income of the Assessee in accordance of the provisions of sub section
(7B) of the said section the actual cost to the assessee shall be cost to the assessee, as
reduced by an amount equal to the amount of depreciation calculated at the rate in the
force that would have been allowable had the asset been used for the purpose of
Business since the date of its acquisition.
Interest on money Borrowed
Interest on money Borrowed
For the purpose of For purchase or

Business or Profession Acquisition of Asset
Deduction u/s
36 (1) (iii) Before commencement of Business Existing Business
Interest shall be
Capitalise in cost of assets For period after date
Capitalized but not
interest upto date of put to of put to use then
after the date of put
use, as no deduction u/s deduction u/s 36(1)(iii)
to use
36(1)(iii) irrespective of fact
whether asset is purchased
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for extension or not
As per judgement of court, where any amount of loan has been taken for the purpose
of purchase of asset and income is received by investing that money temporarily, then
such income shall be deducted from cost of asset.
If assessee has deposited money with bank for taking Letter of Credit(L/C) for
purchase of asset then interest received on such deposit shall be deducted from cost of
asset.
Where any surplus amount has been invested then income from such surplus shall
not reduce cost of asset and it will be taxed under the head income from other
sources.
Where any expenditure has been incurred for test run of asset in which some units are
produced which are sold at price which is less than total cost then, such net cost of
trial run /test run shall be capitalised in cost of asset. If sale proceed exceeds expenses
incurred for trial run, then such excess amount shall be deducted from cost of asset.
Assessee has given contract for construction of factory building to a contractor. In the
process of construction has received following amount from the contractor.
(i) Charges for machine used by contractor.
(ii) Charges for residential quarter used by employees of contractor.
(iii) Charges for stone collected from ground by contractor.
All the above incomes received by assessee are in process of construction of asset
and so, will be deducted from cost of asset.
Similarly, water charges, electricity charges paid by contractor to assessee in process

of construction of asset shall be deducted from cost of asset.
Cases where actual cost of asset is deemed cost i.e. cost specified
Explanation to Sec. 43(1):
In explanation to sec.43(1), they have specified situations, where actual cost is cost
specified in respective explanation.
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Explanation 1 to sec. 43(1)
Where any asset was purchased for scientific purpose or later on put to business use,
then actual cost of such asset shall be cost of acquisition minus deduction allowed u/s
35.
As per this explanation, where any person has received any asset by way of gift or
inheritance, then actual cost shall be cost of asset minus depreciation allowed to donor
of asset. i.e. (WDV of donor). [ If suppose donor has not claimed any depreciation,
then in that case, actual cost for Assessee shall be cost of asset of donor]
Where any transfer of asset is with the intention or objective of avoiding tax then
actual cost of asset to transferee shall be value determined by assessing officer.
Where any assessee has required same asset which was earlier transferred by him then
in that case actual cost for assessee shall be WDV of asset, at the time of earlier
transferred or transaction value i.e. cost of acquisition now, whichever is LESS.
Explanation 4A to sec. 43(1)
Where any asset has been transferred by assessee and is (reacquired) again taken back
on lease from transferee, then in that case, actual cost to transferee shall be WDV of
transferor.
Where any building acquired earlier is put to business now, then actual cost of such
asset shall be cost of asset minus depreciation that would have been allowed if asset
was used for business from date of acquisition.
Where any asset has been transferred by holding company to its 100% subsidiary
company or vice a versa then actual cost of asset to transferee shall be WDV of
transferor.
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Where any asset has been transferred by Amalgamating company to Amalgamated

company in the scheme of amalgamation then actual cost of asset for Amalgamated
company shall be WDV of Amalgamating company.
Where any asset has been transferred by demerged company to resulting company in
scheme of demerger then actual cost of asset to resulting company shall be WDV of
asset to Demerged Company.
Where any amount has been borrowed for the purpose of acquisition of asset, then
interest on such amount borrowed shall not be capitalized after date of put to use to
use of this asset.
Where any asset has been acquired and on which any tax has been paid which is
refundable to assessee or assessee can claim credit of the same then in that case, such
tax shall not be included in the cost of asset.
Where any part of cost of asset has been reimbursed by or subsidised by central
Government, state Government, any other authority of Govt. or any other person then
that part of cost of asset shall not be included in actual cost of asset.
If subsidy has been received for group of asset then it is to be apportioned in the ratio
of cost of asset.
As per one of the judgement, subsidy can be of capital nature or revenue nature. If it is
of capital nature i.e. specifically related to a particular asset then it shall be deducted
from cost of asset. If subsidy is of revenue nature then it is included in business
income.
Assessee received subsidy from Government of India for setting a project in rural
area. Amount of subsidy is determined based on % of cost of asset. A.O. said subsidy
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was of capital nature. Court said classification of whether subsidy is of capital or
revenue nature will depend on intention behind subsidy. In given case subsidy is for
setting up a project in rural area i.e. to motivate and encourage investment in rural
area so it is of revenue nature even though computation is based on cost.
Where any Non-Resident person acquired any asset outside India and now brings to
India for the purpose of using it for business or profession in India, then actual cost of
such asset shall be cost of acquisition incurred outside India minus depreciation that
would have been allowed had that asset being used in India from start.
Where any asset has been transferred by any company in scheme of corporatisation of
Recognized stock exchange then in that case, cost to the company(Transferee) shall be
cost to transferor had no corporatisation had taken place.
Actual cost in the hands of successor when predecessor has claimed deduction u/s
35A shall be nil.
Calculation of Depreciation:
Depreciation in Income Tax is allowed at the rate specified in schedule to Income Tax
Act. Further if asset acquired during the P. Y. is put to use for less than 180 days then
depreciation shall be allowed at ½ of rate specified provided that asset is there on last
day of P.Y.
Proportionate Depreciation:
In following cases, depreciation shall be allowed on proportionate basis i. e. it shall be

distributed between predecessor and successor in ratio of number of days.
(i) Succession of propitiatory company [Sec.47(xiv)]
(ii) Succession of partnership firm by company [Sec.47(xiii)]
(iii) Succession of business otherwise then inheritance.
24
(iv) Transfer of Asset by Amalgamating Company to amalgamated company in
scheme of Amalgamation.
(v) Transfer of Asset by Demerged Company to Resulting company in scheme of

Demerger.
(vi) Conversion of a Private Company or unlisted Public company to a limited

liability partnership as per Sec. 47(xiiib)
Depreciation on Straight Line method[As a percentage on cost]
As per provision of this section companies engaged in generation or generation and

distribution of electricity shall be allowed depreciation on SLM on asset acquired on
or after 01/04/1997 at the rates specified in the schedule to the act.
Assessee has the option to claim depreciation by WDV method in which case normal
block of asset system shall be applicable. Assessee who has started business before
01/04/1997 has to exercise option on or before due date of filling return for A.Y.
1998-99. In case of assessee starting business on or after 01/04/1997, due date of
exercising option will be due date of filing return for previous year in which business
has been commenced.
Option once exercised shall be applicable for all future previous years. If no option is
exercised then depreciation shall be allowed on SLM. SLM applicable only for assets
acquired on or after 01/04/1997. For asset acquired before 01/04/1997 depreciation
shall be continued to be allowed by WDV method.
Total Depreciation to be allowed over the life of asset shall not exceed total cost of
Asset.
25
Sale of Asset
Cost 100
WDV 40
Sold for
Rs. 10 Rs. 75 Rs.145
[WDV-SP] [40-10] [SP-WDV] [75-40]
is allowed as shall be regarded as

deduction as Cost-WDV=100-40 SP-Cost=145-100=45
Business Income u/s
Terminal =60 BI u/s 41(2) Capital Gain u/s 50A
41(2) also known as
Depreciation Balancing charge
Long Term/ Short Term
Depending upon holding
period. If LTCG then
Indexed cost of
Acquisition
If asset acquired & put to use for less than 180 days, then depreciation shall be
allowed at ½ of rate specified in schedule.
Whether claiming of depreciation is compulsory

As on today, claiming on dep. is compulsory, as it is specifically said in Act.
Whether depreciation can be allowed as deduction from estimated Incomes : i.e.

when No proper books of Accounts are maintained by assessee.
As per one of the judgement deduction of depreciation cannot be allowed from

estimated income.
Depreciation on car manufactured outside India.
No depreciation shall be allowed on cars manufactured outside India and acquired

before 01/04/2001. Depreciation on such cars for hiring it out to tourist or it is used
for business outside India is allowed deduction. If car manufactured outside India is
acquired on or after 01/04/2001 then depreciation is allowed in normal manner just
like on other cars.
26
Additional Depreciation:
As per provision of section, deduction is allowed to industrial undertaking engaged in

manufacturing or production of goods, articles etc. From assessment year 2013-14,
the assessee engaged in the business of generation or generation and distribution
of powershall also be allowed additional depreciation under this section. W.E.F.
A. Y. 2017-18 business of transmission of power is also eligible for Additional
depreciation.
For plant and machinery acquired during P.Y. deduction is allowed by way of
Additional depreciation in P.Y. in which new plant and machinery has been acquired.
Additional depreciation is allowed at 20% and if asset is used for less than 180 days
then at 10% (½ of 20%). If an undertaking is set up in the notified backward areas in
Andhra Pradesh, Bihar, Telangana or West Bengal by company, it shall be eligible to
claim deduction of additional depreciation at 35% instead of 20% and if asset is used
for less than 180 days then at 17.5% (½ of 35%).
Section 32(1) has been amended from A.Y. 2016-17 to provide that if the asset is put
to use for less than 180 days in the year of acquisition, then additional depreciation
would be 10 percent of the cost of acquisition in the first year and the balance 10
percent would be available in the immediately succeeding previous year. The
amended provision would be applicable from the assessment year 2016-17. For the
earlier assessment years, one can take the shelter of the judicial rulings given.
No deduction of additional depreciation shall be allowed for following assets.
(i) Plant and machinery which was earlier used by any person whether in India or
outside India.
(ii) Any Plant and Machinery which is to be installed in office premises or residential
accommodation including any guest house.
(iii) Any road transport vehicles or office appliances.
(iv) Asset cost of which has been fully allowed as deduction either by way of
depreciation or otherwise.
(v) Ships and aircrafts
27
Unabsorbed Depreciation:
If profit before depreciation is insufficient then deduction of depreciation is allowed

to the extent of profit available and excess depreciation not allowed as deduction
regarded as unabsorbed depreciation.
This unabsorbed depreciation can be deducted or claimed set off not only business
income but also from income under other head.
If after deducting from other income also there is depreciation then it can carried
forward for UNLIMITED TIME.
Further, after carry forward in next year also it can be set off with not only business
income but also with other than business income.
If company has brought forward losses as well as unabsorbed depreciation, then order
of set off from current year net profit is
(i) C.Y. depreciation
(ii) Brought forward business losses
(iii) Brought forward unabsorbed depreciation
28
Disallowance :
1) Section 37 (2B) :- Where any expenditure is incurred by way of donation etc. to
political party or for advertisement in pamphlet, broachers etc, for political party,
then no deduction shall be allowed.
2) Section 38 :-No deduction shall be allowed for any rent, rates, taxes, insurance,
depreciation on plant & machinery, building & F & F to the extent relates to asset
not used for business or profession
e.g. :- Rate of Dep @ 15% Computation of Income

Asset is used 60% for personal purpose NP XXX
Opening WDV 200000 (+) Dep. 45000
(+) A.C……. 100000 (-) Dep. Allowed (18000)
(-) M.P……. --- (45000 X 40%)
300000 XXX
(-) Depreciation @ 15% (45000)
255000 P & L A/c
To Dep. 45000
As per Delhi High Court

