2107-main-project-profits-and-gains-from-business-and-professions.pdf

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2107 - MAIN Project - PROFITS AND GAINS FROM
BUSINESS AND PROFESSIONS
Bachelors of commerce (Accountancy and finance) (University of Mumbai)
Studocu is not sponsored or endorsed by any college or university
2107 - MAIN Project - PROFITS AND GAINS FROM
BUSINESS AND PROFESSIONS
Bachelors of commerce (Accountancy and finance) (University of Mumbai)
Downloaded by Maan Fuul (maanfuul@gmail.com)
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PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE AND ECONOMICS
PROFITS AND GAINS FROM BUSINESS AND PROFESSIONS 1
Chapter No. 1: Introduction
1.1 Definition of Business:
As per Section 2(13) of the Income Tax Act, 1961, unless the context otherwise requires, the
term 'Business' includes any trade, commerce or manufacture or any adventure or concern in
the nature of Trade, Commerce or Manufacture.
1.2 Definition of Profession:
“Profession” may be defined as a vacation, or a job requiring some thought, skill and special
knowledge like that of C.A., Lawyer, Doctor, Engineer, Architect etc. So profession refers
to those activities where the livelihood is earned by the persons through their intellectual or
manual skill.
1.3 Business and Profession under Income Tax:
The term 'Income from business and profession' means any income shown in profit and loss
account after taking into account all the allowed expenditures by an assessee. The income
also includes both positive (profit) and negative incomes (loss). So, both legal and illegal
business incomes are taxable in nature.
“Profit and gains of business or profession” is one of the heads of income under the Income
Tax Act.
Under section 28, the following income is chargeable to tax under the head “Profits and gains
of business or profession”: profits and gains of any business or profession; any compensation
or other payments due to or received by any person specified in section 28(ii).
1.4 History of Taxation Post 1922:
 Preliminary :
The rapid changes in administration of direct taxes, during the last decades, reflect the
history of socio-economic thinking in India. From 1922 to the present day changes in direct
tax laws have been so rapid that except in the bare outlines, the traces of the I.T. Act, 1922
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can hardly be seen in the 1961 Act as it stands amended to date. It was but natural, in these
circumstances, that the set up of the department should not only expand but undergo
structural changes as well.
 Changes in administrative set up since the inception of the department:
The organisational history of the Income-tax Department starts in the year 1922. The
Income-tax Act, 1922, gave, for the first time, a specific nomenclature to various Income-tax
authorities. The foundation of a proper system of administration was thus laid. In 1924,
Central Board of Revenue Act constituted the Board as a statutory body with functional
responsibilities for the administration of the Income-tax Act. Commissioners of Income- tax
were appointed separately for each province and Assistant Commissioners and Income-tax
Officers were provided under their control. The amendments to the Income tax Act, in 1939,
made two vital structural changes: (i) appellate functions were separated from administrative
functions; a class of officers, known as Appellate Assistant Commissioners, thus came into
existence, and (ii) a central charge was created in Bombay. In 1940, with a view to exercising
effective control over the progress and inspection of the work of Income-tax Department
throughout India, the very first attached office of the Board, called Directorate of Inspection
(Income Tax) - was created. As a result of separation of executive and judicial functions, in
1941, the Appellate Tribunal came into existence. In the same year, a central charge was
created in Calcutta also.
1.5 Distinguish between Business and Profession:
BUSINESS PROFESSION
1. Meaning: It is an economic activity
where goods and services are produced
and distrusted. Any activity that involves
give and take behaviour can be
summarized as “Business.”
The Profession is also an economic
activity under which a person uses his
knowledge and provide expert services.
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2. Nature: A person invests his capital
and starts a Business. He may or may not
have the proper skills or knowledge.
A Professional has to make formal
training before starting his profession.
3. Special education: Business does not
require special formal education tough it
is advisable.
Professional requires formal education to
practise a profession.
4. Capital Requirement: Capital is an
amount introduced by a businessman to
conduct a business.
Compared to Business, less capital is
required to carry out a Profession.
Professionals may sometimes need not
require Capital as far as they are not
willing to start their business through their
profession.
5. Returns: A Business earns Profits. Wherein, a Professional receives fees for
his/her work done.
6. Registration: A businessman need not
register with a particular body or
association.
A professional has to register under the
respective body or association eg. A
Lawyer has to register himself with the
Bar Council of India before carrying out
his profession.
7. Code of conduct: The owners of the
Business decide the code of conduct.
A Professional has to follow the code of
conduct as per the association they are
working with.
8. Examples: Retailers, Manufacturers,
Sole traders, Entrepreneurs, Wholesalers,
etc.
Doctors, Professor, Lawyers, Engineers,
CA, etc.
1.6 Types Of Business:
 Barter System
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Barter System involves exchange of goods and services between two or more parties without
the use of money.
It is the oldest form of commerce/business/trading.
Individuals and companies barter goods and services between each other based on equivalent
estimates of prices and goods.
People in olden era used to exchange goods or services in exchange of goods and services as
there was no currency introduced at that time.
Examples of Barter System are as follows:
1. Exchange of wheat with other pulses.
2. Exchange of milk with groceries.
3. Exchange of shoes with pots and pans.
4. Exchange of tea with salt/sugar.
5. Exchange of clothes with shoes, etc.
 Advantages
1. The advantages of barter system are, the system is simple, there are no complexities
involved
2. Unlike monetary system, natural resources will not be overexploited, power will not be
concentrated in some circles.
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3. There won't be problems of balance of payments crisis, foreign exchange crisis, or other
complex problems.
 Disadvantages
1. There is lack of double coincidence of wants.
2. There is lack of a common measure of value.
3. Difficulty in making deferred payments.
4. Difficulty in storing value.
5. Indivisibility of certain goods.
After the Currency was introduced the types of Business are as follows-
 Sole Proprietorship
A Sole Proprietorship or a Single Proprietorship is a type of business structure owned by an
individual who generally has full control and authority over the business.
Basically, Sole Proprietor is a person also known as Entrepreneur. So Entrepreneur starts his
own business with his entrepreneurship skills.
Over here, there is only one owner of the business who enjoys the profits and suffers the
losses of the business.
The business owner is referred to as the “sole proprietor” and exclusively owns all assets and
profits of the business.
Examples of sole proprietors are small businesses such as, a local grocery store, a local
clothes store, an artist, freelance writer, IT consultant, freelance graphic designer, etc.
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 Advantages
1. Easy to Establish
2. Easier to Operate
3. Difficulty in Obtaining Funds
4. Higher Tax Incidence
5. Sole Beneficiary of Profits
6. Compliance & Taxation
7. Unlimited Liability
8. Privacy
 Disadvantages
1. Limitation of Management Skills
2. Limitation of Capital
3. Limited Scope for Expansion
4. Risk of Wrong Decisions
5. No Large-Scale Economies
6. Lack of Continuity
7. Weak Bargaining Position
8. Unlimited Liability
9.
 Partnership
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A Partnership is a type of business carried on by minimum two people in order to manage
and operate the business and its profits. Here, the ownership of business is shared between
two people.
There are several types of partnership arrangements. In particular, in a partnership business,
all partners share liabilities and profits equally, while in others, partners may have limited
liability.
The division of profits and losses also depends upon the capital brought into the business by
each partner.
If there is equal amount of capital brought by the partner, then the profits are divided equally.
Wherein, if the capital is not equal in amount then, the profits are divided as per the ratio of
the capital.
 Advantages
1. Bridging the Gap in Expertise and Knowledge
2. New/ Different Perspective
3. Potential Tax Benefits
4. More Business Opportunities
5. Better Work/Life Balance
6. Moral Support
7. More Cash/ Income
8. Cost Savings
 Disadvantages
1. Liabilities, In addition to sharing profits and assets, a partnership also entails sharing any
business losses, as well as responsibility for any debts, even if they are incurred by the other
partner.
2. Future Selling Complications.
3. Loss of Autonomy.
4. Lack of Stability.
5. Emotional Issues.
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 Types of Partners under The Indian Partnership Act
1. Active Partner/ Managing Partner.
2. Nominal Partner.
3. Minor Partner
4. Dormant/ Sleeping Partner.
5. Partners by Estoppel.
6. Partners in Profits only.
 Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure for Private
Companies. It is one of the most common legal entities to form a business.
All partners in a general partnership are responsible for the business and are
subject to unlimited liability for business debts and corporations.
An LLC allows the pass-through taxation of a partnership with the limited
liability of a corporation.
The liability of all Partners is limited upto an extent.
Managers/ Managing members/ Managing Director are responsible for the
management of the company, rather than a board of directors. Managing
members of an LLC operate like a corporate board of directors.
 Advantages
1. Liability of Partners is limited.
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2. No minimum Capital is required.
3. No limit of Business owners.
4. Registration cost is low.
5. No compulsory Audit is required.
6. Unlimited business owners.
7. It becomes easier in order to manage the business.
 Disadvantages
1. Difficult to raise Capital.
2. No Perpetual Existence.
3. Confusion across states.
1.7 Types Of Profession:
 Accountant
Accountants are responsible for examining financial statements to ensure accuracy and
compliance with existing laws and regulations, handling tax-related tasks such as calculating
the Comptroller.
The comptroller of a corporation supervises and reviews important financial reports for
publication. An accountant takes care of the accounting process of a business. All the record
of payments and receipts are recorded by the accountant.
 Professor/ Teacher
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Teaching is a professional skill owned by the Professors/ Teachers. The Professional method
of teaching is carried out in Institutes, Schools and Colleges. The Degree can be also be done
in a specific stream. For eg, Literature, Management, Science, Accounting, etc. Professors
teach students and conduct examination to learn about the student’s capability. Professors
play a huge role in the development of student’s future.
 Lawyer
A Lawyer is a professional who is qualified to offer advice about the law or represent
someone in legal matters. Qualified lawyers have to attend law school and pass a bar exam in
order to practice law. Lawyer, of course, means one who practices the law. A Lawyer plays
an important is the Court of Law. Lawyer has to present all the necessary proofs in order to
defend his/her client. A professional fees is charged by the lawyer on every visit of the court.
A Lawyer has to particularly wear the Attorney Court Dress while visiting court.
 Engineer
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An Engineer holds Professional skills and qualification whose job is to design, build or repair
engines, machines, etc. Today, there are now six major branches of engineering: mechanical,
chemical, civil, electrical, management and geotechnical, and hundreds of different
subcategories of engineering under each branch. Engineers design, evaluate, develop, test,
modify, install, inspect and maintain a wide variety of products and systems.
 Doctor
Doctor also holds a professional degree to diagnose and treat illness and injury. Doctors
examine patients and arrive upon diagnosis, perform surgeries, prescribe medications,
educate patients and their family members, check patients' records, and keep an eye on their
recovery. Doctors are also categorized into many types. We have Surgeons, Dermatologists,
Neurologists, Gynecologists, Dentists, Urologists, Cardiologists, Orthopaedics, etc.
 Commercial Banker
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A commercial banker, also known as a business or institutional banker, is a business
professional who helps clients with their financial needs. Commercial bankers may work in
small or large banks or other financial institutions.
A commercial banking career path has you providing clients. As a credit analyst or loan
officer, you deliver financial advice and solutions tailored to your clients' needs, such as
growing their business, buying new equipment, funding working capital, and day-to-day
banking.
To become a Commercial Banker one must have strong customer service skills, quantitative
ability, and organizational skills. They must also have a solid understanding of the banking
industry. They lead staff and are responsible for improving and increasing bank performance.
 Sec 2(13)
As per Section 2(13) of the Income Tax Act, 1961, unless the context otherwise requires, the
term 'business' includes any trade, commerce or manufacture or any adventure or concern in
the nature of trade, commerce or manufacture.
 Sec 2(36)
Under section 2(36) profession includes vocation. Vocation simply means a way of living for
which one has special fitness. So vocation simply means any type of activity in which a
person is engaged and he earns his livelihood from such activity. The practice of a religion
may also amount to vocation.
 Key Points-
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1. Must be carried on by Assessee.
2. Only profit of the previous year are to be taxed.
3. Must be carried on during the previous year.
4. Income includes negative income i.e Loss.
5. Relevance of method of accounting (cash or mercantile).
6. A person cannot do business with one self. Hence, notional profit is not taxable. If a
proprietor withdraws goods costing Rs. 50,000 for personal use at an agreed value of Rs.
60,000 then profit of Rs. 10,000 shall not be taxable.
