↓G SiR

Be i
 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.185

UNIT – 3: PROFITS AND GAINS OF BUSINESS OR

PROFESSION

LEARNING OUTCOMES
After studying this unit, you would be able to-
comprehend the meaning of “business” and “profession” and the
scope of income chargeable to tax under this head;
comprehend the meaning of speculative transaction and the tax
treatment of loss incurred in speculation business;
identify the expenditures/payments which are admissible as
deduction, comprehend the conditions to be satisfied to avail such
deductions, the limits, if any, specified in respect thereof;
compute the deductions available while computing business income
applying the relevant provisions under default tax regime under
section 115BAC;
compute the deductions available while computing business income
applying the relevant provisions under normal provisions of the Act;
identify the expenditures/payments which are not admissible as
deduction;
identify the deductions allowable only on actual payment;
examine when certain receipts are deemed to be income chargeable
to tax under this head;
identify the assessees who are required to compulsorily maintain
books of account and get them audited;
apply the presumptive tax provisions under the Act to compute
income from eligible business or profession;
compute the business income by applying the charging and deeming
provisions and allowing permissible deductions;
compute the business income in cases where income is partly
agricultural and partly business in nature.

© The Institute of Chartered Accountants of India

 3.212 INCOME TAX LAW

PART B INTANGIBLE ASSETS

Know-how, patents, copyrights, trademarks, licences, franchises or 25%
any other business or commercial rights of similar nature, not
being goodwill of a business or profession

Note: Students should refer to Income-tax Rules, 1962 for the detailed
classification of assets under Rule 5(1) and the rates applicable thereto.

ILLUSTRATION 1
Mr. X, a proprietor engaged in manufacturing business, furnishes the following
particulars:

Particulars `
(1) Opening balance of plant and machinery as on 1.4.2023 (i.e., WDV 30,00,000
as on 31.3.2023 after reducing depreciation for P.Y. 2022-23)
(2) New plant and machinery purchased and put to use on 8.06.2023 20,00,000
(3) New plant and machinery acquired and put to use on 15.12.2023 8,00,000
(4) Computer acquired and installed in the office premises on 3,00,000
2.1.2024

Compute the amount of depreciation and additional depreciation for the A.Y. 2024-
25, if Mr. X has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A). Assume that all the assets were purchased by
way of account payee cheque.
SOLUTION
Computation of depreciation and additional depreciation for A.Y. 2024-25

Plant & Computer

Particulars Machinery (40%)
(15%)
Normal depreciation
@15% on ` 50,00,000 [See Working Notes 1 & 2] 7,50,000 -
@7.5% (50% of 15%, since put to use for less than
180 days) on ` 8,00,000 60,000 -
@20% (50% of 40%, since put to use for less than
180 days) on ` 3,00,000 - 60,000

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.213

Additional Depreciation
@20% on ` 20,00,000 (new plant and machinery 4,00,000 -
put to use for more than 180 days)
@10% (50% of 20%, since put to use for less than
180 days) on ` 8,00,000 80,000 -
Total depreciation 12,90,000 60,000

Working Notes:
(1) Computation of written down value of Plant & Machinery

Particulars Plant & Computer

Machinery
(`) (`)
Opening balance as on 1.4.2023 30,00,000 -
Add: Plant & Machinery purchased on 08.6.2023 20,00,000 -
Add: Plant & Machinery acquired on 15.12.2023 8,00,000 -
Computer acquired and installed in the office - 3,00,000
premises
Written down value as on 31.03.2024 58,00,000 3,00,000
(2) Composition of plant and machinery included in the WDV

Plant & Computer

Particulars Machinery
(`) (`)
Plant and machinery put to use for 180 days or 50,00,000
more [` 30,00,000 (WDV) + ` 20,00,000
(purchased on 8.6.2023)]
Plant and machinery put to use for < 180 days 8,00,000 -
Computers put to use for < 180 days - 3,00,000
58,00,000 3,00,000

Notes:
(1) Where an asset acquired during the previous year is put to use for less than
180 days in that previous year, the amount of deduction allowable as
normal depreciation and additional depreciation would be restricted to 50%
of amount computed in accordance with the prescribed percentage.

© The Institute of Chartered Accountants of India

 3.214 INCOME TAX LAW

Therefore, normal depreciation on plant and machinery acquired and put to

use on 15.12.2023 and computer acquired and installed on 02.01.2024, is
restricted to 50% of 15% and 40%, respectively. The additional depreciation
on the said plant and machinery is restricted to ` 80,000, being 10% (i.e.,
50% of 20%) of ` 8 lakh.

Mr. X is eligible for additional depreciation since he has exercised the

option of shifting out of the default tax regime provided under section
115BAC(1A).

(2) As per third proviso to section 32(1)(ii), the balance additional depreciation
of ` 80,000 being 50% of ` 1,60,000 (20% of ` 8,00,000) would be allowed as
deduction in the A.Y.2025-26.

(3) As per section 32(1)(iia), additional depreciation is allowable in the case of

any new machinery or plant acquired and installed after 31.3.2005 by an
assessee engaged, inter alia, in the business of manufacture or production
of any article or thing, @20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter
alia, any machinery or plant installed in office premises, residential
accommodation or in any guest house.
Accordingly, additional depreciation is not allowable on computer installed
in the office premises.

(5) Actual Cost [Section 43(1)]

The expression “actual cost” means the actual cost of the asset to the
assessee as reduced by that portion of the cost thereof, if any, as has been
met directly or indirectly by any other person or authority.
However, where an assessee incurs any expenditure for acquisition of any
asset or part thereof in respect of which a payment or aggregate of
payments made to a person in a day, otherwise than by an account payee
cheque drawn on a bank or account payee bank draft or use of electronic
clearing system through a bank account or through such other prescribed
electronic mode, exceeds ` 10,000, such expenditure shall not form part of
actual cost of such asset [Second proviso to section 43(1)].
The prescribed electronic modes include credit card, debit card, net
banking, IMPS (Immediate payment Service), UPI (Unified Payment
Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.217

the prior approval of the joint commissioner, may determine the

actual cost having regard to all the circumstances of the case.

In the Explanation 4A, a non-obstante clause has been included to the

effect that Explanation 4A will have an overriding effect over
Explanation 3. The result of this is that there is no necessity of finding
out whether the main purpose of the transaction is reduction of tax
liability. Explanation 4A is activated in every situation described above
without inquiring about the main purpose.

(vii) Building previously the property of the assessee: Where a building

which was previously the property of the assessee is brought into use
for the purposes of the business or profession, its actual cost to the
assessee shall be the actual cost of the building to the assessee, as
reduced by an amount equal to the depreciation calculated at the
rates in force on that date that would have been allowable had the
building been used for the purposes of the business or profession
since the date of its acquisition by the assessee [Explanation 5].
ILLUSTRATION 2
A car purchased by Dr. Soman on 10.08.2020 for ` 5,25,000 for personal
use is brought into professional use on 1.07.2023 by him, when its
market value was ` 2,50,000.
Compute the actual cost of the car and the amount of depreciation for the
A.Y. 2024-25 assuming the rate of depreciation to be 15%.
SOLUTION
As per section 43(1), the expression “actual cost” would mean the
actual cost of asset to the assessee.
The purchase price of ` 5,25,000 is, therefore, the actual cost of the
car to Dr. Soman. Market value (i.e. ` 2,50,000) on the date when the
asset is brought into professional use is not relevant.
Therefore, amount of depreciation on car as per section 32 for the
A.Y.2024-25 would be ` 78,750, being ` 5,25,000 x 15%.
Note: Explanation 5 to section 43(1) providing for reduction of notional
depreciation from the date of acquisition of asset for personal use to
determine actual cost of the asset is applicable only in case of building

© The Institute of Chartered Accountants of India

 3.218 INCOME TAX LAW

which is initially acquired for personal use and later brought into
professional use. It is not applicable in respect of other assets.

(viii) Capitalization of interest paid or payable in connection with

acquisition of an asset: Certain taxpayers have, with a view to obtain
more tax benefits and reduce the tax outflow, resorted to the method
of capitalising interest paid or payable in connection with acquisition
of an asset relatable to the period after such asset is first put to use.
This capitalisation implies inclusion of such interest in the ‘Actual Cost’
of the asset for the purposes of claiming depreciation, investment
allowance etc. under the Income-tax Act, 1961. This was never the
legislative intent nor was it in accordance with recognised accounting
practices. Therefore, with a view to counteracting tax avoidance through
this method and placing the matter beyond doubt, Explanation 8 to
section 43(1) provides that any amount paid or payable as interest in
connection with the acquisition of an asset and relatable to period after
asset is first put to use shall not be included and shall be deemed to
have never been included in the actual cost of the asset [Explanation 8].

(ix) Amount of duty of excise or additional duty leviable shall be

reduced if credit is claimed: Where an asset is or has been acquired
by an assessee, the actual cost of asset shall be reduced by the
amount of duty of excise or the additional duty leviable under section
3 of the Customs Tariff Act, 1975 in respect of which a claim of credit
has been made and allowed under the Central Excise Rules, 1944 5
[Explanation 9].
(x) Subsidy or grant or reimbursement: Where a portion of the cost of
an asset acquired by the assessee has been met directly or indirectly
by the Central Government or a State Government or any authority
established under any law or by any other person, in the form of a
subsidy or grant or reimbursement (by whatever name called), then, so
much of the cost as is relatable to such subsidy or grant or
reimbursement shall not be included in the actual cost of the asset to
the assessee.

5
Now Central Excise Rules, 2002

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.225

ORDER OF SET-OFF

Brought
Current Year Unabsorbed
forward
Depreciation depreciation
Business Loss

ILLUSTRATION 3

A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has
acquired the following assets in his office during F.Y. 2023-24 at the cost shown
against each item. Calculate the amount of depreciation that can be claimed from
his professional income for A.Y.2024-25. Assume that all the assets were purchased
by way of account payee cheque.

Sl. Description Date of Date when Amount

No. acquisition put to use `
1. Computer including computer software 27 Sept., 23 1 Oct., 23 35,000
2. Computer UPS 2 Oct., 23 8 Oct., 23 8,500
3. Computer printer 1 Oct., 23 1 Oct., 23 12,500
4. Books (other than annual 1 Apr., 23 1 Apr., 23 13,000
publications are of ` 12,000)
5. Office furniture 1 Apr., 23 1 Apr., 23 3,00,000
(Acquired from a practicing C.A.)
6. Laptop 26 Sep., 23 8 Oct., 23 43,000

SOLUTION
Computation of depreciation allowable for A.Y.2024-25

Asset Rate Depreciation

(`)
Block 1 Furniture [See working note below] 10% 30,000
Block 2 Plant (Computer including computer software,
Computer UPS, Laptop, Printers and Books) [See
working note below] 40% 34,500
Total depreciation allowable 64,500

© The Institute of Chartered Accountants of India

 3.226 INCOME TAX LAW

Working Note:
Computation of depreciation

Block of Assets `
Block 1: Furniture – [Rate of depreciation - 10%]
Put to use for more than 180 days [` 3,00,000@10%] 30,000
Block 2: Plant [Rate of depreciation- 40%]
(a) Computer including computer software (put to use for more than 14,000
180 days) [` 35,000 @ 40%]
(b) Computer UPS (put to use for less than 180 days) [` 8,500 @20%] 1,700
[See note below]
(c) Computer Printer (put to use for more than 180 days) [` 12,500 @40%] 5,000
(d) Laptop (put to use for less than 180 days) [` 43,000 @20%] [See 8,600
note below]
(e) Books (being annual publications or other than annual publications)
(Put to use for more than 180 days) [` 13,000 @40%] 5,200
34,500

Note - Where an asset is acquired by the assessee during the previous year and is put
to use for the purposes of business or profession for a period of less than 180 days,
the deduction on account of depreciation would be restricted to 50% of the prescribed
rate. In this case, since Mr. Dhaval commenced his practice in the P.Y. 2023-24 and
acquired the assets during the same year, the restriction of depreciation to 50% of the
prescribed rate would apply to those assets which have been put to use for less than
180 days in that year, namely, laptop and computer UPS.
ILLUSTRATION 4
Mr. Gamma, a proprietor started a business of manufacture of tyres and tubes for
motor vehicles on 1.1.2023. The manufacturing unit was set up on 1.5.2023. He
commenced his manufacturing operations on 1.6.2023. The total cost of the plant
and machinery installed in the unit is ` 120 crore. The said plant and machinery
included second hand plant and machinery bought for ` 20 crore and new plant
and machinery for scientific research relating to the business of the assessee
acquired at a cost of ` 15 crore.
Compute the amount of depreciation allowable under section 32 of the Income-tax
Act, 1961 in respect of the assessment year 2024-25. Assume that all the assets
were purchased by way of account payee cheque and Mr. Gamma has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A).

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.227

SOLUTION
Computation of depreciation allowable for the A.Y. 2024-25
in the hands of Mr. Gamma

Particulars ` in crore

Total cost of plant and machinery 120.00

Less: Used for Scientific Research (Note 1) 15.00

105.00

Normal Depreciation at 15% on ` 105 crore 15.75

Additional Depreciation:

Cost of plant and machinery 120.00

Less: Second-hand plant and machinery (Note 2) 20.00

Plant and machinery used for scientific

research, the whole of the actual cost of
which is allowable as deduction u/s 35(1)(iv)
15.00 35.00
read with section 35(2)(ia) (Note 2)

85.00

Additional Depreciation at 20% 17.00

Depreciation allowable for A.Y.2024-25 32.75

Notes:
1. As per section 35(2)(iv), no depreciation shall be allowed in respect of plant
and machinery purchased for scientific research relating to assessee’s
business, since deduction is allowable under section 35 in respect of such
capital expenditure.
2. Mr. Gamma is entitled to additional depreciation since he has exercised the
option of shifting out of the default tax regime provided under section
115BAC(1A). As per section 32(1)(iia), additional depreciation is allowable in
the case of any new machinery or plant acquired and installed after 31.3.2005
by an assessee engaged in, inter alia, the business of manufacture or
production of any article or thing, at the rate of 20% of the actual cost of such
machinery or plant.

© The Institute of Chartered Accountants of India

 3.228 INCOME TAX LAW

However, additional depreciation shall not be allowed in respect of, inter alia, –
(i) any machinery or plant which, before its installation by the assessee,
was used either within or outside India by any other person;
(ii) any machinery or plant, the whole of the actual cost of which is
allowed as a deduction (whether by way of depreciation or otherwise)
in computing the income chargeable under the head “Profit and gains
of business or profession” of any one previous year.
In view of the above provisions, additional depreciation cannot be claimed
in respect of -
(i) Second hand plant and machinery;
(ii) New plant and machinery purchased for scientific research relating to
assessee’s business in respect of which the whole of the capital
expenditure can be claimed as deduction under section 35(1)(iv) read
with section 35(2)(ia) & (iv).

(8) Building, machinery, plant and furniture not exclusively used for
business purpose [Section 38(2)]
Where any building, plant and machinery, furniture is not exclusively used
for the purposes of business or profession, the deduction on account of
expenses on account of current repairs to the premises, insurance premium
of the premises, current repairs and insurance premium of machinery, plant
and furniture and depreciation in respect of these assets shall be restricted
to a fair proportionate part thereof, which the Assessing Officer may
determine having regard to the user of such asset for the purposes of the
business or profession.
(9) Balancing Charge
Section 41(2) provides for the manner of calculation of the amount which
shall be chargeable to income-tax as income of the business of the previous
year in which the monies payable for the building, machinery, plant or
furniture on which depreciation has been claimed under section 32(1)(i), i.e.
in the case of power undertakings, is sold, discarded, demolished or
destroyed. The balancing charge will be the amount by which the moneys
payable in respect of such building, machinery, plant or furniture, together
with the amount of scrap value, if any, exceeds the written down value.

© The Institute of Chartered Accountants of India

 3.234 INCOME TAX LAW

(iv) Sum paid to National Laboratory, etc. [Section 35(2AA)]: Section

35(2AA) provides that any sum paid by an assessee to a National
Laboratory or University or Indian Institute of Technology or a
specified person for carrying out approved programmes of scientific
research approved by the prescribed authority will be eligible for
deduction of the amount so paid.
No other deduction under the Act: No contribution which qualifies
for deduction under this clause will be entitled to deduction under any
other provision of the Act.
It has been clarified that the deduction to which an assessee is entitled
on account of payment of any sum by him to an approved National
Laboratory, University, Indian Institute of Technology or a specified
person for the approved programme shall not be denied to the
donor-assessee merely on the ground that after payment of such sum
by him, the approval granted to any of the aforesaid donee-entities or
the programme has been withdrawn.

Term Meaning
Specified person A person who is approved by the prescribed authority

Deduction u/s 35(2AA) would be available to an assessee only

if he exercises the option of shifting out of the default tax
regime provided under section 115BAC(1A).

ILLUSTRATION 5
Mr. A, furnishes the following particulars for the P.Y.2023-24. Compute the
deduction allowable under section 35 for A.Y.2024-25, while computing his income
under the head “Profits and gains of business or profession”, if.
(i) he is paying tax under default tax regime under section 115BAC
(ii) he has exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A)

Particulars `
1. Amount paid to notified approved Indian Institute of Science, 1,00,000
Bangalore, for scientific research
2. Amount paid to IIT, Delhi for an approved scientific research 2,50,000
programme

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.235

3. Amount paid to X Ltd., a company registered in India which has 4,00,000

as its main object scientific research and development, as is
approved by the prescribed authority
4. Expenditure incurred on in-house scientific research and
development facility as approved by the prescribed authority
related to his business
(a) Revenue expenditure on scientific research 3,00,000
(b) Capital expenditure (including cost of acquisition of land 7,50,000
` 5,00,000) on scientific research

SOLUTION
(i) If Mr. A is paying tax under default tax regime under section 115BAC
Computation of deduction under section 35 for the A.Y.2024-25

Particulars ` Section Allowability Amount of

deduction (`)
Payment for
scientific research
Indian Institute of 1,00,000 35(1)(ii) Not allowable Nil
Science, Bangalore under default
tax regime
IIT, Delhi 2,50,000 35(2AA) Nil
X Ltd. 4,00,000 35(1)(iia) Nil
Expenditure incurred
on in-house research
and development
facility
Revenue expenditure 3,00,000 35(1)(i) Allowable 3,00,000
under default
Capital expenditure 2,50,000 35(1)(iv) 2,50,000
tax regime
(excluding cost of read with
acquisition of land 35(2)(ia)
` 5,00,000)
Deduction allowable under section 35 5,50,000

© The Institute of Chartered Accountants of India

 3.236 INCOME TAX LAW

(ii) If Mr. A has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A)
Computation of deduction under section 35 for the A.Y.2024-25

Particulars ` Section % of Amount of

deduction deduction (`)
Payment for scientific
research
Indian Institute of Science 1,00,000 35(1)(ii) 100% 1,00,000
IIT, Delhi 2,50,000 35(2AA) 100% 2,50,000
X Ltd. 4,00,000 35(1)(iia) 100% 4,00,000
Expenditure incurred on
in-house research and
development facility
Revenue expenditure 3,00,000 35(1)(i) 100% 3,00,000
Capital expenditure 2,50,000 35(1)(iv) 100% 2,50,000
(excluding cost of read with
acquisition of land 35(2)(ia)
` 5,00,000)
Deduction allowable under section 35 13,00,000

(v) “Investment-linked tax incentives” for specified businesses

[Section 35AD]
(1) List of specified businesses: Although there are a plethora of tax incentives
available under the Income-tax Act, 1961 they do not fulfill the intended
purpose of creating infrastructure since these incentives are linked to profits
and consequently, have the effect of diverting profits from the taxable
sector to the tax-free sector.
With the specific objective of creating rural infrastructure and environment
friendly alternate means for transportation of bulk goods, investment-linked
tax incentives have been introduced for specified businesses, namely –
setting-up and operating ‘cold chain’ facilities for specified products;
setting-up and operating warehousing facilities for storing agricultural
produce;

© The Institute of Chartered Accountants of India

 3.242 INCOME TAX LAW

(9) Set-off or carry forward and set-off of loss from specified business:
The loss of an assessee claiming deduction u/s 35AD in respect of a
specified business can be set-off against the profit of another specified
business u/s 73A, irrespective of whether the latter is eligible for deduction
u/s 35AD.
Example: A assessee, exercising the option of shifting out of the default tax
regime provided under section 115BAC(1A), can therefore, set-off the losses of
a hospital or hotel which begins to operate after 1st April, 2010 and which is
eligible for deduction section 35AD, against the profits of the existing business
of operating a hospital (with atleast 100 beds for patients) or a hotel (of two-
star or above category), even if the latter is not eligible for deduction under
section 35AD.

