Objectives & Agenda : To analyse and interpret the provisions of the Income-tax Act relating to computation of 'Profits and gains of business or profession' (PGBP). In this Webinar, we shall look at the general admissible deductions, amounts not deductible, deductions subject to payments, Computation of income in case of construction and service contracts, Insurance business, etc. Finally, the Webinar will touch upon relevant Judicial Precedents.

1. Understanding Income Tax - Profits &
Gains of Business or Profession
[Sec 36 – Sec 43D]
CA. Divakar Vijayasarathy

2. Credits and Acknowledgments
Bharathi Priya R D
CA. Jugal Gala

3. Legends used in the Presentation
AO Assessing Officer
AY Assessment Year
CG Central Government
ICDS Income Computation and Disclosure Standards
PGBP Profits and Gains of Business or Profession
PY Previous Year
RBI Reserve Bank of India
SDV Stamp Duty Value
TDS Tax Deducted at Source

4. Presentation Schema
Other Deductions – Sec
36
General – Sec 37
Building, etc., partly
used for business, etc.,
or not exclusively so
used – Sec 38
Amounts Not
Deductible – Sec 40
Expenses or Payments
not Deductible in Certain
Circumstances – Sec 40A
Certain deductions to
be only on actual
payment – Sec 43B
Profits Chargeable to
Tax – Sec 41
Special Provision for
Deductions in the Case
of Business for
Prospecting, etc., for
Mineral Oil – Sec 42
Taxation of Foreign
Exchange Fluctuation –
Sec 43AA
Special provision for
computation of income
– Sec 43C, 43CA and
43CB
Special provision in
case of income of
public financial
institutions, public
companies, etc. – Sec
43D
Judicial Precedents

5. Grouping of Sections
Sec Description
Miscellaneous Deductions
36 Other Deductions
37 General
38 Building, etc., partly used for business, etc., or not exclusively so used
Disallowances
40 Amounts not deductible
40A Expenses or payments not deductible in certain circumstances
43B Certain deductions to be only on actual payment
Deemed Income
41 Profits Chargeable to Tax
Specified Scenarios and Specific Businesses
42 Special provision for deductions in the case of business for prospecting, etc., for mineral oil
43AA Taxation of foreign exchange fluctuation
43C Special provision for computation of cost of acquisition of certain assets
43CA Special provision for full value of consideration for transfer of assets other than capital assets in certain cases
43CB Computation of income from construction and service contracts
43D Special provision in case of income of public financial institutions, public companies, etc.

6. Miscellaneous Deductions – Sec 36, 37 and 38

7. Other Deductions – Sec 36
Sec Expenditure Assessee Conditions
36(1)(i) Insurance premium paid
on stores and stock
All assessees Premium must be actually paid during the PY
36(1)(ia) Insurance premium on
life of cattle
Federal Milk Co-
operative Societies
• Premium is actually paid by the society during the PY
• Cattle are owned by the members of the society
36(1)(ib) Insurance on the health
of the employees
Employer assessees • Premium payment is made by modes other than cash
• Health insurance is taken under an approved scheme of
General Insurance Corporation of India or any other
approved insurer
36(1)(ii) Bonus or Commission
paid to employees
Employer assessees Such bonus / commission shall not be otherwise payable as
profits or dividend - Deduction subject to Sec 43B (certain
deductions allowed only on actual payment)
36(1)(iii) Interest on Borrowed
Capital - Capital can be
borrowed for both
capital or revenue
(working capital)
requirements
All assessees • Interest should be on money borrowed by the assessee for
business or profession
• In the event of extension of existing business, any interest
on capital borrowed towards purchase of a new asset,
interest from the date of borrowing till the date of putting
the asset to use shall be capitalized and shall not claimed as
a deduction under this section
• Deduction is subject to the provisions of Sec 43B (certain
deductions allowed only on actual payment)

