PROF.

VINIT KUMAR TAXATION 9873126173

7. PROFITS & GAINS OF BUSINESS/PROFESSION

Section 28 CHARGING SECTION - INCOMES TAXABLE U/H BUSINESS/PROFESSION

As per Section 28, following incomes shall be chargeable u/h PGBP (the list is not exhaustive):
1. Profits and gains of any business/profession
2. Export incentives
3. Value of any benefit or perquisite arising from any business/profession:
4. Any interest, salary, bonus commission or remuneration, by by a partner of a firm from such firm to
the extent allowed u/s 40(b).
5. Non-compete fee received/receivable for not carrying on a business/ profession:
6. Sum received under Keyman Insurance Policy

MODES OF COMPUTATION (SEC 29)… format कैसा होता है

Particular amt

Profit and gain from business & profession

Section 38
ASSETS PARTLY USED FOR BUSINESS. AND PARTLY USED FOR PERSONAL PURPOSES
Where any asset has been used by the assessee partly for business purposes and partly for personal purposes,
expenditure is allowed only to the extent the asset has been used for business purposes.
Example: A motor car is used by Mr A for business purposes to the extent of 60% and balance 40% for personal
purposes. In this case, expenditure shall be allowed to be debited only to the extent of 60%.

RENT, RATES, TAXES, REPAIR & INSURANCE OF BUILDINGS (Section 30)

The following expenses in respect of premises are allowed as deduction u/s 30. Such expenses are allowed even if
the assessee is not the owner of the premises provided such premises are used for the purposes of
business/profession:
❑ Rent charges paid by the tenant (where the building is owned by the assessee, notional rent in respect of
such building is not allowed to be deducted), Revenue expenses on repairs
❑ Insurance premium relating to the premises
❑ Municipal taxes, land revenues, local rate, etc (subject to provisions of Section 43B)

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PROF.VINIT KUMAR TAXATION 9873126173

REPAIRS AND INSURANCE OF PLANT & MACHINERY AND FURNTIURE & FIXTURES
(Section 31)
The following expenses in respect of plant & machinery and furniture & fixtures are allowed as deduction u/s 31
provided these assets are used for the purposes of business/profession. The assessee need not be the owner of
the assets:
❑ Revenue expenses on repairs
❑ Insurance premium relating to the asset.
Note: Capital expenditure on repairs incurred by the owner shall be added to the cost of the asset.

DEPRECIATION (Section 32)

Conditions to be Fulfilled for Claiming Depreciation (Cumulative Conditions)
• Generally, the asset on which depreciation is to be claimed must be owned by the assessee either
individually or jointly with any other person (in case of joint ownership, each co-owner will get depreciation
on his share of the asset);
• The asset should be used for the purposes of business/profession; and
• A rate of depreciation must be prescribed under the Income Tax Act in respect of such asset (no
deprecation can be claimed in respect of land owned by an assessee and used for his business/profession as
no rate of depreciation has been prescribed for land under the Income Tax Act).
Assets on Which Depreciation is Admissible
• Tangible Asset
❑ Buildings (the amount of buildings should not include the cost of land) Depreciation
❑ Furniture and fittings
❑ Plant & Machinery - As per Section 43(3), plant & machinery includes ships, vehicles, books, scientific
apparatus and surgical equipment used for the purpose of the business or profession but does not
include tea bushes, livestock, buildings or furniture and fittings.
• Intangible Assets: Intangible assets would include goodwill, know-how, patents, copyrights, trademarks,
licenses, franchises or any other commercial rights of similar nature.
Rates of Depreciation
Block Nature of Asset
1
Buildings 5% Residential building other than hotels and boarding
Buildings 10% Non residential building, godown, office, factory, etc. including hotels and
boarding
Buildings 40% Temporary construction
Furniture 10% Any furniture including electrical fittings
Plant/Machinery 20% Ocean going ships, vessels, speed boats
Plant/Machinery 30% Motor car (including lorries and buses) used for hiring purposes
Motor car, other than used in a business of running them on hire, acquired
Plant/Machinery 30%
and put to use between 23-08-2019 and 31-03-2020
Motor buses, motor lorries and motor taxis used in a business of running
Plant/Machinery 45%
them on hire, acquired and put to use between 23-08-2019 and 31-03-
2020
Computer including computer software
Plant/Machinery 40%
Books owned by a professional
Plant/Machinery 40% Air or water pollution control equipment
Plant/Machinery 15% Oil Wells
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In general (if nothing is mentioned regarding nature of plant &
Plant/Machinery 15%
machinery and including motor car not used for hiring purpose)
Intangible assets3 25% Acquired after 31/3/98

1.
Buildings include roads, bridges, culverts, wells (excluding oil wells) and tube wells.
2.
Plant does not include tea bushes or live stocks or buildings or furniture & fittings.
3
Patent, Know-how, Copy-rights, Trade-mark, Licences, Franchises and other business or commercial right of
similar nature (it does not include goodwill)

Manner of Calculating Depreciation under Income Tax Act

• Depreciation would be allowable to the owner even in respect of assets which are actually worked or utilized
by another person (such as lessee or licensee).
• Under the Income Tax Act, depreciation is allowed only on WDV basis. Straight line method of depreciation
is not allowed except in case of power generating companies.
• Depreciation is not calculated on the basis of value of individual assets; rather it is allowed on the basis of
'block of assets' concept. Block of assets refers to a group of assets which belong to the similar class of
assets and carry the same rate of depreciation.
• Depreciation at full rate in some cases and at half rate in other cases:
Case I: If the asset has been put to use during the year of acquisition
(a) The asset has been put to use for 180 days or more during the Depreciation shall be
relevant previous year calculated at full rate
(b) The asset has been put to use for less than 180 days during the Depreciation shall be
relevant previous year calculated at half rate
Example:

Example:

Case II : If the Asset has been acquired during one previous year and has been subsequently put to
use during a different year
Depreciation shall be calculated at the full rate in the year in which the asset has been put to use.
The number of days for which the asset has been put to use during such year is irrelevant.
Example:

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• Meaning of 'PUT TO USE':
'Put to use' means making an asset ready for use (i.e. installing an asset so that it is ready to be used).
Actual use of the asset is not necessary.

Amount on which depreciation is to be calculated {Section 43(6)}:

Opening WDV as on 1" April of the relevant PY XXXX
Add: Actual cost of assets purchased during the year (Meaning of 'actual cost' is XXXX
given u/s 43(1)
Less: Sale value of assets sold/ Insurance claim in case of assets destroyed/ Scrap (XXXX)
value in case of assets discarded
Value of block of assets for the purpose of charging depreciation XXXX
Less: Depreciation for the relevant PY (XXXX)
Opening WDV as on 1st April of the next PY XXXX

• Special point in respect of asset used for less than 180 days:
❑ If any asset in the block has been put to use for less than 180 days during the relevant PY, the actual
cost of such asset shall be separated from the 'value of block of assets for the purpose of charging
depreciation'. Depreciation on the actual cost so separated shall be charged at half rate. On the
balance amount, depreciation shall be charged at the full rate.
❑ If the 'value of block of assets for the purpose of charging depreciation' is less than the actual cost
of the asset used for less than 180 days, depreciation shall be charged at half rate on the entire
'value of block of assets for the purpose of depreciation'.
• Special Cases:
❑ If all assets in the block have been sold/destroyed/discarded and there still remains some balance in
the block, such balance would be treated as short term capital loss as per Section 50 and no
depreciation shall be allowed on such balance. Further, such block would cease to exist with effect
from next previous year.
❑ If there is negative balance in the block, such negative balance would be treated as short term
capita! gains as per Section 50. The opening WDV of block of assets for the next previous year shall
be taken to be 'NIL'.