ILLUSTRATION 6
Mr. A commenced operations of the businesses of setting up a warehousing facility
for storage of food grains, sugar and edible oil on 1.4.2023. He incurred capital
expenditure of ` 80 lakh, ` 60 lakh and ` 50 lakh, respectively, on purchase of land
and building during the period January, 2023 to March, 2023 exclusively for the
above businesses, and capitalized the same in its books of account as on 1st April,
2023. The cost of land included in the above figures is ` 50 lakh, ` 40 lakh and ` 30
lakh, respectively. During the P.Y. 2023-24, he incurred capital expenditure of ` 20
lakh, ` 15 lakh & ` 10 lakh, respectively, for extension/reconstruction of the
building purchased and used exclusively for the above businesses.
Compute the income under the head “Profits and gains of business or profession”
for the A.Y.2024-25 and the loss to be carried forward, assuming that Mr. A is
exercising the option of shifting out of the default tax regime provided under
section 115BAC(1A) and has fulfilled all the conditions specified under section 35AD
and wants to claim deduction under section 35AD and has not claimed any
deduction under Chapter VI-A under the heading “C – Deductions in respect of
certain incomes”.
The profits from the business of setting up a warehousing facility for storage of food
grains, sugar and edible oil (before claiming deduction under section 35AD and
section 32) for the A.Y. 2024-25 is ` 16 lakhs, ` 14 lakhs and ` 31 lakhs,
respectively. Also, assume in respect of expenditure incurred, the payments are
made by account payee cheque or use of ECS through bank account.

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.243

SOLUTION
Computation of profits and gains of business or profession for A.Y.2024-25

Particulars ` (in lakhs)

Profit from business of setting up of warehouse for storage of 31
edible oil (before providing for depreciation under section 32)
Less: Depreciation under section 32
10% of ` 30 lakh, being (` 50 lakh – ` 30 lakh + ` 10 lakh) 3
Income chargeable under “Profits and gains from business or 28
profession”

Computation of income/loss from specified business under section 35AD

Food Sugar Total

Particulars Grains
` (in lakhs)
(A) Profits from the specified business of setting up
a warehousing facility (before providing
deduction u/s 35AD) 16 14 30
Less: Deduction under section 35AD
(B) Capital expenditure incurred prior to 1.4.2023
(i.e., prior to commencement of business) and
capitalized in the books of account as on
1.4.2023 (excluding the expenditure incurred on
acquisition of land) = ` 30 lakh (` 80 lakh – ` 50
lakh) and ` 20 lakh (` 60 lakh – ` 40 lakh) 30 20 50
(C) Capital expenditure incurred during the P.Y. 20 15 35
2023-24
(D) Total capital expenditure (B + C) 50 35 85
(E) Deduction under section 35AD
100% of capital expenditure (food grains/ sugar) 50 35 85
Total deduction u/s 35AD for A.Y.2024-25 50 35 85
(F) Loss from the specified business of setting up
and operating a warehousing facility (after
providing for deduction under section 35AD)
to be carried forward as per section 73A (A-E) (34) (21) (55)

© The Institute of Chartered Accountants of India

 3.244 INCOME TAX LAW

Notes:
(i) Deduction of 100% of the capital expenditure is available under section 35AD
for A.Y.2024-25 in respect of specified business of setting up and operating a
warehousing facility for storage of sugar and setting up and operating a
warehousing facility for storage of agricultural produce where operations are
commenced on or after 1.4.2012 or on or after 1.4.2009, respectively.

(ii) However, since setting up and operating a warehousing facility for storage of
edible oils is not a specified business, Mr. A is not eligible for deduction under
section 35AD in respect of capital expenditure incurred in respect of such business.
(iii) Mr. A can, however, claim depreciation@10% under section 32 in respect of
the capital expenditure incurred on buildings. It is presumed that the
buildings were put to use for more than 180 days during the P.Y.2023-24.
(iv) Loss from a specified business can be set-off only against profits from
another specified business. Therefore, the loss of ` 55 lakh from the
specified businesses of setting up and operating a warehousing facility for
storage of food grains and sugar cannot be set-off against the profits of
` 28 lakh from the business of setting and operating a warehousing facility
for storage of edible oils, since the same is not a specified business. Such
loss can, however, be carried forward indefinitely for set-off against profits
of the same or any other specified business.
ILLUSTRATION 7
Mr. Suraj, a proprietor, commenced operations of the business of a new three-star
hotel in Madurai, Tamil Nadu on 1.4.2023. He incurred capital expenditure of ` 50
lakh during the period January, 2023 to March, 2023 exclusively for the above
business, and capitalized the same in his books of account as on 1st April, 2023.
Further, during the P.Y. 2023-24, he incurred capital expenditure of ` 2 crore (out of
which ` 1.50 crore was for acquisition of land) exclusively for the above business.
Compute the income under the head “Profits and gains of business or profession”
for the A.Y.2024-25, assuming that he has fulfilled all the conditions specified under
section 35AD and opted for claiming deduction under section 35AD; and he has not
claimed any deduction under Chapter VI-A under the heading “C – Deductions in
respect of certain incomes”. He has exercised the option of shifting out of the
default tax regime provided under section 115BAC(1A).
The profits from the business of running this hotel (before claiming deduction under
section 35AD) for the A.Y.2024-25 is ` 25 lakhs. Assume that he also has another

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.245

existing business of running a four-star hotel in Coimbatore, which commenced

operations fifteen years back, the profits from which are ` 120 lakhs for the A.Y.2024-
25. Also, assume that payments for capital expenditure were made by net banking.
SOLUTION
Computation of profits and gains of business or profession for A.Y. 2024-25

Particulars `
Profits from the specified business of new hotel in Madurai 25 lakh
(before providing deduction under section 35AD)
Less: Deduction under section 35AD
Capital expenditure incurred during the P.Y.2023-24
(excluding the expenditure incurred on acquisition of
land) = ` 200 lakh – ` 150 lakh 50 lakh
Capital expenditure incurred prior to 1.4.2023 (i.e.,
prior to commencement of business) and capitalized in
the books of account as on 1.4.2023 50 lakh
Total deduction under section 35AD for A.Y.2024-25 100 lakh
Loss from the specified business of new hotel in Madurai (75 lakh)
Profit from the existing business of running a hotel in Coimbatore 120 lakh
Net profit from business after set-off of loss of specified business 45 lakh
against profits of another specified business under section 73A

(10) Other conditions contained under section 35AD

S. Particulars Condition
No.
1. Audit of The deduction shall be allowed to the assessee only if
accounts the accounts of the assessee for the relevant P.Y. have
been audited by a chartered accountant and the
assessee furnishes the audit report in the prescribed
form, duly signed and verified by such accountant.
2. Asset to be Section 35AD(7A) provides that any asset in respect
used for of which a deduction is claimed and allowed u/s
specified 35AD shall be used only for the specified business for
business for a period of eight years beginning with the previous
eight years year in which such asset is acquired or constructed.
3. (i) Asset If any asset on which a deduction u/s 35AD has been
demolished, claimed and allowed, is demolished, destroyed,

© The Institute of Chartered Accountants of India

 3.246 INCOME TAX LAW

destroyed, discarded or transferred, the sum received or receivable

discarded for the same is chargeable to tax u/s 28(vii).
or This does not take into account a case where asset on
transferred which deduction u/s 35AD has been claimed is used for
for which a any purpose other than the specified business by way of
deduction a mode other than that specified above.
has been
allowed
(ii) Asset As per section 35AD(7B), if asset is used for any
used for purpose other than the specified business during 8
any other years beginning with the previous year in which such
business asset is acquired, the total amount of deduction so
other than claimed and allowed in any previous year(s) in respect
specified of such asset, as reduced by the amount of
business depreciation allowable in accordance with the
during 8 provisions of section 32 as if no deduction had been
years allowed u/s 35AD, shall be deemed to be income of
the assessee chargeable under the head “Profits and
gains of business or profession” of the previous year in
which the asset is so used.
In such a case, as per the proviso to Explanation 13 to
Section 43(1), the actual cost of such asset for the
assesse shall be the actual cost as reduced by amount
of depreciation would have been allowable had the
asset been used for the purpose of business since the
date of its acquisition.

ILLUSTRATION 8
Mr. Arnav is a proprietor having two units – Unit A carries on specified business of
setting up and operating a warehousing facility for storage of sugar; Unit B carries on
non-specified business of operating a warehousing facility for storage of edible oil.
Unit A commenced operations on 1.4.2022 and it claimed deduction of ` 100 lacs
incurred on purchase of two buildings for ` 50 lacs each (for operating a warehousing
facility for storage of sugar) under section 35AD for A.Y.2023-24. However, in February,
2024, Unit A transferred one of its buildings to Unit B.
Examine the tax implications of such transfer in the hands of Mr. Arnav.

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.247

SOLUTION
Since the capital asset, in respect of which deduction of ` 50 lacs was claimed u/s
35AD, has been transferred by Unit A carrying on specified business to Unit B
carrying on non-specified business in the P.Y.2023-24, the deeming provision u/s
35AD(7B) is attracted during the A.Y.2024-25.

Particulars `
Deduction allowed u/s 35AD for A.Y.2023-24 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2023-24 [10% of ` 50 lacs] 5,00,000
Deemed income under section 35AD(7B) 45,00,000

Mr. Arnav, however, by virtue of proviso to Explanation 13 to section 43(1), can

claim depreciation u/s 32 on the building in Unit B for A.Y.2024-25. For the
purpose of claiming depreciation on building in Unit B, the actual cost of the
building would be:

Particulars `
Actual cost to the assessee 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2023-24 [10% of ` 50 lacs] 5,00,000
Actual cost in the hands of Mr. Arnav in respect of building in its 45,00,000
Unit B

(vi) Amortisation of Preliminary Expenses [Section 35D]

(1) Nature of expenditure: Section 35D provides for the amortisation of
preliminary expenses incurred by Indian companies and other resident non-
corporate taxpayers for the establishment of business concerns or the
expansion of the business of existing concerns.
(2) Applicable: This section applies
(a) only to Indian companies and resident non-corporate assessees;

(b) in the case of new companies to expenses incurred before the

commencement of the business;
(c) in the case of extension of an existing undertaking to expenses
incurred till the extension is completed, i.e., in the case of the setting
up of a new unit - expenses incurred till the new unit commences
production or operation.

© The Institute of Chartered Accountants of India

 3.264 INCOME TAX LAW

Example: Tax on royalty paid to Mr. A, a resident, has been deducted during the
previous year 2023-24, the same has to be paid by 31st July/ 31st October, 2024, as
the case may be. Otherwise, 30% of royalty paid would be disallowed in computing
the income for A.Y.2024-25. If in respect of such royalty, tax deducted during the
P.Y.2023-24 has been paid after 31st July/31st October, 2024, 30% of such royalty,
disallowed in A.Y.2024-25, would be allowed as deduction in the year of payment,
i.e., A.Y.2025-26.

Note - Students are advised to read Chapter 7 on “Advance tax, tax deduction at
source and tax collection at source” before solving this illustration.

ILLUSTRATION 9
Delta Ltd. credited the following amounts to the account of resident payees in the
month of March, 2024 without deduction of tax at source. What would be the
consequence of non-deduction of tax at source by Delta Ltd. on these amounts during
the financial year 2023-24, assuming that the resident payees in all the cases
mentioned below, have not paid the tax, if any, which was required to be deducted by
Delta Ltd.?
Particulars Amount in `
(1) Salary to its employee, Mr. X (credited and paid in March, 12,00,000
2024)
(2) Directors’ remuneration (credited in March, 2024 and paid 28,000
in April, 2024)

Would your answer change if Delta Ltd. has deducted tax on directors’ remuneration in
April, 2024 at the time of payment and remitted the same in July, 2024?
SOLUTION
Non-deduction of tax at source on any sum payable to a resident on which tax is
deductible at source as per the provisions of Chapter XVII-B would attract
disallowance u/s 40(a)(ia).
Therefore, non-deduction of tax at source on any sum paid by way of salary on
which tax is deductible u/s 192 or any sum credited or paid by way of directors’
remuneration on which tax is deductible u/s 194J, would attract
disallowance@30% u/s 40(a)(ia). Whereas in case of salary, tax has to be deducted
u/s 192 at the time of payment, in case of directors’ remuneration, tax has to be
deducted at the time of credit of such sum to the account of the payee or at the
time of payment, whichever is earlier. Therefore, in both the cases i.e., salary and

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.265

directors’ remuneration, tax is deductible in the P.Y.2023-24, since salary was paid
in that year and directors’ remuneration was credited in that year. Therefore, the
amount to be disallowed u/s 40(a)(ia) while computing business income for
A.Y.2024-25 is as follows –

Particulars Amount Disallowance u/s

paid in ` 40(a)(ia) @30%
(1) Salary 12,00,000 3,60,000
[tax is deductible under section 192]
(2) Directors’ remuneration 28,000 8,400
[tax is deductible under section 194J
without any threshold limit]
Disallowance under section 40(a)(ia) 3,68,400

If the tax is deducted on directors’ remuneration in the next year i.e., P.Y.2024-25 at
the time of payment and remitted to the Government, the amount of ` 8,400 would
be allowed as deduction while computing the business income of A.Y. 2025-26.

Disallowance of any sum paid to a resident at any time during the previous
year without deduction of tax under section 40(a)(ia) [Circular No.10/2013,
dated 16.12.2013]
There have been conflicting interpretations by judicial authorities regarding the
applicability of provisions of section 40(a)(ia), with regard to the amount not
deductible in computing the income chargeable under the head ‘Profits and gains
of business or profession’. Some court rulings have held that the provisions of
disallowance under section 40(a)(ia) apply only to the amount which remained
payable at the end of the relevant financial year and would not be invoked to
disallow the amount which had actually been paid during the previous year
without deduction of tax at source.
Departmental View: The CBDT’s view is that the provisions of section 40(a)(ia) would
cover not only the amounts which are payable as on 31st March of a previous year
but also amounts which are payable at any time during the year. The statutory
provisions are amply clear and in the context of section 40(a)(ia), the term "payable"
would include "amounts which are paid during the previous year".

© The Institute of Chartered Accountants of India

 3.266 INCOME TAX LAW

ILLUSTRATION 10
During the financial year 2023-24, the following payments/expenditure were made/
incurred by Mr. Raja, a resident individual (whose turnover during the year ended
31.3.2023 was ` 99 lacs):
(i) Interest of ` 45,000 was paid to Rehman & Co., a resident partnership firm,
without deduction of tax at source;
(ii) ` 10,00,000 was paid as salary to a resident individual without deduction of
tax at source;
(iii) Commission of ` 16,000 was paid to Mr. Vidyasagar, a resident, on 2.7.2023
without deduction of tax at source.
Briefly discuss whether any disallowance arises under the provisions of section
40(a)(ia) assuming that the payees in all the cases mentioned above, have not paid
the tax, if any, which was required to be deducted by Mr. Raja?
SOLUTION
Disallowance under section 40(a)(ia) of the Income-tax Act, 1961 is attracted
where the assessee fails to deduct tax at source as is required under the Act, or
having deducted tax at source, fails to remit the same to the credit of the Central
Government within the stipulated time limit.
(i) The obligation to deduct tax at source from interest paid to a resident arises
u/s 194A in the case of an individual, whose total turnover in the
immediately preceding P.Y., i.e., P.Y.2022-23 exceeds ` 1 crore. Thus, in
present case, since the turnover of the assessee is less than ` 1 crore, he is
not liable to deduct tax at source. Hence, disallowance u/s 40(a)(ia) is not
attracted in this case.
(ii) The disallowance of 30% of the sums payable under section 40(a)(ia) would be
attracted in respect of all sums on which tax is deductible under Chapter XVII-
B. Section 192, which requires deduction of tax at source from salary paid, is
covered under Chapter XVII-B. The obligation to deduct tax at source under
section 192 arises, in the hands all assessee-employer even if the turnover
amount does not exceed ` 1 crore in the immediately preceding previous year.
Therefore, in the present case, the disallowance under section 40(a)(ia) is
attracted for failure to deduct tax at source under section 192 from salary
payment. However, only 30% of the amount of salary paid without
deduction of tax at source would be disallowed.

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.267

(iii) The obligation to deduct tax at source under section 194H from commission
paid in excess of ` 15,000 to a resident arises in the case of an individual,
whose total turnover in the immediately preceding previous year, i.e.,
P.Y.2022-23 exceeds ` 1 crore. Thus, in present case, since the turnover of
the assessee is less than ` 1 crore, he is not liable to deduct tax at source
u/s 194H. Mr. Raja is not required to deduct tax at source u/s 194M also
since the aggregate of such commission to Mr. Vidyasagar does not exceed
` 50 lakh during the P.Y. 2023-24. Therefore, disallowance under section
40(a)(ia) is not attracted in this case.
(3) Section 40(a)(ii)
Any sum paid on account of any rate or tax levied on profits on the basis of or in
proportion to the profits and gains of any business or profession.
It is clarified that the term “tax” would include and would be deemed to have
always included any surcharge or cess on such tax. Hence, tax including surcharge
and cess would be disallowed while computing business income [Explanation 3 to
section 40(a)(ii)].
(4) Section 40(a)(iii)

Any sum which is chargeable under the head ‘Salaries’ if it is payable outside
India or to a non-resident and if the tax has not been paid thereon nor deducted
therefrom under Chapter XVII-B.

(5) Section 40(a)(iv)

Any contribution to a provident fund or the fund established for the benefit of
employees of the assessee, unless the assessee has made effective arrangements
to make sure that tax shall be deducted at source from any payments made from
the fund which are chargeable to tax under the head ‘Salaries’.
(6) Section 40(a)(v)
Tax paid on perquisites on behalf of employees is not deductible - In case of
an employee, deriving income in the nature of perquisites (other than monetary
payments), the amount of tax on such income paid by his employer is exempt
from tax in the hands of that employee.
Correspondingly, such payment is not allowed as deduction from the income of
the employer. Thus, the payment of tax on non-monetary perquisites by an

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.269

(4) Interest to any partner in excess of 12% p.a.- Any interest payment
authorised by the partnership deed falling after the date of such deed to
the extent such interest exceeds 12% simple interest p.a.
(5) Remuneration to a working partner in excess of prescribed limits - Any
remuneration paid to a working partner, authorised by a partnership deed
and falling after the date of the deed in excess of the following limits:

Book Profit Quantum of deduction

On the first ` 3 lakh of book ` 1,50,000 or 90% of book profit,
profit or in case of loss whichever is higher
On the balance of book profit 60% of book profit

(6) Meaning of certain terms:

Term Meaning
Book The net profit as shown in the profit and loss account for the
Profit relevant previous year computed in accordance with the
provisions for computing income from profits and gains
[Explanation 3 to section 40(b)].
The above amount should be increased by the remuneration
paid or payable to all the partners of the firm if the same has
been deducted while computing the net profit.
Working An individual who is actively engaged in conducting the
partner affairs of the business or profession of the firm of which he is
a partner [Explanation 4 to section 40(b)]

ILLUSTRATION 11
A firm has paid ` 7,50,000 as remuneration to its partners for the
P.Y.2023-24, in accordance with its partnership deed, and it has a book profit
of ` 10 lakh. What is the remuneration allowable as deduction?
SOLUTION
The allowable remuneration calculated as per the limits specified in section
40(b)(v) would be –

Particulars `
On first ` 3 lakh of book profit [` 3,00,000 × 90%] 2,70,000

© The Institute of Chartered Accountants of India

 3.270 INCOME TAX LAW

On balance ` 7 lakh of book profit [` 7,00,000 × 60%] 4,20,000

6,90,000

The excess amount of ` 60,000 (i.e., ` 7,50,000 – ` 6,90,000) would be

disallowed as per section 40(b)(v).
(7) Explanations to section 40(b)
(1) Where an individual is a partner in a firm in a representative capacity:
(i) interest paid by the firm to such individual otherwise than as
partner in a representative capacity shall not be taken into
account for the purposes of this clause.
(ii) interest paid by the firm to such individual as partner in a
representative capacity and interest paid by the firm to the
person so represented shall be taken into account for the
purposes of this clause [Explanation 1 to section 40(b)]
(2) Where an individual is a partner in a firm otherwise than in a
representative capacity, interest paid to him by the firm shall not be
taken into account if he receives the same on behalf of or for the
benefit of any other person [Explanation 2 to section 40(b)].
ILLUSTRATION 12
Rao & Jain, a partnership firm consisting of two partners, reports a net profit of
` 7,00,000 before deduction of the following items:
(1) Salary of ` 20,000 each per month payable to two working partners of the
firm (as authorized by the deed of partnership).

