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CA Kishan Kumar PGBP

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CHAPTER 7

PROFIT AND GAINS FROM

BUSINESS AND PROFESSION

LEARNING OBJECTIV E S

After studying this chapter, you would be able to understand -

The meaning of “Business” and “Profession”

When income is chargeable under this head

The nature of income chargeable under this head

What is a speculative transaction

Computation of depreciation, additional depreciation and related concepts

What are the admissible deductions while computing income under this head

What are the inadmissible deductions while computing income under this head

Tax treatment of assets used for business as well as for personal use

Tax treatment of personal assets brought to business use

When are certain receipts deemed to be income chargeable to tax under this head

Taxability of payments made by Partnership Firm to its partners

Which are the deductions allowable only on actual payment basis

Who are the assesses required to compulsorily maintain books of account

When is the audit of accounts compulsory

Who are the Assessee to whom presumptive tax provisions apply

How income is computed on presumptive basis

Income Computation and Disclosure Standards

Every successful person has a

painful story. Every painful story

has a successful ending. Accept the

pain and get ready for success.


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SUMMARY OF SECTIO N S

Particulars Sections

Profits and gain of business or profession chargeability/ scope of income under this head 28

Income from profits and gains of business or profession how computed 29

Rent rates taxes repairs and insurance for building 30

Repairs and insurances of machinery plant and furniture 31

Depreciation 32

Treatment of unabsorbed depreciation 32(2)

Investment allowance for investing in backward area 32AD

Expenditure on scientific research 35

Deduction in respect of expenditure on specified business 35AD

Donation to association and institutions for rural development programmes 35CCA

Expenditure on agricultural extension project 35CCC

Expenditure on skill development project 35CCD

Amortization of certain preliminary expenses 35D

Amortization in case of amalgamation or demerger 35DD

Amortization of expenditure incurred under voluntary retirement scheme 35DDA

Deduction for Premium paid for insurance of stock-in-trade 36(1)(i)

Deduction for health insurance premium paid for employees 36(1)(ib)

Interest on borrowed capital 36(1)(iii)

Employer contribution to a recognized provident fund or approved superannuation fund, Pension scheme and approved gratuity fund

36(1)(iv), (iva) & (v)

Employee's contribution to RPF or superannuation fund etc. received by the employer 36(1)(va)

Bad debts 36(1)(vii)

Expenditure on promoting family planning amongst the employees 36(1)(ix)

Securities transaction tax 36(1)(xv)

Commodities transaction tax 36(1)(xvi)

General deductions 37(1)

Advertisement to political parties 37(2B)

Building etc. partly used for business and partly for personal purpose 38

Amounts not deductible 40

Deduction of TDS in case of payments of Interest, Royalty and FTS made to Non-Residents 40(a)(i)

Deduction of TDS in case of payments made to Residents 40(a)(ia)

Payments to relatives/ related persons 40A(2)

Disallowance out of cash expenditure exceeding INR 10,000 40A(3)

Exceptions to section 40A(3) Rule 6DD

Disallowance in respect of provision for gratuity 40A(7)

Disallowance in respect of contribution to non-statutory funds 40A(9)

Deemed profits chargeable to tax 41

Actual cost 43(1)

Certain deduction to be only on actual payment 43B

Full value of considerations for transfer of assets other than capital assets in certain cases 43CA

Maintenance of accounts by certain persons carrying on business or profession 44AA

Compulsory audit of accounts 44AB

Provisions for computing profits and gain of business on presumptive basis 44AD

Provisions for computing profits and gain of profession presumptive basis 44ADA

Provisions for computing profits and gain of business of plying hiring or leasing goods carriage on presumptive basis

44AE

Block of assets 2(11)


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1. INCOME CHA RGEABLE TO TAX UND ER TH E HEAD BUSINE SS / PROF ESSION [SECTIO N 28]

As per charging section 28, income from any business/ profession shall be taxable under the head Business /

Profession.

Income shall be computed in accordance with general practice of accountancy. However, revenue and expenses are

determined as per provisions of Income-tax Act, 1961.