8. Contd.
Sec Expenditure Assessee Conditions
36(1)(iiia) Discount on Zero Coupon
Bond
Issuing Entity being:
• Infrastructure
Capital company or
fund
• Public sector
company or
• Scheduled Bank
• Pro rata discount having regard to the life of the bond shall be allowed
Pro rata discount : Redemption Value – Issue Price
–––––––––––––––––––––––––
Life of the Bond
• Life of the bond is the period from the date of issue to the date of
redemption
36(1)(iv) Employer’s contribution to
Recognised Provident Fund
or Approved
Superannuation Fund
Employer Assessees • Deduction allowed upto specified limits
• Payment shall be made before the due date of filing returns under Sec
139(1)
• Where payment is made beyond the due date, deduction shall be
allowed in the year of such payment
• Deduction is subject to Sec 43B
36(1)(iva) Contribution towards a
pension scheme referred
under Sec 80CCD
All employer
Assessees
• Deduction restricted to 10% of salary of the employee
• “Salary” includes dearness allowance, if the terms of employment so
provide, but excludes all other allowances and perquisites
36(1)(v) Employer’s Contribution to
approved Gratuity Fund
Employer Assessees • Payment shall be made before the due date of filing returns
• Where payment is made beyond the due date, deduction shall be
allowed in the year of such payment
• Deduction is subject to Sec 43B
• Fund created for exclusive benefits of employees under irrevocable trust

9. Contd.
Sec Expenditure Assessee Conditions
36(1)(va) Sum received from
Employees towards
contribution for welfare
schemes
Employer
assessees
• Payment to the credit of the employees account shall be made before the
due date under the relevant Act
• According to Sec 2(24)(x), contributions received from employees towards
welfare schemes, shall be regarded as income of the employer
• However, if such contribution is paid to the credit of the employee within
the due date as per the relevant Act (i.e. Provident Fund Act etc.) the same
shall be allowed as a deduction
• Where the employer fails to make the contribution within the due date, no
deduction shall be allowed under Sec 36(1)(va)
• Amount received (to the extent not paid within due date) shall be regarded
as income of the employer
36(1)(vi) Allowance in respect of
Dead or permanently
useless animals
All assessees • Animals should have been used for business
• It should not be held as Stock in trade
• Deduction : Actual Cost - Sale proceeds of animals or Carcasses
36(1)(vii) Bad Debts written off All assessees • Debt must have been considered while computing the income of the
assessee
• Debt must be revenue in nature, except in the case of banking or money
lending business wherein money lent in the ordinary course of business is
eligible for deduction
• Business should be in existence in the PY
• Debt must be written off in the books of the assessee
• Successor of the business is eligible to write off predecessor’s bad debts

10. Contd.
Sec Expenditure Assessee Conditions
36(1)(viia) Provision for Bad and Doubtful
Debts
Scheduled / Non Scheduled Bank
incorporated in India or a cooperative
bank other than a primary agricultural
credit society or a primary co-
operative agricultural and rural
development bank
Maximum 8.5% of Gross Total Income (computed
before deduction under this clause and Chapter
VIA) + Maximum 10% of aggregate average rural
advances
Scheduled bank and non-scheduled bank allowed
a further deduction of an amount not exceeding
the income derived from redemption of securities
in accordance with prescribed scheme by CG,
provided such income is disclosed in the return of
income under the head “PGBP”
Banks incorporated outside India,
Public Financial Institutions, State
Financial Corporation, State Industrial
Investment Corporation, non-banking
financial company
Maximum 5% of Gross Total Income (computed
before deduction under this clause and Chapter
VIA)

11. Contd.
Sec Expenditure Assessee Conditions
36(1)(viii) Amount transferred to a Special Reserve
maintained by :
• Specified Finance Corporation, banking
company or co operative bank other than
a primary agricultural credit society or a
primary co operative agricultural and
rural development bank engaged in
providing Long term finance (5 years) for
Industrial /Agricultural/ Infrastructure /
Housing development in India
• Housing finance company providing long
term finance (5 years) for construction or
purchase of residential houses
• Any other financial corporation including
a public company engaged in providing
long term finance (5 years) for
development of infrastructure facility (Sec
80-IA and Sec 80-IB) in India
Such Finance
corporation,
banking company,
housing finance
company and public
company
Lower of the following shall be deductible:
• Amount transferred to reserve or 20% of profits
derived from such business (before deduction
under this clause)
• Where Reserve exceeds 200% of Paid up capital
and General Reserves, no further deduction shall
be allowed
• Amount withdrawn from such reserve account
shall be considered as income of the year of such
withdrawal irrespective of whether the business is
in existence or otherwise – Sec 41(4A)