Opening WDV 200000
(+) A.C……. 100000
(-) M.P……. ---
300000
(-) Depreciation @ 15% 45000
(-) Disallowed 27000
(45000 X 60%) (18000)
Closing WDV 282000
In this 27000 disallowed is c/f through WDV. So will be allowed in future and
therefore as such no disallowance.
Judgment to be given rethought.
In section 40, 40 A & 43 B, they have said" Notwithstanding anything
contained in any of the provision of section of 30 to 37(1)...........
Case :- Assessee asked what does this means.
Court said- This provision will have overriding effect and if any expense
disallowed under these sections as well as allowed under any section
specified earlier he. section 30 to 37(1), then expenses shall be disallowed as
per provisions of these sections.
29
3) Section 40 (a) :-
No deduction shall be allowed for the following expenditure incurred during the
P.Y.
(i) Any interest, royalty, fees for technical services or other sum paid to any non-
resident person (other than company) or foreign company without deducting
tax on the same or deducting tax but without paying the same to government
on or before last day specified u/s 200(1) then deduction shall be allowed in
following manner:
a) Tax is deductible but not deducted in current P.Y then no deduction shall
be allowed in current P.Y and deduction shall be allowed in P.Y in which
tax is deposited by assessee with Government.
b) Tax is deductible and is deducted during P.Y but is not deposited on or

before due date of filing return u/s 139 (1), then no deduction shall be
allowed in P.Y of deduction and deduction shall be allowed in P.Y. in
which tax is deposited by assessee with Government.
E.g. For explaining implication of above provision :
TDS default pertaining to any sum Law applicable from the assessment
(other than salary) payable outside year 2015-16
India or payable to a non-resident
which is taxable in the hand of
recipient in India
1. Tax is deductible but it is not If tax is deducted in any subsequent year,
deducted the expenditure which is disallowed in the
current year will be deducted in the year
in which TDS will be deposited by the
assessee with the Government.
2. Tax is deductible (and it is so Disallowance provisions will not be
deducted during the financial applicable if TDS is deposited up to the
year) provisions will not due date of submissions of return of
deposited up to due date of incomeunder section 139(1). If T08 is
submissionsof return of income deposited after this date, expenditure will
under section 139(1). be deductible in the ear in which TDS is
deposited.
30
E.g. : X Ltd. pays royalty of Rs.40 lakh to a foreign company. In the hands offoreign
company it is taxable in India X Ltd. has international transactionsand due
date of submission of return of income is November 30 of the assessment
year -
Law applicable from the assessment year 2015-2016
Situation 1 - Tax is deducted on October 10,2017 but it is not deposited

upto 31 March 2018 but instead deposited on November 30,2018 (being
the due date of submission of return of income for the assessment year
2018-19). Royalty of Rs. 40 lakh will be allowed as deduction for the
assessment year 2018-19. Disallowance provision of section 40 (a) (i) will
not be applicable.
Situation 2 - Tax is deducted on March 10, 2018 but it is not deposited on

November 30, 2018 (being the due date of submission of return of income
for the assessment year 2018-19). Royalty of Rs. 40 lakh will be not be
allowed as deduction for the assessment year 2018-19.
Disallowanceprovision of section 40 (a) (i) will be applicable. Deduction
shall be allowed in PY in which tax is paid to Government.
(ii) Where any amount payable to a resident person and which is subject to TDS,
then deduction shall be allowed in following manner:
a) Tax is deductible but not deducted in current P.Y then 30% of expenditure
shall not be allowed in current P.Y and deduction shall be allowed in P.Y in
which tax is deposited by assessee with Government.
b) Tax is deductible and is deducted during P.Y but is not deposited on or before
due date of filing return 0/5 139 (1), then 30% of expenditure shall not be
allowed in P.Y of deduction and deduction shall be allowed in P.Y in which
tax is deposited by assessee with Government.
Important point to be noted :
(i) If TDS default pertaining to payment or credit given to a resident is committed

upto A Y 2014-15 then 100% of expenditure shall be disallowed instead of 30 %
and that to only for payment covered in S -193,194A, 194C, 194H, 194I and
194J.
31
(ii) In case of salary paid to resident in India, disallowance due to non deduction of
tax is only from AY 2015-16. Upto 2014-15 no disallowance was there due to
non deduction.
E.g.:
Law applicable from the assessment year 2015-2016 onwards

Case 1-X Ltd. pays salary of Rs. 50000 per month to a residentemployee.
Besides. in incurs expenses on providing perquisites and giving
allowances. The total expenditure incurred on salary. allowances and
perquisites for the financial year 2017-18 is Rs. 11,20,000. Further X Ltd.
contributes 12 percent of sale towards recognized provident fund.
Taxable salary in the hands of employee is Rs. 980.000. Tax is deductible
but it is not deducted.
TDS default under section 192 is covered under section 40(a) (la) with
effect from the assessment year 2015-16 Consequently, E 357600 (i.e.. 30
per cent of (Re 1120000+ PF contribution of 12 per cent of salary of Rs.
600000)] will be disallowed for the assessment year 2018-19. If. however.
tax is deducted on taxable salary of Rs. 980000 in a subsequent ear Rs.
357600 will be deductible in the ear of deposit of TDS.
Case 2 -Y Ltd. has taken office building on rent from A 8: Co. (annual rent
being Rs. 25,00,000). Tax is deducted during the financial year 2017-18
but it is deposited on December 15 2018.
Since tax is not deposited till the due date of submission of return of
income. Rs. 750.000 (being 30 per cent of Rs. 25,00,000) will
be disallowed for the assessment year 2018-19. However, Rs. 7.50.000
will be deductible in the assessment year 2019-20 (relevant to the previous
at 2017-18 in which TDS is deposited.
Further a relief is given in case of (a) (and not in case b) (Regarding deduction and
payment of TDS). This relief will be available if the following conditions are
satisfied-
1. Tax is deductible on the aforesaid payments but it is not deducted (wholly or

partly) by the payer (i.e.. Case a ).
2. The payer is not deemed to be an assessee-in-default under the first provision to

section 201(1), Under the first provision to section 201(1), the payer is not
deemed to be an assessee-in-default if-
A. the resident recipient has furnished his return of income under section 139;
32
B. the resident recipient has taken into account the above in such return of
income;
C. the resident recipient has paid the tax due on the income declared in such
return of income; and
D. the payer furnishes a certificate to this effect from a chartered accountant in a

prescribed form.
If the above conditions are satisfied, then for the purpose of section 40(a)(ia) it shall
be deemed that the payer has deducted and paid the tax on such amount on the date
furnishing of return of income by the resident recipient
E.g.: 1. X Ltd. pays a sum of Rs 45,000 as commission to Y Ltd. (an Indian company)
on 20/04/ 2017 without deducting tat at source. Y Ltd. pays advance tax on the due
dates on its income (including Rs 45,000). Entire tax liability is paid by Y Ltd. during
the financial year 2017-18 by way of advance tax. Return of income of Y Ltd. for the
assessment year 2018-19 is submitted on 29/09/2018. X Ltd has a certificate to this
effect from chartered accountant in the prescribed form.
In this case, tax is not deducted by X Ltd. In the financial year 2017-18. By virtue of
section 40(a) (ia) 30 % of the payment of Rs. 45,000 will be disallowed in computing
the income for the assessment year 2018-19. However, X Ltd cannot be treated as an
assessee-in-default under the provisions of first provision to section 201(1), as the
following conditions are satisfied -
a. Y Ltd. has furnished his return of income under section 139;
b. Y Ltd. has taken into account the above income in such return of income;
c. Y Ltd. has paid the tax due on the income declared in such return of income, and
d. X Ltd. has a certificate to this effect from a chartered accountant in a prescribed

form.
Under the amended provisions, it will be assumed that X Ltd. has deducted and paid
tax on 29/09/2018. As a consequence, 30 % of Rs. 45,000 will be allowed as
deduction in the hands of X Ltd. for the financial year 2018-19.
Eg.:2. Suppose in the above case, Y Ltd. is a foreign company. The aforesaid amount
will be disallowed in the hands of X Ltd. under section 40(a)(i). The amended
provisions are not applicable in the case of section 40(a)(i) when the recipient is non-
33
resident. Even the first provision to section 201(1) is not applicable therefore, in the
hands of X Ltd. nothing will be allowed as deduction even for the financial year 2018-
19.
Eg.:3. On July 10,2017, Ltd. pays Rs.10,80,000 as rent to B (a resident individual)
after deducting tax at the rate of 10 percent under section 194-l. The tax so deducted
by X Ltd. is not deposited till 31/03/2018. However, 8 submits his return of income
on 15/07/2018 after including Rs. 10,80,000 in his income. As per his return of
income a refund of Rs. 40,00,000 is due to him.
In this case, the amended provisions are not applicable (the amended provisions are
applicable only when the payer fails to deduct the whole or any part of tax). If tax is
deducted but not paid, the amended provisions [as well as the first provision to section
201(1)] are not applicable. X Ltd. cannot claim any deduction for the previous year
2016-18 or 2018-19 in respect of rent payment of Rs. 10, 80,000.
Eg.: Assume Due date of filing Return is 31/7 of AY
Due Date of
Actual Actual
Amt Payment for
Case date of TDS paid Deduction in P.Y.
paid on Deduction in
deduction on
PY 2017-18
I Full deduction in
27/09/17 27/09/17 06/10/17 31/07/2018
2017-18
II Full deduction in
27/09/17 27/09/17 08/10/17 31/07/2018
2017-18
III Full deduction in

27/09/17 27/09/17 08/10/17 31/07/2018
2017-18
IV 70% in 2017-18 and
27/09/17 27/09/17 08/10/17 31/07/2018
30% in 2018-19
V Full deduction in
31/03/18 31/03/18 25/05/18 31/07/2018
2017-18
70% is allowed in
2017-18 and
Since not
VI Not balance 30% in PY
31/03/18 deducted no
deducted in which TDS is
due date
deposited with
Govt.
Since
deducted after
PY, Due date 70% in 2017-18 and
VII 27/09/17 02/04/18 04/04/18
is date of 30% in 2018-19
deposit to
Government
34
VIII Same as 70% in 2017-18 and
01/12/17 02/04/18 04/04/19
above 30% in 2019-20
IX Same as 70% in 2017-18 and

01/12/17 02/04/19 04/04/19
above 30% in 2019-20
Tax paid
by payee Date of filling
70% in 2017-18 and
on of return is
X Not 30% in 2018-19
01/12/17 15/12/17 regarding as
deducted assuming that payee
and return date of
is resident
filed on payment
30/06/18
E.g.: Assume Due date of filing Return is 30/9 of AY

Due Date of
Actual Actual
Amt Payment for
Case date of TDS paid Deduction in P.Y.
paid on Deduction in
deduction on
PY 2017-18
I 02/10/17 02/10/17 06/11/17
II 07/11/17 07/11/17 08/12/17
III 20/01/18 20/01/18 08/02/18
IV 07/04/17 07/04/17 08/04/18
V 31/03/18 31/03/18 25/05/18
VI 31/03/18 31/03/18 25/08/18
VII 31/03/18 31/03/18 25/10/18
Not
VIII 31/03/18
deducted
IX 07/06/17 21/04/18 24/04/18
X 10/11/17 12/04/18 04/04/19
XI 16/01/18 02/04/19 04/04/21
Tax paid
by payee
on
Not
XII 16/12/17 05/04/18
deducted
and return
filed on
31/08/2018
(ii) Where any amount has been deposited to any PF, superannuation Fund in which
there is no person responsible for deducting tax at source at the time of
withdrawal of amount from fund, then no deduction shall be allowed.
35
(iii) Any tax paid by employer (Assessee) for Non-monetary perquisites provide by
employer to employee.
(iv) Any amount 0 Income Tax Paid
(v) Any amount of Wealth Tax paid
(vi) Any amount of salary paid without depositing it to government and without
deducting tax on the same.
(viii) Disallowance of royalty, license fees, etc., in case of State Government