7. There is no difference between legal and illegal business for taxation purpose. Even
income from illegal business shall be taxable.
 History of Income Tax:
In India, the system of direct taxation as it is known today has been in force in one form or
another even from ancient times. In this article, we are discussing how the Income Tax
evolved over the time in India.
1860 - The Tax was introduced for the first time by Sir James Wilson. India’s First “Union
Budget” Introduced by Pre-independence Finance Minister, James Wilson on 7 April, 1860.
The Indian Income Tax Act of 1860 was enforced to meet the losses sustained by the
government on account of the military mutiny of 1857. Income was divided into four
schedules taxed separately:
(1) Income from landed property;
(2) Income from professions and trades;
(3) Income from Securities;
(4) Income from Salaries and pensions.
Time to time this act was replaced by several license taxes.
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1886 - Separate Income tax act was passed. This act remained in force up to, with
various amendments from time to time. Under the Indian Income Tax Act of 1886, income
was divided into four schedules taxed separately:
(1) Salaries, pensions or gratuities;
(2) Net profits of companies;
(3) Interests on the securities of the Government of India;
(4) Other sources of income.
1918 - A new income tax was passed. The Indian Income Tax Act of 1918 repealed the
Indian Income Tax Act of 1886 and introduced several important changes.
1922 - Again it was replaced by another new act which was passed in 1922. The
organizational history of the Income-tax Department starts in the year 1922. The Income-tax
Act, 1922, gave, for the first time, a specific nomenclature to various Income-tax authorities.
The Income Tax Act of 1922 remained in force until the year 1961.
The Income Tax Act of 1922 had become very complicated on account of innumerable
amendments. The Government of India therefore referred it to the law commission
in1956 with a view to simplify and prevent the evasion of tax
1961 - In consultation with the Ministry of Law finally the Income Tax Act, 1961 was
passed. The Income Tax Act 1961 has been brought into force with
1 April 1962.It applies to the whole of India (including Jammu and Kashmir).
Since 1962 several amendments of far-reaching nature have been made in the Income Tax
Act by the Union Budget every year which also contains Finance Bill. After it is passed by
both the houses of Parliament and receives the assent of the President of India, it becomes
the Finance act.
At present, there are five heads of Income:
(1) Income from Salary;
(2) Income from House Property;
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(3) Income from Profits and Gains of Business or Profession;
(4) Income from Capital Gains;
(5) Income from Other Sources.
 Income Tax Act, 1961:
1. This Act may be called the Income- tax Act, 1961
2. It extends to the whole of India
3. Save as otherwise provided in this Act, it shall come into force on the 1st day of April,
1962 .
 Definitions In this Act, unless the context otherwise requires,-
" Advance Tax" means the advance tax payable in accordance with the provisions of Chapter
XVII.
 Deduction under this section is to be allowed after the income chargeable to tax under the
head ‘Profits and Gains from Business and Profession’ has been computed under rule 8.
 Brief Study:
Sr.
No.
Section Particulars
1. 28(i) Profit and gains from any business or profession carried on
by the assessee at any time during the previous year
2. 28(ii) Any compensation or other payment due to or received by
any specified person
3. 28(iii) Income derived by a trade, professional or similar
association from specific services performed for its
members
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4. 28(iiia) Profit on sale of a license granted under the Imports
(Control) Order 1955, made under the Import Export
Control Act, 1947
5. 28(iiib) Cash assistance (by whatever name called) received or
receivable by any person against exports under any scheme
of Government of India
6. 28(iiic) Any duty of Customs or Excise repaid or repayable as
drawback to any person against exports under the Customs
and Central Excise Duties Drawback Rules, 1971.
7. 28(iiid) Profit on transfer of Duty Entitlement Pass Book Scheme,
under Section 5 of Foreign Trade (Development and
Regulation) Act, 1992
8. 28(iiie) Profit on transfer of Duty Free Replenishment Certificate,
under Section 5 of Foreign Trade (Development and
Regulation) Act 1992
9. 28(iv) Value of any benefits or perquisites arising from a business
or the exercise of a profession.
10. 28(v) Interest, salary, bonus, commission or remuneration due to
or received by a partner from partnership firm
11. 28(va) a) Any sum received or receivable for not carrying out any
activity in relation to any business or profession; or
b) Any sum received or receivable for not sharing any
know-how, patent, copyright, trademark, licence, franchise,
or any other business or commercial right or information or
technique likely to assist in the manufacture of goods or
provision of services.
12. 28(vi) Any sum received under a Key man Insurance policy
including the sum of bonus on such policy
12A. 28(via) Any profit or gains arising from conversion of inventory
into capital asset.
13. 28(vii) Any sum received ( or receivable) in cash or in kind, on
account of any capital assets (other than land or goodwill or
financial instrument) being demolished, destroyed,
discarded or transferred, if the whole of the expenditure on
such capital assets has been allowed as a deduction under
section 35AD
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14. Explanation to section
28
Income from speculative transactions. However, it shall be
deemed to be distinct and separate from any other business.
15. 41(1)  Remission or cessation of liability in respect of any
loss, expenditure or trading liability incurred by the
taxpayers
 Recovery of trading liability by successor which was
allowed to the predecessor shall be chargeable to tax in the
hands of successor. Succession could be due to
amalgamation or demerger or succession of a firm
succeeded by another firm or company, etc.
 Any liability which is unilaterally written off by the
taxpayer from the books of accounts shall be deemed as
remission or cessation of such liability and shall be
chargeable to tax.
16. 41(2) Depreciable asset in case of power generating units, is sold,
discarded, demolished or destroyed, the amount by which
sale consideration and/ or insurance compensation together
with scrap value exceeds its WDV shall be chargeable to
tax.
17. 41(3) Where any capital asset used in scientific research is sold
without having been used for other purposes and the sale
proceeds together with the amount of deduction allowed
under section 35 exceed the amount of the capital
expenditure, such surplus or the amount of deduction
allowed, whichever is less, is chargeable to tax as business
income in the year in which the sale took place.
18. 41(4) Where bad debts have been allowed as deduction
under Section 36(1)(vii) in earlier years, any recovery of
same shall be chargeable to tax.
19. 41(4A) Amount withdrawn from special reserves created and
maintained under Section 36(1)(viii) shall be chargeable as
income in the previous year in which the amount is
withdrawn.
20. 41(5) Loss of a discontinued business or profession could be
adjusted from the deemed business income as referred to in
section 41(1), 41(3), (4) or (4A) without any time limit.
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20A. 43AA Any foreign exchange gain or loss arising in respect of
specified foreign currency transactions shall be treated as
income or loss. Such gain or loss shall be computed in
accordance with notified ICDS [subject to Section 43A]
21. 43CA Where consideration for transfer of land or building or both
as stock-in-trade is less than the stamp duty value, the value
so adopted shall be deemed to be the full value of
consideration for the purpose of computing income under
this head.
However, no such adjustment is required to be made if
value adopted for stamp duty purposes does not exceed
110% of the sale consideration.
Note:
To boost the demand in the real-estate sector and to enable
the real-estate developers to sell their unsold inventory at a
lower rate, the safe harbour limit is increased from existing
10% to 20% in case of transfer of residential property
during the period from 12-11-2020 to 30-06-2021 by way of
the first-time allotment to any person. Further, the
consideration received or accruing as a result of such
transfer should not exceed Rs. 2 crores.
21A. 43CB The profits and gains arising from construction contract or a
contract for providing service is to be determined on the
basis of percentage completion method, in accordance with
the notified ICDS.
In case of contract for providing services with duration of
not more than 90 days, the profits and gains shall be
determined on basis of project completion method.
While as in case of contract for providing services with
indeterminate number of acts over a specified period of time
shall be determined on basis of straight line method.
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22. 43D As per RBI Guidelines, Interest on bad and doubtful debts
of Public Financial Institution or Scheduled Bank or [a co-
operative bank other than a primary agricultural credit
society or a primary co-operative agricultural and rural
development bank] or State Financial Corporation or State
Industrial Investment Corporation, shall be chargeable to tax
in the year in which it is credited to Profit and Loss A/c or
year in which it is actually received, whichever happens
earlier.
With effect from Assessment Year 2020-21, the Finance
(No. 2) Act, 2019 has covered ‘Deposit Taking NBFCs’ and
‘Systemically Important Non-deposit Taking NBFCs’ in the
ambit of 43D. Hence, such NBFCs shall be able to
recognize interest on bad and doubtful debts in the year in
which it is credited to Profit and Loss A/c or year in which
it is actually received, whichever happens earlier.
Deposit Taking NBFC’ means a NBFC which is accepting
or holding public deposits and is registered with the RBI.
‘Systemically Important Non-deposit Taking NBFC means
a NBFC which is not accepting or holding public deposits
and having total assets of not less than Rs. 500 crore as per
the last audited balance sheet and is registered with the RBI.
23. 43D Similarly as per NHB Guidelines, Interest on bad and
doubtful debts of housing finance company, shall be
chargeable to tax, in the year it is credited to P & L A/c or
year in which it is actually received by them, whichever is
earlier.
24 — Assistance in the form of a subsidy or grant or cash
incentive or duty drawback or waiver or concession or
reimbursement (by whatever name called) by the Central
Govt. or State Govt. or any authority or body or agency to
the assessee would be included in definition of income as
referred to in Section 2(24). However, in the following
cases subsidy or grant shall not be treated as income:
i) The subsidy or grant or reimbursement which is taken
into account for determination of the actual cost of the asset
in accordance with the provisions of Explanation 10 to
clause (1) of Section 43;
ii) The subsidy or grant by the Central Government for the
purpose of the corpus of a trust or institution established by
the Central Government or a State Government, as the case
may be.
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2. Deductions under Sections 30 to 37
Amount deductible, while computing, Profits and Gains of Business or Profession are:-
Section Nature of
expenditure
Quantum of
deduction
Assessee
30 Rent, rates, taxes,
repairs (excluding
capital
expenditure) and
insurance for
premises
Actual expenditure
incurred excluding
capital expenditure
All assessee
31 Repairs (excluding
capital
expenditure) and
insurance of
machinery, plant
and furniture
Actual expenditure
incurred excluding
capital expenditure
All assessee
32(1)(i) Depreciation on
i) buildings,
machinery, plant
or furniture, being
tangible assets;
ii) know-how,
patents,
copyrights,
trademarks,
licenses,
franchises, or any
other business or
commercial rights
of similar nature
not being goodwill
of business or
profession, being
intangible assets
Allowed at prescribed
percentage on Straight
Line Method for each
asset
Provided that where an
asset is acquired by the
assessee during the
previous year and is
put to use for a period
of less than one
hundred and eighty
days in that previous
year, the deduction in
respect of such asset
shall be restricted to
fifty per cent of the
amount calculated at
the percentage
prescribed for an asset.
Assessees engaged in
business of generation or
generation and distribution
of power
Note:
Taxpayers engaged in the
business of generation or
generation and distribution
of power shall have the
option to claim depreciation
either on basis of straight
line basis method or written
down value method on each
block of asset.
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32(1)(ii) Depreciation on
i) buildings,
machinery, plant
or furniture, being
tangible assets;
ii) know-how,
patents,
copyrights,
trademarks,
licenses,
franchises, or any
other business or
commercial rights
of similar nature
not being goodwill
of business or
profession, being
intangible assets
Allowed at prescribed
percentage on WDV
method for each block
of asset
assessee during the
of less than one
hundred and eighty
year, the deduction in
respect of such asset
shall be restricted to
fifty per cent of the
amount calculated at
the percentage
prescribed for an asset.
All assessees
32(1)(iia) Additional
depreciation on
new plant and
machinery (other
than ships, aircraft,
office appliances,
second hand plant
or machinery,
etc.).
(subject to certain
conditions)
Additional
depreciation shall be
available @20 % of
the actual cost of new
plant and machinery.
assessee during the
of less than one
hundred and eighty
year, then deduction of
additional depreciation
would be restricted to
50% in the year of
acquisition and
balance 50% would be
allowed in the next
year
All assessee engaged in
– manufacture or production
of any article or thing; or
– generation, transmission or
distribution of power (if
taxpayer is not claiming
depreciation on basis of
straight line method)
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Proviso
to Section
32(1)(iia)
Additional
depreciation on
new plant and
machinery (other
than ships,
aircraft,office
appliances, second
hand plant or
machinery, etc.))
(Subject to certain
conditions)
Additional
depreciation shall be
available @35 % of
the actual cost of new
plant and machinery.
assessee during the
of less than one
hundred and eighty
year, then deduction of
additional depreciation
would be restricted to
50% of actual cost in
the year of acquisition
and balance 50%
would be allowed in
the next year
Note:
1. Manufacturing unit
should be set-up on or
after 1st day of April,
2015.
2. New plant and
machinery acquired
and installed during
the period beginning
on the 1st day of April,
2015 and ending
before the 1st day of
April, 2020
All assessees- where an
assessee sets up an
undertaking or enterprise for
production or manufacture of
any article or thing in any
notified backward area in
state of the state of Andhra
Pradesh, Bihar, Telangana or
West Bengal.
lOMoARcPSD|32216039