(2) Depreciation on plant and machinery under section 32 (computed) ` 1,50,000.

(3) Interest on capital at 15% per annum (as per the deed of partnership). The
amount of capital eligible for interest is ` 5,00,000.
Compute:
(i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
(ii) Allowable working partner salary for the A.Y. 2024-25 as per section 40(b).

SOLUTION
(i) As per Explanation 3 to section 40(b), “book profit” shall mean the net profit
as per the profit and loss account for the relevant previous year computed

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.271

in the manner laid down in Chapter IV-D as increased by the aggregate

amount of the remuneration paid or payable to the partners of the firm if
the same has been already deducted while computing the net profit.
In the present case, the net profit given is before deduction of depreciation
on plant and machinery, interest on capital of partners and salary to the
working partners. Therefore, the book profit shall be as follows:
Computation of Book Profit of the firm under section 40(b)
Particulars ` `
Net Profit (before deduction of depreciation, salary 7,00,000
and interest)
Less: Depreciation under section 32 1,50,000
Interest @ 12% p.a. [being the maximum
allowable as per section 40(b)] (` 5,00,000 ×12%) 60,000 2,10,000
Book Profit 4,90,000

(ii) Salary actually paid to working partners = ` 20,000 × 2 × 12 = ` 4,80,000.

As per the provisions of section 40(b)(v), the salary paid to the working
partners is allowed subject to the following limits -

On the first ` 3,00,000 of ` 1,50,000 or 90% of book profit, whichever

book profit or in case of loss is more
On the balance of book profit 60% of the balance book profit

Therefore, the maximum allowable working partners’ salary for the

A.Y. 2024-25 in this case would be:
Particulars `
On the first ` 3,00,000 of book profit [(` 1,50,000 or 90% of 2,70,000
` 3,00,000) whichever is more]
On the balance of book profit [60% of (` 4,90,000 - 1,14,000
` 3,00,000)]
Maximum allowable partners’ salary 3,84,000
Hence, allowable working partners’ salary for the A.Y.2024-25 as per the
provisions of section 40(b)(v) is ` 3,84,000.

© The Institute of Chartered Accountants of India

 3.280 INCOME TAX LAW

(iv) Contributions by employers to funds, trust etc. [Section 40A(9)]

This sub-section has been introduced to curb the growing practice amongst
employers to claim deductions from taxable profits of the business of
contributions made apparently to the welfare of employees from which, however,
no genuine benefit flows to the employees.

Accordingly, no deduction will be allowed where the assessee pays in his capacity
as an employer, any sum towards setting up or formation of or as contribution to
any fund, trust, company, association of persons, body of individuals, society
registered under the Societies Registration Act, 1860 or other institution for any
purpose.
However, where such sum is paid in respect of funds covered by sections 36(1)(iv),
36(1)(iva) and 36(1)(v) or any other law, then, the deduction will not be denied.
ILLUSTRATION 13
X Ltd. contributes 20% of basic salary to the account of each employee under a
pension scheme referred to in section 80CCD. Dearness Allowance is 40% of basic
salary and it forms part of pay of the employees.
Compute the amount of deduction allowable under section 36(1)(iva), if the basic
salary of the employees aggregate to ` 10 lakh. Would disallowance under section
40A(9) be attracted, and if so, to what extent?
SOLUTION
Computation of deduction u/s 36(1)(iva) and disallowance u/s 40A(9)

Particulars `
Basic Salary 10,00,000
Dearness Allowance@40% of basic salary [DA forms part of pay] 4,00,000
Salary for the purpose of section 36(1)(iva) (Basic Salary + DA) 14,00,000
Actual contribution (20% of basic salary i.e., 20% of ` 10 lakh) 2,00,000
Less: Permissible deduction under section 36(1)(iva) (10% of
basic salary plus dearness pay = 10% of ` 14,00,000 = 1,40,000
` 1,40,000)
Excess contribution disallowed under section 40A(9) 60,000

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.285

expenditure deserving deduction in the computation of income. Therefore,

irrespective of the nomenclature, the deduction will be allowed in the previous
year in which the converted interest is actually paid.
ILLUSTRATION 14
Hari, an individual, carried on the business of purchase and sale of agricultural
commodities like paddy, wheat, etc. He borrowed loans from Andhra Pradesh State
Financial Corporation (APSFC) and Indian Bank and has not paid interest as detailed
hereunder:
`
(i) Andhra Pradesh State Financial Corporation (P.Y. 2022-23 & 2023-24) 15,00,000
(ii) Indian Bank (P.Y. 2023-24) 30,00,000
45,00,000
Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during
the year 2023-24, converted the above interest payable by Hari to them as a loan
repayable in 60 equal installments. During the year ended 31.3.2024, Hari paid 5
installments to APSFC and 3 installments to Indian Bank.
Hari claimed the entire interest of ` 45,00,000 as an expenditure while computing
the income from business of purchase and sale of agricultural commodities.
Examine whether his claim is valid and if not what is the amount of interest, if any,
allowable.
SOLUTION
According to section 43B, any interest payable on the term loans to specified
financial institutions and any interest payable on any loans and advances to, inter
alia, scheduled banks shall be allowed only in the year of payment of such
interest irrespective of the method of accounting followed by the assessee. Where
there is default in the payment of interest by the assessee, such unpaid interest
may be converted into loan. Such conversion of unpaid interest into loan shall not
be construed as payment of interest for the purpose of section 43B. The amount
of unpaid interest so converted as loan shall be allowed as deduction only in the
year in which the converted loan is actually paid.
In the given case of Hari, the unpaid interest of ` 15,00,000 due to APSFC and of
` 30,00,000 due to Indian Bank was converted into loan. Such conversion would
not amount to payment of interest and would not, therefore, be eligible for
deduction in the year of such conversion. Hence, claim of Hari that the entire

© The Institute of Chartered Accountants of India

 3.286 INCOME TAX LAW

interest of ` 45,00,000 is to be allowed as deduction in the year of conversion is

not tenable. The deduction shall be allowed only to the extent of repayment
made during the financial year. Accordingly, the amount of interest eligible for
deduction for the A.Y.2024-25 shall be calculated as follows:
Interest Number of Amount Instalments Interest
outstanding Instalments per paid allowable
instalment (`)
APSFC 15 lakh 60 25,000 5 1,25,000
Indian Bank 30 lakh 60 50,000 3 1,50,000
Total amount eligible for deduction 2,75,000

Clarification on non-applicability of section 43B on employee's Contribution

to welfare funds [Explanation 5 to section 43B]
As per section 2(24)(x), any sum received by an assessee, being an employer from
his employee as contribution to any provident fund or superannuation fund or
any fund set up under Employee’s State Insurance Act, 1948 or any other fund for
the welfare of employees would be considered as the income of an employer.
The deduction in respect of above sum will be allowed to the assessee under
section 36(1)(va) only if such sum is credited by the assessee to the employee’s
account in the relevant fund on or before the due date, being the date specified
under the relevant Act, Rule, order or notification issued thereunder.
As per section 43B, any sum payable by the assessee as an employer by way of
contribution to any provident fund or superannuation fund or gratuity fund or
any other fund for the welfare of employees, would be allowable during any P.Y. if
the same has been paid on or before the 'due date' applicable in his case for
furnishing the return of income under section 139(1) in respect of that P.Y.
Explanation 5 clarifies that the provisions of section 43B regarding allowability of
certain expenditure in a previous year only on actual payment basis (i.e., payment
on or before the due date of filing of return of income for relevant assessment
year), does not apply and would deemed never to be applied to employee’s
contribution received by employer towards any welfare fund. In effect, clause (b)
of section 43B covers only employer’s contribution to provident fund,
superannuation fund, gratuity fund or any other fund for welfare of employees,
for remittance of which extended time limit upto due date of filing return u/s
139(1) is available; however, it does not include within its scope, employees’

© The Institute of Chartered Accountants of India

 3.290 INCOME TAX LAW

The term ‘assessable’ has been defined to mean the price which the stamp
valuation authority would have, notwithstanding anything to the contrary
contained in any other law for the time being in force, adopted or assessed, if it
were referred to such authority for the purposes of the payment of stamp duty.

Date of Actual Stamp Stamp duty Full value Remark

transfer of consider- duty value value (SDV) on of
land/ ation on the the date of considera-
building date of registration tion
held as agreement
stock-in- ` in lakhs
trade
Example:
1/9/2023 100 120 130 120 As part of the
(` 10 lakhs (1/7/2023) (1/9/2023) consideration is
received by received by A/c
A/c payee payee cheque on
cheque on the date of
1/7/2023) agreement,
Stamp duty value
(SDV) on the date
of agreement to
be adopted as
full value of
consideration,
since the SDV
exceeds 110% of
consideration i.e.,
` 110 lakhs.
Example:
1/9/2023 100 109 130 130 SDV on the date of
(` 10 lakhs (1/7/2023) (1/9/2023) registration to be
received by adopted as full
cash on value of
1/7/2023) consideration and
such SDV exceeds
110% of
consideration i.e.,
` 110 lakhs. Since
part of
consideration is
received by cash

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.291

on the date of
agreement, the
SDV on the date of
agreement cannot
be considered vis-
à-vis actual
consideration.
Example:
31/1/2024 100 109 130 100 Actual sales
(` 10 lakhs (1/7/2023) (31/1/2024) consideration
received by would be the full
A/c payee value of
cheque on consideration,
1/7/2023) since SDV on the
date of agreement
does not exceed
110% of actual
consideration. SDV
on the date of
agreement can be
considered vis-à-
vis actual
consideration,
since part of the
consideration has
been received by
account payee
cheque on the
date of agreement.
Example:
31/3/2024 100 120 130 130 SDV of the date
(Full (1/5/2023) (31/3/2024) of registration
amount would be the full
received in value of
cash on the consideration
date of since the SDV
registration) exceeds 110% of
consideration i.e.,
` 110 lakhs.

© The Institute of Chartered Accountants of India

 3.294 INCOME TAX LAW

books for each place of his profession, such books and documents may be
kept and maintained at the respective places.

Period for which the books of account and other documents are
required to be kept and maintained by notified professions: The Central
Board of Direct Taxes has also been empowered to prescribe, by rules, the
period for which the books of account and other documents are required to
be kept and maintained by the taxpayer.
The above books of account and documents shall be kept and maintained
for a minimum of 6 years from the end of the relevant assessment year.
ILLUSTRATION 15
Vinod is a person carrying on profession as film artist. His gross receipts from
profession are as under:
Particulars `
Financial year 2020-21 1,15,000
Financial year 2021-22 1,80,000
Financial year 2022-23 2,10,000
What is his obligation regarding maintenance of books of accounts for
Assessment Year 2024-25 under section 44AA of Income-tax Act, 1961?
SOLUTION
Section 44AA(1) requires every person carrying on any profession, notified
by the Board in the Official Gazette (in addition to the professions already
specified therein), to maintain such books of account and other documents
as may enable the Assessing Officer to compute his total income in
accordance with the provisions of the Income-tax Act, 1961.
As per Rule 6F, a person carrying on a notified profession shall be required
to maintain specified books of accounts:

(i) if his gross receipts in all the three years immediately preceding the
relevant previous year has exceeded ` 1,50,000; or
(ii) if it is a new profession which is setup in the relevant previous year, it
is likely to exceed ` 1,50,000 in that previous year.

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.295

In the present case, Vinod is a person carrying on profession as film artist,

which is a notified profession. Since his gross receipts have not exceeded
` 1,50,000 in financial year 2020-21, the requirement under section 44AA to
compulsorily maintain the prescribed books of account is not applicable to
him.

Mr. Vinod, however, required to maintain such books of accounts as would

enable the Assessing Officer to compute his total income.
(2) Maintenance of books of account and other documents by persons
carrying on business or profession [other than notified professions
referred to in section 44AA(1)] [Section 44AA(2)]
I. In case of Individual or HUF: An Individual or HUF carrying on any
business or profession (other than notified professions specified in section
44AA(1)) must maintain such books of account and other documents as
may enable the Assessing Officer to compute his total income in
accordance the provisions of the Income-tax Act, 1961 in the following
circumstances:
(i) Existing business or profession: In cases where the income
from the existing business or profession exceeds ` 2,50,000 or
the total sales, turnover or gross receipts, as the case may be,
in the business or profession exceed ` 25,00,000 in any one of
three years immediately preceding the accounting year; or
(ii) Newly set up business or profession: In cases where the
business or profession is newly set up in any previous year, if his
income from business or profession is likely to exceed
` 2,50,000 or his total sales, turnover or gross receipts, as the
case may be, in the business or profession are likely to exceed
` 25,00,000 during the previous year.
II. Person (other than individual or HUF): Every person (other than
individual or HUF) carrying on any business or profession [other than
the notified professions referred to in section 44AA(1)] must maintain
such books of account and other documents as may enable the
Assessing Officer to compute his total income in accordance the
provisions of the Income-tax Act, 1961 in the following circumstances:

© The Institute of Chartered Accountants of India

 3.306 INCOME TAX LAW

Example:
Let us consider the following particulars relating to a resident individual, Mr. A,
being an eligible assessee carrying on retail trade business whose total turnover do
not exceed ` 2 crore in any of the previous year relevant to A.Y.2024-25 to
A.Y.2026-27-

Particulars A.Y.2024-25 A.Y.2025-26 A.Y.2026-27

Total turnover (`) 1,80,00,000 1,90,00,000 2,00,00,000
Amount received through 1,60,00,000 1,45,00,000 1,80,00,000
prescribed electronic modes on or
before 31st October of the A.Y.
Income offered for taxation (`) 11,20,000 12,30,000 10,00,000
% of gross receipts 6% on ` 1.60 6% on ` 1.45 5% on ` 2
crore and 8% crore and 8% crore
on ` 20 lakhs on ` 45 lakhs
Offered income as per presumptive Yes Yes No
taxation scheme u/s 44AD

In the above case, Mr. A, an eligible assessee, opts for presumptive taxation under
section 44AD for A.Y.2024-25 and A.Y.2025-26 and offers income of ` 11.20 lakh
and ` 12.30 lakh on gross receipts of ` 1.80 crore and ` 1.90 crore, respectively.
However, for A.Y.2026-27, he offers income of only ` 10 lakh on turnover of ` 2
crore, which amounts to 5% of his gross receipts. He maintains books of account
under section 44AA and gets the same audited under section 44AB. Since he has
not offered income in accordance with the provisions of section 44AD(1) for five
consecutive assessment years, after A.Y. 2024-25, he will not be eligible to claim the
benefit of section 44AD for next five assessment years succeeding A.Y.2026-27 i.e.,
from A.Y.2027-28 to 2031-32.
ILLUSTRATION 16

Mr. Praveen engaged in retail trade, reports a turnover of ` 2,98,50,000 for the
financial year 2023-24. Amount received in cash during the P.Y. 2023-24 is
` 14,00,000 and balance through prescribed electronic modes on or before 31st October
2024. His income from the said business as per books of account is ` 15,00,000
computed as per the provisions of Chapter IV-D “Profits and gains from business or
Profession” of the Income-tax Act, 1961. Retail trade is the only source of income
for Mr. Praveen. A.Y. 2023-24 was the first year for which he declared his business
income in accordance with the provisions of presumptive taxation u/s 44AD.

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.307

(i) Is Mr. Praveen also eligible for presumptive determination of his income
chargeable to tax for the assessment year 2024-25?
(ii) If so, determine his income from retail trade as per the applicable presumptive
provision.
(iii) In case Mr. Praveen wants to declare profits as per books of account from
retail trade, what are his obligations under the Income-tax Act, 1961?
(iii) What is the due date for filing his return of income under both the options?
SOLUTION
(i) Yes. Since his cash receipts during the P.Y. does not 5% of the total turnover
(14,00,000/2,98,50,000 x 100) and his total turnover for the F.Y.2023-24 is
below ` 300 lakhs, he is eligible for presumptive taxation scheme under
section 44AD in respect of his retail trade business.
(ii) His income from retail trade, applying the presumptive tax provisions under
section 44AD, would be ` 18,19,000 (` 1,12,000, being 8% of ` 14,00,000 +
` 17,07,000, being 6% of ` 2,84,50,000).
(iii) Mr. Praveen had declared profit for the previous year 2022-23 in accordance
with the presumptive provisions and if he wants to declare profits as per
books of account which is lower than the presumptive income for any of the
five consecutive assessment years i.e., A.Y. 2024-25 to A.Y. 2028-29, he
would not be eligible to claim the benefit of presumptive taxation for five
assessment years subsequent to the assessment year relevant to the
previous year in which the profit has not been declared in accordance the
presumptive provisions i.e. if he declares profits lower than the presumptive
income in say P.Y. 2023-24 relevant to A.Y.2024-25, then he would not be
eligible to claim the benefit of presumptive taxation for A.Y. 2025-26 to
A.Y. 2029-30.
Consequently, Mr. Praveen is required to maintain the books of accounts
and get them audited under section 44AB, since his income exceeds the
basic exemption limit.
(iv) In case he declares presumptive income under section 44AD, the due date
would be 31 st July, 2024.
In case he declares profits as per books of account which is lower than the
presumptive income, he is required to get his books of account audited, in
which case the due date for filing of return of income would be 31st
October, 2024.

© The Institute of Chartered Accountants of India

 3.308 INCOME TAX LAW

ILLUSTRATION 17
Mr. X commenced the business of operating goods vehicles on 1.4.2023. He
purchased the following vehicles during the P.Y.2023-24. Compute his income
under section 44AE for A.Y.2024-25.
Gross Vehicle Weight Number Date of purchase
(in kilograms)
(1) 7,000 2 10.04.2023
(2) 6,500 1 15.03.2024
(3) 10,000 3 16.07.2023
(4) 11,000 1 02.01.2024
(5) 15,000 2 29.08.2023
(6) 15,000 1 23.02.2024
Would your answer change if the goods vehicles purchased in April, 2023 were put
to use only in July, 2023?
SOLUTION
Since Mr. X does not own more than 10 vehicles at any time during the previous
year 2023-24, he is eligible to opt for presumptive taxation scheme under section
44AE. ` 1,000 per ton of gross vehicle weight or unladen weight per month or
part of the month for each heavy goods vehicle and ` 7,500 per month or part of
month for each goods carriage other than heavy goods vehicle, owned by him
would be deemed as his profits and gains from such goods carriage.

Heavy goods vehicle means any goods carriage, the gross vehicle weight of which
exceeds 12,000 kg.

(1) (2) (3) (4)

Number of Date of No. of months for No. of months × No. of
Vehicles purchase which vehicle is vehicles
owned [(1) × (3)]
For Heavy goods vehicle
2 29.08.2023 8 16
1 23.02.2024 2 2
18

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.309

For goods vehicle other than heavy goods vehicle

2 10.4.2023 12 24
1 15.3.2024 1 1
3 16.7.2023 9 27
1 02.1.2024 3 3
55

The presumptive income of Mr. X under section 44AE for A.Y.2024-25 would be -
` 6,82,500, i.e., 55 × ` 7,500, being for other than heavy goods vehicle + 18 x
` 1,000 x 15 ton being for heavy goods vehicle.
The answer would remain the same even if the two vehicles purchased in April, 2023
were put to use only in July, 2023, since the presumptive income has to be calculated
per month or part of the month for which the vehicle is owned by Mr. X.

3.16 COMPUTATION OF BUSINESS INCOME IN

CASES WHERE INCOME IS PARTLY
AGRICULTURAL AND PARTLY BUSINESS IN
NATURE
Taxability in case of composite income

Rule Nature of composite income Business Agricultural

income Income
(Taxable) (Exempt)
7A Income from sale of rubber products 35% 65%
derived from rubber plants grown by the
seller in India
7B Income from sale of coffee
- grown and cured by the seller in India 25% 75%
- grown, cured, roasted and grounded by
the seller in India 40% 60%
8 Income from sale of tea grown and 40% 60%
manufactured by the seller in India

© The Institute of Chartered Accountants of India

 3.310 INCOME TAX LAW

Notes –
(1) In computing income from sale of tea/sale of rubber/sale of coffee, an
allowance shall be made in respect of the cost of planting bushes/rubber
plants/coffee plants in replacement of bushes/plants that have died or become
permanently useless in an area already planted, if such area has not previously
been abandoned. For the purpose of determining such cost, no deduction shall
be made in respect of the amount of any subsidy which, under the provision of
section 10(30) or 10(31), respectively, is not includible in the total income.