Undertaking (Refer note below)
Excise duty on liquor manufacture is a State subject In past, State Governments have
granted liquor distribution rights to private distributors against annual license fees.
There used to be substantial tax leakage as manufacturers and private distributors
underreported sales turnover to evade excise duty and sales tax. Such tax evasion
compelled State Governments to take over liquor distribution from private distributors
to give monopoly distribution rights to newly set up State Government Undertakings.
Presently.all State Governments have given monopoly liquor distribution rights to
their PSUs against annual license fees. State Governments and their PSUs are separate
entities.
Amount charged from PSUs on account of annual license fees is deductible in the
hands of PSUs for tax purposes. In the hands of State Government, there is no
income-tax liability. Moreover, the distribution of license fees is not subject to
dividend distribution tax, as license fees is not distribution of dividend.
Section 40 has been amended to tackle the aforesaid situation. After the amendment,
any amount collected by a State Government from its PSU before payment of tax and
declaration of income shall be disallowed. The salient features of this amendment are
given below –
 Amount not deductible - The following shall not be allowed as deduction from
the assessment year 2014-15 –
1. Any amount paid by way of royalty, license fee, service fee, privilege fee,
service charge or any other fee or charge (by whatever name called), which is
levied exclusively on a State Government undertaking by the State
Government.
36
2. Any amount which is appropriated (directly or indirectly) from a State
Government Undertaking by the State Government
 What is state Government Undertaking - For the above purpose, a

StateGovernment undertaking includes the following -
a. a corporation established by (or under) any Act of the State Government.
b. a company in which more than 50 per cent of the paid-up equity share capital is
held by the State Government;
c. a company in which more than 50 per cent of the paid-up equity share capital is
held by the above two entities (whether singly or taken together);
d. a company or corporation in which the State Government has the right to
appoint the majority of the directors or to control the management or policy
decisions, directly or indirectly, including by virtue of its shareholding or
management rights or shareholders agreements or voting agreements or in any
other manner;
e. an authority, a board or an institution or a body established or constituted by or
under any Act of the State Government or owned or controlled by the State
Government.
(4) Section 40(b) :
No deduction shall be allowed of following amount in case of partnership firm

(PFAS)
(i) Any salary. remuneration, commission, etc. paid to any partner

(nonworking)
(ii) Any salary, remuneration, commission, etc. paid to any working partner but
which is not authorized by partnership deed.
(iii) Any remuneration. commission, salary etc paid to working partner as per
authorization of partnership deed but for the period before such
authorization.
(iv) Any interest paid on capital of partner in excess of percentage authorized by

partnership deed.
(v) Any interest paid on capital of partner as per authorization of partnership

(deed but 15 excess of 12% pa then such excess amount.
37
(vi) Any remuneration, commission, salary etc, paid to working partner a per
limit specified 1n partnership deed but in excess of amount specified below.
 For partnership firm engaged in specified profession or otherwise

Book Profit (BP) Remuneration Allowed
Upto Rs. 300,000 90% of BP or Rs. 150,000 whichever is Highest
Above Rs. 300,000 60% of BP

Book profit means profit calculated as per chapter of Business or Profession i.e.
Net Profit after unabsorbed depreciation but before set off of Brought forward
losses.
E.g. : NPBD 400000

Depreciation 100000
Unabsorbed Depreciation 350000
B/f Business Loss 120000
Calculate Book Profit for Remuneration
Solution:
NPBD 400000
(-) Depreciation 100000
300000
(-) B/f Business Loss (120000)
180000
(-) B/f Unabsorbed Dep. (180000)
NIL
(+) B/f Losses Adjusted 120000
Boo Profit 1200000
 Explanation 1 to Section 40 (b):

Where any indivi0ual is partner in representative capacity and interest is received
in personal capacity than limit of section 40(b) shall not be applicable.
For e.g.: - Mr. X is partner in a partnership firm. on behalf of ‘X'HUF and X HUF
has introduced capital of Rs.21akh and X has given loan to partnership firm of
Rs. 1 lakh. Interest is paid by firm @16%.
38
In this case, internal shall be allowed@ 16% on capital introduced by X on loan
provided by Mr. X to Partnership firm and on capital of X HUF interest at the rate
of 12% shall only be allowed.
 Explanation 2 to Section 40 (b):
Where any individual is partner in personal capacity and interest is paid in
representatives capacity then limit of section 40(b) shall not be applicable on
interest paid in representative capacity.
For e.g.:X is partner in partnership Firm on his own behalf. X has given loan of
Rs.1 Lakh to partnership firm and X HUF has given loan of Rs. 2 Lakh. Firm has
paid interest @ 16% In this case no deduction shall be allowed on interest paid
on Rs.1 Lakh to Mr. X in excess of 12 % such restriction will not be there on
interest paid to X HUF
(5) Section 40 (ba) : For AOP &BOl:-
In the case of AOP/BOI, income will be determined as under:
1. lfany Salary, bonus, commission or remuneration (by whatever name

called) is paid by the AOP/BOI to its members, it is not deductible
[section 40(ba)].
2. Similarly, any interest paid by AOP/BOI to its members (on loan, capital.
or borrowing) by whatever name called is not deductable[section 40 (ba)].
Remuneration is not allowed a deduction- In the case of AOP/BOI, Salary,

bonus, commission or remuneration to members (by whatever name called), is
not allowed as deduction in the computation of income of the AOP/BOI. Even
remuneration for actual services is not deductible.
Interest not allowed as deduction -Interest paid by AOP/BOI to its member as

not allowed as deduction by virtue ofsection 40(ba).
When interest is paid on capital and charged on drawing -Explanation 1 to

section 40(ba) provides that where interest is paid by AOP/BOI to a member
who has also paid interest to the AOP/BOI, the amount of interest to be
disallowed under section 40(ba) is limited to the net amount of interest paid by
the AOP/BOI to the member, that is the amount by which the payment of interest
39
by the AOP/BOI to the member exceeds the payment of interest by the member
to the AOP/BOI.
Case 1 -An AOP/BOI pays interest of Rs. 40,000 to a member A and receives
Rs. 13,000 from the same member as interest on withdrawals, the amount which
is to be disallowed as deduction under section 40(ba) is Rs. 27,000.
Case 2- If, on the other hand, an AOP/BOI pays interest Rs. 5,000 to a member
and that member pays interest of Rs. 8,000 to the AOP/BOI in the same previous
year, no disallowance of interest is required to be made under section 40(ba).
Case 3 -Where AOP/BOI pays interest to three of its members and receives
interest from the fourth member, the entire amount of interest paid to the three
members will be disallowed under section 40(ba), while interest received from
the fourth member is taxable as income in the hands of the AOP/BOI.
When receipt of interest acts in representative capacity - Explanation 2 and 3

deal with cases where the receipt of interest acts in a representative capacity.
Explanation 2 - Explanation 2 provides that where an individual is a member in

an AOP/BOI on behalf, or for the benefit of any other person, interest paid by
the AOP/BOI to such individual, otherwise than as member in a representative
capacity, is not taken into account. for the purpose of section 40(ba). it is also
provided that in such cases, interest paid by the AOP/BOI to the person, so
represented, is taken into account for the purposes of section 40(ba).
For instance, X is a member in AOP/BOI on behalf of his HUF. The AOP/BOI

pays interest on deposit and capital Rs.23,000 to X (otherwise than as member
in a representative capacity) and Rs.15,000 to X (for HUF).
In this case section 40(ba) will not be applicable in respect of payment of Rs.
23,000 ; it will be deductible. However, the payment of Rs. 15,000 will be
subject to application of section 40(ba) (and consequently, it will not be
deducted).
Explanation 3 -Explanation 3 provides that where an individual is a member in

AOP/BOI (otherwise than in a representative capacity) interest paid by the
AOP/BOI to such individual will not be taken into account for the purpose of
section 40(ba), if such interest is received by him, on behalf, or for the benefit, of
any other person.
40
For instance X, a member, receives Rs. 10,000 from the AOP/BOI as interest on
deposit made by his minor son, Rs. 10,000 will be allowed subject to the
provisions of sections 36(1)(iii), 40(a)(i) and 40A(2) while computing income of
the AOP/BOI. Similarly, if X is a member in a AOP/BOI in his personal
capacity, interest paid by the AOP/BOI to X (not his personal capacity, but say,
as representing the HUF of which he is karta) is not taken into account for the
purpose of section 40(ba).
(6) Section 40 A (2) :
Payment to specified persons :
Where any payment has been made to any specified person for any expenditure
in excess of F.M.V. of goods or services received, than such excess expenditure
shall be disallowed.
Disallowance under section 40A(2), on account of any expenditure being

excessive or unreasonable having regard to the fair market value, shall not be
made in respect of a specified domestic transactions (referred to in section
928A), if such transaction is at arm's length price [ as defined in section 92F(ii)]
Specified person include following:-
Sr.No. Assessee Sr.No. Specified Person

Any relative Le. spouse, brother, sister, any
1)
lineal ascendant or descendant to individual.
1. Individual
Any person is whose business, either assessee
2)
or relative of assessee has substantial interest.
Any director of such company or their
1)
relative.
Any person in whose business either assessee
2) or director of such company or their relative
2. Company has substantial interest.
Companies having the same holding (or
controlling) company. For instance, Y Ltd.
3)
owns 20 percent equity shares capital in X
Ltd. Y Ltd. also owns 20 percent equity share
Any partner or member of such PF, AOP,
1)
BOI, HUF or their relative.
Firm AOP,
3. Any person in whose business either assessee
BOI, HUF
2) or partner, member of such firm AOP, BOI,
HUF or their relative has substantial interest.
41
4. All Any individual who has substantial interest in
1)
Assessee business of Assessee.
Any company, PF, AOP, BOI, HUF which
has substantial interest in business
2)
ofAssessee, its director. partner. member&
their relatives.
Where any director, partner or member has
substantial interest in business of assessee
3) than company firm. AOP, BOI, HUF of
which such director, member or partner has
substantial interest & its relatives.
Substantial Interest Means :
(1) In case of company, beneficial owner at least 20% of shares carrying voting
power and are not entitled to fixed dividend.
(2) In case of other than company, PSR should be at least 20%.
As per one of thecase, amount of expenses shall be disallowed if & only if it

is paid to specified person and is in excess of its FMV.
Provision of section 40A (2) can be applied even to partnership firm.
(7) Section 40 A (3) :