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PROF.VINIT KUMAR TAXATION 9873126173

MISC. TOPICS

1. SLUMP SALE CONDITION

Slump sale [Sec. 2(42C)]: It means transfer of undertaking(s) for a lump sum consideration without assigning
values to the individual assets of such undertaking(s). Computation of written down value of block of assets in case
of slump sale:

Particulars Amount
W.D.V of the block at the beginning of the previous year ***
Add: Purchase during the previous year ***
Mno
Less: Sale consideration for assets sold (to the maximum of mno) (****)
Pqr
Less: WDV (Note) of the asset sold under slump sale (abc)
[Value of deduction at this stage i.e. abc cannot exceed pqr]
XYZ
Less: Depreciation (as a % on XYZ) (***)
WDV of the block at the end of year ****

Note: Written down value of the asset sold under slump sale:

Particulars Amount
Original cost of asset sold under slump sale ***
Less: Depreciation (actual) allowed on such asset in respect of any previous year (***)
commencing before 1987-88
Less: Depreciation (notional) that would have been allowable from the previous year 1987- (***)
88 onwards as if the asset is only asset in the relevant block.
Written down value of the asset sold under slump sale ***

2. depreciation in case partly use of asset in agriculture and non agriculture activity.
Mr. X, a grower and manufacturer of tea, purchased machinery (15%) on 10-04-2022 for ` 10 lakh. He computed
depreciation for A.Y. 2024-25 as given below; needs your comment on his working:
Particulars Amount

Opening W.D.V. as on 1/4/2022 Nil

Add: Assets purchased during the year 10,00,000
10,00,000

Less: Depreciation for the P.Y. 2022-23 [` 10,00,000 * 15% * 40%] 60,000
(As he is engaged in the business of growing and manufacturing tea; hence 60% is
considered as part of agricultural income)
Opening W.D.V. as on 1/4/2023 9,40,000

Less: Depreciation for the P.Y. 2023-24 [` 9,40,000 * 15% * 40%] 56,400

Opening W.D.V. as on 1/4/2023 8,83,600

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PROF.VINIT KUMAR TAXATION 9873126173
Further, compute his business income for A.Y. 2024-25 assuming that his income before depreciation and without
reducing element of agricultural income is ` 8,00,000/-
Solution :
The method of computation of depreciation followed by Mr. X is not correct as Expl. 7 to sec.43(6) provides that:
“Where the income of an assessee is derived, in part from agriculture and in part from business chargeable to
income-tax under the head “Profits and gains of business or profession”, for computing the written down value of
assets acquired before the previous year, the total amount of depreciation shall be computed as if the entire
income is derived from the business of the assessee under the head “Profits and gains of business or profession”
and the depreciation so computed shall be deemed to be the depreciation actually allowed under this Act.”
The correct computation of depreciation is as follow:
Particulars Amount
Opening W.D.V. as on 1/4/2022 Nil

Add: Assets purchased during the year 10,00,000

10,00,000

Less: Depreciation for the P.Y. 2022-23 [` 10,00,000 * 15%]

(Considering the entire income as taxable income) 1,50,000

Opening W.D.V. as on 1/4/2023 8,50,000

Less: Depreciation for the P.Y. 2023-24 [` 8,50,000 * 15%] 1,27,500

Opening W.D.V. as on 1/4/2024 7,22,500

Computation of business income of Mr. X for A.Y. 2024-25

Particulars Amount
Income before depreciation and without reducing element of agricultural income 8,00,000
Less: Depreciation 1,27,500
6,72,500
Less: Agricultural Income being 60% of above 4,03,500
Profits and Gains of Business or Profession 2,69,000

3. sale of block

4. succession of business.

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Section 32(2) TREATMENT OF 'UNABSORBED DEPRECIATION'

Meaning of Unabsorbed Depreciation
Assessee carrying business/profession are allowed to debit the depreciation expenditure while calculating their
income u/h 'business/profession'. However, such expenditure can be debited only to the extent income is available
u/h business/profession. The balance amount of depreciation that cannot be debited is referred to as 'unabsorbed
depreciation'.
Example: PGBP income before debiting current year depreciation is Rs 1,00,000 and current year depreciation
expenditure turns out to be Rs 1,60,000. In this case, depreciation to the extent of Rs 1,00,000 would be debited
to P&L A/c and balance Rs 60,000 would be referred to as 'unabsorbed depreciation'.
Treatment of Unabsorbed Depreciation
• Unabsorbed depreciation of a particular year is allowed to be set-off in the same year against income under
any other head except casual income.
• If unabsorbed depreciation cannot be adjusted in the some year, it is allowed to be cf for indefinite period
of time (ie for an unlimited period) and in the subsequent years, such unabsorbed depreciation shall be
allowed to be set-off against any income other than casual income.
• If any assessee has b/f business losses as well as b/f unabsorbed depreciation, a rational taxpayer would
first adjust business losses and unabsorbed depreciation afterwards.

Section 32(1)(iia) ADDITIONAL DEPRECIATION

OLD REGIME ONLY
Conditions to be Fulfilled (Eligible Assesses)
• Deduction is available to all assessees who are engaged in the business of:
❑ manufacture or production of any article or thing; or
❑ generation, transmission or distribution of electricity.
• The assessee has purchased and installed new plant & machinery.
Meaning of 'New Plant & Machinery'
'New plant & machinery' does not include:
• Second hand plant & machinery whether Indian or imported (ie plant & machinery should be brand new)
• Any plant & machinery installed in any office premises or any residential accommodation like guest houses (i.e.
plant & machinery should be installed at factory)
• Any office appliances including computers or computer software
• Any vehicle , Ship or aircraft
• Any plant & machinery, the actual cost of which is allowed to be debited to P&L A/c (ie plant & machinery for
which deduction is claimed u/s 35, 35AD, etc)
Amount of Additional Depreciation
Case I: If new plant & machinery has been put to use during the year of acquisition:
(a) Put to use for 180 days or more: One-time additional depreciation is allowed @ 20% of the actual cost of the
plant & machinery.
(b) Put to use for less than 180 days: One-time additional depreciation is allowed @ 10% of the actual cost of the
plant & machinery. The balance 10% is allowed in the next year.
Case II: If new plant & machinery has been acquired during one previous year and has been subsequently put to use
during a different year:

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In such cases, one-time additional depreciation is allowed @ 20% of the actual cost of the plant & machinery
in the year in which the asset has been put to use. The number of days for which the asset has been put to
use during such year is irrelevant.
Points to be Noted
• The amount of additional depreciation is in addition to the normal depreciation.
• Further, the amount of additional depreciation is reduced from the actual cost of the plant & machinery to
arrive at its WDV value.

Q1. B Ltd., a newly formed manufacturing concern, has furnished you the following details to compute Depreciation
allowed for the A.Y. 2022-23 and 2023-24:

Assets Date of Acquisition Cost of Acquisition Rate of depreciation

Plant A 02/04/2021 5,00,000 15%
Plant B 07/05/2021 3,00,000 15%
Plant C 15/12/2021 2,00,000 15%
Plant D 05/05/2022 1,00,000 15%

Solution :-Computation of Additional Depreciation

Additional depreciation
Assets Rate Cost
A.Y. 2022-23 A.Y. 2023-24
Plant A 20% 5,00,000 1,00,000 Nil#
Plant B 20% 3,00,000 60,000 Nil#
Plant C 10% 2,00,000 20,000 20,000
Plant D 20% 1,00,000 Nil 20,000
Total 1,80,000 40,000
Calculation of Depreciation u/s 32 of Plant (15%) for the A.Y.2022-23 and 2023-24
Particulars Details Amount
W.D.V. as on 1/4/2021 -
Add: Purchase during the year 10,00,000
10,00,000
Less: Sale during the year Nil
10,00,000
Depreciation (normal) [(₹ 8,00,000 * 15%) + (₹ 2,00,000 * 15% * ½)] 1,35,000
Additional depreciation (as computed above) 1,80,000 3,15,000
W.D.V. as on 1/4/2022 6,85,000
Add: Purchase during the year 1,00,000
7,85,000
Less: Sale during the year Nil
7,85,000
Depreciation (normal) [₹ 7,85,000 *15%] 1,17,750
Additional depreciation (as computed above) 40,000 1,57,750
W.D.V. as on 1/4/2023 6,27,250

Section 32 DEPRECIATION IN CASE OF POWER GENERATING UNITS

CHOICE OF WDV/ SLM
• Assessee engaged in the business of generation or generation and distribution of power shall have the option to
claim depreciation as per:
❑ SLM method on each asset; or
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❑ WDV method on block of assets
• Where the assessee has opted for SLM method on each asset, the following points also need to be taken care of:
❑ Depreciation shall be calculated at half rate if the asset is put to use for less than 180 days in the year of
acquisition.
❑ Additional depreciation shall not be available (ie additional depreciation is available only where WDV method
on block of assets is followed)
❑ Rates of depreciation shall be prescribed separately under the Income Tax Act.