(2) Section 10(30) provides exemption of subsidy received by an assessee

carrying on the business of growing and manufacturing tea in India from or
through the Tea Board for replantation or replacement of tea bushes or for
rejuvenation or consolidation of areas used for cultivation of tea, subject to
fulfillment of specified conditions.
(3) Section 10(31) provides exemption of subsidy received by an assessee
carrying on the business of growing and manufacturing rubber, coffee,
cardamom or other notified commodity in India from or through concerned
Board for replantation or replacement of rubber plants, coffee plants,
cardamom plants or plants for the growing of other notified commodity or
for rejuvenation or consolidation of areas used for cultivation of rubber,
coffee, cardamom or other notified commodity, subject to fulfillment of
specified conditions.
ILLUSTRATION 18
Miss Vivitha, a resident and ordinarily resident in India, has derived the following
income from various operations (relating to plantations and estates owned by her)
during the year ended 31-3-2024:

S. No. Particulars `
(i) Income from sale of centrifuged latex processed from rubber 3,00,000
plants grown in Darjeeling.
(ii) Income from sale of coffee grown and cured in Yercaud, Tamil 1,00,000
Nadu.
(iii) Income from sale of coffee grown, cured, roasted and grounded, 2,50,000
in Colombo. Sale consideration was received at Chennai.
(iv) Income from sale of tea grown and manufactured in Shimla. 4,00,000
(v) Income from sapling and seedling grown in a nursery at 80,000
Cochin. Basic operations were not carried out by her on land.

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.311

You are required to compute the business income and agricultural income of Miss
Vivitha for the A.Y. 2024-25.
SOLUTION
Computation of business income and agricultural income of
Ms. Vivitha for the A.Y.2024-25

Sr. Source of income Gross Business income Agricultural

No. (`) income
% ` `
(i) Sale of centrifuged latex 3,00,000 35% 1,05,000 1,95,000
from rubber plants grown
in India.
(ii) Sale of coffee grown and 1,00,000 25% 25,000 75,000
cured in India.
(iii) Sale of coffee grown, cured, 2,50,000 100% 2,50,000 -
roasted and grounded
outside India. (See Note 1
below)
(iv) Sale of tea grown and 4,00,000 40% 1,60,000 2,40,000
manufactured in India
(v) Saplings and seedlings
grown in nursery in India 80,000 Nil 80,000
(See Note 2 below)
Total 5,40,000 5,90,000

Notes:
1. Where income is derived from sale of coffee grown, cured, roasted and
grounded by the seller in India, 40% of such income is taken as business
income and the balance as agricultural income. However, in this question, these
operations are done in Colombo, Sri lanka. Hence, there is no question of such
apportionment and the whole income is taxable as business income. Receipt of
sale proceeds in India does not make this agricultural income. In the case of an
assessee, being a resident and ordinarily resident, the income arising outside
India is also chargeable to tax.
2. Explanation 3 to section 2(1A) provides that the income derived from
saplings or seedlings grown in a nursery would be deemed to be
agricultural income whether or not the basic operations were carried out on
land. Therefore, such income would be exempt u/s 10(1).

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.337

xxx
(v) Salary payment of ` 10,00,000 to Mr. X outside India by a company
without deduction of tax assuming Mr. X has not paid tax on such salary
income.
(vi) Payment made in cash ` 30,000 to a transporter in a day for carriage of
goods.

6. Examine with reasons, whether the following statements are true or false,
with regard to the provisions of the Income-tax Act, 1961:
(a) Payment made in respect of a business expenditure incurred on 16th
February, 2024 for ` 25,000 through a crossed cheque is hit by the
provisions of section 40A(3).
(b) (i) It is a condition precedent to write off in the books of account, the
amount due from debtor to claim deduction for bad debt.
(ii) Failure to deduct tax at source in accordance with the provisions
of Chapter XVII-B, inter alia, from the amounts payable to a non-
resident as rent or royalty, will result in disallowance while
computing the business income where the non-resident payee has
not paid the tax due on such income.

7. Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and
Loss Account for the year ended 31st March, 2024:
Trading and Profit and Loss Account for the year ended 31.03.2024

Particulars ` Particulars `
To Opening stock 90,000 By Sales 1,12,11,500
To Purchases 1,10,04,000 By Closing stock 1,86,100
To Gross Profit 3,03,600 -
1,13,97,600 1,13,97,600
To Salary 60,000 By Gross profit b/d 3,03,600
To Rent and rates 36,000 By Income from UTI 2,400
To Interest on loan 15,000
To Depreciation 1,05,000
To Printing & stationery 23,200
To Postage & telegram 1,640

© The Institute of Chartered Accountants of India

 3.338 INCOME TAX LAW

To Loss on sale of 8,100

shares (Short-term)
To Other general 7,060
expenses
To Net Profit 50,000
3,06,000 3,06,000

Additional Information:
(i) It was found that some stocks were omitted to be included in both the
Opening and Closing Stock, the values of which were:

Opening stock ` 9,000

Closing stock ` 18,000

(ii) Salary includes ` 10,000 paid to his brother, which is unreasonable to

the extent of ` 2,000.
(iii) The whole amount of printing and stationery was paid in cash by way of
one-time payment to Mr. Ramesh.
(iv) The depreciation provided in the Profit and Loss Account ` 1,05,000 was
based on the following information:
The opening balance of plant and machinery (i.e., the written down value
as on 31.3.2023 minus depreciation for P.Y. 2022-23) is ` 4,20,000. A new
plant falling under the same block of depreciation was bought on
01.7.2023 for ` 70,000. Two old plants were sold on 1.10.2023 for ` 50,000.
(v) Rent and rates includes GST liability of ` 3,400 paid on 7.4.2024.

(vi) Other general expenses include ` 2,000 paid as donation to a Public

Charitable Trust.
You are required to compute the profits and gains of Mr. Sivam under
presumptive taxation u/s 44AD and profits and gains as per the regular
provisions of the Act assuming he has exercised the option of shifting out of
the default tax regime provided under section 115BAC(1A). Assume that the
whole of the amount of turnover received by account payee cheque or use of
electronic clearing system through bank account during the previous year.

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.339

8. Mr. Sukhvinder is engaged in the business of plying goods carriages. On

1st April, 2023, he owns 10 trucks (out of which 6 are heavy goods vehicles,
the gross vehicle weight of such goods vehicle is 15,000 kg each). On 2nd May,
2023, he sold one of the heavy goods vehicles and purchased a light goods
vehicle on 6th May, 2023. This new vehicle could, however, be put to use only
on 15th June, 2023.
Compute the total income of Mr. Sukhvinder for the A.Y. 2024-25, taking note
of the following data:

Particulars ` `
Freight charges collected 12,70,000
Less: Operational expenses 6,25,000
Depreciation as per section 32 1,85,000
Other office expenses 15,000 8,25,000
Net Profit 4,45,000
Other business and non-business income 70,000

9. Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing,

Trading and Profit & Loss Account for the year ended 31.03.2024:
Manufacturing, Trading and Profit & Loss Account
for the year ended 31.03.2024

Particulars ` Particulars `
To Opening Stock 71,000 By Sales 2,32,00,000
To Purchase of Raw 2,16,99,000 By Closing stock 2,00,000
Materials
To Manufacturing 5,70,000
Wages & Expenses
To Gross Profit 10,60,000
2,34,00,000 2,34,00,000
To Administrative 3,26,000 By Gross Profit 10,60,000
charges
To SGST penalty 5,000 By Dividend from 15,000
domestic companies
To GST paid 1,10,000 By Income from 1,80,000
agriculture (net)
To General Expenses 54,000

© The Institute of Chartered Accountants of India

 3.340 INCOME TAX LAW

To Interest to Bank 60,000

(On machinery
term loan)
To Depreciation 2,00,000
To Net Profit 5,00,000
12,55,000 12,55,000

Following are the further information relating to the financial year 2023-24:

(i) Administrative charges include ` 46,000 paid as commission to brother

of the assessee. The commission amount at the market rate is ` 36,000.
(ii) The assessee paid ` 33,000 in cash to a transport carrier on 29.12.2023.
This amount is included in manufacturing expenses. (Assume that the
provisions relating to TDS are not applicable to this payment)
(iii) A sum of ` 4,000 per month was paid as salary to a staff throughout the
year and this has not been recorded in the books of account.
(iv) Bank term loan interest actually paid upto 31.03.2024 was ` 20,000 and
the balance was paid in November 2024.
(v) Housing loan principal repaid during the year was ` 50,000 and it relates
to residential property acquired by him in P.Y. 2022-23 for self-occupation.
Interest on housing loan was ` 23,000. Housing loan was taken from
Canara Bank. These amounts were not dealt with in the profit and loss
account given above.
(vi) Depreciation allowable under the Act is to be computed on the basis of
following information:

Plant & Machinery (Depreciation rate@15%) `

WDV as on 31.03.2023 minus Depreciation for P.Y. 2022-23 11,90,000
Additions during the year (used for more than 180 days) 2,00,000
Total additions during the year 4,00,000

Compute the total income of Mr. Raju for the A.Y. 2024-25 assuming he pays
tax under default tax regime.
Note: Ignore application of section 14A for disallowance of expenditures in
respect of any exempt income.

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.341

10. Mr. Tenzingh is engaged in composite business of growing and curing (further
processing) coffee in Coorg, Karnataka. The whole of coffee grown in his
plantation is cured. Relevant information pertaining to the year ended 31.3.2024
are given below:

Particulars `
Opening balance of car (only asset in the block) as on 1.4.2023 3,00,000
(i.e. WDV as on 31.3.2023 (-) depreciation for P.Y. 2022-23)
Opening balance of machinery as on 1.4.2023 (i.e., WDV as on 15,00,000
31.3.2023 (-) depreciation for P.Y. 2022-23)
Expenses incurred for growing coffee 3,10,000
Expenditure for curing coffee 3,00,000
Sale value of cured coffee 22,00,000

Besides being used for agricultural operations, the car is also used for
personal use; disallowance for personal use may be taken at 20%. The
expenses incurred for car running and maintenance are ` 50,000. The
machines were used in coffee curing business operations.
Compute the income arising from the above activities for the A.Y. 2024-25.

ANSWERS
1. Computation of written down value of block of assets of
Venus Ltd. as on 31.3.2024

Particulars Plant & Computer

Machinery
(` in lacs) (` in lacs)
Written down value (as on 31.3.2023) 30.00 Nil
Less: Depreciation including additional 4.75 -
depreciation for P.Y. 2022-23
Opening balance as on 1.4.2023 25.25
Add: Actual cost of new assets acquired
during the year
New machinery purchased on 1.9.2023 10.00 -
New machinery purchased on 1.12.2023 8.00 -

© The Institute of Chartered Accountants of India

 3.342 INCOME TAX LAW

Computer purchased on 3.1.2024 - 4.00

43.25 4.00
Less: Assets sold/discarded/destroyed Nil Nil
during the year
Written Down Value (as on 31.03.2024) 43.25 4.00

(i) If Mr. Venus exercises the option of shifting out of the default tax
regime provided under section 115BAC(1A)
In this case, since his income would be computed under the optional tax
regime as per the normal provisions of the Act, he would be entitled for normal
depreciation and additional depreciation, subject to fulfilment of conditions.
Computation of depreciation for A.Y. 2024-25

Plant & Computer

Particulars Machinery
(` in lacs) (` in lacs)
I. Assets put to use for more than 180
days, eligible for 100% depreciation
calculated applying the eligible rate
of normal depreciation and
additional depreciation
Normal Depreciation
- WDV of plant and machinery 3.79 -
(` 25.25 lacs x 15%)
- New Machinery purchased on 1.50 -
1.9.2023 (` 10 lacs x 15%)
(A) 5.29 -
Additional Depreciation
New Machinery purchased on 2.00 -
1.9.2023 (` 10 lakhs x 20%)
Balance additional depreciation in
respect of new machinery purchased
on 31.10.2022 and put to use for less 1.00
than 180 days in the P.Y. 2022-23
(` 10 lakhs x 20% x 50%)
(B) 3.00

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.343

II. Assets put to use for less than 180

days, eligible for 50% depreciation
calculated applying the eligible rate
of normal depreciation and
additional depreciation, if any
Normal Depreciation
New machinery purchased on 0.60 -
1.12.2023 [` 8 lacs x 7.5% (i.e., 50% of
15%)]
Computer purchased on 3.1.2023
[` 4 lacs x 20% (50% of 40%)] - 0.80
(C) 0.60 0.80
Total Depreciation (A+B+C) 8.89 0.80

Notes:
(1) As per section 32(1)(iia), additional depreciation is allowable in the
case of any new machinery or plant acquired and installed after
31.3.2005, by an assessee engaged, inter alia, in the business of
manufacture or production of any article or thing, at the rate of 20%
of the actual cost of such machinery or plant.

However, additional depreciation shall not be allowed in respect of,

inter alia,–
(i) any office appliances or road transport vehicles;
(ii) any machinery or plant installed in, inter alia, office premises.
In view of the above provisions, additional depreciation cannot be
claimed in respect of -
(i) Machinery purchased on 1.12.2023, installed in office and
(ii) Computer purchased on 3.1.2024, installed in office.
(2) Balance additional depreciation@10% on new plant or machinery
acquired and put to use for less than 180 days in the year of
acquisition which has not been allowed in that year, shall be allowed
in the immediately succeeding previous year.
Hence, in this case, the balance additional depreciation@10% (i.e., ` 1
lakhs, being 10% of ` 10 lakhs) in respect of new machinery which had

© The Institute of Chartered Accountants of India

 3.344 INCOME TAX LAW

been purchased during the previous year 2022-23 and put to use for
less than 180 days in that year can be claimed in P.Y. 2023-24 being
immediately succeeding previous year.
(i) If Mr. Venus pays tax under default tax regime under section 115BAC
In this case, under the default tax regime as per section 115BAC, he would
be entitled only for normal depreciation but not additional depreciation.
Computation of depreciation for A.Y. 2024-25

Plant & Computer

Particulars Machinery (` in lacs)
(` in lacs)
I. Assets put to use for more than 180
days, eligible for 100% depreciation
calculated applying the eligible rate of
normal depreciation
Normal Depreciation
- WDV of plant and machinery 3.79 -
(` 25.25 lacs x 15%)
- New Machinery purchased on 1.50 -
1.9.2023 (` 10 lacs x 15%)
(A) 5.29 -
II. Assets put to use for less than 180 days,
eligible for 50% depreciation calculated
applying the eligible rate of normal
depreciation
Normal Depreciation
New machinery purchased on 1.12.2023 0.60 -
[` 8 lacs x 7.5% (i.e., 50% of 15%)]
Computer purchased on 3.1.2023 [` 4 lacs
x 20% (50% of 40%)] - 0.80
(C) 0.60 0.80
Total Depreciation (A+B+C) 5.89 0.80

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.345

2. Computation of depreciation under section 32 for A.Y.2024-25

Particulars ` `
Normal Depreciation
Depreciation@15% on ` 51,50,000, being 7,72,500
machinery put to use for more than 180 days
[WDV as on 31.3.2023 of ` 50,00,000 – Depreciation
for P.Y. 2022-23 of ` 7,50,000+ Purchase cost of
imported machinery of ` 9,00,000]
Depreciation@7.5% on ` 10,00,000, being new
machinery put to use for less than 180 days 75,000
8,47,500
Depreciation@40% on computers purchased 80,000 9,27,500
` 2,00,000
Additional Depreciation (Refer Note below)
Additional Depreciation@10% of ` 10,00,000 1,00,000
[being actual cost of new machinery purchased on
12-10-2023]
Additional Depreciation@20% on new computer
installed in generation wing of the unit [20% of
` 2,00,000] 40,000 1,40,000
Depreciation on Plant and Machinery 10,67,500

Note:-
Mr. Abhimanyu is eligible for additional depreciation since he has exercised
the option of shifting out of the default tax regime provided under section
115BAC(1A). The benefit of additional depreciation is available to new plant
and machinery acquired and installed in power sector undertakings.
Accordingly, additional depreciation is allowable in the case of any new
machinery or plant acquired and installed by an assessee engaged, inter
alia, in the business of generation, transmission or distribution of power, at
the rate of 20% of the actual cost of such machinery or plant.
Therefore, new computer installed in generation wing units eligible for
additional depreciation@20%.
Since the new machinery was purchased only on 12.10.2023, it was put to
use for less than 180 days during the previous year, and hence, only 10%

© The Institute of Chartered Accountants of India

 3.346 INCOME TAX LAW

(i.e., 50% of 20%) is allowable as additional depreciation in the A.Y.2024-25.

The balance additional depreciation would be allowed in the next year.

However, additional depreciation shall not be allowed in respect of, inter

alia, any machinery or plant which, before its installation by the assessee,
was used either within or outside India by any other person. Therefore,
additional depreciation is not allowable in respect of imported machinery,
since it was used in Colombo, before its installation by the assessee.

3. Allowability of the expenses incurred by Mr. Manav, a wholesale dealer

in commodities, while computing profits and gains from business or
profession

(i) Construction of school building in compliance with CSR activities

Under section 37(1), only expenditure not being in the nature of

capital expenditure or personal expense and not covered under
sections 30 to 36, and incurred wholly and exclusively for the purposes
of the business is allowed as a deduction while computing business
income.

However, any expenditure incurred by an assessee on the activities

relating to corporate social responsibility referred to in section 135 of
the Companies Act, 2013 shall not be deemed to have been incurred
for the purpose of business and hence, shall not be allowed as
deduction under section 37.

Accordingly, the amount of ` 5,60,000 incurred by Mr. Manav, towards

construction of school building in compliance with CSR activities shall
not be allowed as deduction under section 37.
(ii) Purchase of building for setting up and operating a warehousing
facility for storage of food grains
Mr. Manav, would be eligible for investment-linked tax deduction
under section 35AD, since he has exercised the option of shifting out
of the default tax regime provided under section 115BAC(1A). The
deduction u/s 35AD would be 100% of ` 4,50,000, being the amount
invested in purchase of building for setting up and operating a
warehousing facility for storage of food grains which commences
operation on or after 1st April, 2009 (P.Y.2023-24, in this case).

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.347

Therefore, the deduction under section 35AD while computing

business income of such specified business would be ` 4,50,000, if
Mr. Manav opts for section 35AD.
(iii) Interest on loan paid to Mr. X (a resident) ` 50,000 on which tax
has not been deducted

As per section 194A, Mr. Manav, being an individual is required to deduct

tax at source on the amount of interest on loan paid to Mr. X, since his
turnover during the previous year 2022-23 exceeds ` 100 lakhs.

Therefore, ` 15,000, being 30% of ` 50,000, would be disallowed under

section 40(a)(ia) while computing the business income of Mr. Manav
for non-deduction of tax at source under section 194A on interest of
` 50,000 paid by it to Mr. X.
The balance ` 35,000 would be allowed as deduction under section 36(1)(iii),
assuming that the amount was borrowed for the purposes of business.

(iv) Commodities transaction tax of ` 20,000 paid on sale of bullion

Commodities transaction tax paid in respect of taxable commodities
transactions entered into in the course of business during the previous
year is allowable as deduction, provided the income arising from such
taxable commodities transactions is included in the income computed
under the head “Profits and gains of business or profession”.
Taking that income from this commodities transaction is included
while computing the business income of Mr. Manav, the commodity
transaction tax of ` 20,000 paid is allowable as deduction under
section 36(1)(xvi).
4. (i) True: Section 36(1)(xv) allows a deduction of the amount of securities
transaction tax paid by the assessee in respect of taxable securities
transactions entered into in the course of business during the previous
year as deduction from the business income of a dealer in shares and
securities.

(ii) True: As per section 40A(3A), in the case of an assessee following

mercantile system of accounting, if an expenditure has been allowed
as deduction in any previous year on due basis, and payment
exceeding ` 10,000 has been made in the subsequent year otherwise

© The Institute of Chartered Accountants of India

 3.348 INCOME TAX LAW

than by an account payee cheque or an account payee bank draft or

use of ECS through a bank account or through such other prescribed
electronic modes such as credit card, debit card, net banking, IMPS,
UPI, RTGS, NEFT, and BHIM Aadhar Pay, then, the payment so made
shall be deemed to be the income of the subsequent year in which
such payment has been made.
(iii) True: According to the Explanation 5 to section 32(1), allowance of
depreciation is mandatory. Therefore, depreciation has to be provided
mandatorily while calculating income from business/ profession
whether or not the assessee has claimed the same while computing
his total income.