32AC Deduction
under section
32AC is available
if actual cost of
new plant and
machinery
acquired and
installed by a
manufacturing
company during
the previous year
exceeds Rs.
25/100 Crores, as
the case may
be.(Subject to
certain conditions)
15% of actual cost of
new asset
Company engaged in
business or manufacturing or
production of any article or
thing
32AD Investment
allowance for
investment in new
plant and
machinery if
manufacturing unit
is set-up in the
notified backward
area in the state of
Andhra Pradesh,
Bihar, Telangana
or West
Bengal(Subject to
certain conditions)
Investment allowance
shall be available
@15 % of the actual
cost of new plant and
machinery in the year
of installation of new
asset.
Note:-
1) New asset should be
acquired and installed
during the period
beginning on the 1st
day of April, 2015 and
ending before the 1st
day of April, 2020.
2) Manufacturing unit
should be set-up on or
after 1st day of April,
2015.
3) Deduction shall be
allowed under Section
32AD in addition to
deduction available
under Section 32AC if
assessee fulfils the
specified conditions
All assessee who acquired
new plant and machinery for
the purpose of setting-up
manufacturing unit in the
notified backward area in the
state of Andhra Pradesh,
Bihar, Telangana or West
Bengal
lOMoARcPSD|32216039

33AB Amount deposited
in Tea / Coffee /
Rubber
Development
Account by
assessee engaged
in business of
growing and
manufacturing tea/
Coffee /Rubber in
India
Deduction shall be
lower of following:
a) Amount deposited
in account with
National Bank for
Agricultural and Rural
Development
(NABARD) or in
Deposit Account of
Tea Board, Coffee
Board or Rubber
Board in accordance
with approved scheme;
or
b) 40% of profits from
such business before
making any deduction
under section
33AB and before
adjusting any brought
forward loss.
(Subject to certain
conditions)
business of growing and
manufacturing
tea/Coffee/Rubber
33ABA Amount deposited
in Special Account
with SBI/Site
Restoration
Account by
assessee carrying
on business of
prospecting for, or
extraction or
production of,
petroleum or
natural gas or both
in India
Deduction shall be
lower of following:
a) Amount deposited
in Special Account
with SBI/Site
Restoration Account;
or
b) 20% of profits from
such business before
making any deduction
under section
33ABA and before
adjusting any brought
forward loss.
(Subject to certain
conditions)
business of prospecting for,
or extraction or production
of, petroleum or natural gas
or both in India
lOMoARcPSD|32216039