Cash Payment :
Where any assessee has incurred any expenditure in excess of Rs.20,000& paid
for the expenditureincurred in excess of Rs. 20,000 in a day (now Rs. 10,000)
otherwise than account payee cheque or DD then no deduction shall be
allowed of suchexpenditure. Thelimit has been raised to 35000 in case
payment is made for plying, hiring or leasing goods carriages.
As per S – 40A (3A) :Where assessee has claimed deduction of any expenditure
in any earlier year (Previous) on accrual basis 82 payment is made in current
previous year in excess of Rs. 10,000 otherwise than A/c payee cheque or DD
than amount of such expenditure shall be regarded as income of Assessee of
current previousyear.
42
These are certain cases in which deduction shall not be disallowed if payment is
in excess of Rs. 10,000 otherwise than A/c payee cheque or DD. these cases are
specified in Rule 6DD. Following are some of cases.
(i) Payment made to Govt. on account of any tax, duty cess etc.
(ii) Payment made to Bank.
(iii) Payment made through Book Entry.
(iv) Payment made in any town, city where no Banking Facility is available.
(v) Payment made for purchase of any agricultural produce directly from
farmeror for skin of Animal etc.
(vi) Where payment is made to any employee who is temporarily working at
place other than his normal place of working for at least 15 days & no bank
account is maintained at such other place then deduction shall be allowed
for salary etc. paid to such employee provided tax has been deducted.
(vii) Where payment is made on Sunday or National Holiday.
(viii) Where payment is made to wholesaler who shall ultimately paid to retailer
in amount not exceeding Rs. 10000 or similar such case
(ix) Where payment is made to employee at the time of retirement by way of
Gratuity or retirement benefit provided his total payment does not exceed
Rs.50000.
(x) Where payment is made by an authorized dealer or a money changer
against purchase of foreign currency or traveller's cheque in normal course
of his business.
It is specified that payment should be for an expenditure 8: so if assessee has paid
more than one expenditure otherwise than Account payee cheque or DD. then
deduction shall be allowed provided each expenditure is not exceeding Rs.
10,000/- Section 40 A(3) is for expenditure incurred & not any capital asset
acquired& so, if any capital asset is acquired in cash then sec 40 A(3) is not
applicable.
Similarly, where any donation is paid if it is eligible for deduction u/s 80G then it
is not covered u/s 40A (3), so no question of disallowance. Where income of
assessee has been estimated ignoring Books of accounts then Sec. 40A (3) is not
applicable.
43
(8) Section 40 A(7) :
No deduction shall be allowed of any gratuity on provision basis. Further, if
gratuity is provided & amount Is deposited in approved Gratuity Fund then it
shall be allowed as deduction.
If deduction is allowed at the time of payment or contributed to approval gratuity
Fund then no further deduction shall be allowed at the time of actual payment of
Gratuity to employee. If deduction was not allowed on provision basis then it
shall be allowed at the time of actual payment
(9) Section 40 A(9)

No deduction shall be allowed of any amount contributed to unapproved
provident fund. super annuation Fund. etc.
Section 43 B:
Sr.No. Expenses Due date

1. Any duty, tax, cess payable
If payment is made on or before due date of
to Govt. filing Return in which expenses has been
incurred then deduction shall be allowed in
2. Any Interest to financial that P.Y. otherwise in year of payment
Institutions [Refer e.g. U/S 36 (1) (iv)]
3. Bonus, Commission payable

to employees
Employers contribution to
4. PF, Superannuation Fund,
Gratuity Fund, etc.
5. Leave encashment
From the assessment year Same as Above
6. 2017-18 expenditure
pertaining to use of railway
assets
Employees contribution in If deposited before due date ofrespective
7. PF,superannuation Fund etc. Fund then in year ofincurrence, deduction
deducted by employer shall beallowed, otherwise no deduction is
fromsalary of employee allowed [Refer e.g. U/S 36 (1) (va).]
44
Section 41 :- Deemed Business Income :
 Section 41 (1) :Where assessee has recovered or received refund or received

advantage of any expenses or trade liability earlier allowed as deduction then such
amount which is received refund shall be regarded as business income in the year
in which it is received whether or not business is Carried on by assessee.
As per one of case law, if amount of deduction claimed by proceed or & later on
refund is received by Successor then it cannot be regarded as income of successor.
Sale tax collected on sales is generally included in sales & so will be income of
Assessee which is credited to profit 8: loss A/C along with sales when sales tax is
actually paid to Govt. then it shall be allowed as deduction u/s 43B. Ifsuppose
sales tax is received refund then it will be regarded as income u/s 41(1) .if such
anyappeal is pending for refund then also it shall be regarded as income & then
later point of time on decision of appeal assesses is required to refund the sales tax
then it shall againbe allowed as deduction.
 Section 41 (2) : For company’s engaged in generation & distribution of

electricity :
If such company has transferred any amount for amount exceeding WDV but upto
cost shall be regarded as Business income irrespective of such business carried on
or not on that previous year. (Balancing charge refer Depreciation)
 Section 41 (3) :Where Assessee had acquired any asset for the purpose of
scientific research & which is transferred then amount received on transfer which
is in excess of WDV but upto cost (To the extent earlier allowed as deduction)
shall be regarded as Business income whether or not Busies ls Carried on by
Assessee during that previous year.
 Section 41 (4) :Where any Assessee has received refund of any amount which
was earlier allowed as deduction as bad debts U/s 36 (1) (vii) then such refund
shall be regarded as business income whether or not business is carried on by
Assessee during P.Y.
E.g.: In P.Y. (2010-11) assessee claimed deduction of Bad Debts of Rs. 40000 but
assessing officer allowed deduction of Rs. 25000 In P.Y. 201748 Assessee has
received refund or has recovered Bad Debts of 35000.
Then in that case Rs. 20000 (35000-15000) amt earlier not allowed as deduction
will be regarded as Business income.
45
Section 41 (4A) :
Where any amount has been withdrawn from special Reserve created U/s
36(1)(viii) then amount withdrawn shall be regarded as income of RV. in which
amount withdrawn whether or not business is carried on by Assessee in that P.Y.
 Section 41 (5)
Where Assessee has received any income chargeable to tax U/s 41(1), 41(3), 41(4)
or 41(4A) and business of assessee is not been carried on then assessee can set off
losses of P.Y. in which business was discontinued from these incomes. Loss of
P.Y. in which business is discontinued can be carried formed for unlimited time
for set off with Incomes specified under this section.
New section 43CA - Section 43CA has been inserted with effect from the assessment
year 2014-15. It provides that where the consideration for the transfer of an asset
(other than capital asset), being land or building or both is less than stamp duty value,
the value so adopted (or assessed or assessable) shall be deemed to be the full value of
the consideration for the purposes of computing income under the head "Profits and
gains of business or profession".
 When date of agreement and date of registration are not same - Sub -sections
(3) and (4) of section 43CA provide that where the date of an agreement fixing the
value of consideration for the transfer of the asset and the date of registration of the
transfer of the asset are not same, the stamp duty value may be taken as on the date
of the agreement for transfer and not as on the date of registration for such transfer.
However this exception shall apply only in those cases where amount of
consideration (or a part thereof) for the transfer has been received by any mode
(other than cash) on or before the date of the agreement.
 Can an assessee challenge stamp duty valuation –The assessee can claim that the
Value adopted (or assessed or assessable) for stamp duty purposes exceeds the fair
market value of the property as on the date of transfer. If this claim is made before
the Assessing Officer and the assessee has not disputed the value so adopted (or
assessed or assessable) in any appeal or revision or reference before any authority
or Court, the Assessing Officer shall refer the valuation of the relevant asset to a
Valuation Officer in accordance with section 55A . If the fair market value
determined by the Valuation Officer is less than the value adopted for stamp duty
purposes, the Assessing Officer may take suchfair market value to be However, if
46
the fair market value determined by the Valuation Officer is more than the value
adopted or assessed for stamp duty purposes, the Assessing Officer shall not adopt
such fair market value and shall take the full value of consideration to be the value
adopted or assessed for stamp duty purposes.
Section 44 AA :- Maintenance of Books of Accounts :-

Category A : As per provision of this section Assessee is required to maintain proper
books of accounts. in case of Assessee engaged in specified profession he is not
required to maintain proper books ofaccount in following cases.
(1) If his gross receipts does not exceed Rs. 150,000 in any one of three P.Y.
immediately precedingrelevant P.Y.
(2) If Assessee has started business during the P. Y. then gross receipt expected
during the P. Y. is not exceeding Rs. 150,000.
Person is said to engaged in specified profession if he is engaged in profession of
medical, Accountancy, Engineering, Architecture, interior Decorator, etc. if shall also
include it Professionals, Company Secretary, Authorized Representative Film Artist.
In case of Assessee engaged in specified profession books of accounts required to be
maintained are specified in Rule 6F
Following are the books of accounts & records are required to be maintained
1. Cash Book
2. Ledger Book
3. Journal if Mercantile System is followed
4. Voucher of Expenses or Bill of Expenses except amount not exceeding Rs.50
5. Copy of Receipts issued except when less than Rs. 25.
Category B: In case of Assessee engaged in other than specified profession is
required to maintain proper books of accounts in following cases.
Category B (1) : For other than Individual and HUF:
(i) Where turnover exceed Rs. 10,00,000/- or income exceed Rs. 120,000 in any one
P. Y. out of three previous years immediately preceding relevant P. Y.
(ii) In case of business started during P. Y. if expected turnover exceeds Rs. 10 Lacs
or expected net Income exceeds Rs. 120,000.
47
Category B (2) : For individual and HUF:
(i) Where turnover exceed Rs. 25,00,000/- or income exceed Rs. 250,000 in any one
P. Y. out of three previous years immediately preceeding relevant P. Y.
(ii) In case of business started during P. Y. if expected turnover exceeds Rs. 25 Lacs
or expected net income exceeds Rs. 250,000.
As such no books of accounts are specified for person engaged in other than specified
profession but they have to maintain all necessary books of accounts which are
required to ascertain income.
If Assessee is required to maintain proper books of accounts but has not maintained
then as per S-271A penalty of Rs. 25000 is charged.
Section 44 AB:-
As per Provision of this section Assessee is required to get books ofAccounts Audited
in following situations.
1. If Assessee is engaged in specified profession then if his gross receipt exceed Rs.
25 Lacs(From AY 2017-18 this limit has been increased to 50 lacs).
2. If Assessee is engaged in other than specified profession then if his Gross

turnover exceeds Rs. 1 crore.
Assessee is required to submit tax audit report in following form on or before

30th September of A. Y.
1. In case of company assessee Report in Form 3CA & Disclosure of Information in

Form 3CD.
2. In case of other than company assessee audit report in Form 3CB & Disclosure of
necessary information in Form 3CD.
If Assessee has not got books accounts audited & reported is not submitted on or
before due date specified then as per S - 271B penalty is charged as 0.5 % of
turnover or Rs. 150000/- whichever is Less.
As per one of the case law if Assessee has not maintained proper books of
Accounts & later on it is found that he was required to get books of accounts
audited also than in that' case Assessing officer can charge penalty both for non-
maintenance books of accounts & for not getting books of accounts audited. He
can charge penalty only for non-maintenance ofbooks ofaccounts.
48
Section 44AA is applicable
If assessee income is computed U/s. 44AD, 44AE, 44AF & 44BB& 44BBB. But if
Assessee claims that his income is less than % specified there then he has to maintain
proper books of Accounts.
Similarly, if Assessee claims that his income is less then limit specified in above
sections then he is required to get audited U/s. 44AB.
lf turnover of Assessee is exceeding Rs. 60,00,000 (From AY 2013-14 limit is

increased to Rs. 1 Crore) then above exception of not maintaining books of
Accounts is not applicable.
Section 44AA(2) has been amended with effect from the assessment year 2017-18.
The modified version provides that, if the following two conditions are satisfied , an
assessee will have to keep books of account and other documents (as per section 44M)
and get his books ofaccounts audited u/s 44AB for computing his total income
(a) The provisions of section 44AD(4) are applicable in his case.
(b) His total income exceeds the maximum amount which is not chargeable
to income-tax.
The above is also applicable for presumptive income covered u/s 44ADA. In both
44AD and ADA it is necessary that income exceeds MEL not chargeable to tax.
Income is Computed on Presumptive Basic
44 AD 44 AE
Assessee engaged in any business excluding Assessee engaged in
business of transportation covered in S plying, hiring or leasing
44AE. This scheme is applicable only to an vehicles
individual, a HUF, or PF who is resident but
not LLP, Company, AOP/BOI etc. It shall Vehicles are of 2 types
also not be applicable to an assessee who is 1) Heavy Rs. 7500 RM.
availing deductions u/s 10A, 10AA, 10B,
2) Other than Heavy
10BA or deductionunder any provisions of
Rs. 7500 pm.
chapter VIA for income
Income is 8% of Turnover (Read note below)
49
44AE :-1) For Period Vehicle is OWNED by Assessee. 2)Part of the month
regarded as full month. 3)Assessee should not own more than 10 vehicles at
any time duringP.Y.
44AD:- 1) Income will be 6 % of Turnover or gross receipt if following 2
conditions are fulfilled :
a) Turnover or gross receipt is received by an account payee
cheque/DD/electronic clearing.
b) The above payment is received during the FY on or before the due date
of submission ofreturn u/s 139 (1).
Other Important Points for 44AE :-