TREATMENT IN CASE OF ASSET

Where the assessee has opted for 'SLM method on each asset', tax treatment at the time of sale of asset shall be
as follows:
• If the sale price of the asset is less than its WDV:
The difference between the sale price and WDV shall be allowed to be debited to the P&L A/c (such
difference is referred to as terminal depreciation).
• If the sale price of the asset is more than its WDV but sale price of the asset does not exceed the actual
cost of the asset:
The difference between the sale price and WDV/ shall be taxable as income u/h PGBP as per Section 41(2)
(such income is referred to as 'balancing charge).
• If the sale price of the asset is more than its WDV and sale price of the asset also exceeds the actual cost
of the asset:
❑ The difference between the actual cost of the asset and its WDV shall be taxable as income u/h PGBP as
per Section 41(2) (such income is called as 'balancing charge').
❑ The difference between the sale price of the asset and its actual cost shall be taxable as capital gains as
per Section 50A.
Q1. Important Ltd. is a power-generating unit. On 1-4-2021, it purchased a plant of ₹ 50,00,000 eligible for
depreciation @ 15% on SLM. Compute balancing charge or terminal depreciation assuming the plant is sold on
21/4/2023 for:

A) ₹ 7,50,000 B) ₹ 30,00,000 C) ₹ 45,00,000 D) ₹ 55,00,000

Answer:Computation of capital gain or balancing charge or terminal depreciation for the P.Y.2023-24

Amount
Particulars Note
A B C D
Written down value as on 1/4/2023 1 35,00,000 35,00,000 35,00,000 35,00,000
Less: Sale Proceeds 7,50,000 30,00,000 45,00,000 55,00,000
Balance 27,50,000 5,00,000 (-) 10,00,000 (-) 20,00,000
Terminal depreciation 27,50,000 5,00,000 Nil Nil
Balancing Charge 2 Nil Nil 10,00,000 15,00,000
Short term capital gain 2 Nil Nil Nil 5,00,000

1. Computation of Written down value as on 1/4/2023

Particulars Amount
Original cost 50,00,000
Less: Depreciation for the year 2021-22 7,50,000
WDV as on 1/4/2022 42,50,000

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PROF.VINIT KUMAR TAXATION 9873126173
Less: Depreciation for the year 2022-23 7,50,000
WDV as on 1/4/2023 35,00,000

Section 43(1) ACTUAL COST

Meaning of Actual Cost
Actual cost is the cost for which an asset is acquired by the assessee.
Note: Any part of the cost paid by any other person or any authority directly or indirectly is not to be included.
Example: Mr X has bought a machinery of Rs 10 lakhs. He has received a government grant of Rs 3 lakhs for
acquisition of the said asset and the balance Rs 7 lakhs has been paid by him. In this case, actual cost u/s 43(1)
shall be Rs 7 lakhs only.
Items to be Included in Actual Cost
Actual cost would include the following:
• Expenses directly related to the acquisition of the asset;
• Expenses necessary to bring the asset to site and install it (such as carriage inwards, charges related to
loading and unloading of the asset, installation charges, etc);
• Expenses incurred to put the asset in use (such as cost of making a support structure for the asset);
• Interest on capital borrowed for the acquisition of asset commencing from the date of borrowing till
the date the asset was first put to use.
Example:

Assets Initially Used For Personal Purposes Subsequently Used in Business/ Profession

Case (a): Buildings previously used for personal purposes subsequently used for business/profession.
In such cases, actual cost shall be the actual cost of the building to the assessee as reduced by an amount equal to
the depreciation that would have been allowable had the building been used for the business/profession since the
date of its acquisition. In other words, notional depreciation would be allowed
Example: Mr A bought a residential building for the purposes of his residence on 01.11.2021 for Rs 20,00,000. The
residential building was brought by him for his professional use on 01.12.2023, when its market value was Rs
40,00,000. In this case, the actual cost of the asset u/s 43 (1) shall be computed as under:
Particulars Amount (Rs)
Cost of residential building 20,00,000
Less: Notional depreciation @ 2.5% for PY 21-22(Less than 180 days) (50,000)
WDV as on 01.04.2022 19,50,000
Less: Notional depreciation @ 5% for PY 22-23 (97,500)
Actual cost of residential building u/s 43(1) = WDV as on 01.04.2023 18,52,500
Depreciation for PY 2022-23 @ 5% 92,625

Case (b): Any other asset (such as P&M, furniture. etc) previously used for personal purpose subsequently
used for the purpose o business/ profession.
In such cases, the cost of acquisition of the asset shall be treated as actual cost for the purposes of Section
43(1). In other words, no notional depreciation shall be allowed.

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PROF.VINIT KUMAR TAXATION 9873126173

Section 43B CERTAIN DEDUCTIONS ALLOWED ON ACTUAL PAYMENT BASIS

Applicability of Section 43B
• Section 43B is applicable where the assessee maintains his books of accounts on the basis of mercantile
system of accounting (ie accrual basis).
• Section 43B cannot apply in situations where the assessee follows cash basis of accounting (because under
cash accounting system, all expenses are allowed on actual payment basis)
Types of Expenses to be Allowed on Actual Payment Basis Only
• Any sum payable by way of tax, duty, cess or fee (by whatever name called under any law for the time being
in force);
• Any sum payable to the Indian Railways for use of the Railway assets;
• Employer's contribution to provident fund, superannuation fund or any other fund for the welfare of the
employees;
• Bonus, commission or leave salary payable by the employer to his employees; and
• Interest on loan taken from a scheduled bank including a co-operative bank;
❑ public financial institution (ie, ICICI, IFCI, Mei, LIC, UTI, etc);
❑ state financial corporation; or
❑ state industrial investment corporation.
Last Date of Payment
• The above mentioned expenses can be paid till the last date of filing of return of income relating to the
previous year in which the expenditure was incurred. If the payment is so made, expenditure is allowed in the
previous year itself.
• If the payment is made after the last date of filing of return of income, expenditure is allowed in the year in
which the payment was made.

Conversion Of Outstanding Interest Into A Fresh Loan/Advance

➢ Where an assessee has taken a loan from scheduled banks, public financial institution, state financial
corporation or state industrial investment corporation and such assessee is not able to pay any outstanding
interest, the lenders may restructure the loan and convert the outstanding interest into a fresh
loan/advance.
➢ Section 43B clarifies that the interest so converted and not "actually paid" shall not be deemed as
actual payment, and hence would not be allowed as deduction.
➢ The unpaid interest, whenever actually paid to the above specified banks/financial institutions, will be in
the nature of revenue 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.
➢ In other words, if outstanding interest is converted into a fresh loan/advance, no deduction shall be
allowed in the year of conversion. Deduction shall be allowed in the year in which such converted interest
has been actually paid.