12. Contd.
Sec Expenditure Assessee Conditions
36(1)(ix) Expenditure on promoting
family planning amongst
employees
Company
Assessees
• Revenue expenditure is fully allowed
• Capital expenditure is allowed in 5 installments
• Unabsorbed (capital & revenue) expenditure shall be treated similar to
unabsorbed depreciation
• Sale of a Family planning asset is treated similar to sale of a scientific
research asset
• In the event of amalgamation, the unamortized amount shall be allowed to
the amalgamating company
36(1)(xii) Payments made to
Governing statutes
corporation
or a body
corporate
• Corporate should have been established by Central /State/Constitutional Act
• Expenditure incurred for objects and purposes authorized by the Act
• Expenditure is not capital in nature
36(1)(xiii) Banking cash transaction
tax
All assessees • Paid on taxable banking transactions entered during previous year
36(1)(xiv) Contribution to a notified
credit guarantee fund
trust for small industries
Public
financial
Institution
• Such fund trust shall be notified by the CG
• Actual amount paid shall be allowed as a deduction

13. Contd.
Sec Expenditure Assessee Conditions
36(1)(xv) Securities Transaction Tax All Assessees • Income from such securities should be assessable as profits and gains of
business or profession
• Actual amount paid during the PY shall be allowed
• Where the securities are held as capital assets, deduction under Sec
36(1)(xv) shall not be allowed
• Also securities transaction tax is not an allowable deduction in computation
of capital gains – 5th proviso to Sec 48 (Mode of computation)
36(1)(xvi) Commodities Transaction
Tax
All Assessees • Income from such commodities should be assessable as profits and gains of
business or profession
• Actual amount paid during the PY shall be allowed
36(1)(xvii) Expenditure incurred for
purchase of sugarcane
Co-operative
Society
Assessees
• Co-operative society must be engaged in the business of manufacture of
sugar
• Purchase of sugarcane should be at a price which is equal to or less than the
price fixed or approved by the Government
36(1)(xviii) Marked to market loss or
other expected loss
All Assessees • Computed in accordance with the Income Computation and Disclosure
Standards (ICDS) notified under Sec 145(2)

14. General – Sec 37
Any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed
in computing the income chargeable under the head "Profits and gains of business or profession“ – Sec 37(1)
• Such expenditure should not be in the nature described in Sec 30 to Sec 36 and
• Such expenditure should not be in the nature of capital expenditure or personal expenses of the assessee
Exclusions:
• Any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be
allowed as deduction
• Any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in Sec
135 of the Companies Act, 2013 shall not be allowed as deduction
No allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure,
tract, pamphlet or the like published by a political party – Sec 37(2B) - Contributions to recognised political party shall be
allowed as 100% deduction under Sec 80GGB and Sec 80GGC

15. Building, etc., partly used for business, etc., or not
exclusively so used – Sec 38
Where any premise (taken on rent) is used as a dwelling house by the assessee, then:
• Rent paid
• Current repairs
• Land revenue and municipal taxes
• Claimed as deduction under Sec 30 shall be deductible only to such extent as may be determined by the AO having
regard to the proportionate annual value of the property used for business/profession
Where building (occupied otherwise as tenant), plant or furniture not exclusively used for business or profession, then:
• Current repairs under Sec 31
• Insurance Premium under Sec 31
• Depreciation under Sec 32
• On all the assets shall be restricted to a fair proportion as may be determined by the AO

16. Disallowances – Sec 40, 40A and 43B

17. Amounts Not Deductible – Sec 40
Sec Nature of Expenditure
40(a)(i) Interest, Royalty, Fees for technical services etc. paid outside India or to a Non-resident
Expenses when Disallowed - In the case of any assessee:
• Any interest
• Royalty
• Fees for technical services
• Other sums chargeable under the Act
Which is payable outside India or in India to a non resident
On which tax is deductible but:
• Such tax has not been deducted at source, or
• After deduction, such sum has not been paid before the expiry of the due date for filing returns under Sec
139(1)
Amount of disallowance – 100% of the amount involved
Expenditure when Allowable - Expenditure is allowable when such tax:
• Is deducted in any subsequent years or
• Has been deducted in the previous year but paid in any subsequent year after the expiry of time limit of filing
returns under Sec 139(1)
Such expenditure shall be allowed for the PY in which such tax is paid
• Where an assessee fails to deduct the whole or any part of the tax on any such sum but is not deemed to be an
assessee in default under the first proviso to Sec 201(1) (explained in next slide), then, it shall be deemed that the
assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee
referred to in the said proviso

18. Contd.
Any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in
accordance with the provisions of this Chapter on the sum paid to a payee or on the sum credited to the account of
a payee shall not be deemed to be an assessee in default in respect of such tax if such payee
• has furnished his return of income under section 139
• has taken into account such sum for computing income in such return of income and
• has paid the tax due on the income declared by him in such return of income
• and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed
First proviso to Sec 201(1)