(iv) True: Section 36(1)(ib) provides deduction in respect of premium paid

by an employer to keep in force an insurance on the health of his
employees under a scheme framed in this behalf by GIC or any other
insurer. The medical insurance premium can be paid by any mode
other than cash, to be eligible for deduction under section 36(1)(ib).
(v) False: Expenditure incurred in making payment to the employee in
connection with his voluntary retirement either in the year of
retirement or in any subsequent year, will be entitled to deduction in 5
equal annual installments beginning from the year in which each
payment is made to the employee.
(vi) False: Additional depreciation can be claimed only in respect of
eligible plant and machinery acquired and installed by an assessee
engaged in the business of manufacture or production of any article
or thing or in the business of generation or transmission or
distribution of power.
In this case, the individual is engaged in trading activities and the new
plant has been acquired and installed in a trading concern. Hence, he
will not be entitled to claim additional depreciation under section
32(1)(iia), even though he has exercised the option of shifting out of
the default tax regime provided under section 115BAC(1A).
5. (i) Not allowable as deduction: As per section 40A(7), no deduction is
allowed in computing business income in respect of any provision
made by the assessee in his books of account for the payment of
gratuity to his employees except in the following two cases:

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.349

(1) where any provision is made for the purpose of payment of sum
by way of contribution towards an approved gratuity fund; or

(2) where any provision is made for the purpose of making any
payment on account of gratuity that has become payable during
the previous year.

Therefore, in the present case, the provision made on the basis of

actuarial valuation for payment of gratuity has to be disallowed under
section 40A(7), since, no payment has been actually made on account
of gratuity.
Note: It is assumed that such provision is not for the purpose of
contribution towards an approved gratuity fund.

(ii) Allowable as deduction: As per Rule 6DD, in case the payment is

made for purchase of agricultural produce directly to the cultivator,
grower or producer of such agricultural produce, no disallowance
under section 40A(3) is attracted even though the cash payment for
the expense exceeds ` 10,000.
Therefore, in the given case, disallowance under section 40A(3) is not
attracted since, cash payment for purchase of oil seeds is made
directly to the farmer.
(iii) Not allowable as deduction: Income-tax of ` 20,000 paid by the
employer in respect of non-monetary perquisites provided to its
employees is exempt in the hands of the employee under section
10(10CC).

As per section 40(a)(v), such income-tax paid by the employer is not

deductible while computing business income.
(iv) Allowable as deduction: Payment for fire insurance is allowable as
deduction under section 36(1). Since payment is made by credit card,
which is a prescribed electronic mode, disallowance under section
40A(3) is not attracted in this case.

(v) Not allowable as deduction: Disallowance under section 40(a)(iii) is

attracted in respect of salary payment of ` 10,00,000 outside India by
a company without deduction of tax at source.

© The Institute of Chartered Accountants of India

 3.350 INCOME TAX LAW

(vi) Allowable as deduction: The limit for attracting disallowance under

section 40A(3) for payment otherwise than by way of account payee
cheque or account payee bank draft or use of ECS through a bank
account or through such other prescribed electronic mode is ` 35,000
in case of payment made for plying, hiring or leasing goods carriage.
Therefore, in the present case, disallowance under section 40A(3) is
not attracted for payment of ` 30,000 made in cash to a transporter
for carriage of goods.

6. (a) True: In order to escape the disallowance specified in section 40A(3),

payment in respect of the business expenditure ought to have been
made through an account payee cheque. Payment through a crossed
cheque will attract disallowance under section 40A(3).
(b) (i) True: It is mandatory to write off the amount due from a debtor
as not receivable in the books of account, in order to claim the
same as bad debt under section 36(1)(vii). However, where the
debt has been taken into account in computing the income of
the assessee on the basis of ICDSs notified under section 145(2),
without recording the same in the accounts, then, such debt
shall be allowed in the previous year in which such debt
becomes irrecoverable and it shall be deemed that such debt or
part thereof has been written off as irrecoverable in the accounts
for the said purpose.
(ii) True: Section 40(a)(i) provides that failure to deduct tax at
source from, inter alia, rent or royalty payable to a non-resident,
in accordance with the provisions of Chapter XVII-B, will result in
disallowance of such expenditure, where the non-resident payee
has not paid the tax due on such income.
7. Computation of business income of Mr. Sivam for the A.Y. 2024-25

Particulars ` `
Net Profit as per profit and loss account 50,000
Add: Inadmissible expenses/ losses
Under valuation of closing stock 18,000
Salary paid to brother – unreasonable 2,000
[Section 40A(2)]
Printing and stationery - whole amount of 23,200

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.351

printing & stationery paid in cash would be

disallowed, since such amount exceeds
` 10,000 [Section 40A(3)]
Depreciation (considered separately) 1,05,000
Short term capital loss on shares 8,100
Donation to public charitable trust 2,000 1,58,300
2,08,300
Less: Items to be deducted:
Under valuation of opening stock 9,000

Income from UTI [Chargeable under the 2,400 11,400

head “Income from Other Sources]
Business income before depreciation 1,96,900
Less: Depreciation (See Note 1) 66,000
1,30,900
Computation of business income as per section 44AD:
As per section 44AD, where the amount of turnover is received, inter alia, by
way of account payee cheque or use of electronic clearing system through
bank account or through such other prescribed electronic modes, the
presumptive business income would be 6% of turnover, i.e., ` 1,12,11,500 x
6 /100 = ` 6,72,690
Notes:
1. Calculation of depreciation

Particulars `
Opening balance of plant & machinery as on 1.4.2023 4,20,000
(i.e. WDV as on 31.3.2023 (-) depreciation for P.Y. 2022-23)
Add: Cost of new plant & machinery 70,000
4,90,000
Less: Sale proceeds of assets sold 50,000
WDV of the block of plant & machinery as on 31.3.2024 4,40,000
Depreciation@15% 66,000
No additional depreciation is allowable as the assessee is
not engaged in manufacture or production of any article.

© The Institute of Chartered Accountants of India

 3.352 INCOME TAX LAW

2. Since GST liability has been paid before the due date of filing return of
income under section 139(1), the same is deductible.

8. Section 44AE would apply in the case of Mr. Sukhvinder since he is engaged
in the business of plying goods carriages and owns not more than ten
goods carriages at any time during the previous year.

Section 44AE provides for computation of business income of such assesses

on a presumptive basis. The income shall be deemed to be ` 1,000 per ton
of gross vehicle weight or unladen weight, as the case may be, per month or
part of the month for each heavy goods vehicle and ` 7,500 per month or
part of month for each goods carriage other than heavy goods vehicle,
owned by the assessee in the previous year or such higher sum as declared
by the assessee in his return of income.
Mr. Sukhvinder’s business income calculated applying the provisions of
section 44AE is ` 13,72,500 (See Notes 1 & 2 below) and his total income
would be ` 14,42,500.
However, as per section 44AE(7), Mr. Sukhvinder may claim lower profits
and gains if he keeps and maintains proper books of account as per section
44AA and gets the same audited and furnishes a report of such audit as
required under section 44AB. If he does so, then his income for tax purposes
from goods carriages would be ` 4,45,000 instead of ` 13,72,500 and his
total income would be ` 5,15,000.
Notes:
1. Computation of total income of Mr. Sukhvinder for A.Y. 2024-25

Particulars Presumptive Where books

income are maintained
` `
Income from business of plying
goods carriages [See Note 2 13,72,500 4,45,000
Below]
Other business and non-business 70,000 70,000
income
Total Income 14,42,500 5,15,000

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.353

2. Calculation of presumptive income as per section 44AE

Type of carriage No. of Rate per ton Ton Amount

months per month/ `
per month
(1) (2) (3) (4)
Heavy goods
vehicle
1 goods carriage 2 1,000 15 30,000
upto 1st May (15,000/1,000)
5 goods carriage 12 1,000 15 9,00,000
held throughout (15,000/1,000)
the year
Goods vehicle
other than heavy
goods vehicle
1 goods carriage 11 7,500 - 82,500
from 6th May
4 goods carriage 12 7,500 - 3,60,000
held throughout
the year
Total 13,72,500
9. Computation of total income of Mr. Raju for the A.Y. 2024-25

Particulars ` `
Profits and gains of business or profession
Net profit as per profit and loss account 5,00,000
Add: Excess commission paid to brother disallowed 10,000
under section 40A(2)
Disallowance under section 40A(3) is not Nil
attracted since the limit for one time cash
payment is ` 35,000 in respect of payment to
transport operators. Therefore, amount of
` 33,000 paid in cash to a transport carrier is
allowable as deduction.
Salary paid to staff not recorded in the books 48,000
(Assuming that the expenditure is in the
nature of unexplained expenditure and hence,
is deemed to be income as per section 69C

© The Institute of Chartered Accountants of India

 3.354 INCOME TAX LAW

and would be taxable @ 60% under section

115BBE – no deduction allowable in respect of
such expenditure) [See Note 1 below]
Bank term loan interest paid after the due date 40,000
of filing of return under section 139(1) –
disallowed as per section 43B
State GST penalty paid disallowed [See Note 2 5,000
below]
Depreciation debited to profit and loss account 2,00,000 3,03,000
8,03,000
Less: Dividend from domestic companies 15,000
[Chargeable to tax under the head “Income
from Other Sources”]
Income from agriculture [Exempt under 1,80,000
section 10(1)]
Depreciation under the Income-tax Act, 1961
(As per working note) 2,23,500 4,18,500
3,84,500
Income from house property
Annual value of self-occupied property Nil
Less: Deduction u/s 24(b) – interest on housing loan Nil Nil
[Not allowable, since Mr. Raju is paying tax as
per default tax regime]
Income from Other Sources
Dividend from domestic companies 15,000
Gross Total Income 3,99,500
Less: Deduction u/s 80C [Not allowable, since
Mr. Raju is paying tax as per default tax regime] Nil
Total Income 3,99,500

Working Note:
Computation of depreciation under the Income-tax Act, 1961

Particulars `
Depreciation@15% on ` 13.90 lakhs (WDV as on 31.3.2023 less
depreciation for P.Y. 2022-23 i.e., ` 11.90 lakh plus assets 2,08,500
purchased during the year and used for more than 180 days ` 2
lakh)

© The Institute of Chartered Accountants of India

 PROFITS & GAINS OF BUSINESS OR PROFESSION 3.355

Depreciation @7.5% on ` 2 lakh (Assets used for < 180 days) 15,000
2,23,500

Since Mr. Raju is paying tax as per default tax regime, additional
depreciation u/s 32(1)(iia) would not be available to him.
Notes (Alternate views):
1. It is also possible to take a view that the salary not recorded in the
books of account was an erroneous omission and that the assessee
has offered satisfactory explanation for the same. In such a case, the
same should not be added back as unexplained expenditure, but
would be allowable as deduction while computing profits and gains of
business and profession.
2. Where the imposition of penalty is not for delay in payment of sales
tax or VAT or GST but for contravention of provisions of the Sales Tax
Act or VAT Act or GST Law, the levy is not compensatory and
therefore, not deductible. However, if the levy is compensatory in
nature, it would be fully allowable. Where it is a composite levy, the
portion which is compensatory is allowable and that portion which is
penal is to be disallowed.
Since the question only mentions “GST penalty paid” and the reason
for levy of penalty is not given, it has been assumed that the levy is
not compensatory and therefore, not deductible. It is, however,
possible to assume that such levy is compensatory in nature and
hence, allowable as deduction. In such a case, the total income would
be ` 3,94,500.
10. Where an assessee is engaged in the composite business of growing and
curing of coffee, the income will be segregated between agricultural income
and business income, as per Rule 7B of the Income-tax Rules, 1962.

As per the above Rule, income derived from sale of coffee grown and cured
by the seller in India shall be computed as if it were income derived from
business, and 25% of such income shall be deemed to be income liable to
tax. The balance 75% will be treated as agricultural income.
Particulars ` `
Sale value of cured coffee 22,00,000
Less: Expenses for growing coffee 3,10,000

© The Institute of Chartered Accountants of India

 3.356 INCOME TAX LAW

Car expenses (80% of ` 50,000) 40,000

Depreciation on car (80% of 15% of
` 3,00,000) [See Computation below] 36,000
Total cost of agricultural operations 3,86,000
Expenditure on coffee curing 3,00,000
operations
Add: Depreciation on machinery 2,25,000
(15% of ` 15,00,000)
[See Computation below]
Total cost of the curing operations 5,25,000
Total cost of composite operations 9,11,000
Total profits from composite activities 12,89,000
Business income (25% of above) 3,22,250
Agricultural income (75% of above) 9,66,750

Computation of depreciation for P.Y. 2023-24

Particulars ` `
Car
Opening balance as on 1.4.2023 (i.e., WDV as on 3,00,000
31.3.2023 (-) depreciation for P.Y.2022-23)
Depreciation thereon at 15% 45,000
Less: Disallowance @20% for personal use 9,000
Depreciation actually allowed 36,000
Machinery
Opening balance as on 1.4.2023 (i.e., WDV as on 15,00,000
31.3.2023 (-) depreciation for P.Y.2022-23)
Depreciation @ 15% for P.Y. 2023-24 2,25,000

Explanation 7 to section 43(6) provides that in cases of ‘composite income’,

for the purpose of computing written down value of assets acquired before
the previous year, the total amount of depreciation shall be computed as if
the entire composite income of the assessee (and not just 25%) is
chargeable under the head “Profits and gains of business or profession”.
The depreciation so computed shall be deemed to have been “actually
allowed” to the assessee.

© The Institute of Chartered Accountants of India

Profits and Gains from Business and Profession LESSON 6

Provided also that, where income is chargeable to tax under sub-section (1A) of section 115BAC, the written
down value of the block of asset as on the 1st day of April, 2023 shall be increased by such depreciation
which is attributable to clause (iia) of sub-section (1) of section 32 and which is not allowed to be set off under
sub-clause (a) of clause (ii) of sub-section (2) of section 115BAC if both the following conditions are satisfied,
namely:-
(i) the assessee has not exercised option under sub-section (5) for any previous year relevant to the
assessment year beginning on or before the 1st day of April, 2023; and
(ii) there is a depreciation allowance in respect of a block of assets which has not been given full effect to
prior to the assessment year beginning on the 1st day of April, 2024, and is attributable to the provisions
of clause (iia) of sub-section (1) of section 32

Illustration 1:
X Ltd. has a block of assets (P&M), carrying 15% depreciation, WDV on 1st Apr 2023 is INR 75,00,000. It
purchased subsequently on 1st Dec. 2023, another machinery for INR 25,00,000 and put to use on the same
day. X Ltd. was amalgamated with Y Ltd. effective 1st Feb. 2024.

Solution:

Compute the depreciation allowable for X Ltd. and Y Ltd. for the AY 2024-25.

Block Days Allowable Depreciation

75,00,000 365 Full 11,25,000

25,00,000 121 Half 1,87,500

Total Depreciation 13,12,500

Predecessor 306 On the Opening P&M 9,43,151

Successor 59 1,81,849

Predecessor 62 On the Acquired P&M 96,074

Successor 59 91,426

Notes:

(1) The depreciation for the asset in existence and used for the whole year is proportionately divided
on the basis of the number of days used by the predecessor until amalgamation date and the
successor post amalgamation date.

(2) The depreciation for the asset acquired during the year and used for the remaining part of the
year is proportionately divided on the basis of the number of days used by the predecessor until
amalgamation date and the successor post amalgamation date, beginning the date of acquisition.

Note: As per the CBDT circular, irrespective of the accounting treatment, the Lessor shall be entitled to claim
depreciation on leased assets, whether the lease is an operating lease or a financial lease.

191
EP-TL&P Profits and Gains from Business and Profession

Steps for computing Depreciation:

Illustration 2:
M Ltd. owns the following assets on 1.4.2023:

Assets WDV as on Rates of

1.4.2023 (`) Depreciation (%)

Building A 10,20,000 10

Building B 5,40,000 10

Building C 6,35,000 10

Machinery C 1,65,000 30

Machinery D 4,000 30

Machinery E 50,000 30

Furniture A 1,10,000 10

Furniture B 8,000 10

192
Profits and Gains from Business and Profession LESSON 6

The following assets are acquired by the company during the previous year 2023-24:

Asset Actual Cost ` Rate of Depreciation (%) Date of acquisition

Building D 5,40,000 10 14.5.2023

Machinery F 16,000 30 21.9.2023

Patents 40,000 25 15.4.2023

Technical Know-how 60,000 25 17.5.2023

The following assets are sold by the company during the previous year 2023-24:

Asset Sale consideration (`) Date of Sale

Machinery C 1,10,000 2.9.2023

Machinery E 80,000 28.3.2023

Determine the depreciation for the assessment year 2024-25.

Solution:

Particulars WDV as on Additions Assets sold WDV as on Depreciation

1.4.2023 (`) during the during the 31.3.2024 (`)
year (`) year (`) (`)

Block 1 Building 10% 21,95,000 5,40,000 — 27,35,000 2,73,500

Block 2 Machinery 30% 2,19,000 16,000 1,90,000 45,000 13,500

Block 3 Furniture & 1,18,000 — — 1,18,000 11,800

Fixtures

Block 4 Intangible Nil 1,00,000 — 1,00,000 25,000

assets

Total 323800

Illustration 3:
W.D.V. of the block having two machines namely A & B as on 1.4.2023 is `6,00,000. Machine C was acquired
on 12.11.2023 for `3,00,000 and put to use on the same date. Machine C is sold on 31.3.2024 for `4,00,000.
(a) Compute the depreciation allowable for the assessment year 2024-25.
(b) What will be the amount of depreciation allowed, if machine ‘A’ is sold instead of machine ‘C’.
(c) What will be the amount of depreciation allowed if both ‘A’ and B machines are sold instead of
machine C

193
EP-TL&P Profits and Gains from Business and Profession

Solution (a)

Particulars (`)
W.D.V. of the block as on 1.4.2023 6,00,000
Addition during the year of Machine C for less than 180 days 3,00,000
9,00,000
Less: Sale price of machine C sold during the year (4,00,000)
W.D.V. as on 31.3.2024 for the purpose of charging depreciation 5,00,000
Depreciation on `5,00,000 @ 15% (75,000)
W.D.V. as on 1.4.2024 4,25,000

Full depreciation @ 15% has been charged, as the machine C which was put to use for less than 180 days during
the year, ceases to exist on 31.3.2024 and as such depreciation shall not be charged at the rate of 50% of the
normal rate. It would have been charged, if the machine other than C had been sold during the year.
(b)

Particulars Amount Amount

W.D.V. of the block as on 1.4.2023 6,00,000
Addition during the year of Machine C put to use for less than 180 days 3,00,000
9,00,000
Less : Sale price of machine A sold during the year 4,00,000
5,00,000
Depreciation @ 7.5% on `3,00,000 22,500
@ 15% on balance`2,00,000 30,000 52,500
W.D.V. as on 1.4.2024 4,47,500

(c)

Particulars Amount Amount

W.D.V. of the block as on 1.4.2023 6,00,000
Addition during the year of Machine C put to use for less than 180 days 3,00,000
9,00,000
Less : Sale price of machine A & B sold during the year 4,00,000
5,00,000
Depreciation* @ 7.5% on `3,00,000 22,500
@ 15% on balance `2,00,000 30,000 52,500
W.D.V. as on 1.4.2024 4,47,500

* Although only one asset ‘C’ is left in the block whose cost is ` 3,00,000, still depreciation will be allowed
on the balance amount of `2,00,000 @ 15% as the block has not ceased to exist.

194
EP-TL&P Profits and Gains from Business and Profession

acquired by the assessee has been met directly or indirectly by the Central Government or a State
Government or any authority established under any law or by any other person, in the form of a subsidy
or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such
subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee.
Asset acquired by a non-resident outside India: Where an asset which was acquired outside India by
an assessee, being a non-resident, is brought by him to India and used for the purposes of his business
or profession, the actual cost of the asset to the assessee shall be the actual cost to the assessee, as
reduced by an amount equal to the amount of depreciation calculated at the rate in force that would
have been allowable had the asset been used in India for the said purposes since the date of its
acquisition by the assessee.
Capital Asset acquired under scheme for Corporatisation: Where any capital asset is acquired by the
assessee under a scheme for corporatisation of a recognised stock exchange in India, approved by
the Securities and Exchange Board of India established under section 3 of the Securities and Exchange
Board of India Act, 1992 (15 of 1992), the actual cost of the asset shall be deemed to be the amount
which would have been regarded as actual cost had there been no such corporatization.
Capital Asset on which deduction has been allowed or allowable u/s 35AD shall be treated as nil:
Actual cost of inventory converted into capital asset, if used for business, shall be the Fair Market
Value.
Note: Interest paid before the commencement of the production on amounts borrowed by the assessee for
acquisition and installation of the plant and machinery shall form part of the actual cost u/s 43(1), as decided
by the Supreme Court in Challapalli Sugars Limited Vs CIT.