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Section 35 EXPENDITURE ON SCIENTIFIC RESEARCH

PART 1: Scientific Research NOT Carried on by the Assessee - Deductibility of Donations

Donation Given to Purpose of Donation Deduction Allowed
National laboratory, IIT, university or a specified Carrying out scientific research 100% of donation
person approved by the prescribed authority under an approved research given
(Section 35(2AA)) programme
Approved research association, approved college, Carrying out scientific research 100% of donation
approved university or approved institution given
Approved research association, approved college, Carrying out social science or 100% of donation
approved university or approved institution statistical research given
An approved company registered in India and having Carrying out scientific research 100% of donation
research & development as its main object given
➢ Note 1: The person to whom donation is given can utilize the donation for the prescribed research. There
is no condition that such research should be related to the business of the assessee.
➢ Note 2: Where the assessee is not carrying any business/profession, such donations are allowed as
deduction u/s 80GGA to the extent of 100% of the amount of donation.

PART 2: Scientific Research Carried on by Assessee – Deduction of Expenses

Where any assessee carries out any research of scientific nature related to the business carried on by him,
expenses are deductible in the following manner:
Case (a) - Expenditure incurred BEFORE the commencement of business:
• Capital Expenditure:
❑ Capital expenditure (other than expenditure on acquisition of land) incurred during three years
immediately preceding the date of commencement of business shall be allowed as an expense in
the year in which the business commences.
❑ Such capital expenditure can be incurred on acquisition of P&M, construction of building,
acquisition of vehicles, etc for the purpose of scientific research.
❑ Where any assessee has purchased any land & building, expenditure is allowed only for the
building portion and not for the land portion.
• Revenue Expenditure:
❑ Following revenue expenditure incurred during three years immediately preceding the date of
commencement of business shall be allowed as an expense in the year in which the business
commences:
➢ Salary paid to employees engaged in scientific research (excluding perquisites)
➢ Purchase of materials used in scientific research
❑ Pre-commencement revenue expenditure is allowed only to the extent it has been certified by the
prescribed authority.

Case (b) - Expenditure incurred AFTER the commencement of business:

• Capital Expenditure:

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❑ 100% of the capital expenditure incurred by an assessee on scientific research in relation to
his business is allowed as an expense in the year in which the capital expenditure is incurred by
the assessee.
❑ Capital expenditure incurred on acquisition of land is not allowable as deduction Where any
assessee has purchased any land & building, expenditure is allowed only for the building portion
and not for the land portion.
• Revenue Expenditure:
Entire revenue expenditure incurred by an assessee on scientific research in relation to his business
is allowed as an expense in the year in which such expenditure is incurred. (Certification from
prescribed authority not required)
Special Provision for Some Companies [Section 35(2AB)]
• This special provision applies only to those companies which are engaged in the business of bio-
technology or in any business of manufacture or production of any article/thing other than those
specified in the Eleventh Schedule. Following conditions are also required to be fulfilled:
❑ Research and development facility should be approved by a prescribed authority.
❑ The company has entered into an agreement with the prescribed authority for audit of accounts
maintained for such facility.
• Deduction for post-commencement expenditure:
Capital Expenditure Revenue Expenditure
➢ On land: Nil 100% of the expenditure incurred
➢ On building: 100% can be claimed as deduction
➢ On other assets: 100%
Special Points
• Depreciation not allowed:
No depreciation can be claimed u/s 32 in respect of those assets which deduction has been claimed u/s 35.
• Treatment of unabsorbed capital expenditure on scientific research:
❑ The rules for set-off & carry-forward of unabsorbed capital expenditure on scientific research are similar to
set-off & carry-forward of unabsorbed depreciation.
❑ Unabsorbed capital expenditure on scientific research of a particular year is allowed to be set-off in the
same year against income under any other head except casual income.
❑ If unabsorbed capital expenditure on scientific research cannot be adjusted in the same year, it is allowed to
be carried forward for indefinite period of time (le for an unlimited period) and in the subsequent years,
such unabsorbed expenditure shall be allowed to be set off against any income other than casual income.
TREATMENT OF SCIENTIFIC RESEARCH ASSET NO LONGER USED FOR SCIENTIFIC RESEARCH:
Asset sold without using for the purposes of any other business Asset transferred to any other
business after use
➢ Section 41(3) shall apply. Least of the following two amounts The asset shall be added to the
shall be taxable as PGBP income: - existing block of assets of the
- Sale price of asset; or other business. Actual cost of
- Deduction allowed u/s 35 the asset so transferred shall be
➢ Capital gains shall arise if the sale price exceed, the cost of the taken to be 'NIL'.
asset. Capital gains shall be long term if the asset was sold Sale value will be treated as
after a period of 3 years; otherwise capital gains shall be short- capital gain.
term.

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Section 35AD INVESTMENT LINKED TAX INCENTIVE FOR SPECIFIED BUSINESS

Business Covered
Section 35AD provides investment linked incentives to the following businesses:
• Setting-up and operating a cold chain facility
• Setting-up and operating a warehousing facility for storage of agricultural produce
• Building and operating a hospital with minimum 100 beds for patients (the hospital can be located
anywhere in India)
• Developing and building a housing project under a scheme for affordable housing
• Production of fertilizers in India
• Laying and operating a cross-country natural gas or crude oil or petroleum oil pipeline for distribution,
including storage facilities being an integral part of such network.
• Building and operating, anywhere in India, a hotel of two star or above category (Where an assessee
has built a hotel and has subsequently outsourced the hotel operations to any other person, the
assessee would still be eligible for deduction u/s 35AD)
• Developing and building a housing project under a scheme for slum redevelopment or rehabilitation
• Setting-up and operating an inland container depot or a container freight station
• Bee-keeping and production of honey/beeswax
• Setting-up and operating a warehousing facility for storage of sugar
• Laying and operating a slurry pipeline for transportation of iron ore
• Setting-up and operating a semi-conductor wafer fabrication manufacturing unit
• Developing or maintaining and operating or developing, maintaining and operating a new infrastructure
facility

Quantum of Benefits u/s 35AD

Case (a) - Expenditure incurred AFTER the commencement of business:
• Capital Expenditure:
❑ On land, goodwill or financial instruments: Nil
❑ Other capital expenditure: 100 % of the capital expenditure shall be allowed deduction in the
year in which such capital expenditure has been incurred.

• Revenue Expenditure:
100% of the revenue expenditure shall be allowed as deduction in the year in which such revenue
expenditure has been incurred.

Case (b) - Expenditure incurred BEFORE the commencement of business:

Expenditure incurred before the commencement of business shall be allowed as deduction in the year in
which the business commences to the extent of 100% of such expenditure provided such expenditure has
been capitalized in the books of accounts on the date of commencement of business. However, expenditure
on acquisition of land, goodwill or financial instruments shall not be allowed.

• Meaning 'Infrastructure Facility':

➢ A road including toll road, a bridge or a rail system;
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➢ A highway project including housing or other activities being an integral part of the highway
project;
➢ A water supply project, water treatment system, irrigation project, sanitation and sewerage
system or solid waste management system; and
➢ A port, airport, inland waterway, inland port or navigational channel in the sea.

• No other deduction possible:

If deduction has been allowed u/s 35AD, the assessee shall not be allowed any deduction in respect
of the specified business u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-1E, 80JJA, 80JJAA,
80QQ8 and 80RRB.