19. Contd.
Sec Nature of Expenditure
40(a)(ia) Commission, Interest etc. paid to a resident
Expenditure when Disallowed:
1. In the case of any assessee, any sum payable to a resident assessee as:
- Any interest
- Commission
- Brokerage
- Rent
- Royalty
- Fees for professional services
- Fees for technical services
2. Amounts payable to a resident contractor or sub contractor
On which tax is deductible at source and such tax has not been deducted at source or after deduction, such sum has
not been paid on or before the due date for filing returns under Sec 139(1)
Amount of Disallowance – 30% of the amount involved
Expenditure when Allowable:
Expenditure is allowable in any subsequent PY when such tax:
• Is deducted in any subsequent years or
• Has been deducted in the previous year but paid in any subsequent year after the expiry of the above time limit.
Note: Where an assessee fails to deduct the whole or any part of the tax on any such sum but is not deemed to be
an assessee in default under the first proviso to Sec 201(1) (explained in previous slide), then, it shall be deemed that
the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the
resident payee referred to in the said proviso

20. Contd.
Sec Nature of Expenditure
40(a)(ib) Sum payable to non-resident on which equalisation levy is deductible
- In case of non-resident
- Payment for specified service on which equalisation levy is deductible
- Not deducted or deducted but not paid on or before the specified due date of filing returns under Sec 139(1)
Expenditure is allowable in any subsequent PY when such levy:
• Is deducted in any subsequent years or
• Has been deducted in the previous year but paid in any subsequent year after the expiry of the above time limit.
40(a)(ii) Rates or taxes levied on profits or gains of any business or profession Includes any sum eligible for relief of tax under Sec 90/90A (bilateral
relief) / Sec 91 (unilateral relief)
40(a)(iib) Any amount
• Paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which
is levied exclusively on; or
• Which is appropriated, directly or indirectly, from,
a State Government undertaking by the State Government
A State Government undertaking includes
(i) a corporation established by or under any Act of the State Government
(ii) a company in which more than 50% of the paid-up equity share capital is held by the State Government
(iii) a company in which more than 50% of the paid-up equity share capital is held by the entity referred to in clause (i) or clause (ii)
(whether singly or taken together)
(iv) a company or corporation in which the State Government has the right to appoint the majority of the directors or to control the
management or policy decisions, directly or indirectly, including by virtue of its shareholding or management rights or shareholders
agreements or voting agreements or in any other manner
(v) an authority, a board or an institution or a body established or constituted by or under any Act of the State Government or owned or
controlled by the State Government;

21. Contd.
Sec Nature of Expenditure
40(a)(iii) Salaries payable outside India or to a Non resident without deduction of taxes (TDS) shall not be allowed as a deduction. Expenditure
once disallowed stands disallowed forever
40(a)(iv) Any payment to a Provident fund or other fund established for the benefit of employees of the assessee, unless the assessee has made
effective arrangements of TDS on payments made from the funds which are chargeable as Salaries (specifically unrecognized funds or
welfare funds because recognised funds do have mechanism to deduct TDS)
40(a)(v) Any tax actually paid by an employer on non monetary perquisites shall not be allowed as a deduction for the employer
Note: Such tax paid by the employer is not a taxable in the hands of the employee by virtue of Sec 10(10CC)
40(b) Payment of Interest and Remuneration to partners of a Firm:
• Remuneration or salary to a non working partner shall not be allowed as a deduction.
• Remuneration to working partners and interest to any partner shall be allowed only if it is authorized by the partnership deed
(Circular No. 739 dated 25.03.1996 states that the remuneration amount should be mandatorily quantified – fine if mentioned as per
the Act)
• Remuneration/interest paid for a period prior to the date of authorization by the deed shall not be allowable.
• Maximum interest on partner’s capital shall be restricted to 12%. However, if the rate as per deed is less, then interest shall be
allowed to such extent
Remuneration to all the working partners shall be subject to the following limits:
Allowable remuneration / interest shall be the lower of:
• Remuneration / interest as per books
• Limits as per Sec 40(b)
Book Profit Slab Maximum Limit
First Rs.3,00,000 of book profit Rs 1,50,000 or 90% of book profit whichever is high
Balance of book profit 60% of book profit