Illustration 4
Ashwani borrowed a sum of `30,00,000 on 1.4.2021 @ 12% p.a. to construct the building for the purpose of
her business. The construction of house property in completed on 30.6.2023 and put to use immediately.
The loan is still outstanding. Cost of construction of building is `60 lakh. Calculate the actual cost of building
which shall be eligible for depreciation.
Solution:

Particulars Amount

Cost of construction ` 60,00,000

Add: Interest from 1.4.2021 to 30.6.2023 (`30,00,000 x 12/100 x 27/12) 8,10,000

Total actual cost eligible for depreciation 68,10,000

Note: Interest payable after 30.6.2023 shall be allowed as revenue expenditure.

Written Down Value (WDV) [Section 43(6)]

Asset acquired during previous year: In case of acquisition of assets during the Previous Year, the
actual cost becomes the WDV.
Asset acquired before previous year: In case of assets acquired before the Previous Year, the WDV =
Actual Cost to the Assessee Less Depreciation c/f if any.

196
Profits and Gains from Business and Profession LESSON 6

Asset transfer from holding company to subsidiary, or vice-versa: In case of transfer of assets from
holding company to subsidiary, or vice-versa, or from a amalgamating company to an amalgamated
company, then the actual cost of assets in the books of the transferee company would be the WDV of
the block of assets, as in the books of transferor company for the immediately preceding Previous Year,
minus, the allowable depreciation during the Current Year.
WDV in case successor is LLP: In case of a successor LLP, the WDV in the books of the LLP would be
the WDV in the books of the predecessor company on the date of such conversion.
The WDV of the following assets may be reduced to NIL:
(a) the moneys receivable by the assessee in respect of the assets sold, together with the scrap
value if any is > than the current WDV of the assets at the beginning of the year as increased by
the actual cost of any new asset acquired, OR
(b) where the entire block of assets is sold during the year.

Unabsorbed Depreciation
It’s the depreciation that couldn’t be consumed fully, that is, the profits were not sufficient to absorb it.
Can be carried forward indefinitely. The current year depreciation and the brought forward business
losses get priority in the set off over the unabsorbed depreciation, in that order.

Depreciation on Straight Line Basis

In the case of Power Units [Section 2(1)(i)] (optional to power generating units) from the assessment year 1998-99,
an undertaking engaged in generation or generation and distribution of power can claim depreciation on straight
line basis on the actual cost of individual asset. But the aggregate depreciation cannot exceed the actual cost.
Alternatively, such undertaking can claim depreciation, at its option, according to written down value method like
any other assessee. The option for this purpose shall be exercised before the due date of furnishing return of income.
Once this option is exercised, it shall be final and shall apply to all the subsequent years.
Where an assessee incurs any expenditure for acquisition of any asset in respect of which a payment (or
aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft or use
of ECS through a bank account or such other electronic mode as may be prescribed, exceeds Rs. 10,000, such
Payment shall be ignored for the purpose of computation of Actual Cost of such asset.
The prescribed electronic modes include credit card, debit card, net banking, IMPS (Immediate payment Service),
UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer),
and BHIM (Bharat Interface for Money) Aadhar Pay [CBDT Notification No. 8/2020 dated 29.01.2020].

Terminal Depreciation
If any asset, on which depreciation is claimed on basis of SLM, is sold and the amount by which money payable
together with scrap value, fall short of WDV of such asset, depreciation shall be allowed equal to such deficiency
in the year of sale.

Illustration 5:
An electricity company which was charging depreciation on straight line method and whose actual cost of
the asset was `6,00,000 and written down value `5,50,000 sold the said asset during 2023-24 after 2 years.
What will be the tax treatment if the asset is sold for:
(i) ` 4,50,000 (ii) 5,80,000 (iii) ` 7,00,000

197
EP-TL&P Profits and Gains from Business and Profession

Solution
(i) ` 4,50,000 - ` 5,50,000 = ` 1,00,000 will be allowed as terminal depreciation in the previous year 2023-24.
(ii) ` 5,80,000 - ` 5,50,000 = ` 30,000 shall be balancing change and taxable as business income as per
section 41(2).
(iii) ` 7,00,000 - 5,50,000 = ` 50,000 shall be balancing charge and hence taxable as business income `
7,00,000 - 6,00,000 = ` 1,00,000 shall be short-term capital gain.

Balancing Charge [Section 41(2)]

If any asset, on which depreciation is claimed on basis of SLM, asset is sold and the amount by which moneys
payable together with scrap value, exceeds WDV of such asset, then the least of the following shall be taxable
under the head PGBP.
(i) difference between the actual cost and WDV.
(ii) difference between aggregate of moneys payable and WDV.

Additional Depreciation [Section 32(1)(iia)]

The additional depreciation is available to assessee engaged in the business of manufacture or production of
any article or thing or engaged in the business of generation, transmission or distribution of power at the rate
of 20% of actual cost of eligible new machinery or plant (other than ships and aircrafts acquired and installed
after 31/3/05.
Additional Depreciation shall not be allowed if –

Note:
Where asset is purchased and put to use in business in the same previous year for less than 180 days then
additional depreciation is allowed at 50% of rate of additional depreciation and balance 50% of additional
depreciation in immediately succeeding financial year.
If an assessee taxed under section 115BAC / 115BAD he / it will not be entitled to claim deduction of additional
depreciation.

198
EP-TL&P Profits and Gains from Business and Profession

Illustration 6:
Mr. Mohan, engaged in the business of generation of power, furnishes the following details for FY 2023-24.
He has opted for WDV method, you are required to compute the allowable depreciation for FY 2023-24.
The Opening Block as on 22nd April, 2023 was INR 950,000 (15% block). He acquired second hand machinery
for INR 250,000 on 30th Nov’23. He also acquired Power Generation Machinery on 1st Aug 2023 for INR
10,00,000. He invested in an AC for Office for INR 200,000 on 9th Sep’23 and a pollution control equipment
for INR 250000 on 30th Jun’ 23. He bought additional power generation machinery for INR 500,000 on 1st
Feb’ 24. Also, he sold assets valued INR 400,000 for INR 350,000 during the year.
Solution:

Particulars INR Block Date Particulars INR Block Date

Opening WDV 9,50,000 15% Air 2,50,000 40% 30th

Pollution Jun, 23
Control
Equipment

Acq. Second 2,50,000 15% 30th

hand Nov’23

Power 10,00,000 15% 1st

Generation Aug’23
Machinery

AC for Office 2,00,000 15% 9th

Sep’23

Power 5,00,000 15% 1st

Generation Feb’24
Machinery

Sale Value 3,50,000

Depreciation

On the ones put 18,750

to use for < 180
day

37,500

On the On the
Remaining Pollution
2,70,000 1,00,000
Block, which Control
comes to INR Equipment
18,00,000

200
Profits and Gains from Business and Profession LESSON 6

Depreciation 3,26,250
allowable

Addl Addl
Depreciation Depreciation
2,00,000 50,000
allowable allowable
on Power on the Poll
Generation Control
Machinery @ 20 Equipment @

Power
Generation
50,000
Machinery @
20% which was
used for
< 180 days

Total 5,76,250 Total 1,50,000

Depreciation Depreciation
Allowable Allowable

Notes:
a) The cells highlighted denote the ones which were put to use for < 180 days.
b) Power generation equipment, pollution control equipment can enjoy additional depreciation.
c) No depreciation is allowable on second hand machinery or office appliances like AC.

Tea/Coffee/Rubber Development Account [Section 33AB]

Section 33AB is applicable to an assessee carrying on the business of growing and manufacturing tea or coffee
or rubber in India. For claiming the deduction u/s 33AB the assessee has to satisfy the following conditions:
an assessee, carrying on business of growing and manufacturing tea or coffee or rubber in India
Any amount deposited with the National Bank or in an account maintained by the assessee with the
Bank in accordance with and for the purposes specified in a scheme approved in this behalf by the Tea
Board of India or the Coffee Board of India or the Rubber Board;
assessees whose accounts have been audited and the assessee furnishes along with his return of
income the report of such audit in the prescribed form and duly signed and verified by such accountant.
In cases where the accounts of the tax payer are required to be audited under any other law, it would
be sufficient if the accounts are audited under that law and the audit report as per that law is furnished
with the return along with a further report in the form prescribed for the purposes of this provision.
Deduction:
(a) a sum equal to the amount or the aggregate of the amounts so deposited; or
(b) Forty per cent of the profits of such business (computed under the head “Profits and gains of business
or profession” before making any deduction under Section 33AB), whichever is less.

201
Profits and Gains from Business and Profession LESSON 6

Illustration 7:
Binod furnishes the following particulars for PY 2023-24. You are required to arrive at the deduction
allowable u/s 35 for AY 2024-25, while computing the Income under the head “Profits / Gains from Business/
Profession”.
1. Amount paid to M/s ABC Ltd., a company registered in India, which has as it’s main object, scientific
research and development, as approved by the prescribed authority INR 600,000
2. Amount Paid to IIT Mumbai, for an approved scientific research programme INR 375,000
3. Revenue Expenditure on In-house R&D facility as approved by prescribed authority INR 450,000
4. Capital Expenditure on In-house R&D facility as approved by prescribed authority INR 12,00,000.
This includes cost of Land INR 450,000
5. Amount paid to Indian Institute of Science, Bangalore, for Scientific Research INR 10,00,000
Solution:

Expenditure INR Allowable Deduction

Section

Amount paid to M/s ABC Ltd., a company 6,00,000 100% 35(1)(iia) 6,00,000
registered in India, which has as it’s main object,
scientific research and development, as approved
by the prescribed authority

Amount Paid to IIT Mumbai, for an approved 3,75,000 100 % 35(2AA) 3,75,000
scientific research programme

Revenue Expenditure on In-house R&D facility as 4,50,000 100% 35(1)(i) 4,50,000

approved by prescribed authority

Capital Expenditure on In-house R&D facility as 7,50,000 100% 35(1)(iv) 7,50,000

approved by prescribed authority

Amount paid to Indian Institute of Science, 10,00,000 100 % 35(1)(ii) 10,00,000

Bangalore for Scientific Research

Total 31,75,000 31,75,000

Amortization of Spectrum Fees for Purchase of Spectrum [Section 35ABA]

New section 35ABA is inserted to provide amortization of amount paid on the acquisition of any right to use
spectrum for telecommunication services by paying spectrum fees. The section provides:
i. Any capital expenditure incurred and actually paid by the assessee on acquisition of any right to use
spectrum for Telecom services by paying spectrum fee will be allowed as deduction in equal instalments.
Deduction will start from the year in which payment is made (or the year of commencement of business,
whichever is later) and ending with the year in which spectrum comes to an end, irrespective of the
previous year in which liability for expenditure was incurred according to the method of accounting
regularly followed by assessee or payable in such manner as may be prescribed.

207
Profits and Gains from Business and Profession LESSON 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 eight years beginning with the previous year in which such asset is
acquired or constructed.
If any asset on which a deduction under section 35AD has been allowed, is used for any purpose other than
the specified business, the total amount of deduction so claimed and allowed in one or more previous years in
respect of such asset, as reduced by the amount of depreciation allowable in accordance with the provisions
of section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be income of the
assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which
the asset is so used.
Example: Suppose a company purchased plant and machinery for Rs. 2 crores for a specified business, and
claimed deduction under section 35AD. However, the very next year the plant and machinery purchased was
put to use for unspecified business.
In this case, since the machinery has been used for unspecified business, the deduction claimed under section
35AD will be disallowed. However, the amount of deduction to be disallowed will be reduced by the depreciation
allowable in accordance with the provisions of section 32.
Deduction claimed under section 35AD on a capital asset: Rs. 2,00,00,000
Depreciation eligible will be @15%: Rs. 30,00,000
Profit chargeable to tax in accordance with the sub-section (7B) of section 35AD: Rs.1,70,00,000

Illustration 8:
Kiara Ltd. constructed a building and started operating a hotel of 3 star category w.e.f. 1.4.2023. The company
incurred the following expenditure in this connection.

1. Capital expenditure (including cost of land ` 70 lakhs) incurred during December, ` 1,30,00,000
2021 to March 2023 which were capitalized in the books of account 31.3.2023

2. Capital expenditure incurred during previous year 2023-24 (it includes ` 40 ` 1,40,00,000
lakhs paid for Goodwill)

Compute the deduction available under section 35AD in the assessment year 2024-25.
Solution:

Particulars ` Amount

Capital expenditure incurred before commencement but capitalized in books of account 1,30,00,000

Less: Cost of land not eligible for deduction under section 35 AD (70,00,000)

60,00,000

Capital expenditure incurred during previous year 2023-24 exclusive of value of 1,00,00,000
goodwill

Deduction allowable under section 35AD 1,60,00,000

211
EP-TL&P Profits and Gains from Business and Profession

Illustration 9:
ABC Ltd commenced operations of the Business of a new Four-Star Hotel in Chennai on 01.04.2023. The
Company incurred Capital Expenditure of ` 40 Lakhs during the period January, 2023 to March, 2023
exclusively for the above Business, and capitalised the same in its Books of Account as on April, 2023.
Further, during the Previous Year 2023-2024, it incurred Capital Expenditure of ` 2.5 Crores (out of which ` 1
Crore was for Acquisition of Land) exclusively for the above Business.
Compute the Income under the heading Profits and Gains of Business or Profession for the Assessment
Year 2024-2025, assuming that ABC Ltd has fulfilled all the conditions specified for claim of deduction u/s
35AD and has not claimed any deduction under Chapter VI-A under the heading “C- Deductions in respect
of certain incomes”. The Profits from the Business of running this Hotel (before claiming deduction u/s 35AD),
for the Assessment Year 2024-2025 is ` 80 Lakhs.
Assume that the Company also has another existing Business of running a Four-Star Hotel in Kanpur, which
commenced Operations 6 years back, the Profits from which was ` 130 Lakhs for the AY 2024-2025.
Solution:
Assessee: ABC Ltd Previous Year: 2023-2024 Assessment Year: 2024-2025
Computation of Deduction u/s 35AD

Particulars ` Lakhs

1. Income from Four Star Hotel in Chennai 80

Less: Eligible deduction u/s 35AD:

(i) Prior Period Expenditure (40) (190)
(ii) Capital Expenditure (` 250 Lakhs - ` 100 Lakhs) (150)

Total [Loss can be set-off only against the Income from any Specified Business] [Section 73A] (110)

2. Income from Four Star Hotel in Kanpur [Being a Specified Business, above Loss is eligible to 130
be set- off against this Income u/s 73A],

Income under the head Profits & Gains of Business/Profession 20

Note: Expenditure relating to acquisition of Land is not allowable as a deduction u/s 35AD.

Expenditure by way of Payment to Associations and Institutions for carrying out Rural
Development Programmes [Section 35CCA]
Any sum paid to a rural development fund set up and notified by the Central Government and to the National
Urban Poverty Eradication Fund similarly set up and notified qualifies for deduction on fulfilment of certain
conditions.

Expenditure on Agricultural extension project [Section 35CCC]

Where an assessee incurs any expenditure on agricultural extension project notified by the Board then, there
shall be allowed a deduction of a sum equal to 100 % of such expenditure.

212
Profits and Gains from Business and Profession LESSON 6

In cases of amalgamation as defined in Section 2(1B) of the Act, where the undertaking of an Indian Company
has been transferred before the expiry of ten years, the amalgamating company would not be entitled to the
allowance towards amortisation of preliminary expenses in the year in which the amalgamation takes places.
But the amalgamated company would be entitled to the allowance for the remaining period over which the
allowance under this section is available. The total period over which the amortisation is allowable should not
exceed ten years or five years as the case may be in the case of both the amalgamating company and the
amalgamated company. The allowance under this section would not be denied, in cases of amalgamation, to the
amalgamated company merely because the expenditure has not actually been incurred by the amalgamated
company. Similarly, in case of demerger where an undertaking of an Indian company which is entitled to the
deduction under this section is transferred before the expiry of the said period of 10 years or 5 years (as the
case may be), to another company in a scheme of demerger no deduction shall be admissible to the demerged
company in the year in which the demerger takes place. The resulting company would be entitled to claim
deduction for the balance period under this section. In other words, the deduction for the balance period will
be available to resulting company as it would have been available to demerged company, if the demerger
had not taken place. In cases where preliminary expenses qualify for amortisation under Section 35D and the
allowance claimed by the assessee in this regard is allowed in any assessment year, these expenses would not
qualify for any allowance or deduction in respect of any other assessment year or even in the same year under
any other provision of the Income-tax Act, 1961.

Illustration 10:
(a) Compute the deduction allowable under section 35D on the basis of the following information submitted.

Preliminary expenses incurred ` 2,20,000

Cost of project ` 50,00,000

(b) What will be your answer if the above preliminary express have been incurred by Ruchira Ltd. & the
capital employed is ` 60,00,000.
Solution

(a) Cost of project ` 50,00,000

5% of cost of project ` 2,50,000

Actual expenditure incurred ` 2,20,000

Deduction allowed shall be limited to ` 2,20,000

Deduction allowed shall be ` 2,20,000/5 = ` 44,000 for a period of 5 years starting from the previous year
in which business has commenced.

(b) Actual preliminary expenditure incurred ` 2,20,000

5% of cost of project ` 2,50,000
Capital employed ` 60,00,000
5% of capital employed ` 3,00,000

Maximum deduction to be allowed shall be restricted to ` 2,20,000 Deduction allowable for 5 years —
` 2,20,000/5 = ` 44,000 every year

215
EP-TL&P Profits and Gains from Business and Profession

What is the Time Limit specified u/s 15 of the Micro, Small and Medium Enterprises Development Act, 2006 ?
Section 15 of MSME Development Act, 2006 stipulates that “Where any supplier supplies any goods or renders
any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between
him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day*:
Provided that in no case the period agreed upon between the supplier and the buyer in writing shall not exceed
forty-five days from the day of acceptance or the day of deemed acceptance”
From the above it is clear that, the buyer shall make the payment to the supplier as agreed between them,
however the same cannot exceed beyond 45 days from date of acceptance or the day of deemed acceptance
i.e., from the day of acceptance of the goods/service.
*‘Appointed day’ means day following immediately after the expiry of the period of fifteen days from the day of
acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
These expenses (except at point no. g i.e. sum payable by the assessee to a micro or small enterprise)
outstanding at the end of the previous year would be allowed as deduction only to the extent they have been
actually paid on or before the due date of filing the income-tax return u/s 139(1) failing which they would be
allowed in the previous year in which they have been actually paid.
The provisions of this section are applicable only to employer’s contribution and are not applicable to employee’s
contribution for the welfare funds. Hence employer‘s contribution to various funds is allowed as deduction if the
same is paid on or before the due date of filing return under section 139(1). However employee’s contribution for
the welfare funds is first deemed as income of the assessee (employer) u/s 36(1)(va) and the same is allowed
deduction only when such sums are deposited by the assessee to the employee’s account in the relevant fund
or funds on or before the due date as per the respective welfare acts.
It is hereby clarified that the provisions of this section shall not apply and shall be deemed never to have
been applied to a sum received by the assessee from any of his employees to which the provisions of sub-
clause (x) of clause (24) of section 2 applies.”[Amendment vide Finance Act, 2021]
Note:
1. Where there is default in the payment of such interest, such interest can be converted in to a loan. Such
conversion of the unpaid interest in to loan, by itself, does not constitute the payment, for purposes of
Section 43B. This shall be allowed proportionately in the previous year in which the converted interest
is actually paid.
2. A deduction of any sum, being interest payable under this section to any public financial institution or a
State financial corporation or a State industrial investment corporation, shall be allowed if such interest
has been actually paid and any interest referred to in that clause which has been converted into a loan
or borrowing or debenture or any other instrument by which the liability to pay is deferred to a future
date shall not be deemed to have been actually paid.
Any sum payable means a sum for which the assessee incurred liability in the previous year even though such
sum might not have been payable within that year under the relevant law.

Illustration 11
During the Financial Year 2023-2024, the following payments / expenditure were made / incurred by Mr.
Yuvan Raja, a Resident Individual (whose turnover during the year ended 31.03.2023 was ` 54 Lakhs):
1. Interest of ` 12,000 and commission Rs.15,000 was paid to Rehman & Co, a Resident Partnership
Firm.