• Sale of asset for which deduction has been claimed u/s 35AD to be treated as business income:
If any asset, in respect of which deduction has been allowed u/s 35AD, is sold, destroyed, demolished
etc, the amount received on its sale, disposal, etc shall be treated as income of the assessee u/h
'income from business/profession'.
• Assets cannot be used for other purposes for 8 years:
❑ The assets, the cost of which has been claimed as deduction u/s 35AD, must be used for the
specified business for a period of at least 8 years.
❑ If such asset is used for any purpose other than the specified business within the period of 8
years, the following amount shall be deemed to be the income of the assessee u/h 'income
from business/profession' for the previous year in which the asset has been so used.
Total deduction allowed u/s 35AD XXXX
Less: Amount of depreciation allowable u/s 32 (XXXX)
Amount deemed as income u/h PGBP XXXX
Example: Deduction claimed u/s 35AD on a capital asset is Ps 100 lakhs whereas depreciation
eligible on such asset u/s 32 is Rs 15 lakhs. In this case, an amount of Ps 85 lakhs would be deemed
as the income of the assessee u/h 'income from business/profession'.
• Set-off & carry-forward of losses of a specified business covered u/s 35AD (Section 73A):
❑ Intra-Head Adjustment: Losses of a business specified u/s 35AD are allowed to be set-off
only against the income of another business specified u/s 35AD.
❑ Inter-Head Adjustment: Losses of a business specified u/s 35AD cannot be set-off against
income under any other head.
❑ Carry Forward of Losses: Unadjusted losses of a business specified u/s 35AD are allowed to
be carried forward indefinitely for being set-off against the income of a business specified u/s
35AD in future years.

Section 35D AMORTIZATION OF CERTAIN PRELIMINARY EXPENSES

Eligible Assessee
• Benefit u/s 35D is available to the following persons:
❑ An Indian company
❑ Any non-corporate assessee provided he is resident in India (i.e. resident individual, resident
HUF, resident firm, etc)
In other words, benefit u/s 35D is not available to a foreign company or a non-resident
• Deduction is available if the eligible assessee incurs any expenditure on specified purposes in the
following manner:
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❑ In case of new business: Eligible expenditure should be incurred before the commencement of
business.
❑ In case of existing business: Eligible expenditure should be incurred for extension of existing
business or setting up a new unit.

Eligible Expenditure (i.e. Purposes For Which Expenditure Should Be Incurred)

a) The following four types of expenses are allowed if the work is carried on by the assessee himself or
by a concern approved by CBDT:
❑ Expenditure on preparation of feasibility report
❑ Expenditure on preparation of project report
❑ Conducting market survey/any other survey necessary for the business of the assessee;
❑ Engineering services relating to the business of the assessee.
b) Legal charges for drafting an agreement related to setting up the business.
c) The following expenditure in the case of a company:
❑ Legal charges for drafting of MOA & AOA and expenses incurred on their printing; of the
company under the Companies Act;
❑ Expenses incurred in connection with public issue of shares or debentures of the company (like
underwriting commission; brokerage; expenses related to drafting, printing and advertisement of
the prospectus, etc)

Quantum of Deduction
Assessee Maximum Deduction Period of Deduction
Indian Company Lower of the following two: Deduction is allowed in 5 equal installments
• Amount of eligible expenditure in 5 years in the following manner:
OR ➢ In case of new business:
• 5% of cost of project or 5% of The period of 5 years would start from
capital employed, whichever is higher the previous year in which the business
Resident Lower of the following two: commences.
Individual, • Amount of eligible expenditure ➢ In case of existing business:
Resident Firm, OR The period of 5 years would start from
etc • 5% of cost of project the previous year in which the extension
of the undertaking is completed or the
new undertaking commences operation.

Section 35CCA , 35CCC, 35CCD & 35DDA MISCELLANEOUS DEDUCTIONS

Section 35CCA Donations To Associations For Rural Development Programmes

Where a person runs any business/profession, donations given to any notified organization for the purpose
of rural development shall be allowed as deduction while computing income u/h business/profession.
Donations given to Rural Development Fund or National Urban Poverty Eradication Fund shall also be allowed
as deduction.
Note: If the person is not carrying out any business/profession, such donations would be allowed as
deduction u/s 80GGA.
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Section 35CCC Weighted Deduction for Expenditure On Agriculture Extension Project

Where an assessee incurs any expenditure (other than cost of any land or building) on notified agricultural
extension project, then he will be eligible to claim a weighted deduction of 100% of such expenditure.

Section 35CCD Weighted Deduction For Expenditure For Skill Development

Where a company incurs any expenditure (not being expenditure in the nature of cost of any land or
building) on any notified skill development project, then such company can claim a weighted deduction of
100% of such expenditure.

Section 35DDA Amortization Of Expenditure For Skill Development

Section 35DDA allows an employer to debit the expenditure incurred in connection with any voluntary
retirement scheme implemented by the employer. Such amount would be allowed to be deducted in 5 years
in 5 equal annual installments starting with the previous year in which such amount was actually paid.

Deduction of expenses incurred in case of amalgamation or demerger [Sec. 35DD]

Applicable to: An Indian company
Conditions
1. Assessee has incurred certain expenditure wholly & exclusively for the purpose of amalgamation or demerger.
2. No deduction has been claimed for such expenses under any other section.
Quantum of deduction: 1/5th of expenses so incurred for a period of 5 years commencing from the year
in which amalgamation or demerger takes places.

Amortisation of expenditure incurred under VRS [Sec. 35DDA]

Applicable to: All assessee

Condition: Assessee has incurred any expenditure, by way of compensation to employees in connection with
their voluntary retirement.

Quantum of deduction: 1/5th of expenditure so paid for a period of 5 years commencing from the year in
which such expenditure was paid.

Effect of amalgamation or demerger: In case of transfer of undertaking under the scheme of

amalgamation or demerger, the amalgamated company or resulting company (being Indian company) as the
case may be, shall be entitled to claim deduction u/s 35DDA for the residual period as if the
amalgamation or demerger had not taken place.

Effect of succession of business: Where there has been succession of business, whereby a firm or
proprietary concern is succeeded by a company fulfilling the conditions laid down in sec. 47 (xiii) & (xiv) or a
private company or unlisted public company is succeeded by a limited liability partnership fulfilling the
conditions laid down in sec. 47 (xiiib), the provisions of this section shall apply to the successor concern, as
they would have applied to the predecessor, if succession of business had not taken place. Further, it is to
be noted that:

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1. No deduction shall be allowed to amalgamating company, demerged company, a firm,
proprietary or other concern in the previous year in which amalgamation, demerger or
succession, as the case may be, takes place.
2. No deduction shall be allowed in respect of such expenditure under any other provisions of the Act.

A comparative study of Sec. 10(10C) {under the head “Salaries”} and Sec. 35DDA {under the head
“Profits & gains of business or profession”}
🖸 Exemption u/s 10(10C) for “Compensation for voluntary retirement” is not available to employee of the
partnership firm, HUF, proprietorship firm, etc. Deduction u/s 35DDA can be claimed by all assessee.
🖸 Exemption u/s 10(10C) for “Compensation for voluntary retirement” is available only if the scheme is
approved by the Board. Deduction can be claimed u/s 35DDA even if the scheme is not approved by the Board.

Amortisation of expenditure on prospecting etc. for development of minerals [Sec. 35E]

Applicable to Any Indian company and any other resident assessee.

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Conditions to 1. Assessee is engaged in operations relating to prospecting for or extraction or
be satisfied production of
mineral specified in Seventh Schedule.

2. Expenditure has been incurred by the assessee on –

a. Prospecting for any mineral specified in Seventh Schedule; or

b. Development of a mine or other natural deposit of any such mineral.

Period during which expenditure is incurred: Expenditure incurred during

following pe- riod shall qualify for deduction –
➢ In the previous year in which commercial production commences; and

➢ At any time during the period of 4 years preceding the year in which
commercial
production commences.

Expenditures which are not qualified for deduction: Following expenditures do not
qual- ify for deduction:
➢ Expenditure on acquisition of site or any right in or over such site; or

➢ Expenditure on acquisition of deposits of mineral or any rights in or over such

deposits;

➢ Expenditure of capital nature (being building, plant, machinery or furniture) in

respect of which depreciation allowance is admissible u/s 32.