22. Contd.
Sec Nature of Expenditure
40(b)
Contd.
Note: 1. Working partner refers to an individual partner actively engaged in
conducting the affairs of the business/profession of the firm.
2. Interest paid to representative partners:
• Where an individual (say A) is a partner in a firm on behalf of and for the benefit of
any other person (say B), then:
• Interest paid by the firm to the representative partner (A) in his individual capacity
(i.e. not in the capacity of a representative partner) shall not be considered for the
purposes of Sec 40(b)
• However, interest paid to the representative partner (A) in his capacity as such and
to the person so represented (B) shall be considered for Sec 40(b)
• Where an individual partner (say C) receives interest on behalf and for the benefit
of any other person, restriction under Sec 40(b) shall not operate provided the
representative (C) is not a partner in his individual capacity.
3. Partnership deed must specify the amount of remuneration to be allowed or the
manner in which remuneration is to be computed, for it to be allowed as a
deductible expense.
4. Book Profit: Net Profit computed as per P&L A/c (+) Remuneration paid / payable
to partners if debited (+) Brought forward business loss, deduction u/s 80C to 80U if
debited (-) income from other heads credited to P&L A/c.

23. Contd.
Sec Nature of Expenditure
40(ba) Expenses not allowable in the case of an Association of Persons / Body of Individuals:
• Any interest, salary, bonus, commission or remuneration paid by an Association of Persons / Body of Individuals to
its members
• If Association of Persons / Body of Individuals receives as well as pays interest to its members, excess of interest
paid over and above interest received shall be disallowed
Exception:
1. Where a member receives interest in his representative capacity
2. Where a representative member receives interest in his individual capacity (explained in previous slide)

24. Expenses or Payments not Deductible in Certain
Circumstances – Sec 40A
Expenses incurred on related parties – Sec 40A(2)
Where an assessee incurs any expenditure for which
Payment has been made or is to be made to a specified person and
Such payment is considered unreasonable or excessive by the AO having regard to:
• Fair market value of the goods or services provided
• Assessee’s business / profession needs
• Benefit derived from such expense
Then the AO can disallow such portion of the expenditure he/she considers excessive or unreasonable

25. Contd.
Specified Person – Sec 40A(2)(b)
Assessee Specified person
Individual • Any relative of such individual
• Any person in whose business or profession the individual or his relatives have substantial interest (20%)
Note: Relative includes spouse, brother, sister and lineal ascendant or descendent of the individual- Sec 2(41)
Company, Firm,
Association of
Persons and
HUF
• Any director of the company, partner of the firm, member of an Association of person or family
• Any relative of such director, partner or member
• Any person in whose business or profession the assessee or such director, partner or member or any relative of
such persons have substantial interest (20%)
All assesses • Any individual having substantial interest (20%) in the business or profession of the assessee
• Any relative of such individual.
• Any company, firm, Association of persons or HUF
o one of whose directors/ members/ partners have substantial interest (20%) in the business of the
assessee
o any other director, member or partner
o any relative of such other director, member or partner.
• Any company, firm, Association of persons or HUF
o having substantial interest (20%) in the business or profession of the assessee
o any director, partner or member of such person
o any relative of such director, partner or member

26. Contd.
Disallowance of expenditure in excess of Rs 10,000 under certain situations- Sec 40A(3)
• Any expenditure in respect of which payment in excess of Rs 10,000 is made to a person in a day
• In cash
100% of such expenditure shall not be allowed as a deduction
Disallowance of expenditure in excess of Rs10,000 under certain situations- Sec 40A(3A)
• Any liability in respect of which payment in excess of Rs 10,000 is made to a person in a day
• In Cash
100% of such expenditure shall not be allowed as a deduction
In the case of payment made for plying, hiring or leasing goods carriages, the above limit will be Rs.35,000 instead of Rs.10,000
No person can enforce that a payment exceeding Rs 10, 000/Rs 35,000 should be made by cash – Sec 40A(4)
Sec 40A(3) and Sec 40A(3A) not apply in the following circumstances:
• Expenditure not claimed as a deduction under Sec 30-37 excluding advances made for expenses under Sec 30-37
• Capital expenditure

27. Exceptions to sec 40A(3) & 40A(3A) – Rule 6DD
• Payments to:
• Reserve Bank of India or any other banking company
• State Bank of India and its subsidiaries
• Any co operative bank or land mortgage bank
• Any primary agricultural credit society or a primary credit society
• Life Insurance Corporation of India
• Payments to Government where its required under a legal tender
• Payments by way of
• Letter of credit through a bank
• Mail or Telegraphic transfer through a bank
• Book adjustment between accounts in banks
• Bills of exchange payable to a bank
• Use of electronic clearing system through a bank account
• Credit card or Debit card.
• Where there is a book adjustment of a receivable and payable
• Payments for purchase made directly from cultivator, grower or producer of:
• Agricultural or forest produce
• Produce of animal husbandry, dairy or poultry farming
• Fish or fish products (includes other marine products)
• Products of horticulture or apiculture