(1) Provision of this section shall be applicable if turnover of Assessee does not
exceed 1 Crore.
(2) If Assessee is computing Income by these sections then he is not required to
maintain proper books of accounts U/s. 44AA but has to maintain necessary
details to ascertain to mover.
(3) Where Assessee is partnership Firm then from the income computed above It
shall he allowed deduction of salary, remuneration, interest subject to limit
specified u/s 40 (b).
(4) No deduction shall be allowed on account of expenses incurred & all expenses
shall be deemed to be allowed.
(5) No deduction shall be allowed of depreciation but WDV is toreduced as if
depreciation is allowed.
(6) If Assessee argue that his income is less than limits specified in this section then
be is required to maintain proper books of accounts as per S44AA & audited u/s
44 AB.
Other Important Points for section 44 AD :-

a) Provision of this section shall be applicable if turnover of Assessee does not
exceed 2 Crore.
b) If Assessee is computing Income by this section then he is not required to
maintain proper books of accounts U/s. 44AA but has to maintain necessary
details to ascertain turnover.
50
c) Where Assessee is partnership firm then from the income computed above it
shall not be allowed deduction of salary, remuneration, interest subject to limit
specified u/s 40 (b) w.e.f. AY 2017-18. Thus e.g.: given for 44 AE will not apply
for 44 AD
d) No deduction shall be allowed on account of expenses incurred & all expenses
shall be deemed to be allowed.
e) No deduction shall be allowed of depreciation but WDV is toreduced as it
depreciation is allowed.
f) If Assessee argue that his income is less than limits specified in this section then
be is required to maintain proper books of accounts as per S 44AA & audited u/s
44 AB.
g) Section 44AD has been amended with retrospective effect from the assessment
year 2011-12 to clarify that this presumptive scheme is not applicable to the
following:
A. a person carrying on professionas referred to in section 44AA(1)
B. Personearningincome in the nature of commission or brokerage; or
C. A person carrying on any agency business.
D. A person who Is in the business of playing, hiring or leasing goods
carriages.
h) Where an eligible assessee declares profit for any previous year at the rate of 8
per cent of turnover under section 44AD and declares profit for any of the 5
consecutive subsequent assessment year at lower than 8 per cent, he shall not be
eligible to claim the benefit of the provisions of section 44AD for 5 subsequent
assessment years [i.e., subsequent to the assessment year relevant to the previous
year in which the profit has not been declared at the rate of 8 per cent].
i) Advance tax payment exemption no more available :-An assessee (opting for
computation of business income on estimated basis under section 44AD) is
exempted from payment of advance tax relating to such business. However, this
exemption will not be available from the assessment year 2017-18. Such an
assessee will have to pay advance tax during the financial year immediately prior
to the assessment year (100 per cent of tax pertaining to such business shall be
paid by way of advance tax on or before March 15 of the financial year
51
immediately prior the assessment year). Thus no relevance of dates being 15th
Sept and 15th Dec.
For e.g.: An eligible assessee claim to be taxed on presumptive basis of 8 per cent of
turnover under section 44AD for assessment year 2017-18. He offers income of Rs. 8
Lakh on the turnover of Rs. 1 crore. For assessment year 2018-19 and assessment year
2019-20 also he offers income in accordance with the provisions of section 44AD.
However, for assessment year 2020-21, he offers income of Rs. 41akh on turnover of
Rs. 1crore. in this case since he has not offered income in accordance with the
provisions of section 44AD for S consecution assessment years, after assessment year
2017-18, he will not be eligible to claim the benefit of section 44AD for next Five
assessment years (i.e., from assessment years 2021-22 to 2025-26). Consequently, for
the assessment years 2021-22 to 2025-26.
a. He will have to maintain the book of account as per section “All (irrespective
of income or tut hover) it his total hit time exceeds the exemption limit, and
b. He will have to set his books of account audited under section 44AB
(irrespective of turnover) if his total income exceeds the exemption limit.
The above consequences will be applicable even if for the assessment years 2021-
22 to 2025-26. he wants to declare 8 per cent (or higher) of turnover as his
business income.
Computation of professional income on estimated basis under section 44ADA
Section 44ADA has been inserted from the assessment year 2017-18. The provisions
of section “ADA are given below -
1. The assessee is resident and engaged in a profession referred to in section 44AA
(1) (i.e. such IS legal. medical. engineering or architectural profession or the
profession of accountancy or technical consultancy or interior decoration or any
other profession as in notified by the board).
2. Gross receipts of the assessee from the profession do not exceed Rs. 50 lakh.
3. If the above two conditions are satisfied, income of the assessee shall be
calculated an estimated basis at a sum equal to 50 per cent at the total gross
receipts.
4. The assessee can voluntarily declare a higher income in his return.
52
5. All deductions under sections 30 to 38, including depreciation and unabsorbed
depreciation. are deemed to have been already allowed and no further deduction
is allowed under these sections.
6. The written down value is calculated, where necessary, as if depreciation as
applicable has been allowed. Moreover, it will be assumed that disallowance, if
any, under sections 40,40A and 438 has been considered while calculating the
estimated income @ 50 percent
7. An assessee can declare his income to be lower than the deemed profits and gains
as stated above. The following consequences are applicable if the taxpayer
declares his income which is lower than the deemed profits and gains as stated
above
- The assessee will have to maintain the books of account as per section 44M, if
his total Income exceeds the exemption limit.
- The assessee will have to get his books of account audited under section 4MB
(irrespective of turnover), if his total income exceeds the exemption limit.
Other Sections
Sec. 33 AB - Tea / Coffee / Rubber Development Fund.
Sec. 33 ABA - Site Restoration Fund Sec. 35
Sec. 35 - Scientific Research (SR)

Sec. 35(1)(i) - For Revenue Expenditure for SR for B or P
Sec. 35(1)(iv) & (2) - For Capital Expenditure for SR for B or P
Sec. 35(1) (ii) - For contribution for SR
Sec. 35 (1) (iii) - For contribution for social/statistic research
Sec. 35 (1) (iia) - For contribution for SR to Indian Company
Sec. 35 (2AA) - For contribution for SR to National Laboratory etc
Sec. 35(2AB) - For Inhouse Research
Sec. 35ABA - Spectrum for telecommunication services

Sec. 35 ABB - Telecommunication Business
Sec. 35 AC - For Eligible Projects
Sec. 35 AD - For Expenditure on specified Projects
Sec. 35 CCA - For Rural Development.
53
Sec. 35CCC - Weighted Deduction for expenditure incurred on agricultural
extension project (From AY 2013- 14)
Sec. 35CCD - Weighted deduction for expenditure for skill development
(From AY2013- 14)
Sec. 35 D - Preliminary Expenditure
Sec. 35 DD - Expenses in respect of Amalgamation / Demerger .
Sec. 35 DDA - Expenses on Voluntary Retirement.
Sec. 35 E - For Expenses on Prospecting of mineral ores etc.
Deduction of expenditure for Scientific Research

Phase out plan of weighed deduction under section 35
Section 35 has been amended to phase out weighted deduction as follows -
Section Deduction Currently Deduction available from the

available (it will continue assessment year 2018-19
up to the assessment year
2017-18)
35(1)(ii): Contribution to 175% of actual  150% of actual
an approved research contribution contribution for the
association, University, assessment years 2018-19
college or other institution to 2020-21
for conduction scientific  100% of actual
research contribution from the
assessment year 2021-22
35(1)(iia): Contribution to 125% of actual 100% of actual contribution
an approved India contribution from the assessment year
scientific research 2018-19
company
32(1) (iii): Contribution to 125% of actual 100% of actual contribution
an approved research contribution from the assessment year
association, university, 2018-19
college or other institution
for conduction research in
social science / statistical
research
35 (2AA): Contribution to 200% actual contribution  150% of actual
an approved national contribution for the
laboratory, University, assessment years 2020-
IIT, specified person 2021
 100% of actual
54
contribution from the
35 (2AB): Expense (by a 200% actual contribution  150% of actual
company) on an approved contribution for the
in-house research unit assessment years 2020-
2021
 100% of actual
contribution from the
Sec. 35 (1) (i) For Revenue Expenditure for SR for B or P (100% of cost).
Expenditure = incurred in P.Y. + incurred in 3 years immediately
preceeding date of commencement of business to the extent
approved by Appropriate Authority.
Sec. 35 (1) (iv) & (2) For Capital Expenditure for SR for B or P (100% of cost).
Expenditure = incurred in P.Y. + incurred in 3 years immediately
preceeding date of commencement of business to the extent
approved by Appropriate Authority. Expenditure shall not
include cost of land .Also deduction of capital expenditure for scientific
research shall not exceed amount of profit available. Expenditure which could
be deducted due to insufficient profit is c/f as unabsorbed capital expenditure
for scientific research (similar to unabsorbed depreciation).
If asset purchased for scientific Research is converted for Business purpose then it's
unmortise amount (WDV) will be included in block of Asset to which it is related and
thereafter all treatment will be same as for block of Asset . [Block is alive, Block is
not alive etc).
Sale of Asset. Acquired for Scientific research and then Sold:-
Cost Rs. 100
WDV Rs. 40
(Deduction Received is only 60 due to Insufficient Profit)
55
LTCA = Long Term Capital Asset LTCG = Long Term Capital Gain
STCA = Short term Capital Asset STCG = Short term Capital Gain
ICOA = Indexed Cost of Acquisition
Sec. 35 (2AA):
Where assessee has donated any amount during P.Y. to any National Laboratory or
University or Institution or Association approved or any other person approved with
specific instruction that amount is to be used for carrying on scientific research, then
deduction shall be allowed as 200% of amount donated.
Section 35 (2AB): For Inhouse Research :