35(1)(i) Revenue
expenditure on
scientific research
pertaining to
business of
assessee is
allowed as
deduction (Subject
to certain
conditions).
Entire amount incurred
on scientific research
is allowed as
deduction.
Expenditure on
scientific research
within 3 years before
commencement of
business (in the nature
of purchase of
materials and salary of
employees other than
perquisite) is allowed
as deduction in the
year of
commencement of
business to the extent
certified by prescribed
authority.
All assessee
35(1)(ii) Contribution to
approved research
association,
university, college
or other institution
to be used for
scientific research
shall be allowed as
deduction (Subject
to certain
conditions)
100% of sum paid to
such association,
university, college, or
other institution is
allowed as deduction.
All assessee
35(1)(iia) Contribution to an
approved company
registered in India
to be used for the
purpose of
scientific research
is allowed as
deduction (Subject
to certain
conditions)
100% of sum paid to
the company is
allowed as deduction
All assessee
lOMoARcPSD|32216039

35(1)(iii) Contribution to
approved research
association,
university, college
or other institution
with objects of
undertaking
statistical research
or research in
social sciences
shall be allowed as
deduction (Subject
to certain
conditions)
100% of sum paid to
such association,
university, college, or
other institution is
All assessee
35(1)(iv) read
with 35(2)
Capital
expenditure
incurred during the
year on scientific
research relating to
the business
carried on by the
assessee is
allowed as
deduction (Subject
to certain
conditions)
Entire capital
expenditure incurred
on scientific research
is allowed as
deduction.
Capital expenditure
incurred within 3 years
before commencement
of business is allowed
as deduction in the
year of
commencement of
business.
Note:
i. Capital expenditure
excludes land and any
interest in land;
ii. No depreciation
shall be allowed on
such assets.
All assessee
35(2AA) Payment to a
National
Laboratory or
University or an
Indian Institute of
Technology or a
specified person is
allowed as
deduction.
100% of payment is
(Subject to certain
conditions).
All assessee
lOMoARcPSD|32216039

The payment
should be made
with the specified
direction that the
sum shall be used
in a scientific
research
undertaken under
an approved
programme.
35(2AB) Any expenditure
incurred by a
company on
scientific research
(including capital
expenditure other
than on land and
building) on in-
house scientific
research and
development
facilities as
approved by the
prescribed
authorities shall be
allowed as
deduction (Subject
to certain
conditions).
Expenditure on
scientific research
in relation to Drug
and
Pharmaceuticals
shall include
expenses incurred
on clinical trials,
obtaining
approvals from
authorities and for
filing an
application for
patent.
100% of expenditure
so incurred shall be
Note:
i. Company should
enter into an
agreement with the
prescribed authority
for co-operation in
such research and
development and
fulfils conditions with
regard to maintenance
of accounts and audit
thereof and furnishing
of reports in such
manner as may be
prescribed.
Company engaged in
business of bio-technology
or in any business of
manufacturing or production
of eligible articles or things
lOMoARcPSD|32216039

35ABA Capital
expenditure
incurred and
actually paid for
acquiring any right
to use spectrum
for
telecommunication
services shall be
allowed as
deduction over the
useful life of the
spectrum.
Deduction will be
available in equal
installments starting
from the year in which
actual payment is
made and ending in the
year in which
spectrum comes to an
end.
Note:
If spectrum fee is
actually paid before
the commencement of
business, the deduction
will be available from
the year in which
business is
commenced.
telecommunication services
35ABB Capital
expenditure
incurred for
acquiring any
license or right to
operate
telecommunication
services shall be
allowed as
deduction over the
term of the license.
Deduction would be
allowed in equal
installments starting
from the year in which
such payment has been
made and ending in the
year in which license
comes to an end.
telecommunication services
35AC Expenditure by
way of payment of
any sum to a
public sector
company/local
authority/approved
association or
institution for
carrying out any
eligible scheme or
project (Subject to
certain
conditions).
Actual payment made
to prescribed entities.
However, a company
can also claim
deduction for
by it directly on
eligible projects.
Note:-
No deduction in any
A.Y. commencing on
or after the 1st day of
April, 2018
All assessee. However,
deduction for direct
expenditure is allowed only
to a company
lOMoARcPSD|32216039

35AD Deduction in
respect of
`expenditure on
specified
businesses, as
under:
a) Setting up and
operating a cold
chain facility
b) Setting up and
operating a
warehousing
facility for storage
of agricultural
produce
c) Building and
operating,
anywhere in India,
a hospital with at
least 100 beds for
patients
d) Developing and
building a housing
project under a
notified scheme
for affordable
housing
e) Production of
fertilizer in India
(Subject to certain
conditions)
150% of capital
for the purpose of
business is allowed as
deduction provided the
specified business has
commenced its
operation on or after
01-04-2012.
100% of capital
expenditure will be
allowed to be deducted
from the assessment
year 2018-19 onwards
Note: If such specified
businesses commence
operations on or before
31-03-2012 but after
prescribed dates,
deduction shall be
limited to 100% of
capital expenditure.
Note: No deduction of
any capital expenditure
above Rs 10,000 shall
be allowed if it is
incurred in cash.
All assessee
35AD Deduction in
respect of
expenditure on
specified
businesses, as
under:
a) Laying and
operating a cross-
country natural gas
or crude or
petroleum oil
pipeline network
for distribution,
100% of capital
for the purpose of
business is allowed as
deduction provided
specified businesses
commence operations
on or after the
prescribed dates.
Note: No deduction of
any capital expenditure
above Rs 10,000 shall
be allowed if the
All assessee
Note: Such deduction is
available to Indian company
in case of following
business, namely;-
i) Business of laying and
operating a cross-country
natural gas or crude or
petroleum oil pipeline
network
ii) Developing or
maintaining and operating or
developing, maintaining and
lOMoARcPSD|32216039

including storage
facilities being an
integral part of
such network;
b) Building and
operating,
anywhere in India,
a hotel of two-star
or above category;
c) Developing and
building a housing
project under a
scheme for slum
redevelopment or
rehabilitation
d) Setting up and
operating an
inland container
depot or a
container freight
station
e) Bee-keeping
and production of
honey and
beeswax
f) Setting up and
operating a
warehousing
facility for storage
of sugar
g) Laying and
operating a slurry
pipeline for the
transportation of
iron ore
h) Setting up and
operating a semi-
conductor wafer
fabrication
manufacturing unit
i) Developing or
maintaining and
operating, or
developing,
payment for such
expenditure is made
otherwise than by an
account payee
cheque/draft or ECS or
through prescribed
electronic mode of
payment.
operating a new
infrastructure facility.
lOMoARcPSD|32216039

maintaining and
operating a new
infrastructure
facility
(Subject to certain
conditions)
35CCA Payment to
following Funds
are allowed as
deduction:
a) National Fund
for Rural
Development; and
b) Notified
National Urban
Poverty
Eradication Fund
Actual payment to
specified funds
All assessee
35CCC Expenditure (not
being cost of
land/building)
incurred on
notified
agricultural
extension project
for the purpose of
training, educating
and guiding the
farmers shall be
allowed as
deduction,
provided the
expenditure to be
incurred is
expected to be
more than Rs. 25
lakhs (Subject to
certain
100% of the
expenditure (Subject to
certain conditions)
All assessee
lOMoARcPSD|32216039

conditions).
35CCD Expenditure
incurred by a
company (not
being expenditure
in the nature of
cost of any land or
building) on any
notified skill
development
project is allowed
as deduction
(Subject to certain
conditions).
100% of the
expenditure (Subject to
certain conditions)
Note:
(i) No deduction shall
be allowed to a
company engaged in
manufacturing
alcoholic spirits or
tobacco products.
Company engaged in
manufacturing of any article
or providing specified
services
35D An Indian
company can
amortize certain
preliminary
expenses (up to
maximum of 5%
of cost of the
project or capital
employed,
whichever is
more) (Subject to
certain conditions
and nature of
expenditures)
Qualifying preliminary
expenditure is
allowable in each of 5
successive years
beginning with the
previous year in which
the extension of
undertaking is
completed or the new
unit commences
production or
operation.
Indian Company
lOMoARcPSD|32216039

35D Non-corporate
taxpayers can
amortize certain
preliminary
expenses (up to
maximum of 5%
of cost of the
project) (Subject
to certain
conditions and
nature of
expenditures)
Qualifying preliminary
expenditure is
allowable in each of 5
successive years
beginning with the
previous year in which
the extension of
undertaking is
completed or the new
unit commences
production or
operation.
Resident Non-corporate
assessees
35DD Expenditure
incurred after 31-
3-1999 in respect
of amalgamation
or demerger can
be amortized by an
Indian Company
Expenditure is allowed
as deduction in five
equal installments in 5
previous years starting
with the year in which
amalgamation or
demerger took place.
Indian Company
35DDA Expenditure
incurred under
Voluntary
Retirement
Scheme is allowed
as deduction.
Each payment under
VRS is allowed as
deduction in five equal
installments in 5
previous years.
All assessee
35E Qualifying
expenditure
incurred by
resident persons
on prospecting for
the minerals or on
the development
of mine or other
natural deposit of
such minerals
shall be allowed as
deduction (Subject
to certain
conditions).
Eligible expenditure is
in ten equal
installments in 10
previous years.
Resident persons
36(1)(i) Insurance
premium covering
Actual expenditure
incurred
All assessee
lOMoARcPSD|32216039

risk of damage or
destruction of
stocks/stores
36(1)(ia) Insurance
premium covering
life of cattle
owned by a
member of co-
operative society
engaged in
supplying milk to
federal milk co-
operative society
Actual expenditure
incurred
All assessee
36(1)(ib) Medical insurance
premium paid by
any mode other
than cash, to
insure employee’s
health under (a)
scheme framed by
GIC of India and
approved by
Central
Government; or
(b) scheme framed
by any other
insurer and
approved by
IRDA
Actual expenditure
incurred
All assessee
36(1)(ii) Bonus or
commission paid
to employees
which would not
have been payable
as profit or
dividend if it had
not been paid as
bonus or
commission
Actual expenditure
incurred
All assessee
lOMoARcPSD|32216039