28. Contd.
Payment for purchases from the producers of cottage industry run without the aid of power
Payment made in a village or town which does not have any bank and the payee resides or carries on his business at that
place
Payment of retirement/retrenchment benefits to an employee or his legal heirs where the sum payable does not exceed Rs
50,000
Salary payment to an employee who is temporarily posted out of his normal place for 15 days or more or is posted on a ship,
and the employee does not have a bank account at such place, provided TDS is deducted on such payment
Payment required to be made on Bank holiday or strike
Payments made through agents who is required to make cash payments for goods and services purchased on behalf of such
person
Where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travelers
cheque in the normal course of his business

29. Contd.
Deduction in respect of gratuity to employees – Sec 40A(7)
No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or
formation of, or as contribution to
• any fund
• Trust
• company
• association of persons
• body of individuals
• society registered under the Societies Registration Act, 1860 (21 of 1860)
• Other institution
For any purpose, except where such sum is so paid, for the purposes of the following:
• Approved superannuation fund
• Recognized provident fund
• Pension scheme referred under Sec 80CCD
• Approved gratuity fund
Payment towards an unrecognized welfare fund – Sec 40A(9)

30. Certain deductions allowed only on actual payment –
Sec 43B Expenses covered by this section are allowed on Payment basis
irrespective of the method of accounting employed by the assessee
Expenses covered under this section
Taxes, duty, cess or
any other fee payable
under any law
Employers contribution to
employee welfare fund like
Provident Fund, gratuity,
superannuation etc.
Bonus or
commission
payable to
employees
Interest on any loan or
borrowing from (not allowed
if interest converted to loan
or advance)
Deposit taking NBFC or
systemically important
non-deposit taking
NBFC
Scheduled bank or a co-
operative bank other than a
primary agricultural credit
society or a primary co-
operative agricultural and rural
development bank
Sum payable by an
employer in lieu of
any leave at the
credit of his
employee i.e. leave
salary encashment
Sum payable to the
Indian Railways for
the use of railway
assets
Any public financial institution
or a State financial corporation
or a State industrial investment
corporation
• During the PY, or
• Before the due date for filing returns
Time Limit for Payment
All expenses covered under this section shall be allowed as a deduction only if they are
paid within the time limits specified. Where these expenses are paid beyond the
specified period, they shall be allowed as a deduction in the year of such payment

31. Deemed Income – Sec 41

32. Profits Chargeable to Tax – Sec 41
Recovery against a deduction allowed earlier – Sec 41(1)
Where an allowance has been allowed towards any loss, expenditure, trading liability and
The assessee has subsequently obtained either by cash or in any other manner
Any amount in respect of such loss or expenditure
Benefit through remission or cessation of such trading liability
Such receipts shall be chargeable to tax as income in the year of receipt
It is not mandatory that the relevant business should be in existence during the year of recovery
Where a “successor in business” has realised an amount of loss, expenditure, liability claimed by the
predecessor, such amount shall be regarded as income of the successor in the year of receipt
Successor in Business
Amalgamated company in the case of amalgamation
Resulting company in the case of demerger
Where one person carrying on business or profession is succeeded by another person, such other person
Where a firm carrying on a business or profession is succeeded by another firm, the other firm

33. Contd.
Sale of capital assets used for scientific research- without having been used for business – Sec 41(3)
Where a capital asset, used for scientific research is directly sold, the entire sale consideration, to the extent of
deduction claimed under Sec 35 (Expenditure on Scientific Research), shall be regarded as income of the assessee
Where the business is no longer in existence, the provisions of this sub-section shall
apply as if the business is in existence in that PY
Recovery of bad debts
allowed as a deduction
Sec 41(4)
• Where the amount recovered is greater than the difference between the debt and
the amount allowed as bad debt, then such excess shall be written back as income
• This provision shall not apply in the cases of succession of business
• Hence, if the successor recovers a sum written off as bad debt by the predecessor,
such amount shall not be regarded as income of the successor
Balancing charge of Power
Sector assessee – Sec 41(2)
• Balancing charge is the surplus of sale consideration over the unamortised value of
a depreciable asset owned by an assessee engaged in the generation and
distribution of power
• The provision shall apply where such assessee has opted to claim depreciation
under the straight line method