As per this section, deduction shall be allowed to company assessee as 200% of
amount incurred for Inhouse Research. Deduction shall be allowed for expenditure
other than for Land & Building and provided assessee agree to co-operate with Local
Authority if research is successful. Deduction shall be allowed to Assessees engaged
in business of manufacturing or production of any article or item other than specified
in eleventh schedule.
Further for availing of this weighted deduction, the company is required to enter into
an agreement with the Secretary, Department of Scientific and Industrial Research
(DSIR) and is also required to obtain his approval The Secretary, DSIR is required to
send the report regarding approval to DGIT (Exemption) in Form No. 3CL who
generally does not have jurisdiction over the assessee-Company. Further, the
company is required to maintain separate books of account for approved R&D facility
and is also required to get the accounts audited. However, the copy of audit report is
required to be submitted to the DSIR only.
The Comptroller and Auditor General of India in its report on performance audit of
pharmaceuticals sector recommended rationalization of the provision relating to
monitoring of this weighted deduction.
In order to have a better and meaningful monitoring mechanism for weighted

deduction allowed under section 35(2AB) the following amendments have been made
with effect from the assessment year 2016-17.
56
1. Deduction under section 35(2AB) shall be allowed only if the company enters into
an agreement with the prescribed authority for co-operation in such research and
development facility and fulfils prescribed conditions with regard to maintenance and
audit of accounts and also furnishes prescribed reports.
2. Reference of the Principal Chief Commissioner or Chief Commissioner has been
inserted in section 35(2AA) and section 35(2AB) so that the report referred to therein
may be sent to the Principal Chief Commissioner or Chief Commissioner having
jurisdiction over the company claiming the weighted deduct ion under the said
section.
Deduction of building is allowed u/s 35 (1) (iv) at 100 % of cost of building, but no
deduction shall be allowed of cost of land. Deduction under this section is available
upto 31/3/2017.
Section 35 AC: Deduction under this section is allowed for any contribution made to
public sector company, Local Authority, any other institution or Association approved
by National Committee for social upliftment.
Thus, in above section company is allowed deduction when it makes contribution to
any other person specified above for social upliftment programme.
If National Committee finds that any particular scheme is not been properly
implemented than will cancel the scheme. Similarly, if it is found that any particulars
association orinstitution is not implementing scheme properly then it shall cancel
approval of such institution or association after giving it "Opportunity of Being
Heard."
Section 35 CCA: Rural Development:

Where any contribution has been made to following institution or Association for
Rural Development then it shall be allowed as deduction.
(i) Associations or institutions engaged in Rural Development.
(ii) Associations or institutions approved & engaged in Training Persons forrural
Development.
(iii) Amount contributed to "National Urban Poverty Eradication Fund."
(iv) Amount contributed to Funds established for Rural Development.
57
Weighted Deduction for expenditure incurred on agricultural extension project
[Sec. 35CCC]:
Section 35CCC has been inserted with effect from the assessment year 2013-14. It
provides that where an assessee incurs any expenditure on notified agricultural
extension project, then he will be eligible to claim a weighted deduction of 150
percent of such expenditure. From AY 2021 - 22 deduction shall be restricted to
100 % (no weighted deduction).
Where a deduction under this section is claimed and allowed for any assessment year
in respect of any expenditure referred to above, deduction shall not be allowed for any
assessment provisions of the Act for the same or any other assessment year.
Weighted deduction for expenditure for skill development [Sec. 35 CCD]

Section 35CCD has been inserted with effect from the assessment year 2013-14. It
provides that where a company incurs any expenditure (not being expenditure in the
nature of cost of any land or building) on any notified skill development project, then
such company can claim a weighted deduction of 150 percent of such expenditure.
From AY 2021 - 22 deduction shall be restricted to 100 % (no weighted
deduction).
Where a deduction under this section is claimed and allowed for any assessment year
in respect of any expenditure referred to above, deduction shall not be allowed in
respect of such expenditure under any other provision of the Act for the same or any
other assessment year.
Section 35 D: Preliminary Expenses

Deduction under this section is allowed to Indian Company or other Resident
NonCorporate Assessees.
Deduction under this section is allowed of following expenses.

(i)Preliminary Expenses incurred for expansion of Existing undertaking.
(ii) Preliminary Expenses incurred for setting up new Unit.
Deduction under this section is allowed in following manner.
58
 Maximum amount of eligible expenditure for non-corporate resident assessee is
5% of Cost of Project.
 Maximum amount of eligible expenditure for Indian Company is 5% of Cost of
Project OR 5% of Capital whichever is HIGHEST.
(Thus, Maximum amount that can be claimed as deduction is amount of preliminary

expenditure incurred or limit specified above whichever is. Less.)
Deduction under this section is allowed of eligible amount is five equal installment
over 5 years.
Preliminary expenses shall include following:

(a) (i) Expenditure incurred for any market research or any other survey.
(ii) Expenditure incurred project report
(iii) Expenditure incurred for feasibility report.
(iv) Expenditure incurred for any Engineering services etc. provided.
(b) Expenditure incurred for entering into agreement by company with persons
executing work.
(c) Following expenditure in case of a company
(i) Expenditure incurred for drafting printing, etc of Articles of Association and
Memorandum of Association.
(ii) Expenditure incurred for Registration of company etc.
(iii) Expenditure incurred for issue of shares, debentures, etc. or by way of
Underwriting Commission, or discount on Issue of Debenture etc.
(d) Any other expenditure specified by Govt.
For claiming deduction report of Chartered Accountant is required. For the purpose of
this section cost of project include expenditure incurred for acquisition of plant &
Machinery. Building Furniture & Fixture upto last day of P.Y. in which business is
started. If it is expansion of existing business then additional amount incurred.
Capital employed includes paid up Share Capital, Long Term Loans, Debentures etc.
as on last day of P.Y. in which business is commenced. In case of expansion or
59
extension, additional amount of fund, as on last day of P.Y. shall be regarded as
capital.
Where during period of deduction Amalgamation or Demerger takes place, then

amalgamated company or Resulting company is allowed deduction for balance period.
As per one of the case law, preliminary expenses not only includes issue expenses it
also includes expenses incurred for refunding capital raised due to no- minimum
subscription. This is because definition of preliminary expenses is inclusive and not
exhaustive.
As per one of the case law Securities Premium or Share Premium is not included in
Capital.
Section 35 DDA: Expenses for Voluntary Retirement:

Where any expenditure is incurred for voluntary retirement then deduction shall be
allowed in 5 equal installment over 5 years. If during the period of deduction any
amalgamation or demerger takes place then deduction shall be allowed to
amalgamated Company for balance period.
Section 35AD: DEDUCTION IN RESPECT OF EXPENDITURE ON

SPECIFIED BUSINESS:
Section 35AD has been inserted (With effect from the assessment year 2010-2011)to
provide for investment- linked tax incentive.
Condition- the following condition should be satisfied to avail of the benefit of
deduction under section 35AD.
Condition 1- SPECIFIED BUSINESS- Deduction under section 35AD is available
only in the case of “specified business” given below
Specified business Who should own Approval (if Date of

the business any) commencement
of business
Setting up and operating a cold Any person Not required On or After
chain facility April 1, 2009
Setting up and operating a Any person Not required On or After
warehousing facility for storage April 1, 2009
of agricultural produce.
60
Laying and operating a cross- An Indian Should be *on or after
country natural gas company approved by April 1, 2007 in
petroleum and the case of
laying and
Or crude or petroleum oil Consortium of Natural gas Operating a
pipeline network for Indian companies regulatory board cross-country
distribution, including storage or an and notified by natural gas
pipeline network
facilities being an integral part authority/board/C the central
for distribution
of such network orporation government or storage. *In
established under the other cases,
any central or on or after April
state act 1, 2009.
Building and operating Any Person No approval On or after April
anywhere in India a new hotel required; 1, 2010
of 2 star or above category however hotel
(applicable form the assessment should be
year 2011-12) classified by the
Central
Government as 2
star hotel or
above category
Building and operating Any Person No approval On or after April
anywhere in India a new hotel required 1, 2010
of 2 star or above category
(applicable form the assessment
year 2011-12)
Developing and Building a Any person Developing and On or after April
housing project (applicable from Building 1, 2010
the assessment year 2011-12) housing project
should be under
a scheme for
slum
redevelopment
or rehabilitation
framed by the
Central
Government/Stat
e Government
and notified by
the Board in
accordance with
prescribed
guidelines
61
Developing and Building a Any Person Developing and On or after April
housing project (applicable from building the 1, 2010
the assessment year 2012-13) housing project
should be under
a scheme for
affordable
housing framed
by the Central
Government or a
State
Government and
notified by the
Board
Production of fertilizer in India Any Person Not Required On or after April
(applicable from the assessment 1, 2011
year (2012-13)
Setting up and operating an Any person As notified or On or after April
inland container depot or a approved under 1, 2012
container freight station. the customs Act
Bee-keeping up and production Any person No approval On or after April
of honey and beeswax 1, 2012
Laying and operating a slurry Any person No approval On or after April
pipeline for the transportation of 1, 2014
iron ore
Setting up and operating a semi Any person As notified by On or after April
conductor wafer fabrication the Board in 1, 2014
manufacturing unit accordance as
may be
prescribed
Developing, operation and An Indian The eligible On or after April
maintaining or developing, Company or a entity has 1, 2014
operating and maintaining an consortium of entered into an
infrastructure facility Indian companies agreement with
or an Central/State
authority/board/c Government/Loc
orporation any al Authority/any
other body other statutory
established or body for
constituted under developing,
any Central or maintaining etc.,
State Act. of new
Infrastructure
facility
62
Note 1:-"cold chain facility" means a chain of facility for storage a transportation of
agricultural and forest produce, meat and meat product, poultry, marine and dairy
product of horticulture, floriculture and apiculture and processed food item under
scientifically controlled conditions including refrigeration and other facilities
necessary for the preservation of such produce.
NOTE 2:- This business should make not less than one-third of its total pipeline
capacity available for use on common carrier basis by any person other than the
assessee or an associated person. Associated person is a person who participate in the
management of assessee: hold at least 26 per cent voting power in the assessee:
appoints more than half of the board of directors or who guarantees not less than 10
per cent of the total borrowing of the assessee.
NOTE 3:- Weighted deduction at the rate of a150 percent in some cases- Weighted
deduction will be available at the rate of 150 percent of the qualifying expenditure in
the case of following business with effect from the assessment year 2013-14. Before
this amendment, these businesses were qualified to claim 100 percent deduction. After
the amendment if operation is started on or after April 1, 2012, weighted deduction
will be available at the rate of 150 percent -
a. Setting-up and operating a cold chain facility.
b. Setting-up and operating a ware housing facility for storage of agricultural
produced.
c. Building and operating, anywhere in India, any hospital with at least 100 beds for
patients.
d. Developing and building a housing project under a scheme for affordable housing
framed by the Central Government or State Government and notified by the Board
e. Production of fertilizers in India.
W.e.f. AY 2018-19 deduction under this section will be 100% only and no
weighted deduction shall be allowed.
NOTE 4:-W.e.f. AY 2013-14 Where an assessee builds a two-star (or above

category) hotel and, subsequently, while continuing to own the hotel, transfers the
63
operation thereof to another person, thus assessee shall be deemed to be carrying on
the specified business of building and operating hotel for the purpose of section 35AD
(applicable from the assessment year 2011-12)
NOTE 5 :- Any expenditure is respect of which payment (or aggregate of payments

made to a person in a day), otherwise than by an account payee cheque/draft/use of
electronic clearing system through a bank account, exceeds Rs.10,000, on deduction
shall be allowed in respect of such payment under section 35AD.
Condition 2- SPECIFIED BUSINESS SHOULD BE NEW BUSINESS- The
specified business should not be set up by splitting up, or the reconstruction, of a
business already in existence. Moreover, it should not be set up by the transfer of old
plant and machinery. 20 per cent old machinery is permitted- If value of the
transferred asset does not exceed 20 per cent of the total value of machinery or plant
used in the business, the condition is deemed to have been satisfied.
Second hand improved machinery is treated as new- any machinery or plant which
was used outside India by any person (other than the assessee) shall not be regarded as
machinery or plant previously used for any purpose, if the following Condition are
fulfilled:
1. Such machinery or plant was not, at any time previous to the date of installation by
the assessee, used in India.
2. Such machinery or plant is imported to the India from any country outside India.
3. No deduction on account of depreciation in respect of such machinery or plant has
been allowed or is allowable under the act in computing the total income of any
person for any period prior to the date of the installation of the machinery or plant by
the assessee.
CONDITION 3-AUDIT OF BOOKS OF ACCOUNT- books of account of the