36(1)(iii) Interest on
borrowed capital
(Subject to certain
conditions)
Interest paid in respect
of capital borrowed for
the purposes of the
business or profession
shall be allowed as
deduction. However, if
capital is borrowed for
acquiring an asset,
then interest for any
period beginning from
the date on which
capital was borrowed
till the date on which
asset was first put to
use, shall not be
All assessee
36(1)(iiia) Discount on Zero
Coupon Bonds
(Subject to certain
conditions)
Pro-rata amount of
discount on zero
coupon bonds shall be
over the life of such
bond
Specified Assessee
36(1)(iv) Employer’s
contributions to
recognized
provident fund and
approved
superannuation
fund [subject to
certain limits and
conditions]
Actual expenditure
incurred
All assessee
36(1)(iva) Any sum paid by
assessee-employer
by way of
contribution
towards a pension
scheme, as
referred to
in section 80CCD,
on account of an
employee.
Actual expenditure not
exceeding 10% of the
salary* of the
employee
*Salary = Basic Pay +
Dearness Allowance
(to the extent it forms
part of retirement
benefits)+ turnover
based commission
All assessee – Employer
lOMoARcPSD|32216039

36(1)(v) Employer’s
contribution
towards approved
gratuity fund
created
exclusively for the
benefit of
employees under
an irrevocable
trust shall be
allowed as
deduction (Subject
to certain
conditions).
Actual expenditure not
exceeding 8.33% of
salary of each
employee
36(1)(va) Deposit of
employee’s
contributions in
their respective
provident fund or
superannuation
fund or any fund
set up under
Employees’ State
Insurance Act,
1948
Actual amount
received if credited to
the employee’s
account in relevant
fund on or before due
date specified under
relevant Act
36(1)(vi) Allowance in
respect of animals
which have died or
become
permanently
useless (Subject to
certain conditions)
Actual cost of
acquisition of such
animals less realization
on sale of carcasses of
animals
All assessee
36(1)(vii) Bad debts which
have been written
off as
irrecoverable
(Subject to certain
conditions)
Actual bad debts
which have been
written off from books
of accounts
Note:-
However, if amount of
debt or part thereof has
been taken into
account in computing
the income of assessee
All assessee
lOMoARcPSD|32216039

on basis of income
computation and
disclosure standards
notified under Section
145(2) without
recording the same in
accounts then, such
debt shall be allowed
in the previous year in
which such debt or
part thereof becomes
irrecoverable. It shall
be deemed that such
debt or part thereof has
been written off as
irrecoverable in the
accounts.
36(1)(viia) Deductions for
provision for bad
and doubtful debts
created by certain
banks, financial
institutions and
non-banking
financial company
(Subject to certain
conditions).
Note
Deduction in
respect of bad
debts actually
written off
under section
36(1)(vii) shall be
limited to that
amount of bad
debts which
exceed the
provision for bad
and doubtful debts
created
under section
36(1)(viia).
Deductions for
provision for bad and
doubtful debts shall be
limited to following:
(a) In case of
scheduled and non-
scheduled banks: Sum
not exceeding
aggregate of 8.5% of
total income (before
any deductions under
this provision and
Chapter VI-A) and
10% of aggregate
average advances
made by rural
branches of such bank;
(b) In case of Financial
Institutions: Up to 5%
of total income before
this provision and
Chapter VI-A; and
(c) In case of foreign
banks: Up to 5% of
total income before
Banks, Public Financial
Institutions, Non-banking
financial company, State
Financial Corporation, State
Industrial Investment
Corporations
lOMoARcPSD|32216039

this provision and
Chapter VI-A
(d) In case of non-
banking financial
company: Up to 5% of
total income before
any deduction under
this provision and
chapter VI-A
36(1)(viii) Deduction under
this provisions is
allowed to
following entities
in respect of
amount transferred
to special reserve
account:
a) Financial
Corporation which
is engaged in
providing long-
term finance for
industrial or
agricultural
development or
development of
infrastructure
facility in India; or
b) Public company
registered in India
with the main
object of carrying
on the business of
providing long-
term finance for
construction or
purchase of
residential houses
in India.
[Subject to certain
conditions]
Deduction shall be
allowed to the extent
of lower of following:
a) Amounts transferred
to special reserve
account
b) 20% of profits
derived from eligible
business
c) 200% of paid-up
capital and general
reserve (on last day of
previous
year) minus balance in
special reserve account
(on first day of
previous year)
Specified financial
corporations or public
company
lOMoARcPSD|32216039

36(1)(ix) Expenditure
incurred by a
company on
promotion of
family planning
amongst
employees is
allowed as
deduction
1) Entire revenue
expenditure is allowed
as deduction
2) Capital expenditure
shall be allowed as
deduction in five equal
installment in five
years
Company
36(1)(xii) Any expenditure
incurred by a
notified
corporation or
body corporate
constituted or
established by a
Central, State or
Provincial Act, for
the objects and
purposes
authorized by the
respective Act is
allowed as
deduction
Actual expenditure
incurred (not being in
the nature of capital
expenditure)
Notified corporations
36(1)(xiv) Contribution to
Credit Guarantee
Trust Fund for
micro and small
industries is
allowed as
deduction
Actual expenditure
incurred
Public Financial Institutions
36(1)(xv) Securities
Transaction Tax
paid
Actual expenditure
incurred if
corresponding income
is included as income
under the head profits
and gains of business
or profession
All assessee
lOMoARcPSD|32216039

36(1)(xvi) Amount equal to
commodities
transaction tax
paid by an
assessee in respect
of taxable
commodities
transactions
entered into in the
course of his
business during
the previous year
is allowed as
deduction
Actual expenditure
incurred if
corresponding income
is included as income
under the head profits
and gains of business
or profession
All assessee
36(1)(xvii) Amount of
expenditure
incurred by a co-
operative society
engaged in the
business of
manufacture of
sugar for purchase
of sugarcane.
Deduction would be
allowed the extent of
lower of following:
a) Actual purchase
price of sugarcane, or
b) Price of sugarcane
fixed or approved by
the Government
Co-operative society
engaged in the business of
manufacture of sugar
36(1)(xviii) Marked to market
loss or other
unexpected loss as
computed in
accordance with
notified ICDS
Actual losses incurred All assessee
37(1) Any other
expenditure [not
being personal or
capital expenditure
and expenditure
mentioned in
sections 30 to 36]
laid out wholly
and exclusively for
purposes of
business or
profession
Actual expenditure
incurred
All assessee
lOMoARcPSD|32216039

37(2B) Expenditure on
advertisement in
any souvenir,
brochure etc.
published by a
political party
shall not be
allowed as
deduction
Not Allowed All assessee
3. Amount expressly disallowed under the Act
Section Description
40(a)(i) Any sum (other than salary) payable outside India or to a non-
resident, which is chargeable to tax in India in the hands of the
recipient, shall not be allowed to be deducted if it was paid
without deduction of tax at source or if tax was deducted but not
deposited with the Central Government till the due date of filing
of return.
Where deductor has failed to deduct the tax and he is not
deemed to be an assessee in default under first proviso to section
201(1), then it shall be deemed that the deductor has deducted
and paid the tax on the date on which the payee has furnished his
return of Income.
However, if tax is deducted or deposited in subsequent year, as
the case may be, the expenditure shall be allowed as deduction
in that year.
40(a)(ia) Any sum payable to a resident, which is subject to deduction of
tax at source, would attract 30% disallowance if it was paid
without deduction of tax at source or if tax was deducted but not
deposited with the Central Government till the due date of filing
of return.
However, where in respect of any such sum, tax is deducted or
deposited in subsequent year, as the case may be, the
expenditure so disallowed shall be allowed as deduction in that
year.
Where deductor has failed to deduct the tax and he is not
deemed to be an assessee in default under first proviso to section
201(1), then it shall be deemed that the deductor has deducted
and paid the tax on the date on which the payee has furnished his
return of Income.
lOMoARcPSD|32216039

40(a)(ib) Any sum paid or payable to a non-resident which is subject to a
deduction of Equalisation levy would attract disallowance if
such sum was paid without deduction of such levy or if it was
deducted but not deposited with the Central Government till the
due date of filing of return.
However, where in respect of any such sum, Equalisation levy is
deducted or deposited in subsequent year, as the case may be,
the expenditure so disallowed shall be allowed as deduction in
that year.
Note: This provision has been inserted by the Finance Act, 2016,
w.e.f. 1-6-2016
40(a)(ii) Any sum paid on account of any rate or tax levied on the profits
and gains of business or profession is not deductible
40(a)(iia) Wealth-tax or any other tax of similar nature shall not be
deductible
40(a)(iib) Amount paid by way of royalty, license fee, service fee,
privilege fee, service charge or any other fee or charge, by
whatever name called, which is levied exclusively on (or any
amount appropriated) a State Government undertaking by the
State Government shall not be deductible.
40(a)(iii) Salaries payable outside India, or in India to a non-resident, on
which tax has not been paid/deducted at source is not deductible.
40(a)(iv) Payments to provident fund or other funds for employees’
benefit shall not be deductible if no effective arrangements have
been made to ensure deduction of at source from payments made
from such funds to employees which shall be chargeable to tax
as ‘salaries’.
40(a)(v) Tax paid by the employer on non-monetary perquisites provided
to employees is not deductible if the tax so paid is not taxable in
the hands of employees by virtue of Section 10(10CC).
40(b) Following sum paid by a partnership firm to its partners shall not
be allowed to be deducted:
1) Salary, bonus, commission or remuneration paid to non-
working partners;
2) Remuneration or interest paid to the partners is not in
accordance with the terms of the partnership deed;
3) Remuneration or interest to partners is in accordance with the
terms of the partnership deed but relates to any period prior to
the date of the deed;
lOMoARcPSD|32216039