34. Contd.
Where a business (other than a speculative business) incurred loss during the previous
year in which the business was discontinued
• Such loss can be set off against any future deemed income as mentioned above in
Sec 41(1),(3) & (4A)
• Such loss can be set off, even if the period between the year of incurrence of loss
and the year of set off is more than 8 years
Loss of a discontinued
business (other than a
speculative business) – Sec
41(5)
Where any sum pertaining to a discontinued business or profession is received during
the previous year, such sum shall be chargeable to tax as if such business or profession
was still in existence
Deemed income of a
discontinued business –
176(3A) and profession
176(4)
Withdrawal from Special
Reserve created under Sec
36(1)(viii) - Sec 41(4A)
• Where a deduction has been allowed in respect of any special reserve created
under Sec 36(1)(viii), any amount subsequently withdrawn from such special
reserve shall be deemed to be income of the assessee for the previous year in
which such amount is withdrawn

35. Specified Scenarios and Specific Businesses – Sec 42,
43AA, 43C, 43CA, 43CB and 43D

36. Special Provision for Deductions in the Case of Business
for Prospecting, etc., for Mineral Oil – Sec 42
• Deduction under this section shall apply if :
• The assessee is into the business of prospecting for or extraction or production of mineral oils
• CG has entered in to an agreement with the assessee for the purpose
• Such agreement has been laid on the Table of each House of the Parliament
• For the purpose of this section “mineral oil” includes petroleum and natural gas
Applicability
Deductions
If all the above conditions are fulfilled, the assessee shall be eligible for the following deduction in lieu of or in
addition to the normal deductions under the provisions of the Act
Prior to commencement of
commercial production
Infructuous or abortive expenditure incurred on area surrendered prior to the
beginning of commercial production over in fructuous or abortive exploration
After commencement of
commercial production
Expenditure incurred in respect of:
• Any drilling activities or services
• Any exploration activities or services
• Physical assets used for drilling or exploration except for assets for which
depreciation is admissible
Allowance for depletion of mineral oil in the mining area, from the year of commercial production, as specified in the
agreement for the purpose

37. Transfer of Business
Situation Tax Implication
Where sale proceeds are less than remaining unallowed
expenditure
Consider the deficit as allowable expenditure in the year of transfer
Where sale proceeds exceed remaining unallowed
expenditure but lower than total expenditure incurred
Consider the surplus as business income in the year of transfer
Where the sale proceeds exceed the original expenditure
incurred
Consider the surplus as business income in the year of transfer
Such surplus cannot exceed:
• Original expenditure less unallowed expenditure
• In other words surplus shall be restricted to the extent of
deduction already allowed
Note: No deduction shall be allowed in the previous year in which the business or any interest therein is transferred if the sale
proceeds are not less than the expenditure disallowed
• In the event of amalgamation/ demerger, the provisions of this section:
• Shall not apply to amalgamating or demerged company
• Shall apply to amalgamated or resulting company as if such amalgamation/ demerger has not
taken place
Tax treatment in
the case of
amalgamation /
Demerger

38. Taxation of Foreign Exchange Fluctuation – Sec 43AA
Any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss, as the case
may be, and such gain or loss shall be computed in accordance with the ICDS notified under Sec 145(2)
Gain or loss arising on account of the effects of change in foreign exchange rates shall be in respect of all foreign currency
transactions, including those relating to—
• Monetary items and non-monetary items
• Translation of financial statements of foreign operations
• Forward exchange contracts
• Foreign currency translation reserves
Subject to Sec 43A [Special provisions consequential to changes in rate of exchange of currency]

39. Special provision for computation of cost of
acquisition of certain assets – Sec 43C
Situation Cost of acquisition of asset transferred
Stock in trade received by an amalgamated company in a
scheme of amalgamation
Cost of acquisition of the stock shall be the sum of:
- Actual cost to the amalgamating company
- Improvement cost if any actually incurred
-Actual expenditure on transfer to amalgamated company
Any asset (other than Sec 45(2)- conversion of capital asset
to stock in trade) received by the assessee as stock in trade
through:
- Total or partial partition of HUF
- Gift, will or an irrevocable trust
Cost of acquisition of the stock shall be the sum of:
- Actual cost to the HUF/ donor
- Improvement cost if any actually incurred
- Actual expenditure on transfer incurred by the donor
including gift tax if any paid
The provisions of this section have been specifically enacted to ensure there is
no avoidance of tax in certain specific types of transactions and assets
Where the previous owner possessed the asset as a capital asset and transfers the same to the assessee to whom
the asset is a stock in trade, the provisions of Sec 43C shall apply and not Sec 45(2)
For example if the previous owner is an individual having gold bars as investment transfers the gold to his
son who is a Jewellery dealer, the cost to the dealer shall be the cost to the previous owner under Sec 43C