➢ Any expenditure which is met directly or indirectly by any other person or

authority and any sale, salvage, compensation or insurance moneys realized by
the assessee in respect of any property or rights brought into existence as a
result of the expenditure shall be excluded.

3. In case of a non-corporate assessee, accounts of the assessee, for the year(s) in

which the expenditure is incurred, have been audited by a chartered accountant and
the audit report in Form 3AE (electronically) must be uploaded one month prior to
the due date of filing of the return of income of the first year in which deduction is
claimed.
Quantum of Total eligible expenditure shall be allowed in 10 equal installments from the year of
Deduction commer- cial production. However, deduction in a previous year cannot exceed income
(before making deduction under this section) of the previous year arising from the
commercial exploitation of any mine(s)

Treatment of unabsorbed amount: The unabsorbed amount of installment relating to

any pre- vious year can be carried forward and added to the installment of the
succeeding year.

In this manner, unabsorbed amount can be carried forward maximum up to the 10th
previous year commencing from the year when commercial production starts.

Section 36 OTHER DEDUCTIONS RELATED TO BUSINESS/PROFESSION

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Premium for Insurance of Stock-In-Trade [36(1)(i)]
Premium paid for insurance of stock or stores is allowed as deduction.
Note: Insurance premium paid on life of owner/partner is a personal expenditure and not allowed as
deduction.

Premium for Insurance on Health of Employees [36(1)(ib)]

Mediclaim premium paid by any mode other than cash for insuring the health of the employees is allowed as
deduction. Premium paid by an employer for obtaining Keyman Insurance Policy is also allowed.

Interest on Borrowed Capital [36(1)(iii)]

• Interest on loans taken for the purposes of business/profession is allowed as deduction.
• However, where loan is taken from scheduled banks, public financial institution, state financial
corporation or state industrial investment corporation or any other person notified u/s 43B, deduction
for interest is available only if such interest has been actually paid till the last date of filing of return
of income.
• Interest on loan taken for the purpose of acquisition of an asset is to be capitalized for the period
commencing from the date of borrowing till the date the asset was first put to use.
Note: Interest on capital to a proprietor is not allowed to be deducted.

EMPLOYER's Contribution to Recognized Provident Fund, Superannuate - Fund, Pension Scheme, Gratuity
Fund [Section 36(1)(iv), (iva) & (v)]
• Employer's contribution to recognized Provident Fund, approved Gratuity Fund and approved
Superannuation Fund is allowed as deduction provided such amount has been deposited till the last
date of filing of return of income (Section 43). (The amount should be within the limits prescribed
under the respective Acts)
• Employer's contribution to Notified Pension Scheme ('NPS') referred to u/s 80CCD is allowed as
deduction. Maximum amount admissible as deduction cannot exceed 10% of salary of employee.
(Discussed in detail u/h Salary')

EMPLOYEE's Contribution to Recognized Provident Fund, Superannuation Fund, etc [Section 36(1)(va)]
• Any sum received by the employer as employee's contribution towards PF, Contribution to
superannuation fund or any other welfare fund is deemed to the business Recognized Provident income
of the employer u/s 2(24)
• When such amount is subsequently paid by the employer to the respective-. authorities, such amount is
allowed as deduction u/s 36(1)(va) to the employer. The amount should be deposited on or before the
last date of filing of return of income. (Delhi HC's decision in the case of AIMIL)

Bad Debts [Section 36(1)(vii)]

• Bad debts are allowed to be deducted on actual basis if all the following conditions are satisfied:
❑ Debt must be incidental to the business/profession of the assessee;
❑ Debt must have been taken into account while computing the assessable income of the assessee
for current year or for prior years; and
❑ Debt must have been written off in the books of accounts.

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• Section 41(4): If a bad debt has been allowed as deduction u/s 36(1)(vii) and subsequently there is
some recovery from such bad debt, such recovered amount is deemed to be the income of the
assessee u/h PGBP for the year in which such amount is recovered. Such recovery shall be taxable
irrespective of the fact whether the assessee carries on any business/profession or not.

Family Planning Expenditure [Section 36(1)(ix)]

• This deduction is available only to companies (Indian as well as foreign).
• Revenue expenditure is allowed fully. Capital expenditure is allowed in five equal annual installments
starting with the previous year in which such expenditure was incurred.
• Family planning expenditure (revenue as well as capital) is allowed to be debited only to the extent
profit is available u/h PGBP. Unabsorbed family planning expenditure is set-off and c/f just like
unabsorbed depreciation.

Securities Transaction Tax (SST) [section 36(1)(xv)]

• If securities/commodities are held as investments: STT/CTT paid cannot be debited to the P&L A/c
where the securities/ commodities are held as investments. Commodities

Commodities Transaction Tax (CTT)[Section 36(1)(xvi)

• if securities/commodities are held as stock-in-trade Transaction STT/CTT paid is allowed to be debited to
the P&L A/c where the securities/commodities are held as stock-in-trade (ie the dealer has the business of
buying/selling such securities/commodities).

Section 37 GENERAL DEDUCTION

Section 37: Applicability
Section 37(1) is a residuary section. To avail deduction u/s 37, the following conditions should be satisfied:
• The expenditure should not be of the nature described u/s 30 to 36.
• It should not be in the nature of capital expenditure.
• It should not be a personal expenditure of the assessee.
• It should be in respect of business carried on by The assessee. In other words, it should be used
wholly and exclusively for the purposes of such business.
• It should not be incurred for any purpose, which is a offence or is prohibited by any law.
Examples
• Salary & wages to employees, commission to agents, printing & stationery, telephone expense and other
business related expenses.
• Expenditure in connection with entertainment/amusement of employees or customers.
• Expenditure incurred on occasion of various festivals like Diwali, Holi, Karva Chauth for employees or
customers.
• Expenditure in connection with advertisement like advertisement in newspapers, television or other
media, payment to ad agency for making the advertisement, etc.

Section 37(2B) Extremely Important

No deduction is available for any expenditure incurred by assessee on advertisement in any souvenir,
pamphlet, publication or newspapers of any political party.
Note: Such donation/expenditure is allowed as deduction u/s 80GGB/80GGC.
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• Deduction of various taxes, interest, penalty etc shall be as follows:
Type of expenditure Direct Taxes (such as income Indirect Taxes (such as GST,
tax, etc) VAT, etc)
Amount of tax Not allowed as it is the personal Allowed as it is a business
liability of the assessee liability for the assessee
Interest paid/payable on Not Allowed Allowed
delayed payment of tax
Interest on loan taken for Not Allowed Allowed
payment of tax liability
Penalty for failure to comply Not Allowed Not Allowed (as it amounts to
with the applicable law Not infraction of kw)
Allowed
Refund of tax already paid Not treated as income Treated as business income
received by the assesse
Interest on refund received Treated as income u/h other Treated as business income
sources
Litigation expenses Allowed Allowed
Filing returns and other Allowed Allowed
professional charges

DEDUCTIBILITY OF EXPENDITURE WHERE TDS HAS NOT BEEN DEDUCTED Section 40(a)(i)
Interest, Royalty, FTS, etc Payable Outside India/Payable to Non-Resident
Applicability of Section- 40(a)(i) - Conditions
• The amount is paid/payable:
❑ to any person outside India; or
❑ to a non-resident in India or a foreign company in India.
• The amount paid is in the nature of interest, royalty, fees for technical services or any other sum.
• Such amount is chargeable to income tax in the hands of the recipient under the Income Tax Act, 1961
and TDS is required to be deducted u/s 195 or any other section.
When Disallowance is Applicable
Interest, royalty, etc would be disallowed in the following two cases:
• Case 1: Tax has not been deducted at source in the current year; or
• Case 2: Tax has been deducted at source during the current year but has not been deposited with the
government till the last date of submission of return u/s 139(1).
Amount of Disallowance
The entire amount of interest, royalty, fees for technical services shall be disallowed in the current year if
either of the above two cases gets attracted.
Reversal of Disallowance
The amount which is disallowed in the current year shall be allowed as deduction in the year in which tax
deducted at source is deposited with the government by the payee.