4) Interest to partners is in accordance with the terms of the
partnership deed but exceeds 12% per annum;
5) Remuneration to partners is in accordance with the terms of
the partnership deed but exceeds the following permissible limit:
a) On first Rs. 3 Lakhs of book profit or in case of loss – Rs.
1,50,000 or 90% of book profit, whichever is more;
b) On the balance of the book profit – 60% of book profit
40(ba) Interest, salary, bonus, commission or remuneration paid by
Association of Persons or Body of Individuals to its members
shall not be allowed as deduction (Subject to certain conditions).
40A(2) Any payment to related parties (relatives, directors, partner,
member of HUF/AOP, person who has substantial interest in
business of the taxpayer, etc.) in respect of any expenditure shall
be disallowed to the extent such expenditure is considered
excessive or unreasonable by the Assessing Officer having
regard to its fair market value.
40A(3)/(3A) An expenditure, which is otherwise deductible under any
provision of the Act, shall be disallowed if payment thereof has
been made otherwise than by account payee cheque/bank draft
or use of electronic clearing system through a bank account or
through other prescribed electronic mode of payment and it
exceeds Rs. 10,000 (Rs. 35,000 in case of payment made for
plying, hiring or leasing goods carriages) in a day (Subject to
certain conditions and exceptions).
40A(7) Provision for payment of gratuity to employees, other than a
provision for contribution to approved gratuity fund, shall not be
allowed as deduction (Subject to specified conditions).
Gratuity actually paid (or payable) during the year and
contribution to approved gratuity fund is allowed as deduction.
40A(9) Any sum paid as an employer for setting up or as contribution to
any fund, trust, company, AOP, BOI, Society or other institution
(other than recognized provident fund, approved superannuation
fund, approved gratuity fund or pension scheme referred to
in section 80CCD) shall not be allowed as deduction deduction
if such contribution or payment is not required by any law.
40(A)(13) No deduction shall be allowed in respect of marked to market
loss or other unexpected loss except as allowable under section
36(1)(xviii).
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4. Expenses deductible on actual payment basis
The following expenses shall be allowed as deduction if such expenditure are actually paid
on or before the due date of filing of return of income:-
Section Particulars
43B(a) Any Tax, Duty, Cess or Fees under any Law
43B(b) Any contribution to Provident Fund/Superannuation Fund/Gratuity
Fund/Welfare Fund
43B(c) Bonus or Commission paid to employees which would not have been
payable as profit or dividend
43B(d) Interest on Loan or Borrowings from Public Financial
Institutions/State Financial Institutions etc.
43B(da) Interest on loan from a deposit taking NBFC or systemically
important non-deposit taking NBFC
43B(e) Interest on loan or advance from bank
43B(f) Payment of Leave Encashment
43B(g) Sum payable to the Indian Railways for the use of railway assets.
5. Other provisions
Section Particulars Provision
42 Special allowance in case of
business of prospecting etc. for
mineral oil (including petroleum
and natural gas) in relation to
which the Central Government
has entered into an agreement
with the taxpayer for the
association or participation
(Subject to certain conditions).
Following deductions shall be allowed as
deductions:
a) Any infructuous exploration expenditure
b) Expenditure on drilling or exploration
activities or services, etc.
c) Allowance in relation to depletion of mineral
oil, etc.
43A Special provisions consequential
to changes in rate of exchange of
Currency (Subject to certain
conditions).
Any increase or decrease in the liability incurred
in foreign currency (to acquire a capital asset)
pursuant to fluctuation in the foreign exchange
rates shall be adjusted with the actual cost of
such asset only on actual payment of the
liability.
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43C Acquisition of any asset (except
stock-in-trade) by the taxpayer in
the scheme of amalgamation or
by way of gift, will etc.
Cost of acquisition of any asset (except stock-in-
trade) acquired by the taxpayer in the scheme of
amalgamation or by way of gift, will etc. from
the transferor (who sold it as stock-in-trade)
shall be the cost of acquisition in the hands of
transferor as increased by cost of any
improvement made
6. Provisions applicable to Non-Resident/Foreign Company
Section Particulars Limit of exemption or
Computation of
income/deduction
Available to
44B read
with 172
Income from shipping
business shall be
computed on
presumptive basis
(Subject to certain
conditions).
7.5% of specified sum
shall be deemed to be
the presumptive income
Non-resident engaged in
shipping business
44BB Income of a non-resident
engaged in the business
of providing services or
facilities in connection
with, or supplying plant
and machinery on hire
used, or to be used, in the
prospecting for, or
extraction or production
of, mineral oils shall be
computed on
presumptive basis
(Subject to certain
conditions).
10% of specified sum
Non-resident engaged in
activities connected with
exploration of mineral oils
44BBA Income of a non-resident
engaged in the business
of operation of aircraft
shall be computed on
presumptive basis
(Subject to certain
conditions).
5% of specified sum
Non-resident engaged in the
business of operating of
aircraft
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44BBB Income of a foreign
company engaged in the
business of civil
construction or the
business of erection of
plant or machinery or
testing or commissioning
thereof, in connection
with turnkey power
projects shall be
computed on
presumptive basis
(Subject to certain
conditions).
10% of specified sum
Foreign Company
44C Deduction for Head
office Expenditure
(Subject to certain
conditions and limits)
Deduction for head-
office expenditure shall
be limited to lower of
following:
a) 5% of adjusted total
income.
b) Head office exp. as
attributable to business
or profession of
taxpayer in India
* In case adjusted total
income of the assessee
is a loss, adjusted total
income shall be
substituted by average
adjusted total income
** Adjusted total
income or average
adjusted total income
shall be computed after
prescribed adjustments
i.e. unabsorbed
depreciations, carry
forward losses, etc.
Non-resident
44DA Deduction of expenditure
from royalty and FTS
received under an
agreement made after 31-
03-2003 which is
Expenditure incurred
wholly and exclusively
for the business of PE
or fixed place of
profession in India shall
Non-resident
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effectively connected to
the PE of non-resident in
India (Subject to certain
conditions)
be allowed as
deduction.
7. Accounts and Audit
Section Particulars Threshold
44AA Compulsory maintenance
of prescribed books of
account – Specified
Profession
(Subject to certain
conditions and
circumstances)
Persons carrying on specified profession and their gross
receipts exceed Rs. 1,50,000 in all the three years
immediately preceding the previous year
44AA Compulsory maintenance
of books of account –
Other business or
profession
(Subject to certain
conditions and
circumstances)
1) If total sales, turnover or gross receipts exceeds Rs.
25,00,000 in any one of the three years immediately
preceding the previous year; or
2) If income from business or profession exceeds Rs.
2,50,000 in any one of the three years immediately
preceding the previous year
44AB Compulsory Audit of
books of accounts
(Subject to certain
conditions and
circumstances)
1) If total sales, turnover or gross receipts exceeds Rs. 2
Crore in any previous year, in case of business; or
Note:
a) Provided that this section is not applicable to the
person, who opts for presumptive taxation Scheme
under Section 44AD and his total sales or turnover does
not exceed Rs 2 crores.
b) Threshold limit of Rs. 1 crore shall be increased to
Rs. 10 crore in case where the cash receipt and payment
made during the year does not exceed 5% of total
receipt or payment the business
2) If gross receipts exceeds Rs. 50 Lakhs in any
previous year, in case of profession.
8. Presumptive Taxation
Section Nature of business Presumptive income
44AD Income from eligible business Presumptive income of eligible business shall be
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can be computed on
presumptive basis if turnover
of such business does not
exceed two crore rupees.
Note: If an assessee opts out
of the presumptive taxation
scheme, after a specified
period, he cannot choose to
revert back to the presumptive
taxation scheme for a period
of five assessment years
thereafter. [section 44AD(4)]
(Subject to conditions)
8% of gross receipt or total turnover.
Note: Presumptive income shall be calculated at
rate of 6% in respect of total turnover or gross
receipts which is received by an account payee
cheque or draft or use of electronic clearing system
or through any other electronic mode as may be
prescribed.
44ADA Income from eligible
profession u/s 44AA(1) can
be computed on presumptive
basis if the total gross receipts
from such profession do not
exceed fifty lakh rupees in a
previous year.
(Subject to conditions)
Presumptive income of such profession shall be
50% of total gross receipt.
44AE Presumptive income from
business of plying, hiring or
leasing of goods carriage if
assessee does not own more
than 10 goods carriage.
For Heavy Goods Vehicle:
Rs. 1,000 per ton of gross vehicle weight for every
month or part of a month during which the heavy
goods vehicle is owned by assessee.
For Other Goods Vehicle:
Rs. 7,500 for every month or part of a month during
which the goods carriage is owned by assessee.
Note: ‘Heavy goods vehicle’ means goods carriage
vehicle the gross vehicle weight of which exceeds
12,000 kilograms.
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Chapter No. 2: Research and Methodology
 Objectives:
1. To study the different aspect of Profits and Gains from Business and Profession.
2. To study about the roles played by Business and Profession.
3. To know how both Business and Profession are different from each other.
4. To learn about various types of Business and Profession.
5. To study about the Profits and Losses calculated in both the aspects.
6. To study about the taxation carried on by the Business and Profession.
7. To understand the different functions of Business ad Profession.
8. To understand the deductions under the head of Business and Profession.
9. To understand the different taxation methods used for both.
10. To know about the various skills, techniques and methods used by Businessmen and
Professionals to earn profits and avoid losses.
 Scope of the Study:
1. The scope of study on Profits and Gains from Business and Profession mainly focuses on
the study about Business and Profession.
2. Method of Accounting Sections 145 and 145A.
3. Deductions against business income.
4. Calculation of depreciation.
5. Actual Cost and Written Down Value.
6. Income from Undisclosed Account.
7. Audit of Books of Accounts.
8. Special Provisions for for computing Profits and Gains of retail business (Section 44AF).
9. Presumptive Income and Presumptive Taxation.
10. Maintenance of accounts by certain persons carrying on Profession or Business (Section
44AA).