40. Special provision for full value of consideration for
transfer of assets other than capital assets in certain
cases – Sec 43CA
Land or building or both
(other than capital asset)
Sale consideration < SDV SDV deemed to be full value of consideration
Where date of
agreement differs from
date of registration
SDV on date of
agreement to be
taken
Condition – whole or part of consideration received
through account payee cheque or bank draft or
electronic methods on or before date of agreement
Where SDV does not exceed 105% of actual consideration – actual consideration to be taken
Assessee claims
SDV > FMV
Reference to valuation
officer to verify
If Valued FMV >
SDV
Yes - SDV shall be
takenSDV not been disputed
before any order, court
or authority
Relevant provisions of
valuation shall apply
No - FMV shall
be taken

41. Computation of income from construction and
service contracts – Sec 43CB
The profits and gains arising from a construction contract or a contract for providing services shall be determined on the
basis of % of completion method in accordance with the ICDS notified under Sec 145(2)
• With duration of not more than 90 days shall be determined on the basis of project
completion method
• Involving indeterminate number of acts over a specific period of time shall be
determined on the basis of straight line method
Provided that profits and
gains arising from a
contract for providing
service
• The contract revenue shall include retention money
• The contract costs shall not be reduced by any incidental income in the nature of
interest, dividends or capital gains
For the purposes of % of
completion method,
project completion
method or straight line
method

42. Special provision in case of income of public financial
institutions, public companies, etc. – Sec 43D
Interest on bad and doubtful debts as categorized in accordance with the guidelines of RBI shall be chargeable to tax in the
year of receipt or in the year of credit to Profit and Loss account whichever is earlier
This section shall apply only to the following assessees
deposit taking non-
banking financial company
or a systemically
important non-deposit
taking non-banking
financial company
Scheduled
bank, or a co-
operative
bank other
than a primary
agricultural
credit society
or a primary
co-operative
agricultural
and rural
development
bank
State
financial
corporation
or State
industrial
investment
corporation
Public
financial
institution
Public company in
accordance with the
guidelines of National
Housing Bank (not RBI)

43. Judicial Precedents
Where assessee-company claimed deduction of legal and professional expenses incurred in relation to buyback of shares of
company from its shareholders, since said expenditure would not in any manner enhance capital structure of assessee company,
expenditure in question being revenue in nature was eligible for deduction under section 37(1) - Principal Commissioner of
Income Tax vs. Bayer Vapi (P.) Ltd. [2019] 106 taxmann.com 395 (Gujarat)
Nomination charges paid by assessee, engaged in quarrying granite blocks from mines, to State Government for allotment of
land for quarrying of granite, could not be equated with terms 'tax, duty cess or fees' under section 43B(a) - Tamil Nadu
Minerals Ltd. vs. Joint Commissioner of Income-tax, Company Range-III, Chennai [2019] 107 taxmann.com 214 (Madras)
Assessing Officer could not make addition to assessee's income under section 41(1) in respect of sundry creditors shown in
books of account merely on ground that assessee failed to furnish PAN or correct address of those creditors - Principal
Commissioner of Income Tax, Bengaluru vs. B.T. Nagraj Reddy [2019] 106 taxmann.com 308 (Karnataka)
Construction/purchase of residential houses does not tantamount to Housing Development; no deduction would be allowed
under section 36(1)(viii) in respect of income from loans given for individual residential houses South Indian Bank Ltd. vs.
Assistant Commissioner of Income-tax, Circle-1 (1), Thrissur [2019] 104 taxmann.com 452 (Cochin - Trib.)
Where assessee oil exploration company had no choice but to surrender oil blocks as Government of India refused to extend
contract period for oil exploration, act of assessee to hand over oil blocks before commencement of commercial production
would be treated as 'surrender' for claiming deduction of oil exploration expenditure under section 42(1)(a) Principal
Commissioner of Income-tax vs. Hindustan Oil Exploration Company Ltd. [2019] 106 taxmann.com 117 (Bombay)

44. Thank You
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