230
Profits and Gains from Business and Profession LESSON 6

2. Interest of ` 4,000 was paid as interest to Mr. R.D. Burman, a Non-Resident.

3. ` 3,00,000 was paid as salary to a resident individual.
4. He had sold goods worth ` 5 Lakhs to Mr. Deva. He gave Mr. Deva a cash discount of ` 12,000 later.
Commission of ` 15,000 was paid to Mr. Vidyasagar on 02.07.2023.
In none of these transactions, tax was deducted at source. Briefly discuss whether any disallowance arises
under the provisions of Section 40(a)(i) / 40(a)(ia) of the Income Tax Act, 1961.
Solution:
Assessee: Mr. Yuvan Raja Previous Year: 2023-2024 Assessment Year: 2024-2025
1. Payment of Interest and Commission: The Assessee is not subject to Tax Audit in the preceding
PY since the Turnover of ` 54 Lakhs is less than the prescribed limit of u/s 44AB for PY 2022-2023.
Therefore the Assessee is not liable to deduct Tax for both interest u/s 194A and commission u/s
194H. The amounts of ` 12,000 (Interest) and ` 15,000 (Commission) are allowable expenditure.
2. Interest, Royalty, Fees for Technical Services or other similar sum payable outside India or in India
to a Non-Resident not being a Company, or to a Foreign Company, on which tax has not been paid
or deducted at source or after deduction, tax has not been paid before the prescribed time u/s 139(1)
will be allowed as a deduction in computing the income of the previous year in which such tax has
been paid and not in the previous year to which it relates to. Hence, the interest of ` 4,000 paid to
Mr. Burman without deduction of tax is not an allowable expenditure for the Previous Year 2023-
2024. [Note: However, Where an Assessee fails to deduct tax at source but is not deemed to be an
Assessee in Default u/s 201(1), then it shall be deemed that the Assessee has deducted and paid the
tax on such sum, on the date of furnishing of Return of Income by the Payee.]
3. Salary to a Resident: TDS on Salaries to Resident Employees in India is also covered u/s 40(a)(ia).
So, payment of ` 3,00,000 to a Resident Individual on which Tax was not deducted is disallowed to
an extent of 30%. However, is allowed in the year of TDS remittance.
4. Sale of Goods and Cash Discount are business transactions and TDS is not attracted for these
transactions. Therefore the amounts are not disallowed u/s 40(a)(ia).

Changes in Rate of Exchange [Section 43A]

As per Section 43Aof the Income-tax Act, where an assessee has acquired any asset in any previous year from
a country outside India for the purposes of his business or profession and, in consequence of a change in the
rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction
in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time
of acquisition of the asset) at the time of making payment towards the whole or part of the cost of the asset or
for payment of the whole or part of the moneys borrowed by him from any person directly or indirectly in any
foreign currency specifically for the purpose of acquiring the capital asset. The amount by which the liability of
the assessee in terms of Indian Rupees is increased or reduced as a result of change in the rate of exchange of
the currency, would be added to or as the case may be deducted from the actual cost of the asset as defined
in Section 43(1). Consequently, the amounts of depreciation allowable to assessee in respect of the asset would
correspondingly be increased or reduced, as the case may be.
For these purposes, the expression “rate of exchange” must be taken to mean the rate of exchange determined
or recognised by the Central Government for the conversion of Indian Rupee into foreign currency or vice-versa.
In cases where the whole or part of the liability in respect of the payment for the cost of the asset or in respect of
the money borrowed from a foreign source for acquiring the capital asset is not met by the assessee but directly
or indirectly by any other person or authority, the liability so met by the other persons should not be taken into

231
EP-TL&P Profits and Gains from Business and Profession

Illustration 12
In the example below, the assessee has opted for presumptive taxation in AY 2020-21 and 2022-23 but in
AY 2023-24, since his computed gains from business were lower than the presumptive, he didn’t opt for it.
Hence for 5 AY’s subsequent to that year, i.e., from AY 2023-24 to AY 2027-28, he will not be able to opt for
presumptive basis u/s 44AD.

ASSESSMENT YEAR

Particulars 2020-21 2022-23 2023-24

Gross Receipts 1,80,00,000 1,90,00,000 2,00,00,000

Presumptive Opted Y Y N

Tax Rate 8% 8% Not Applicable

Deemed Income for 14,40,000 15,20,000 10,00,000

Taxation

Books of Accounts & Audit N N Y

PRESUMPTIVE TAXATION FOR PROFESSIONALS [SECTION 44ADA]

Assessee on which section applicable
Resident Individual,
Resident Firm (excluding LLP)
who is engaged in any profession specified u/s 44AA(1) namely legal / medical / engineering / architectural
/ accountancy / technical consultancy / interior decoration, or any other profession as notified by the Central
Board of Direct Taxes (CBDT), in the Official Gazette
Profession on which section is applicable:
a) In case of an assessee carrying on notified profession u/s 44AA(1) i.e legal, medical, engineering,
accountancy, architecture, interior decoration, technical consultancy, whose gross receipts does not
exceed 50 Lakhs in the relevant PY.
b) In case of an assessee carrying on notified profession u/s 44AA(1) i.e legal, medical, engineering,
accountancy, architecture, interior decoration, technical consultancy, whose aggregate cash receipts
in the relevant PY does not exceed 5% of total gross receipts and whose gross receipts does not exceed
75 Lakhs.

Income to be computed on Presumptive Basis

50% of gross receipts of such profession or a sum higher than the aforesaid sum claimed to have been earned
by the assessee.
No deduction shall be allowed to the assessees under sections 30 to 38 and the salary and interest paid to
the partners shall not be allowed for deduction subject to the conditions and limits specified in section 40(b).

240
EP-TL&P Profits and Gains from Business and Profession

QUESTIONS AND ANSWERS

CASE 1

Ms. Priya is engaged in the business of generation and distribution of power and opts the WDV method for
claiming Depreciation. She has an opening block of INR 50,00,000. She acquired new machinery for INR
25,00,000 on 15th Nov 2023. She also imported a new machinery from Zurich for INR 10,00,000 on 14th
Apr 2023. This machine was used there earlier and she is the first user in India. Additionally, she bought
computers for INR 500,000 on 9th Sep 2023.
You are required to compute the allowable depreciation under Income Tax Act, 1961 for AY 2024-25.
Answer

Items Date INR Category Rate Depreciation

Opening WDV 1st Apr 2023 50,00,000 Full 15% 7,50,000

New Machinery 15th Nov 2023 25,00,000 Half 15% 1,87,500

Imported Machinery 14th Apr 2023 10,00,000 Full 15% 1,50,000

Computers 9th Sep 2023 5,00,000 Full 40% 2,00,000

Total Depreciation 12,87,500

Addl Depreciation

New Machinery 25,00,000 Half 20% 2,50,000

Computers 5,00,000 Full 20% 1,00,000

Additional Depreciation 3,50,000

Annual Depreciation 16,37,500

Note: The machinery that was imported was first used therein at Zunich, earlier, before being imported into
India and hence no depreciation will be allowed on the same.

CASE 2

Examine whether the following expenses incurred by Ms. Priyanka, a dealer in Securities, will be allowable?
(a) Expenses on CSR Activities INR 750,000
(b) Setting up a cold chain facility for specified products, INR 10,00,000
(c) Interest on loan paid to Mr. Shyam, INR 100,000 on which no TDS was affected. Her sales for the PY
was INR 5 Crores
(d) Securities Transaction Tax paid INR 50,000
Answer:
(a) Expenses on CSR activities are not allowable as a deduction u/s 37 and hence the entire INR 750,000
would be disallowed

242
Profits and Gains from Business and Profession LESSON 6

(b) This is a specified business for which she can claim 100% deduction u/s 35AD, hence entire INR
10,00,000 will be allowable
(c) The turnover of Ms. Priyanka exceeds the threshold of INR 100,00,000 and hence she was required
to deduct tax at source. Since she didn’t, 30% of the interest, i.e., 30% of INR 100,000, that is INR
30,000 would be disallowed u/s 40(a)(ia) and the balance INR 70,000 would be allowable for the
assessee u/s 36(1)(iii)
(d) Securities Transaction Tax of INR 50,000 would be an allowable expense, assuming that income
from such source, has been included under the head “Profits / Gains from Business / Profession”.

CASE 3

Mr. Kundan Lal, a trader at Kolkata, submits the P&L as under, for FY 2023-24:

Profit & Loss Account for Year Ended 31st March, 2024
Particulars INR Particulars INR
To Opening Stock 1,00,000 By Sales 1,25,00,000
To Purchases 1,20,00,000 By Closing Stock 2,00,000
To Gross Profit 6,00,000
Total 1,27,00,000 Total 1,27,00,000
To Rent, Rates, Taxes 1,08,000 By Gross Profit 6,00,000
To Salaries 1,25,000 By Interest Income 5,000
To Interest on loan 25,000
To Depreciation 2,25,000
To Printing & Stationery 25,000
To Postage & Telegram 1,750
To Loss on Sale of Shares (Short Term) 12,190

To General Expenses 17,060

To Net Profit 66,000
Total 6,05,000 Total 6,05,000

Additional Information:
a) Closing Stock & Opening Stock was under-valued by 10%
b) Salary includes INR 20,000 paid to a relative which was considered unreasonable
c) The whole amount of Printing & Stationery was paid in Cash at one go
d) WDV of the Plant & Machinery on 1st April, 2023 was INR 12,00,000. Additions of INR 5,00,000 were
made on 1st June 2023 and on 1st Oct 2023, Machinery was sold for INR 12,57,993
e) Rent & Rates included GST Liability for Mar’ 24 , of INR 27,000, duly paid within 7th April 2024

243
EP-TL&P Profits and Gains from Business and Profession

f) A general expenses includes donation of INR 12,000 was made to a public charitable trust during
the year.
You are required to:
a) Calculate the Profits / Gains from Business Profession
b) Advise whether he should opt for the Presumptive scheme u/s 44AD
You can assume that the entire amount of turnover was received by account payee cheque.
Answer:

Particulars INR

Net Profit 66,000

Add: UV Closing Stock 22,222

Salary (Relative) 20,000

Printing & Stationery (Cash > 20000) 25,000

Depreciation 2,25,000

Donation 12,000

Loss on Sale of Shares 12,190

3,82,412

Less: UV Opening Stock (11,111)

Allowable Depreciation (66,301)

Interest Income (5,000)

Profits / Gains from Business / Profession 3,00,000

Under Presumptive Taxation 7,50,000

Since the tax liability on presumptive basis, i.e., 6% of Gross Receipts (INR 125,00,000 *6%) = INR 750,000
is higher than the computed Profits / Gains from Business Profession, he shouldn’t adopt for presumptive
basis. However, since his turnover is > INR 1 Crore, audit u/s 44AB would be mandatory, if he doesn’t adopt
presumptive basis.
Notes:
a) Under-valued closing stock added to Profits [(100/90*200,000) – 2,00,000]
b) Under-valued opening stock reduced [(100/90*100,000) – 1,00,000]
c) Salary to relative, to the extent considered reasonable, added back
d) Since the cash payment was > INR 10,000, entire amount disallowed u/s 40 A (3)

244
Profits and Gains from Business and Profession LESSON 6

e) Depreciation added back and allowed as under:

Particulars INR

Opening WDV 12,00,000

Additions 5,00,000

Disposals 12,57,993

Closing WDV 4,42,007

Depreciation @ 15% 66,301

f) Since the unpaid GST Liability was paid before the due date and before the date of filing return of
income u/s 139(1), it is allowable.

CASE 4

Net profit as per profit and loss account of X is Rs. 6,86,000 for the year ending 31st March, 2024. The
following information is noted from his accounts:
(a) Advertisement expenditure debited to profit and loss account include the following:
(i) Expenditure incurred outside India: Rs. 46,000 (permitted by RBI);
(ii) Articles presented by way of advertisement (60 articles cost of each being Rs. 900; and 36
articles cost of each being Rs. 1,700);
(iii) Rs 16,000 being cost of advertisement which appeared in a newspaper owned by a political
party;
(iv) Rs. 11,400 being capital expenditure on advertisement;
(v) Rs. 12,000 paid in cash; and
(vi) Rs. 7,000 paid to a concern in which X has substantial interest (amount is excessive to the
extent of Rs. 1,400).
(b) Out of salary to employees of Rs. 8,70,000 debited to the profit and loss account:
(i) Rs. 40,000 is employees’ contribution to recognised provident fund, Rs. 37,500 of which is
credited in the employees’ account in the relevant fund before the ‘due date’;
(ii) Rs. 46,000 is bonus which is paid on 13th November, 2024;
(iii) Rs. 36,000 is commission which is paid on 1st December, 2024;
(iv) Rs. 20,000 is incentive to workers which is paid on 10th December, 2023;
(v) Rs. 40,000 is paid outside India in respect of which tax is not deducted at source;
(vi) Rs. 6,000 being capital expenditure for promoting family planning amongst employees; and
(vii) Rs. 40,000 being entertainment allowance given to employees;
(viii) Entertainment expenditure debited to profit and loss account is Rs. 9,000. Determine the net
income of X for the assessment year 2024-25.

245
EP-TL&P Profits and Gains from Business and Profession

Answer:
Calculation of Net Income of X for Assessment Year 2024-25

Particular Amount

Net Profit as per Profit and Loss Account 6,86,000

Add: Inadmissible items:

Cash paid for advertisement expenses (Note 3) 12000

Cost of advertisement which appeared in a newspaper owned by a political party 16000

Excessive amount paid to a concern in which X has substantial interest 1400

Employee contribution to recognised provident fund (to the extent not credited in the
employees’ account in the relevant fund before the ‘due date’)
2500

Bonus being paid to employees after the ‘due date’ of filing the return 46000

Commission being paid to employees after the ‘due date’ of filing the return 36000

Salary paid outside India in respect of which tax is not deducted at source 40000

Capital expenditure for promoting family planning amongst employees (allowed only to a
corporate assessee)
6000

Capital expenditure on Advertisements 11400

Net Income 8,57,300

Notes:
1. Restrictions on advertisement and entertainment abolished.
2. With the abolition of Section 37(3), which inter alia governed the deductibility of advertising expenses,
advertising too has come within the fold of the omnibus Section 37(1) which specifically frowns on
capital expenditure. The Himachal Pradesh High Court verdict in Mohan Meakin Breweries Ltd. v. CIT
(1979) 118 ITR 101 allowing capital expenditure on advertising therefore has ceased to have the force
of law as it was rendered in the context of Section 37(3).
3. Advertisement expenses of Rs. 12,000 (i.e., exceeding the limit of Rs. 10,000) is paid in cash, hence
disallowed under section 40A(3).
4. The ‘due date’ for filing return where the assessee is a person (other than a company) who is required
to get his accounts audited under the Income-tax Act or any other law is September 30; and where
the assessee is a person deriving income from business and who is not required to get his accounts
audited, the ‘due date’ is July, 31. Under the provisions of Section 43B of the Act - Bonus Rs. 46,000
paid on 13th Nov., 2024 and Commission Rs. 36,000 paid on 1st Dec., 2024 are not admissible since
the payments are made after the above mentioned ‘due date’.
5. Incentive to workers which is paid on 10th December, 2023 is admissible on ‘due basis’.

246
 Chapter 3: Profits & Gains from Business
Profession Unit 3
Descriptive Questions

Easy
Question 1 RTP May’19
Mr. X commenced the business of operating goods vehicles on 1.4.2023. He purchased the
following vehicles during the P.Y.2023-24. Compute his income under section 44AE for A.Y.2024-
25.
Gross Vehicle Weight (in kilograms) Number Date of purchase
(1) 7,000 2 10.04.2021
(2) 6,500 1 15.03.2022
(3) 10,000 3 16.07.2021
(4) 11,000 1 02.01.2022
(5) 15,000 2 29.08.2021
(6) 15,000 1 23.02.2022
Would your Answer change if the goods vehicles purchased in April, 2023 were put to use only in
July, 2023?
Answer:
Since Mr. X does not own more than 10 vehicles at any time during the previous year 2023-24, he is
eligible to opt for presumptive taxation scheme under section 44AE. Rs. 1,000 per ton of gross vehicle
weight or unladen weight per month or part of the month for each heavy goods vehicle and Rs. 7,500
per month or part of month for each goods carriage other than heavy goods vehicle, owned by him
would be deemed as his profits and gains from such goods carriage. Heavy goods vehicle means any
goods carriage, the gross vehicle weight of which exceeds 12,000 kg.
(1) (2) (3) (4)
Number of Date of purchase No. of months for which No. of months × No. of
Vehicles vehicle is owned vehicles [(1) × (3)]
For Heavy goods vehicle
2 29.08.2023 8 16
1 23.02.2024 2 2
18
For goods vehicle other than heavy goods vehicle
2 10.4.2023 12 24
1 15.3.2024 1 1
3 16.7.2023 9 27
1 02.1.2024 3 3
55

Page | 141
The presumptive income of Mr. X under section 44AE for A.Y.2024-25 would be -Rs. 6,82,500, i.e., 55
× Rs. 7,500, being for other than heavy goods vehicle + 18 x Rs. 1,000 x 15 ton being for heavy goods
vehicle.
The answer would remain the same even if the two vehicles purchased in April,2023 were put to use
only in July, 2023, since the presumptive income has to be calculated per month or part of the month
for which the vehicle is owned by Mr. X.

Question 2 MTP April’21 & Oct ‘23

M/s. Moksh Enterprises, a sole proprietorship owns four machines, put in use for business in
March, 2022. The depreciation on these machines is charged @ 15%. The written down value of
these machines as on 1st April, 2023 was ₹ 7,70,000. Two of the old machines were sold on
15th July, 2023 for ₹ 10,00,000. A second-hand plant was bought for ₹ 6,10,000 on 30th
December, 2023. You are required to:
(i) Determine the claim of depreciation for Assessment Year 2024-25.
(ii) Compute the capital gains liable to tax for Assessment Year 2024-25.
If Moksh Enterprises had sold the two machines in July, 2023 for ₹ 15,00,000, explain, will
there be any difference in your above workings? 4 Marks
Answer:
i. Computation of depreciation for A.Y.2024-25
Particulars ₹
W.D.V. of the block as on 1.4.2023 7,70,000
Add: Purchase of second hand plant during the year [in December, 2023] 6,10,000
13,80,000
Less: Sale consideration of old machinery during the year [in July, 2023] 10,00,000
W.D.V of the block as on 31.03.2024 3,80,000
Depreciation @ 15% but restricted to 50% thereon. ₹ 3,80,000 X 7.5% 28,500
[Since the value of the block as on 31.3.2024 represents part of actual cost of second-
hand plant purchased in December, 2023, which has been put to use for less than 180
days, depreciation is restricted to 50% of the prescribed percentage of 15% i.e.
depreciation is restricted to 7½%.
Therefore, the depreciation allowable for the year is ₹ 28,500 being 7½% of ₹
3,80,000]
ii. In the given case, no capital gains would arise, since the block of asset continues to exist, and
some of the assets are sold for a price which is lesser than the written down value of the block as
increased by the actual cost of asset purchased during the year.
iii. If the two machines are sold in July, 2023 for ₹ 15,00,000, then short term capital gains would
arise, since the sale consideration is more than the aggregate of the written down value of the
block at the beginning of the year and the additions made during the year.

Particulars ₹ ₹
Sale consideration 15,00,000
Less: W.D.V. of the machines as on 1.4.2023 7,70,000
Purchase of second plant during the year 6,10,000
13,80,000
Short term capital gains 1,20,000

Page | 142
Question 3 MTP April’21 & Nov 19
Mr. Yogesh is in the business of operating goods vehicles. As on 1set April, 2023, he had the
following vehicles:
Vehicle Gross Vehicle Weight Date of Purchase Put to use during F.Y. 2023-24?
(in Kgs.)
A 9000 2-6-2022 Yes
B 15000 15-5-2022 Yes
C 12000 4-8-2022 No (as under repairs)
During P.Y. 2023-24, he purchased the following vehicles:
Vehicle Gross Vehicle Weight (in Kgs.) Date of Purchase Date on which put to
use
D 11500 20-4-2023 10-5-2023
E 14000 15-5-2023 18-5-2023
Compute his income under section 44AE of the Income-tax Act, 1961 for A.Y. 2024-25.
4 Marks
Answer:
Since Mr. Yogesh does not own more than 10 vehicles at any time during the previous year 2023 -24,
he is eligible to opt for presumptive taxation scheme under section 44AE. As per section 44AE, ₹ 1,000
per ton of gross vehicle weight or unlade weight, as the case may be, per month or part of the month
for each heavy goods vehicle and ₹ 7,500 per month or part of month for each goods carriage other
than heavy goods vehicle, owned by him would be deemed as his profits and gains from such goods
carriage.
Heavy goods vehicle means any goods carriage, the gross vehicle weight of which exceeds 12,000 kg.