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 Significance of the Study:
1. The study on Profits and Gains from Business and Profession is important in terms of the
awareness between the people that both are different aspects.
2. It is important to study and evaluate the calculations under both the aspects.
3. The study on the topic tells us about the impact of the taxation on government as well.
4. The study on Profits and Gains from Business and Profession is Significant in nature.
5. It also helps us study the tax that is paid by the Businessmen and Professional and how it
is calculated.
6. It helps us know about the deductions as well under the topic.
7. The study on this topic also emphasizes on the revenue generated by the government
through the profits and gains from the business and profession an the tax paid on them.
8. The government also generates revenue from this source which is further used for the
development of the nation.
9. The study also helps us to know about the various sections in the Income Tax Law.
10. Also, this study the functioning of the Law and its rules and even exemptions.
 Limitations of the Study:
1. The major limitation of the study was that the data was collected on the secondary basis.
2. As the study in done on purely secondary basis, there are no personal reviews.
3. There is no primary data involved while the study was done.
4. Over here, there is no survey done in order to tabulate data and identify the reviews.
5. The information is specific.
6. Secondary data affects the quality of the research.
7. The research gets impacted as there was plenty of data.
8. It becomes difficult to ignore the irrelevant data.
9. Purification of data had to be done in order to bifurcate the data from various data.
10. Cannot refine questions, measures, or procedure based on feedback or pilot tests.
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 Sample Size:
1. The sample size is a term used in market research for defining the number of subjects
included in a sample size.
2. By sample size, we understand a group of subjects that are selected from the general
population and is considered a representative of the real population for that specific study.
3. Sample size measures the number of individual samples measured or observations used in
a survey or experiment.
4. Sample is a smaller version of the entire population that your dissertation research is about.
Sample size is the number of subjects in your study.
5. Sampling helps alot in research.
6. Secondary research does not use sample size.
7. It is mainly used by the Primary research.
8. In secondary data, the sample size is mainly the relevant data collected for the research.
9. Secondary sampling designs are applied after some data or other information has already
been obtained.
10. Secondary data analysis involves a researcher using the information that someone else
has gathered for his or her own purposes.
 Data Collection:
1. Data collection is the process of gathering and measuring information on variables of
interest.
2. It is an established systematic fashion that enables one to answer stated research questions,
test hypotheses, and evaluate outcomes.
3. Data may be grouped into four main types based on methods for collection: observational,
experimental, simulation, and derived.
4. Interviews, Questionnaires and surveys, Observations, Documents and records, Focus
Groups, Oral Histories are some of the methods of collecting data.
5. Data collection enables a person or organization to answer relevant questions, evaluate
outcomes and make predictions about future probabilities and trends.
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6. The data collected for the research was from various websites of taxation, magazines,
textbooks, etc.
7. There was a lot of irrelevant data which was altered to meet the needs of the research.
 Techniques and Tools used:
1. A tool is a specific, tangible item such as a template or software program, used in
performing an activity to produce a product or result.
2. A technique is a defined systematic procedure to produce one or more outputs, which may
also use one or more tools.
3. Case Studies, Checklists, Interviews, Observation sometimes, and Surveys or
Questionnaires are all tools used to collect data.
4. It is important to decide the tools for data collection because research is carried out in
different ways and for different purposes.
5. Development tools and techniques are things like data flow diagrams and activity
diagrams.
6. There are used for graphical representation of the flow of data through an information
system.
7. Research methods are the strategies, processes or techniques utilized in the collection of
data or evidence for analysis in order to uncover new information or create better
understanding of a topic.
8. The three common approaches to conducting research are quantitative, qualitative, and
mixed methods.
9. Data may be grouped into four main types based on methods for collection: observational,
experimental, simulation, and derived.
10. Mainly, the topic uses mixed methods as there is quality information collected and also
the quantity is maintained in order to complete the research.
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Chapter No. 3: Review of Literature
1. A literature review is a search and evaluation of the available literature in your given
subject or chosen topic area.
2. It documents the state of the art with respect to the subject or topic you are writing about.
3. A literature review surveys the literature in a chosen area of study.
 Case Studies:
1. Can the assessee treat shares held in subsidiary company, which is ordered to
be wound up, as trading loss?
Relevant Case Law – CIT v. H. P. Mineral and Industrial Development Corporation
Ltd. (2008) 305 ITR 111 (HP)
Relevant Section – 28
 One of the assessee’s subsidiary companies was ordered to be wound up and the
assessee decided to write off the value of the shares held by it in the subsidiary company.
 The lower authorities decided in favour of the assessee holding that there was no
question of selling off the shares as the subsidiary company had gone into liquidation.
 The High Court held that once a company had been ordered to be wound up, there was
no question of any party dealing in the shares of that company.
 The Tribunal had come to a finding that the shares were stock-in-trade and had
therefore allowed the loss. The loss had to be treated as a trading loss. The mere fact that the
shares were not sold was of no significance since in fact the shares could not have been sold
and had become worthless.
2. Whether the amount transferred to the reserve fund account as per the provisions of
section 67 of the Gujarat Co-operative Societies Act, 1962, was diversion of income at
source by overriding title or could such transfer be treated as business expenditure
deductible either under section 28 or section 37?
Relevant Case Law – CIT v. Mehsana District Co-op. Milk Producers’ Union Ltd.
(2008) 307 ITR 83 (Guj.)
 The assessee contended that under sub-section (2) of section 67 of the Gujarat Co-
operative Societies Act, 1962, at least one-fourth of the net profits of the society were
required to be carried to the reserve fund every year, and hence there was a diversion at
source by virtue of the provisions of section 67 which operates as an overriding title.
 Hence, it was submitted that the amount transferred to the reserve fund could not be
charged as income liable to tax under the Act. Alternatively, it was pleaded that the amount
of profits transferred to the reserve fund would constitute a charge on the taxable income
under the provisions of section 28 of the Income-tax Act, 1961, or an expenditure having the
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characteristics of business expenditure under section 37. The Assessing Officer rejected the
contention and this was upheld by the Tribunal.
 The High Court held that it was only in the event the society did not choose to use the
reserve fund for the business of the society that the question about investing the reserve fund
in the specified category of investments and thereafter utilizing the same for the objects
specified by the State Government could arise.
 Hence, not only was there no diversion of income by overriding title but in fact there
was no outgoing of funds from the domain of the assessee society. In fact, the profits at the
specified percentage were set apart so as to be available to the society for use in the business
of the society at a later point of time.
 Once the society was in a position to use the funds lying in the reserve fund for the
business of the society as and when the society so chose, there could be no question of
keeping out such profits from the purview of taxation.
 The Tribunal was right in law in holding that the amount transferred to the reserve
fund account as per the provisions of section 67 of the Gujarat Co-operative Societies Act,
1962, was not diversion of income at source by overriding title nor could such transfer be
treated as business expenditure deductible either under section 28 or section 37.
3. Whether the amount received by the assessee under a lease agreement is income from
other sources or business income?
Relevant Case Law – East West Hotels Ltd. v. DCIT (2009) 309 ITR 149 (Kar.)
 The assessee was engaged in the hotel business activities. The assessee by an
agreement with IHC gave one of its hotels on lease for an initial period of 33 years with an
option to renew for a further period of 33 years.
 The assessee claimed that the amount received from IHC had to be treated as its
business income. The claim was rejected by the Assessing Officer on the ground that the
assessee was not getting any business income as the hotel had been leased out by the assessee
to IHC and any amount received by the assessee from such company had to be treated as
income from other sources and not business income.
 The Commissioner (Appeals) as well as the Tribunal held that the income received by
the assessee from such hotel building was income from other sources.
 The High Court held that the clauses in the agreement were more in the nature of a
lease deed and not a licence given for a particular period with no intention to resume its
business of hotel in the premises.
 It could not be said that the assessee had been managing the hotel through IHC.
Therefore, the amount received from IHC had to be treated as income from other sources and
not as business income.
4. Whether the swapping premium is profit derived from the business of providing long
term finance in terms of section 36(1)(viii) of the Income-tax Act, 1961 ?
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Relevant Case Law – Rural Electrification Corporation Ltd., In re (2009) 308 ITR 321
(AAR)
Relevant Section: 36(1)(viii)
 The main object of the applicant, a public sector undertaking, was to provide long-
term finance, primarily to State Electricity Boards, for the purpose of transmission,
distribution and generation of electricity to enable industrial, agricultural and infrastructure
development.
 The applicant was filing income-tax returns right from the beginning and the
Department had all along, in the past, allowed deduction under section 36(1)(viii) of the
Income-tax Act, 1961, in respect of the special reserve created and maintained for providing
long-term finance for industrial or agricultural development or development of infrastructure.