assessee should be audited.
Amount of deduction:- 100 per cent of the capital expenditure incurred wholly and
exclusively for the specified business carried on by assessee is deductible in the
previous year in which the expenditure is incurred. However, this is subject of the
following two proposition -
64
1) Expenditure incurred on the acquisition of any land or goodwill or financial
instrument is not eligible for any deduction under section 35AD.
2) Expenditure incurred prior to the commencement of operation, wholly and

exclusively, for the purpose of ant specified business, shall be allowed as deduction
during the previous year in which assessee commences the operation of his specified
business, if the amount is capitalized in the books of account the assessee on the date
of commencement of operation.
3) If operation of the business of laying and operating a cross-country natural gas

distribution network is commenced during April 1, 2007 and march 31,2009, the
capital expenditure (not being for acquiring land or goodwill or financial instrument)
incurred before April1,2009 (to the extent not allowed as deduction under any section
earlier) will be allowed as additional deduction under section 35AD for the
assessment year 20102011.
Consequences of claiming deduction under section 35AD- The following
consequences should be noted -
1) The assessee shall not be allowed any deduction in respect the specified business
under the provision of chapter VIA under section 80HH to 8ORRB for the same or
any other assessment year.
2) No deduction in respect of expenditure in respect of which deduction has been

claimed shall be allowed to the assessee under any other provision of income-tax Act.
3) 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 transfer shall be treated as income of the assessee and chargeable to
income-tax under the head “profit and gains of business or profession".
4) Any loss computed in respect of the specified business shall not be set of except
against profit and gains: if any, of any other specified business. To the extent the loss
is unabsorbed, the same will be carried forward for set of against profit and gains
from any specified business in the following assessment year and so on.
65
5)If the assessee owns two units-one of them qualified for deduction under section
35AD and the other one is not eligible for the same and there inter unit transfer of
goods or service between the two units, then for the purpose of section 35AD
calculation will be made as if such transaction are made at the market value.
6) Any asset in respect of which a deduction is claimed and allowed under section
35AD, shall be used only for the specified business for a period of 8 years beginning
with the previous year in which such asset is acquired or constructed .If such asset is
used for any purpose other than the specified business, the total amount of deduction
so claimed and allowed in any previous year in respect of such asset, as reduced by
the amount of depreciation allowable in accordance with the provision of section 32
as if no deduction has been allowed under section 35AD, shall be deemed to be
business income of the assessee of the previous year in which the asset is so used
(W.e.f AY 2015-16. However, this provision will not apply to a company which has
become a sick industrial company under section 17(1) of the sick Industrial
Companies (Special Provision) Act within the time period of 8 years as stated above.
7) Double deduction not possible :- where any deduction under section 35 AD has
been availed of by the assesses on account of capital expenditure incurred for the
purposes of specified business in any assessment year, no deduction under section
10AA shall be available to the assesses in the same or any other assessment year in
respect of such specified business.
Other Specified Deductions:
Sec. 36 (1) (i) Expenditure for Insurance of stock in Trade.

Sec. 36 (1) (ia) Expenditure for Insurance of cattles.
Sec. 36 (1) (ib) Expenditure for Insurance of Health of Employee
Sec. 36 (1) (ii) Expenditure for Bonus / commission to employee
Sec. 36 (1) (iii) Expenditure by way of Interest on Capital borrowed for the
purpose of Business / Profession
Sec. 36 (1) (iiia) Discount on Zero coupon Bond to be allowed on Prorata Basis.
Sec. 36 (1) (iv) Employer's contribution to notified pension fund
Sec. 36 (1) (v) Deduction of Employer's contribution to Approved Gratuity
Fund
Sec. 36 (1) (va) Deduction of Employer's contribution to Funds Established for
welfare of Employee.
66
Sec. 36 (1) (vi) Deduction of cost of Animal becoming useless or is dead
Sec. 36 (1) (vii) Deduction on Account of Bad debts.
Sec. 36 (1) (viia) Deduction on Account of Bad debts for Banks/Financial
Institutions
Sec. 36 (1) (viii) Contribution to special reserve.
Sec. 36 (1) (ix) Expenditure for promoting family planning among employees
Sec. 36 (1) (xii) Expenditure incurred by any organization established under any
statute for promoting its objective.
Sec. 36 (1) (xiv) Deduction of Amount Contributed to funds established for SSI.
Sec. 36 (1) (xv) Deduction of Securities Transaction Tax
Sec. 36 (1) (xvi) Deduction of Commodities Transaction Tax
Sec. 36 (1) (xvii) Deduction of Expenditure by co-operative society for purchase
(Fr. A Y 2016-17) of sugarcane
Sections 36(1)(i): Expenses for Insurance of stock - in Trade

Where any expenditure is incurred for Insurance of stocks then deduction of same is
allowed in P.Y. in which it is incurred.
Sections 36(1)(ia): Expenses for Insurance of cattles

Where any insurance premium is paid by Federal Milk Society for insurance of Cattle
of member of member co operative society then deduction shall be allowed in P.Y. in
which expenditure is incurred.
Section 36 (1) (ib) Expenses for Insurance of Health of Employee

Where any insurance premium is paid for Insurance of health of employee as per
scheme framed by General Insurance Corporation (GIC) or any other insurer then
deduction is allowed provided payment is made by A/c payee cheque.
Section 36 (1) (ii) - Expenditure for Bonus/Commission to Employee.

Where assessee has incurred any expenditure by way of bonus or commission to
employees then deduction shall be allowed in P.Y. in which such bonus or
commission is actually paid. Such bonus or commission should be otherwise than
distribution of net profit.
If bonus is in lieu of dividend than it is regarded as distribution of net profit and
deduction shall not be allowed.
67
As per one of the case law, if bonus is paid in excess of amount specified in Payment
of Bonus Act then also it is allowed as deduction provided it should be business
expedient.
Bonus Paid in lieu of return on cap shall not be allowed deduction.
Section 36(1)(xvii) Expenditure by Co - operative Society for purchase of
sugarcane
Under this clause, deduction will be allowed in respect of expenditure incurred by a
cooperative society (engaged in the business of manufacture of sugar) for purchase of
sugarcane at a price which is equal to (or less than) the price fixed or approved by the
Government.
Section 36(1) (iiia) : Discount on Zero Coupon Bond :
Where any company issue Zero coupon Bonds at a discount then, discount of such
bond is allowed as deduction on pro-rata basis.
Section 36 (1) (iv) : Deduction of Employer's Contribution to Approved Super
Annuation Fund or RPF:
Where any employer has contributed any amount to Recognized PF or Approved
Superannuation Fund then deduction of the same is allowed subject to Sec. 43 B. As
per Sec. 43B if amount incurred during P.Y. is deposited on or before due date of
filing return for that year then deduction shall be allowed on incurred basis i.e. in P.Y.
in which expenses is incurred. If amount is deposited after due date of filing return
then deduction shall be allowed in P.Y. in which it is actually paid.
E.g.
P.Y. Amount of Employers Paid on Due date of filling
Contribution
14-15 20,000 6000-1/10/14 31/7/ of A.Y. 15
7000-1/06/15
3000-1/12/15
4000-1/06/15
15-16 30,000 12000-1/07/16 31/7/of A.Y. 16
8000-1/06/17
10000-1/12/17
16-17 40,000 4000-1/12/17
17-18 60,000 30000-1/7/17
25000-1/6/18
5000-1/12/18-19
Calculate amount of deduction in each P.Y.U/s. 36 (1) (iv)
68
Sol :
Previous Year
No. 14-15 15-16 16-17 17-18 18-19

1 6000 6000 - - - -
2 7000 7000 - - - -
3 3000 - 3000 - - -
4 4000 - - 4000 - -
5 12000 - 12000 - - -
6 8000 - - - 8000 -
7 10000 - - - 10000 -
8 40000 - - - 40000 -
9 30000 - - - - -
10 25000 - - - 30000 -
11 5000 - - - 25000 5000
Total 13000 15000 4000 43000 5000
Section 36 (1) (iva) : Deductions of Employer's Contribution to Notified Pension

Fund :
Deduction under this section is allowed for employer's contribution to notified
pension fund 800CCD. Maximum deduction cannot exceed 10% of salary include
Basic + D A in terms + Fixed% of Commission on turnover.
Insofar as the IT Act is concerned, the assessee can get the benefit if the actual
payment is made before the return if filed. Sum deducted, by employer as
employee's contribution to PF & ESI shall be eligible as deduction even if the
payment is deposited after due date mentioned under relevant Acts but before
the due date of filing the return. [Aimil Ltd. (2010)(Del)].
Further, Utrakhand High Court in case of Kichha sugar company Le. (2013)
(Utrakhand) held that the due date referred to in section 36(1) (va) must be read in
conjuction with section 43B(b) to mean the due date of filing the return of income.
Similar view has been taken in the case of NIPSO poly fabrics Ltd (2013)(HP)].
However, the Mumbai tribunal in the case of LKP Securities Ltd. held that Aimil Ltd.
cannot be followed and the deductibility of employers contribution has to be seen
only with reference to section 36(1) (va) together with grace period.
69
Section 36(1) (vi) : Deduction of cost of Animal becoming useless or is dead :
Where assessee has any animal used for business of Assessee and such animal has
either died or became useless then cost of such animal shall be allowed as deduction.
As per one of the case, Assessee had horse which he used for running in race.
Certificate of one horse was cancelled due to consumption of drugs by such horse and
so was not allowed in any race anywhere. Assessee claimed cost of such horse as
deduction as it had become useless. Court allowed the same as deduction.
Section 36 (1) (iii) Expenditure by way of Interest on capital borrowed for the
purpose of Business or Profession:
Where assessee has paid any interest on any capital borrowed for the purpose of B or
P than such interest shall be allowed as deduction.
 Interest is PAID (Paid - Accrued or paid as per method of Accounting followed by
Assessee except in certain cases)
 Amount or capital is Borrowed
 Such amount is to be used for Business or profession.
 Amount borrowed or capital borrowed can be of any mode.
E.g.:- Debentures issued, loan from Bank, Loan from subsidiary company, loan from
other company can be regarded as loan or capital borrowed.
E.g.: Assessee is engaged in manufacturing of Goods and so take deposit from
customer so that they purchase goods or take delivery of goods. Interest paid on such
deposit is also regarded as Interest on Capital borrowed.
Q. Money is borrowed for payment of Income Tax.