Calculation of presumptive income as per section 44AE

Type of carriage No.of months Rate per ton Ton Amount ₹
the vehicle is per month
owned by Mr.
Prakash
(1) (2) (3) (4) (5) [(2) x (3) x (4)]
Heavy goods vehicle Vehicle B (15,000 kgs) 15 (15,000/ 1,80,000
held throughout the year 12 ₹ 1,000 1,000)
Vehicle E (14,000 kgs) purchased on 11 ₹ 1,000 14 (14,000/ 1,54,000
15.5.2020 1,000)
Goods vehicles other than heavy goods Rate per month
vehicle
Vehicle A held throughout the year 12 ₹ 7,500 - 90,000
Vehicle C held throughout the year 12 ₹ 7,500 - 90,000
Vehicle D purchased on 20.4.2023 12 ₹ 7,500 - 90,000
Total 6,04,000

The “put to use” date of the vehicle is not relevant for the purpose of computation of presumptive
income under section 44AE, since the presumptive income has to be calculated per month or part of
the month for which the vehicle is owned by Mr. Yogesh.

Page | 143
Question 4 MTP Oct’20, RTP May 18
Mr. Abhimanyu has furnished the following particulars relating to payments made and expenditure
incurred towards scientific research for the year ended 31.3.2024:
Sl. No. Particulars ₹ (in lakhs)
(I) Payment made to AB University, an approved University 15
(ii) Payment made to Soya College 17
(iii) Payment made to IIT, Madras (under an approved programmed for 12
scientific research)
(iv) Machinery purchased for in-house scientific research 25
Compute the deduction available under section 35 of the Income-tax Act, 1961 for A.Y. 2024-
25, while computing his income under the head “Profits and gains of business or profession”.
4 Marks
Answer:
Computation of deduction allowable under section 35
Particulars Amount (₹ in Section % of Amount of
lakhs) weighted deduction (₹ in
deduction lakhs)
Payment for scientific research
AB University, an 15 35(1)(ii) 150% 22.5
approved University (100%) 15
Soya College [See Note 1] 17 - NIL NIL
IIT Madras (under an approved 12 35(2AA) 150% 18
programme for scientific research) (100%) 12
In-house research [See Note 2]
Capital expenditure – Purchase of 25 35(1)(iv) row 100% 25
Machinery 35(2)
Deduction allowable under section 35 65.50 52
Notes: -
1. Payment to Soya College: Since the Question clearly mentions that AB University (mentioned in item
(I)) is approved research institutions, it is logical to conclude that Siya College mentioned in item (ii)
is not an approved research institution. Therefore, payment to Siya College would not qualify for
deduction under section 35.
2. Deduction for in-house research and development: Only company assesses are entitled to weighted
deduction @150% under section 35(2AB) in respect of expenditure on scientific research on in-house
research and development facility. However, in this case, the assessee is an individual. Therefore, he
would be entitled to deduction@100% of the capital expenditure incurred under section 35(1)(iv) read
with section 35(2), assuming that such expenditure is laid out or expended on scientific research
related to his business. (As per amendment sec 352AA & sec 35(1)(ii) the deduction limit is reduced
from 150% to 100% )

Question 5 MTP March’19

Mr. Satinder is engaged in the business of plying goods carriages. On 1 set April, 2023, he owns
10 trucks (out of which 5 are heavy goods vehicles, the gross vehicle weight of such goods vehicle
is 17,000 kg each). On 5th May, 2023, he sold one of the heavy goods vehicles and purchased a
light goods vehicle on 8th May, 2023. This new vehicle could however be put to use only on 15th

Page | 144
July, 2023. Compute the total income of Mr. Satinder for the assessment year 2024-25, taking
note of the following data:
Particulars ₹ ₹
Freight charges collected 12,50,500
Less : Operational expenses 5,25,500
Depreciation as per section 32 1,85,000
Other office expenses 17,000 7,27,500
Net Profit 5,23,000
Other business and non- business income 70,000
5 Marks
Answer:
Section 44AE would apply in the case of Mr. Satinder since he is engaged in the business of plying
goods carriages and owns not more than ten goods carriages at any time during the previous year.
Section 44AE provides for computation of business income of such assesses on a presumptive basis.
The income shall be deemed to be ₹ 1,000 per ton of gross vehicle weight or unlade weight, as the case
may be, per month or part of the month for each heavy goods vehicle and ₹ 7,500 per month or part
of month for each goods carriage other than heavy goods vehicle, owned by the assesses in the previous
year or such higher sum as declared by the assesses in his return of income. Mr. Santander’s business
income calculated applying the provisions of section 44AE is ₹13,82,500 [See Notes (1) & (2) below]
and his total income would be
₹14,52,500. However, as per section 44AE (7), Mr. Satinder may claim lower profits and gains if he
keeps and maintains proper books of account as per section 44AA and gets the same audited and
furnishes a report of such audit as required under section 44AB. If he does so, then his income for
tax purposes from goods carriages would be ₹5,23,000 instead of ₹13,82,500 and his total income
would be ₹5,93,000.
Notes:
1. Computation of total income of Mr. Satinder for A.Y. 2024-25
Particulars Presumptive Where books are
income maintained
₹ ₹
Income from business of plying goods carriages
[See Note (2) Below] 13,82,500 5,23,000
Other business and non-business income 70,000 70,000
Total Income 14,52,500 5,93,000

2. Calculation of presumptive income as per section 44AE

Type of carriage No. of Rate per Ton Amount ₹
months ton per
month/per
month
(1) (2) (3) (1) x (2) x (3) =
(4)
Heavy goods vehicle
1 goods carriage up to 5th May 2 1,000 17 (17,000/ 1,000) 34,000
4 goods carriage held throughout the 12 1,000 17 (17,000/ 1,000) 8,16,000
year

Page | 145
 Goods vehicle other
than heavy goods vehicle
1 goods carriage from 8th May 11 7,500 - 82,500
5 goods carriage held throughout the 12 7,500 - 4,50,000
year
Total 13,82,500

Question 6 MTP March’18

Kapil & Sons, a partnership firm consisting of two working partners, reports a net profit of ₹
6,00,000 before deduction of the following items:
(1) Salary of ₹ 20,000 each per month payable to two working partners of the firm (as authorized
by the deed of partnership).
(2) Depreciation on plant and machinery purchased on 15.7.2013 by a bearer cheque in single
payment for ₹ 1,50,000.
(3) Interest on capital at 18% per annum (as per the deed of partnership). The amount of capital
eligible for interest ₹5,00,000
You are required to compute:
(i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
(ii) Allowable working partner salary for the assessment year 2024-25 as per section 40(b).
5 Marks
Answer:
(i) As per Explanation 3 to section 40(b), “book profit” shall mean the net profit as per the profit and
loss account for the relevant previous year computed in the manner laid down in Chapter IV-D as
increased by the aggregate amount of the remuneration paid or payable to the partners of the
firm if the same has been already deducted while computing the net profit.

In the present case, the net profit given is before deduction of depreciation on plant and machinery,
interest on capital of partners and salary to the working partner Therefore, the book profit shall be
as follows:
Computation of Book Profit of the firm under section 40(b)
Particulars ₹ ₹
Net Profit (before deduction of depreciation, salary and interest) 6,00,000
Less: Depreciation under section 32 (See note below) NIL
Interest @ 12% p.a. [being the maximum allowable as per section 40(b)]
(5,00,000 × 12%) 60,000 60,000
Book Profit 5,40,000

Note:
As per second proviso to section 43(1), the expenditure for acquisition of asset, in respect of which
payment to a person in a day exceeds ₹ 10,000 has to be ignored for computing actual cost, if such
payment is made otherwise than by way of A/c payee cheque/ bank draft or ECS. Accordingly,
depreciation on plant and machinery purchased on 15.7.2013 is not allowable since the payment is made
otherwise than by A/c payee cheque/ A/c payee draft/ ECS to a person in a day.

(i) Salary actually paid to working partners = ₹ 20,000 × 2 × 12 = ₹ 4,80,000.

As per the provisions of section 40(b)(v), the salary paid to the working partners is allowed
subject to the following limits -

Page | 146
 On the first ₹ 3,00,000 of book profit ₹ 1,50,000 or 90% of book profit, whichever
or in case of loss is more
On the balance of book profit 60% of the balance book profit

Therefore, the maximum allowable working partners’ salary for the A.Y. 2024-25 in this case would
be:
Particulars ₹
On the first ₹3,00,000 of book profit [(₹1,50,000 or 90% of ₹ 3,00,000) whichever is 2,70,000
more]
On the balance of book profit [60% of (₹ 5,40,000 - ₹ 3,00,000)] 1,44,000
Maximum allowable partners’ salary 4,14,000
Hence, allowable working partners’ salary for the A.Y. 2018-19 as per the provisions of section 40(b)(v)
is ₹ 4,14,000.

Question 7 RTP Nov ’18

Mr. Chauhan is having a trading business and his Trading and Profit & Loss Account for the
financial year 2024-25 is as under:
Particulars Amount (₹) Particulars Amount (₹)
To Opening stock 1,50,000 By Sales 2,70,00,000
To Purchase 2,49,00,000 By Closing stock 1,00,000
To Gross Profit 20,50,000
Total 2,71,00,000 Total 2,71,00,000
Salary to employees (Including 5,00,000 By Gross Profit b/d 20,50,000
Contribution to PF)
Donation to Prime Minister Relief Fund 1,00,000
Provision for bad debts 50,000
Bonus to employees 50,000
Interest on bank loan 50,000
Family planning expenditure incurred on 20,000
employees
Depreciation 30,000
Income-tax 1,00,000
To Net profit 11,50,000
Total 20,50,000 Total 20,50,000
Other information:
(i) He incurred expenditure on furniture & fixtures of ₹ 35,000, which is paid in cash on
25.7.2023 to M/s Décor World.
(ii) Depreciation allowable ₹ 40,000 [excluding depreciation on furniture & fixtures refer in (i)
above] as per Income-tax Rules, 1962.
(iii) No deduction of tax at source on payment of interest on bank loan has been made.
(iv) Out of salary, ₹ 25,000 pertains to his contributions to recognized provident fund which was
deposited after the due date of filing return of income. Further, employee’s contribution of
₹ 25,000 was also deposited after the due date of filing return of income.
Compute business income of Mr. Chauhan for the Assessment Year 2024-25.

Page | 147
Question 8 RTP May ’20
Mr. Chirag, set up a manufacturing unit of Baking Soda in notified backward area of the State
of Andhra Pradesh on 18th May, 2023. The following machineries (falling under 15% block)
purchased by him during the previous year 2023-24.
Amount(₹
lakhs)
(i) Machinery X, Machinery Y and Machinery Z from Sahaj Limited on credit 58
(installed and usage started on 18th July, 2023, 25th July 2023 and 1st
August 2023, respectively). Payment is made on 15th April 2024 to Sahaj
Limited by net banking.
(ii) Machinery L from Swayam Limited (installed on 8th August, 2023). The 35
Invoice was paid through a cash payment on the same day.
(iii) Machinery M (a second-hand machine) from Sunshine Limited on 18th 15
December, 2023 (The payment for the purchase invoice was made through
NEFT on 5th January, 2024)
Compute the depreciation allowance under section 32 of the Income-tax Act, 1961 for the
assessment year 2024-25.
Answer:
Computation of depreciation under section 32 for A.Y. 2024-25
Particulars ₹ ₹
Machinery X, Machinery Y and Machinery Z acquired from Sahaj Ltd. 58,00,000
(Since payment is made to Sahaj Ltd by way of use of ECS and the
machineries were put to use for more than 180 days during the previous
year, depreciation is allowable @15%)
Machinery L acquired from Swayam Ltd. in cash and NIL
installed on 8.8.2023 [Since payment of ₹ 35 lakhs is made otherwise 15,00,000
than by account payee cheque/bank draft or use of ECS, the said amount
will not be included in actual cost and hence, depreciation not allowable]
Second hand Machinery M from Sunshine Ltd on 18.12.2023 assuming it
is installed and put to use in P.Y. 2023-24. [Since payment is made to
Sunshine Ltd by way of use of ECS]
Actual Cost 73,00,000
Depreciation for P.Y.2023-24
Depreciation@15% on Machineries X, Y and Z on ₹ 58 lakhs 8,70,000
Depreciation@7.5% (50% of 15%) on ₹ 15 lakhs for Machinery M since
it is put to use for less than 180 days 1,12,500

Page | 149
 Less: HEC@4% 2,520
Tax liability 65,520
Less: TDS 69,600
Tax Refundable 4,080
Since tax refundable in case Dr. Rohan opts for the provisions of section 44ADA is lower than the
regular provisions of the Act, it would be beneficial for him not to opt for section 44ADA and get his
books of account audited and declare income under the regular provisions.

Question 18 MTP, Nov’21,RTP Nov’21

Ms. Soha (aged 35 years), a resident individual, is a dealer of scooters. During the previous year
2023-24, total turnover of her business was Rs. 110 lakhs (out of which Rs. 25 lakhs were
received by way of account payee cheques and balance in cash). Ms. Soha does not opt to pay
tax as per the provisions of section 115BAC. What would be your advice to Ms. Soha relating to
the provisions of advance tax with its due date along with the amount payable, assuming that she
wishes to make maximum tax savings. 3 Marks
Answer:
Computation of advance tax of Ms. Soha under Presumptive Income scheme as per section 44AD
The total turnover of Ms. Soha, a dealer of scooter, is ₹ 110 lakhs. Since her total turnover from such
business is less than Rs. 200 lakhs and she does not wish to get his books of account audited, she can
opt for presumptive tax scheme under section 44AD.

Profits and gains from business computed under section 44AD:

Particulars Rs.
6% of Rs. 25 lakhs, being turnover effected through account payee cheque 1,50,000
8% of Rs. 85 lakhs, being cash turnover 6,80,000
8,30,000
An eligible assesses opting for computation of profits and gains of business on presumptive basis
under section 44AD in respect of eligible business is required to pay advance tax of the whole amount
on or before 15the March of the financial year.

Computation of tax liability of Ms. Soha as per normal provisions of Income-tax Act, 1961
Particulars Amount in Rs.
Total Income 8,30,000
Tax on 8,30,000
Upton Rs. 2,50,000 Nil
₹ 2,50,001 – Rs. 5,00,000@5% 12,500
₹ 5,00,001 – Rs. 8,30,000@20% 66,000 78,500
Add: Health and Education cess@4% 3,140
Tax liability 81,640
Accordingly, she is required to pay advance tax of Rs. 81,640 on or before 15th March of the
financial year. However, any amount by way of advance tax on or before 31st March of the financial
year shall also be treated as advance tax paid during the financial year ending on that day for all the
purposes of the Act.

Page | 171
Question 19 ,RTP Nov’21
Discuss in brief about deduction on account of Preliminary Expenses under section 35D. 5 Marks
Answer:
Under section 35D an Indian Company or a resident non-corporate assesses can claim deduction in
respect of preliminary expenses incurred before commencement of business or setting up a new unit
(Including extension of
the business).
Maximum qualifying amount is as under:
(a) Corporate assessed - 5% of cost of the project. Or 5% of capital employed, whichever is more.
(b) Non-Corporate assessed - 5% of cost of the project.
Deduction of preliminary expenses is allowed in five successive previous years equally (1/5th Every
Year) beginning from year of commencement of business.

Question 20 CS Execu. June’14 New

What are the special provisions for computing Profits and Gains of Business or Profession on
presumptive basis under section 44AD? 5 Marks
Answer:
Under section 44AD if the taxpayer is ordinary resident or Hindu Undivided Family or Resident
Partnership firm (except limited liability) and engaged in any business (except business of negative
list), whose annual turnover does not exceed ₹ 2 crores can opt for taxation on estimated income basis.
Presumptive income will be 8 per cent (6% if received by a/c payee cheque/drafts/ECS, etc.) of
turnover (without any deduction therefrom). In such case assessee will enjoy following benefits:
1. He is not required to maintain account books.
2. He can pay advance tax in one instalment up to 15th March.
3. He can submit his return of income in ITR-4 (a simplified form).

Question 21 CS Execu. June’14 New

Discuss giving reason regarding admissibility or otherwise of the following expenditures while
computing income under the head Income from Business or Profession :
(i) Expenses incurred in connection with a branch, the business of which was discontinued during
the previous year.
(ii) Penalty paid to customs authorities for importing prohibited goods which gave a huge profit to
the business.
(iii) Interest paid on an amount borrowed to acquire a plant for business use upto the date on
which the plant is put to use.
(iv) Rent paid to daughter of the assesses for her building used as office premises of the business.
The building was actually gifted to her by the assesses (father) at the time of her marriage.
(You need not rewrite the statements. Write only admissible/Not admissible with reasons).
4 Marks

Page | 172
Answer:
(i) Admissible: Expenses incurred in connection with a branch, the business of which was discontinued
during the previous year, are admissible while computing income under the head Income from business
or profession as the discontinuance of a branch is not discontinuance of whole business.
(ii) Not Admissible: Penalty paid to customs authorities for importing prohibited goods which is an
illegal activity and therefore not admissible while computing income under the head Income from
Business or Profession.
(iii) Not Admissible: Interest paid on an amount borrowed to acquire a plant for business use up to
the date on which the plant is put to use is capital in nature and shall be capitalized by adding with the
cost of the plant and therefore not admissible while computing income under the head Income from
Business or Profession.
(iv) Admissible: The building is owned by the daughter of the assessed and used for the business of
the assessed. Therefore, rent paid to daughter of the assesses for her building used as office
premises is allowed up to the reasonable limit (Not exceeding market rent).

Question 22 CS Execu. June’14 New

XYZ Pvt. Ltd. furnishes the following information relating to its two business units, one located
in Special Economic Zone (SEZ) and other located in Domestic Tariff Area (DTA) for the year
ended 31-3-2024:
Particulars
Total turnover of Unit A located in SEZ 400
Profit of the business of Unit A 120
Export turnover of Unit A 200
Total turnover of Unit B located DTA 800
Profit of the business of Unit B 80
You are required to compute the deduction available under section 10AA to XYZ Pvt. Ltd. for
the Assessment Year 2024-25 by taking that Unit A in SEZ was set-up in the previous year
2019-20 and separate books of account are being maintained for both the units by the company.
Give brief reasons for your answer in the context of provisions of the Act. 4 Marks
Answer:
100% of the profits derived from export of articles or things or services are eligible for deduction
under section 10AA of the Income-tax Act, 1961 within the first five year period commencing from
the year of manufacture or production of articles or things or provision of services by the unit in SEZ
and thereafter for next 5 years 50%.
Unit A in SEZ is in fifth year of operation and therefore deduction of 100% is available as per section
10AA(7). The profit derived from export of articles or things or services shall be the amount which
bears to the profits of business of the undertaking, being the Unit, the same proportion as the export
turnover of the business carried on by the undertaking as the separate books of account for both the
units have been maintained.
Deduction under section 10AA
= Profits of the business of Unit A x (Export Turnover of Unit A/Total Turn of Unit A)
= ₹ 120 Lakhs x (200/400)

Page | 173
= ₹ 60 Lakhs

Question 23 CS Execu. June’14 New

Mr. Aman has furnished the following particulars relating to payments made and expenditure
incurred towards scientific research for the year ended 31.3.2024:
Particulars ` (in lakhs)
(i) Payment made to AB University, an approved University 15
(ii) Payment made to Siya College 17
(iii) Payment made to IIT, Bangalore (under an approved programmer 12
for scientific research)
(iv) Machinery purchased for in-house scientific research 25
Compute the deduction available under section 35 of the Income-tax Act, 1961 for A.Y. 2024-
25, while computing his income under the head “Profits and gains of business or profession” under
default tax regime under section 115BAC . 4 Marks
Answer:
Computation of deduction allowable under section 35
Particulars Amount (` Section % of Amount of
in lakhs) deduction deduction (`in
lakhs)
Payment for scientific research
AB University, an approved University 15 35(1)(ii) Nil Nil
Siya College 17 - Nil Nil
IIT Bangalore (under an approved programme for 12 35(2AA) Nil Nil
scientific research)
In-house research
Capital expenditure – Purchase of Machinery 25 35(1)(iv)
r. w. 100% 25
35(2)
Deduction allowable under section 35 25
Deduction under section 35(1)(ii) and 35(2AA) is not allowable under default tax regime under section
115BAC.

Page | 174