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Section 40(a)(iii) Salary Payable Outside India/Payable to Non-Resident

Applicability of Section 40(a)(iii) conditions
• The amount is paid/payable:
❑ to any person outside India; or
❑ to a non-resident in India.
• The amount paid is in the nature of salary. Such salary amount is chargeable to income tax in the hands
of the recipient under the Income Tax Act, 1961 and TDS is required to be deducted under the
Income Tax Act, 1961.
When Disallowance is Applicable
The entire amount of salary would be disallowed if tax has not been deducted at source and tax has not
been deposited with the government.
Reversal of Disallowance
If salary amount has been disallowed once, such amount would be treated as disallowed forever even if tax
deducted at source is subsequently deposited with the government by the payer.

Section 40(a)(ia) Payment to a Resident

Applicability of Section 40(a)(ia) - Conditions
• The amount is paid/payable to a person resident in India.
• All types of payment on which tax is deductible u/s 192 to 194LBA are covered under the purview of
Section 40(a)(ia).
When Disallowance is Applicable
• Case 1: Tax has not been deducted at source in the current year; or
• Case 2: Tax has been deducted at source during the current year but has not been deposited with the
government till the last date of submission of return u/s 139(1).
Amount of Disallowance
30% of the expenditure shall be disallowed in the current year if either of the above two cases gets
attracted.
Reversal of Disallowance
The amount which is disallowed in the current year shall be allowed as deduction in the year in which tax
deducted at source is deposited with the government by the payer.
Disallowance Not to be Done in Certain Situations
Where tax has not been deducted at source, but the resident recipient has:
➢ paid the applicable tax after correctly computing his income; and
➢ filed his return of income within the time limit prescribed u/s 139(1),
the payer would not be treated as an assessee in default if he furnishes a certificate from a Chartered
Accountant certifying the above position and disallowance provisions would not be applicable in such cases.
(On the lines of Section 201(1))

question :- Details in respect of interest expenditure is given here-in-below. Determine the year of allowability
Status of Date on which taxis Actual Due date of Actual date of Allowability
Deductee supposed to be date of depositing TDS depositing TDS
deducted TDS
Resident 20-7-2022 20-7-2022 7-8-2022 7-8-2022 100% allowed in
the A.Y. 2023-24
Resident 20-7-2022 20-7-2022 7-8-2022 2-9-2022
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Resident 20-7-2022 20-7-2022 7-8-2022 3-4-2023
Resident 20-7-2022 20-7-2022 7-8-2022 30-06-2023
Resident 20-7-2022 20-7-2022 7-8-2022 12-12-2023 30% of such sumshall be
disallowed (70% shall be
allowed) in the
A.Y. 2023-24 but allowed
in the A.Y.2024-25
Resident 20-7-2022 20-7-2022 7-8-2022 3-4-2024 30% of such sumshall be
disallowed (70% shall be
allowed) in the
A.Y. 2023-24 but
allowed in the A.Y. 2025-
26

Resident 17-6-2022 17-6-2022 7-7-2022 Not deposited 30% of such sum shall
be disallowed (70%
shall be allowed) in
the
A.Y.2023-24 but allowed
in the A.Y. relevant to
the P.Y.
in which tax is paid
Resident 10-11-2022 Not 7-12-2022 Not deposited
deducted
Non-Resident 20-7-2022 20-7-2022 7-8-2022 7-8-2022 100% allowed in
the A.Y. 2023-24
Non-Resident 20-7-2022 20-7-2022 7-8-2022 2-9-2022

Non-Resident 20-7-2022 20-7-2022 7-8-2022 3-7-2023

Non-Resident 16-2-2023 16-2-2023 7-3-2023 10-12-2023 100% of such sum shall

be disallowed in the A.Y.
2023-24 but allowed in
the A.Y. 2024-25

Section 40A(2) PAYMENT TO RELATED PERSON

Applicability of Section 40A(2)
Section 40A(2) applies where a person has incurred any revenue expenditure on goods, services or facilities
and payment for the same is made to:
• A related person; or
• A person who has substantial interest in the business of the assessee.
Assessee (ie Related Person
Payer)
Individual Any relative of the individual specified u/s 2(41) (ie spouse, brother, sister,
lineal ascendant or lineal descendant of the individual)
Firm Partners and their relatives [2(41)]
Company Directors and their relatives [2(41)]

Disallowance in case of Unreasonable Expenditure

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If the payment made for the expenditure specified above is excessive or unreasonable having regard to the
Fair Market Value (FMV)of the goods, services or facilities, that portion of the expenditure which is
unreasonable or excessive shall be disallowed.
Example: Mr A has taken a godown on rent from his sister and has paid rent of Rs 5 lakhs during whereas
the FMV of such rent was only Rs 4 lakhs. In this case, an amount of Rs 1 lakh shall be disallowed u/s
40A(2).

Section 40A(7) EMPLOYER'S CONTRIBUTION TO GRATUITY FUND

• Employer's contribution towards gratuity fund is allowed as deduction if:
▪ The gratuity fund is an approved gratuity fund;
▪ and Requirements of Section 43E have been complied with (ie, the amount has been actually
deposited on or before the last date of filing of ROI).
• Provision for payment of gratuity:
In general, no provision is allowed as deduction. However, provision for payment of gratuity is allowed
as deduction if both the conditions given below are fulfilled:
▪ The gratuity fund is an approved gratuity fund; and
▪ The provision has been made on the basis of actuarial valuation (ie the amount has not been
arrived randomly but on a systematic basis).

Section 40A(9) EMPLOYER'S CONTRIBUTION TO VARIOUS FUNDS

No deduction shall be allowed in respect of any sum paid by an assessee towards setting up or formation of or as
contribution towards any fund except the following:
• Where such sum is required to be paid under any law in force; or
• Where such contribution is towards an approved gratuity fund; or
• Where such contribution is towards an approved superannuation fund; or
• Where such contribution is towards a recognized provident fund; or
• Where such contribution is towards a notified pension fund.
Contribution to unapproved funds or any other staff welfare fund is not allowed as deduction.
However, staff welfare expenses are allowed as deduction.

Section 40A (3)

PAYMENTS EXCEEDING Rs 10,000 TO BE MADE BY ACCOUNT PAYEE CHEQUE/DRAFT
Applicability of Section 40A (3)
• Section 40A(3) applies where all the following conditions are satisfied:
❑ The assessee has incurred any revenue expenditure; and
❑ Payment or aggregate of payments made in a single day to a single person in respect of such
expenditure exceeds Rs 10,000.
• If both the conditions specified above are fulfilled and payment has been made otherwise than by way
of account payee cheque or account payee draft or use of electronic clearing system ('ECS') through a
bank account, the amount of payment shall be disallowed (ie not allowed to be deducted).
• In other words, this section requires that payment to a single person in a single day for expenditure
incurred should be made by an account payee cheque, account payee draft or by using ECS through a
bank account if the payment amount in a single day exceeds Rs 10,000.
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PROF.VINIT KUMAR TAXATION 9873126173
• Where the payment is being made to a transport operator carrying on the business of plying, hiring or
leasing goods carriages, the limit of Rs 10,000 shall be taken as Rs 35,000.