Ans. Not for B or P. Income Tax is regarded as personal liability. Suppose Assessee
hastaken O/D facility & has paid income tax from it, then it does not have direct
nexus & so interest on such O/D cannot be disallowed.
 If Loan is for income which is exempt then interest not allowed as deduction.
 If Assessee has borrowed amount for payment of dividend, then interest on such
loan is allowed as deduction.
(* Due to timely payment of dividend, Goodwill of business is improved. So, business
expedient decision)
70
As per proviso to Sec. 36 (1) (iii) where Assessee has borrowed any amount
for purchase of any Asset for extension or otherwise of existing business, then no
deduction shall be allowed of interest paid on such amount borrowed upto date of put
to use of Asset (Refer Sec. 32)
Section 36 (1) (vii) : Deduction on account of Bad Debts:
Deduction under this section is allowed of following amounts:
a) Any amount which was receivable in course of business, for sale of goods etc. and
could not be recovered than same shall be allowed as bad debts provided it
wasconsidered in computation of income in current P.Y. or any earlier previous
years.
b) Amount lended in business of banking or business of lending money and could
notbe recovered.
For e.g.:- Mr. X. engaged in buying & selling of goods, sold goods of Rs. 45000 to
Mr. Y. in P. Y. 2009 - 10 This amount was regarded as sales of P. Y. 2009-10 In P.Y.
2014-15 assessee finds that he could not recover this amount so, claimed it as bad
debts and this will be allowed as deduction under (a) clause.
For e.g.: Mr. X engaged in business of lending money. During P.Y. 2010-11 he
lended Rs. 200,000/- to Mr. Y. During P Y 2017-18 he finds that he is not able to
recover loan of Rs 200,000/- & Interest of Rs 38000/- Mr. X will be allowed
deduction of Rs 200,000/- under (b) clause and Rs. 38000/- under (a) clause.
As per one of the case law, Assessee was engaged in business of trading on behalf of
customer. Income of Assessee was brokerage receivable from customer. Assessing
officer did not allow deduction of amount of loss incurred due to non - payment by
customer which included brokerage plus amount of transaction. Court allowed the
same as deduction.
What do you mean by considered in computation of Income?

This does not indicate that amount should be regarded as Income. If Assessee has sold
goods and amount of sales has credited to Trading and P&L A/C then it means that
amount is considered in Computation of Income.
If amount was considered as Income by preceeder and bad debts had been incurred by
successor then deduction of bad debts shall be allowed to successor. Any advance
given in normal course of business for carrying on business and which could not be
71
recovered is also allowed deduction u/s 36(1)(vii). For e.g.: Advance given to
customer, Loan to employee etc. Where any amount which is not recoverable is not of
revenue nature then no deduction shall be allowed under this section. As per one of
the case, Assessee had investment which was not held as Stock in trade, loss on such
investment due to decrease in price was not allowed as deduction.
Second proviso has been inserted in section 36(VII). It provides that if a debt becomes
irrecoverable on the basis of ICDS. (Income Computation and Disclosure Standard
without recording the same in the accounts, itshallbe allowedas deduction in the
previous year in which such debt becomes irrecoverable and it shall be deemed that
such debt has been written off as irrecoverable in the accounts for the purposes of
section.
Section 36 (1) (ix):- Expenditure for Family Planning.

Deduction under this section is allowed to company assessee. Deduction under this
section is allowed for following 2 expenses
(1) Revenue expenses incurred for family planning.
(2) Capital expenses incurred for family planning promotion among employees.
Deduction of capital expenditure is allowed in 5 equal installment cannot exceed
profit available. If in capital expenditure any asset has been purchased and it is sold
before its useful life, then treatment will be similar to asset acquired for scientific
research
Sec. 36(1)(xvi):- Commodities transaction tax

With effect from the assessment year 2014-15 it is provided that commodities
transaction tax paid by an assessee in respect of the taxable commodities transactions
entered into in the course of his business during the previous year shall be allowable
as deduction, if the income arising from such taxable commodities transactions is
included in the income computed under the head “Profits and gains of profession".
Section 37(1):- General Deduction: Where any assessee has incurred any
expenditure during previous year for the purposes of business or profession then
deduction shall beallowed under this section provided expenditure should not be of
capital nature or of personal nature. As per explanation to this section, no deduction
72
shall be allowed for any expenditure incurred for any activity which is offence under
any law or which is prohibited under any law.
Corporate social responsibility (CSR)
Under the Companies Act, 2013, certain companies (which have net worth of Rs. 500
crore or more, or turnover of Rs. 1000 crore or more, or a net profit of Rs.5 crore or
more during any financial year) are required to spend certain percentage of their profit
on activities relating to Corporate Social Responsibility (CSR).
A new Explanation has been inserted in section 37(1) so as to clarify that for the
purposes of section 37(1), any expenditure incurred by an assessee on the activities
relating to corporate social responsibility referred to in section 135 of companies Act,
2013 shall not be deemed to be an expenditure incurred by the assessee for the
purposes of the business or profession from the assessment year 2015- 16. However,
deduction may be claimed under any other section (if otherwise possible)
73
RESEARCH METHODOLOGY
OBJECTIVES
1. To study the calculation of income from business and profession and learn the
concepts and techniques to solve the problems.
2. To explain the numerous sections and provisions in income from business and
profession
3. To study various deductions and disallowances under income from business and
profession.
HYPOTHESIS
1. It helps to understand the functioning of taxation firms in India and learn to apply
knowledge to solve the problems faced by them with lieu of income from business
and profession
2. It helps in familiarizing and understanding the concepts of various sections ,

provisions, disallowance, deductions etc.
3. The main reason for selecting this topic is because I would love to join a taxation
firm after completion of my studies .
FOCUS OF STUDY
The main focus of study would be understanding the functioning of taxation firms.
The study will have detailed information regarding all the provisions, deductions,
various sections, disallowances, calculation of various concepts in computing income
from business and profession etc.
74
LIMITATIONS OF STUDY
1. The study is based on primary as well as secondary data. Therefore the findings of
secondary data may have its impact on the present study
2. There can be many more sections which could not be specified by me in the above
matter due to dynamic nature of taxation.
3. Due to time restrictions limited amount of data and information is collected.
DATA COLLECTION
PRIMARY DATA : Primary data is collected by discussing it with various teachers

who are teaching taxation or have a ample amount of knowledge about taxation. All
the sections and provisions are written down under their guidance and all the tables
prepared are with their help.
SECONDARY DATA: Secondary data is collected by the way of various books and
from internet websites .
1. BOOKS : Books are the best source of collecting data from . As we know they are
written by trained and professional people, the margin of error is quite low .
2. INTERNET: Nowadays internet websites had become an integral part of

everyone's life . Whatever we need we find it on Internet.
75
RESEARCH DESIGN

A research design is a plan for collecting, analysing and interpreting the data in a
manner that aims to combine research objective
2. A sample design is a definite design plan for obtaining a sample for a given
collected data.
3. Sample size consists of all the provisions, sections, deductions under the head of
income from business and profession.
76
LITERATURE REVIEW
Taxation Policy has been a widely debated issue all over the world. A large number of
studies have been conducted covering different aspects of income tax structure such
as personal income tax, capital gains taxation, agricultural taxation, efficiency of
income tax administration etc. over the years. In this chapter, the available literature
was studied to get an insight into the main objectives of the study. The review of
literature is confined to India only as income tax legal frame work varies from country
to country. Moreover, reports of important committees constituted by Government of
India have also been reviewed. A brief review of relevant studies in this regard is
given below:
Indian Taxation Enquiry Committee (1924) was appointed by Government of India

to examine the burden of taxation on different classes of people, equity of taxation
and to suggest alternative sources of taxation under the chairmanship of Charles
Todhunter. The committee recommended the following measures for improvement in
taxation of income:
1. Loss sustained in one year should be allowed to carry forward and set off in the
subsequent year.
2. The income of married couples should be taxed at the rates applicable to their
aggregate income
Kaldor (1956) was invited by the government of India in 1955 to review personal and
business tax in the Indian tax system with a view to augmenting resources for the
second five year plan. He found that prevailing taxation system in India at that time
was inefficient and inequitable. He recommended the introduction of an annual tax on
wealth, taxation of capital gains, a general gift tax and a personal expenditure tax for
broadening the tax base. For reducing the scope of tax evasion, he also recommended
the institution of a comprehensive reporting system on property transfers and other
transactions of capital nature. It was argued that all direct taxes should be assessed
simultaneously on the basis of a single comprehensive return. He further suggested
77
that maximum rate of tax on income should not exceed 45 52 per cent. Finally, it was
suggested that to ensure high standard of administration in the Revenue Department,
there should be an adequate increase in the range of salaries payable to income tax
officers
Singh (1971) examined depreciation provisions under the Income Tax Act with
special reference to their impact on corporate financial decisions. He pointed out that
sound depreciation policy could be adopted by the corporates to minimize their tax
liability. However, depreciation policy could not be used for sound financial decisions
because of some inherent weaknesses in the depreciation provisions under the Income
Tax Act viz. complicated tax depreciation structure with too many rates for different
categories of assets, absence of depreciation allowance on the live stock which were
disabled but could not be sold, difference between actual economic life of plant and
machinery and that depicted in tax laws etc. So the author stressed the need for a
rational and liberal deprecation policy to provide incentives for industrial
development and growth. In the end, he suggested that depreciation should be based
on replacement cost in place of historical cost of the asset.
Murti (1982) studied different aspect of income tax administration in India viz. origin
and development of income tax in India, the structure and organization of income tax
administration, public relations, recruitment and training of personnel as well as
morale of income tax personnel. The study reflected both strengths and weaknesses of
Indian Income Tax administration based on its historical evolution since the colonial
period. It highlighted that income tax officials were overburdened with work. The
service conditions in the department were not healthy for accomplishment of goals.
The reforms in administrative machinery were very slow. In the end, the researcher
stressed upon reviewing the income tax administration as a part of the larger Indian
bureaucracy
78
CONCLUSION




.
79
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University of Mumbai for partial completion of the

Under the Faculty of Commerce

AAKASH GAJANAN BORLE

Under the Guidance of

R A Podar College of Commerce & Economics

Matunga (East) Mumbai 400019

University of Mumbai for partial completion of the

Under the Faculty of Commerce

AAKASH GAJANAN BORLE

Under the Guidance of

R A Podar College of Commerce & Economics

Matunga (East) Mumbai 400019

R. A. PODAR COLLEGE OF COMMERCE AND

MATUNGA, MUMBAI-400 019.

Project Guide/Internal Examiner External Examiner

Dr. (Mrs.) Vinita Pimpale Dr. (Mrs.) Shobana Vasudevan

Course Co-ordinator Principal

Date: Seal of the College

R. A. PODAR COLLEGE OF COMMERCE AND

MATUNGA, MUMBAI-400 019.

Name of the learner: AAKASH GAJANAN BORLE

I would like to acknowledge the following as being idealistic channels and

I take this opportunity to thank the University of Mumbai for giving me

I would like to thank my Principal, Dr. Mrs. Shobana Vasudevan for

I would also like to express my sincere gratitude towards my project

I would like to thank my College Library, for having provided various

Signature of the Student

Chapter No. Title of the Chapter Page No.

1.1 Meaning of business and profession

1.2 Valuation of Inventory

1.6 Assets owned by assessee

1.7 Interest on money borrowed

1.8 Calculation of depreciation

1.9 Additional Depreciation

1.10 Unabsorbed Depreciation

1.12 Payment to specified person

1.13 Deemed Business Income

1.14 Maintenance of Books of Accounts

2.4 Need for study

2.6 Limitation of Study

INCOME FROM BUSINESS OR PROFESSION

Defined u/s 2(13) Defined u/s 2(36)

Business includes trade Commerce to manufacture &any adventure or concern in

Buying and Selling Goods.

Large scale buying and selling of goods

Definition of "manufacture"[Sec. 2(29BA)]

Any advantage or concern in nature of Trade, Commerce, or Manufacture:

Profession : [Sec. 2(36)]:

Profession include vocation.

Vocation: For which generally major part of life is spent.

Q. Whether profit objective is compulsory regarding activity as Business or

Section 28: Charging section:

[These are not Subsections as per Act]

company substantially, for change in terms & conditions of contract or

for change in terms & conditions of contract of Agency or its Termination.

organisation owned by Government, any asset or business owned by Assessee.

(3) Any amount received by any Trade or professional association or similar

(4) Any of the following export Incentive.

(a) Profit on sale of Import License.

(b) Cash subsidy from Government.

(c) Any duty drawback received.

(d) Transfer of any duty entitlement passbook or similar passbook.