 For the assessment year 2004-05, the applicant credited Rs.170.85 crores as “swapping
premium” received and claimed deduction thereon under section 36(1)(viii). “Swapping
premium” was a scheme under which long-term finance given at a higher percentage of
interest was converted to a lower rate of interest.
 The applicant itself had declared the swapping premium receipt in its balance-sheet as
“Other income” and not income from lending operations. The Assessing Officer held that the
applicant forfeited the claim for allowance of deduction under section 36(1)(viii) in respect
of the “swapping premium”.
 The Commissioner (Appeals) agreed with the Assessing Officer. The applicant
appealed to the Appellate Tribunal but withdrew the appeal. Meanwhile, the applicant
obtained permission of the Committee on Disputes to pursue the matter before the Authority.
 The Authority ruled:
(i) That the applicant was an eligible entity, i.e., a financial corporation as laid down in
section 36(1)(viii).
(ii) That the applicant was engaged in the business of providing long-term finance to its
clients for rural electrification which paved the way for industrial, agricultural and
infrastructural development. The availability of electricity contributed significantly to the
overall development of the country including that of industry, agriculture and infrastructure.
The provision of electricity was essential for modernization and growth of agriculture and
also catered to the requirements of industry including small and medium industries, agro-
industries, Khadi and village industries, etc. The applicant had been providing finance for
industrial and agricultural development and, keeping in view these very goals, the
Government of India had granted approval to the applicant for deduction under section
36(1)(viii). The applicant could be said to be engaged in providing longterm finance for
industrial and agricultural development in India.
(iii) That the long-term loan financed by the applicant to its clients in the beginning had not
been tampered with on rescheduling of the interest and no fresh loan agreements had also
been drawn.
(iv) That clause (e) of the Explanation to section 36(1)(viii) defined long-term finance as
“any loan or advance where the terms under which moneys are loaned or advanced provide
for repayment along with interest thereon during a period of not less than five years”. In this
case, the loans had been advanced in the beginning for five years and those loan amounts had
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not undergone any change, so the period of five years had to be counted from the date of
advancing the initial loans and not from the date of rescheduling the interest rates.
(v) That the “swapping premium” was nothing but discounted interest and had “originated”
in the long-term finance initially advanced. The premium was actually traced to the original
source and was not a step removed from the business of providing long-term finance. No
fresh agreement had been entered into for advancing long-term financing and the one-time
measure for rescheduling the interest had been actuated by business expediency. The
swapping premium was simply a compensation received for agreeing to a lesser amount as
against a higher fixed rate of interest initially fixed. The business of providing long-term
finance was the immediate and effective source of the swapping premium received.
(vi) That the swapping premium could not be termed as compensation for breach of contract
because neither party had breached the contract. The disclosure of the swapping premium in
the balance-sheet as “Other income” instead of business income was also immaterial since
entries in the books of account are not determinative of the true character of a receipt.
(vii) That, therefore, the applicant was entitled to deduction under section 36(1)
(viii) in respect of the swapping premium received.
5. Whether the payments made by the assessee to its employees under the nomenclature
‘Good work reward’ constitute bonus within the meaning of section 36(1)(ii) of the
Income-tax Act, 1961 or were allowable as normal business expenditure under section
37 ?
Relevant Case Law – Shriram Pistons and Rings Ltd. v. CIT (2008) 307 ITR 363 (Del.)
 The “good work reward” that was given by the assessee to some employees on the
recommendation of senior officers of the assessee did not fall in any of the categories of
bonus specified under the industrial law.
 There was nothing to suggest that the good work reward given by the assessee to its
employees had any relation to the profits that the assessee may or may not make. The reward
had relation to the good work done by the employee during the course of his employment
and at the end of the financial year on the recommendation of a senior officer of the assessee,
the reward was given to the employee.
 Consequently, the “good work reward” could not fall within the ambit of section
36(1)(ii) of the Income-tax Act, 1961. The “good work” reward was allowable as business
expenditure under section 37(1) of the Act.
6. Whether the Tribunal was justified in deleting the addition of an amount represented
rate difference payment in the purchase of milk paid by the assessee even though the
said payment was paid at the end of the previous year?
Relevant Case Law – CIT v. Solapur Dist. Co-Op. Milk Producers and Process Union
Ltd. (2009) 315 ITR 304 (Bom.)
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 The assessee-societies were federal milk societies and their members were primary
milk cooperative societies. The business of the assessee was to purchase milk from its
members and other producers of milk at the rate, i.e., similar to both the members and
outside milk producers and sell the milk to various parties.
 The rate of purchase price was fixed by the board of the assessee-societies. The
purchase price was linked to the fat content of milk and also varied according to seasons. For
instance, the rate for purchase of milk in the lean season was different from the flush seasons.
 The assessee-societies fixed the rate of processing of milk at the beginning of the year
on the basis of the price declared by the Government of Maharashtra and the price which
other buyers paid to the vendors. These rates were revised from time to time. It was made
always clear that the rates were provisional and the final milk rate difference was determined
in the month of March every year and the difference was paid subsequently in the following
year.
 The primary milk society also in turn made payment of the final rate difference to the
individual milk producers around Diwali. The assessees claimed deduction of the final rate
difference. The Assessing Officer refused to exclude the final rate difference paid from the
total amount paid by the assessee. The Commissioner (Appeals) upheld the order. The
Tribunal allowed the appeal and allowed deductions of the final rate.
 The High Court held that the amount to be paid was not out of the profits ascertained
at the annual general meeting. It was not paid to all shareholders. The amount which was the
subject-matter was paid to members who supplied milk and in some case also to
nonmembers.
 The payment was for the quantity of milk supplied and in terms of the quality supplied.
The commercial expediency for payment of this price was the market conditions and the
need to procure more milk from the members and non-members to the assessee.
 Therefore, the amount paid could not be said to be dividend to the members or
shareholders or payment in the form of bonus as bonus also had to be paid from the accrued
profits. It was deductible.
7. Whether the expenses incurred by the assessee for promotion films,
slides, advertisement films is capital expenditure?
Relevant Case Law – CIT v. Geoffrey Manners and Co. Ltd. (2009) 315 ITR 134 (Bom.)
 The assessee incurred expenditure on film production by way of advertisement for the
marketing of products manufactured by it. The Assessing Officer disallowed the expenses
incurred by the assessee for promotion films, slides, advertisement films and treated it as
capital expenditure.
 The Commissioner (Appeals) held that the films were in the form of advertisement
whose life term could not be ascertained. Therefore, they could not be held as capital
expenditure. The Tribunal upheld the order of the Commissioner (Appeals).
 The High Court held that if the expenditure is in respect of an ongoing business of the
assessee and there is no enduring benefit it can be treated as revenue expenditure. If the
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expenditure is in respect of business which is yet to commence then it cannot be treated as
revenue expenditure since the expenditure is on a product yet to be marketed.
 Hence, the expenditure incurred in respect of promoting ongoing products of the
assessee was revenue expenditure.
8. Whether the expenditure incurred by the assessee in the machinery repairs could be
treated as revenue expenditure though this related to the cost of motors and other items
resulting in an enduring benefit to the assessee and was in the nature of capital
expenditure?
Relevant Case Law – CIT v. Hero Cycles P. Ltd (2009) 311 ITR 349 (P&H)
 The assessee claimed expenditure of Rs. 73,180 on purchase of motors and certain
other items of machinery. The Assessing Officer rejected the claim for treating the amount as
revenue expenditure on the ground that the items purchased by the amount were not spare
parts but independent items and the amount had, thus, to be treated as capital expenditure.
 On appeal, the plea of the assessee that most of the items purchased were electric
motors for replacement of existing machinery, was upheld. The Tribunal affirmed the order
and held that occasional replacements were necessary having regard to the machinery
installed.
 The High court held that the Tribunal was right in law in allowing expenditure of
Rs.73,180 shown by the assessee in the machinery repairs account as revenue expenditure.

9. Whether the fine paid for belated payment of excise duty is a allowable business
expenditure?
Relevant Case Law – CIT v. Hoshiari Lal Kewal Krishan (2009) 311 ITR 336 (P&H)
 The assessee claimed deduction of Rs. 31,433 paid as fine for belated payment of the
excise duty instalment. This was disallowed by the Assessing Officer as well as the appellate
authority but the Tribunal allowed it.
 The Supreme Court in Prakash Cotton Mills P. Ltd. v. CIT [1993] 201 ITR
684, observed that whenever any statutory impost paid by an assessee by way of damages or
penalty or interest is claimed as an allowable expenditure under section 37(1) of the Income-
tax Act, the assessing authority is required to examine the scheme of the provisions of the
relevant statute providing for payment of such impost notwithstanding the nomenclature of
the impost as given by the statute, to find whether it is compensatory or penal in nature.
 The authority has to allow deduction under section 37(1) of the Income-tax Act,
wherever such examination reveals the concerned impost to be purely compensatory in
nature.
 Hence, in the present case, the High Court held that it had been clearly found that
though termed as fine, the payment was not in the nature of punishment but was by way of
compensation. The payment was deductible.
lOMoARcPSD|32216039

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