ANY-EXPENSE (+) SINGLE PERSON (+) TOTAL PAYMENT IN SINGLE DAY EXCEEDS Rs 10,000

Payment Exceeding Rs 10,000 Made After Claiming Deduction

• This special provision applies where all the following conditions are satisfied:
❑ An expenditure has been allowed as deduction in earlier years on accrual basis;
❑ Payment exceeding Rs 10,000 in respect of such expenditure is made in subsequent years; and
❑ Such payment has been made otherwise than by way of account payee cheque or account payee
draft or by using EC5 through a bank account.
• If all the above conditions are fulfilled, the payment so made shall be deemed be to the PGBP income
of the assessee for the year in which the payment has been so made.
Example: Mr X has claimed a deduction of Rs 25,000 for rent expenses during PY 2019-20 on accrual basis.
Payment for this expenditure was made on 01/05/20 in cash. The amount of Rs 25,000 shall be deemed to
be the PGBP income of Mr X for PY 2019-20.

Non applicability of Section 40A (3) in Certain Situation -Rules of 6DD the Income Tax Rules, 1962
Section 40A (3) is not applicable in the following situations even though payment exceeding Rs 10,000 is
made otherwise than by way of account payee cheque or account payee draft or by using ECS. These
situations are given under Rule 6DD:
• Where payment is made to the Reserve Bank of India, State Bank of India or other banking
institutions, LIC, UTI, Central Government, State Government, etc.
• Where payment is made in a village or a town which does not have any bank on the date on which the
payment is made and the person to whom payment is made ordinarily resides at such place or has his
business/profession at such place.
• Where payment is made by transferring funds from one bank account to the other or payment is being
made by any credit card/debit card/letter of credit, etc.
• Where payment is made by way of account settlement (eg, Mr B owes Mr A, an amount of Rs 50,000.
Further Mr A has to make a payment of Rs 30,000 to Mr B for purchase of raw material. Mr A
adjusted the payment of Rs 30,000 against the receivable appearing in the books of accounts).
• Where the payment is to be made on a particular day but banks are closed on that day because of
holiday or strike.
• Where products have been manufactured in a cottage industry without the aid or power and the
payment is being made to the producer of such products.
• Where the payment is made for the purchase of
❑ agricultural or forest produce; or
❑ the produce of animal husbandry or dairy or poultry farming; or
❑ fish or fish products; or
❑ the products of horticulture or apiculture,
to the cultivator, grower or producer of such articles, produce or products.
• Where payment is made to an employee on his retirement or payment is made to his family member
after the employee's death and payment is in connection with gratuity or any other retirement benefit
and the payment amount does not exceed Rs 50,000.
• Any other situation given under Rule 6DD.
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PROF.VINIT KUMAR TAXATION 9873126173

Section 40(b) REMUNERATION TO PARTNERS (Eg Salary, Interest on Capital; etc)

Deductibility of Such Remuneration - Conditions
• Remuneration paid/payable by a firm to its partners are deductible only if the conditions mentioned
under Section 184 & Section 40(b) are complied with.
• One of the conditions require that there should exist a legal document which confirms the existence
of a partnership firm (such as partnership deed). Such legal document should give the firm the power
to pay remuneration to its partners.
• A copy of such legal document is also required to be filed at the time of submission of income tax
return for the first time.
Quantum of Deduction:
Type Of Remuneration Payment To Maximum Permissible Deduction
Interest on capital Any partner Rate of interest shall be lower of the
(working partner as well as two: ----Rate specified in partnership
sleeping partner) deed; or
--12% p.a.
(Calculation of interest on simple
interest basis)
Salary, bonus, commission Only working partner (such
or any other remuneration remuneration is not allowed Book Profits Maximum
to be paid to a sleeping Deduction
partner) First Rs 90% of Book
3,00,000 (or in Profits or Rs
the case of a 1,50,000,
loss) whichever is higher
balance Balance 60% of
Book Profits

Example: -If book profits are Rs

10,00,000, maximum salary, etc can
be. Rs 6,90,000

Calculation of Book Profits

Following adjustments should be made to the net profit u/h PGPB to arrive at book profits:
• Only income u/h PGPB is to be taken after including all incomes and deducting all eligible expenses (ie,
income after giving effect to the provisions of Sections 30 to 38)
• Interest on capital is allowed to be deducted only to the extent it is permitted u/s 40(b). Amount in
excess of the permissible figure shall be added back.
• Salary, bonus, commission, etc to partners are not to be deducted.
• Current year depreciation as well as unabsorbed depreciation of previous years are allowed to be
deducted (because such expenditure is covered under Sections 30 to 38)
• Brought forward business asses and Chapter VI-A deductions are not allowed to be deducted (because
such expenditure is not covered under Sections 30 to 38)
Points to be Noted
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PROF.VINIT KUMAR TAXATION 9873126173
• Interest on loan is not covered within the scope of Section 40(b). However, it is allowed to be deducted
if provided for in the partnership deed. The rate of interest would also be specified in the partnership
deed.
• Share of profit received by a partner from a partnership firm is hands of the partners u/s 10(2A).
• Interest on capital and salary, bonus, etc are considered to be the income of the partners u/h PGBP to the
extent they are allowed to be deducted u/s 40(b).

Section 43A
SPECIAL PROVISION FOR CHANGES IN THE RATE OF EXCHANGE OF FOREIGN CURRENCY
• Section 43A applies where an assessee has acquired any asset from outside India and has taken a loan
in foreign currency from outside India for purchasing this asset.
• Losses arising on principal repayments due to foreign exchange fluctuations shall be added to the WDV
of asset and depreciation shall be computed at the increased value in future years.
Example: Mr X has purchased a machinery from USA costing US $1,00,000 and for purchasing this
machine, loan of an equivalent amount was taken from Bank of America, New York Branch. The
exchange rate prevailing on the date of purchase of machinery was $1= Rs 65 and therefore, the asset
and loan were recorded at an amount of Rs 65,00,000 in the books of accounts. At the time of
principal repayment, the value of $1 increased to Rs 68 and therefore Rs 68,00,000 had to be paid to
acquire $1,00,000 and repay the principal amount. Loss of Rs 3,00,000 arising due to foreign exchange
fluctuations on account of principal repayments shall be added to the WDV of the asset as per the
provisions of Section 43A.
• Similarly, gains arising on principal repayments due to foreign exchange fluctuations shall be reduced
from the WDV of asset and depreciation shall be computed at the reduced value in future years.

Section 43CA
SPECIAL PROVISION FOR PERSONS ENGAGED IN SALE/PURCHASE OF LAND OR BUILDING
Section 43CA -Applicability
• This provision applies to persons who are engaged in the business of sale/purchase of land or building.
In other words, this provision applies to a property dealer for whom land or building forms part of
stock-in-trade.
• If any land or building is sold by the property dealer and the sale consideration is less than the SDV of
such land or building, in such cases the SDV shall be deemed to be the sale consideration. In other
words, in case of property dealers, sale price to be credited to P&L A/c shall be higher of the
following:
❑ Stamp Duty Value of land/building; or
❑ Actual amount for which land/building has been transferred
Special Provision for Agreement to Sell Land/ Building
• This provision applies in case of agreement to sell land or building.
• If SDV of land/building as on the date of booking is less than the SDV of land/building as on the date
of registration, the SDV as on the date of booking can be taken provided the booking amount has been
received otherwise than in cash.
S.No Actual Consideration SDV on the Date of SDV on the Date of Sale Value u/s 43CA
Booking/Agreement Registration

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PROF.VINIT KUMAR TAXATION 9873126173
1. Rs 200 lakhs Rs 250 lakhs (Booking Rs 300 lakhs Rs 250 lakhs
amount of Rs 50 (1/3/22)
lakhs received by
cheque on
31/7/2021)
2. Rs 200 lakhs Rs 250 lakhs (Booking Rs 300 lakhs Rs 300 lakhs
amount of Rs 50 (1/3/22)
lakhs received in
cash on 31/7/2021)
3. Rs 200 lakhs Rs 250 lakhs Rs 300 lakhs (Full Rs 300 lakhs
(31/7/2021) amount received on
the date of
registration)

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