The following income shall also be taxable under the head Business/Profession.

a) Income from Speculation Business shall be taxable under the head Business/ Profession.

b) Any interest, salary, bonus, commission or remuneration, by whatever name called, received

by a partner of a Firm to the extent allowed u/s 40(b).

c) Gift in connection with business/profession

Any gift or perquisite or benefit received in connection with business/profession. Similarly, if any gift has been

received from any client, it will be considered to be income under the head Business/ Profession.

Example

1) If a Chartered Accountant has received gift of INR 40,000 from one of his client, it will be considered to

be his income under the head Business/ Profession.

2) Tax Ltd. has engaged one Advocate with regard to its legal proceedings. The company has provided him

facilities of free travelling, boarding / lodging and has incurred INR 10,000. This will be considered to be

professional receipt of the Advocate.

d) Payments for not pursuing any business activity or profession/non-compete fee

If any person has received any payment from any other person for not pursuing any business activity or

profession i.e. payment has been received for closing down the business, it will also be considered to be income

under the head Business / Profession.

Similarly, if payment has been received for not using/sharing any patent right, technical know-how, license or

franchisee or other similar right, it will also be considered to be income under the head Business/ Profession.

Note: The person making such payment should deduct tax at source @ 10% as per section 194J if the

amount exceeds INR 30,000.

Example

Tax Ltd. has received INR 20,00,000 for not carrying out a particular business activity. In this case, the

amount so received shall be considered to be income of the Assessee.

Example

Tax Ltd. has received INR 5,00,000 for not sharing a particular patent. In this case, it will be considered to be

income under the head Business/ Profession

However, any sum, whether received or receivable, in cash or kind, on account of transfer of the right to

manufacture, produce or process any article or thing or right to carry on any business or profession, which is

chargeable under the head “Capital gains” shall not be taxable under PGBP.


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e) any compensation received or receivable, whether revenue or capital, in connection with the termination or the

modification of the terms and conditions of any contract relating to its business shall be taxable as business

income.

f) Payment under Keyman Insurance Policy

Sometimes employer may take a life policy in the name of any of his employees who are considered to be very

important for business or profession. Such policy is called keyman insurance policy and premium is paid by

employer and employer is allowed to debit it to profit and loss account.

The amount received on maturity shall be considered to be income of employer as per section 28.

If any payment has been received by the employee, it will be considered to be income under the head Salary.

Similarly, a policy may be taken in the name of any other person who is considered to very important for the

business of the employer, such policy is called keyman insurance policy. If payment has been received by such

other person, it will be considered to be his income under the head Other Sources as per section 56.

g) Fair market value of inventory on its conversion as capital asset: Fair market value of inventory on the date of

its conversion or treatment as capital asset, determined in the prescribed manner, would be chargeable to tax

as business income.

h) Export Incentives

If any manufacturer is exporting the goods manufactured by him, in such cases he may be given certain

incentives by Govt. Such incentives are called export incentives and are considered to be income of the

Assessee under the head Business/Profession.

Examples

a) Profit on sale of import entitlement license.

b) Profit on sale of Duty Entitlement Pass Book (‘DEPB’).

c) Duty drawback or cash compensatory support.

i) Fair Market Value of Inventory on its conversion into Capital Asset

Where inventory is

converted or treated as a capital asset and

is used for the purpose of business or profession,

any gain on such conversion is taxable under the head PGBP.

Sale Price: Fair Market Value on the date of conversion Cost: will be considered as actual cost of purchase of stock-in trade.

Note As per section 29, the income referred to in section 28 shall be computed as per section 30 to 43D.

2. DEDUCTIBILITY OF EX PENDITURE RELATING TO BUILDI NGS [SECTION 30]

If any Assessee has any building in the use of business/ profession, all expenses relating to the building shall

be allowed to be debited to the profit and loss account and such expenses may be:

a) Rent charges paid

b) Repairs expenses


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c) Municipal tax or local tax or land revenue (but on payment basis as per section 43B)

d) Premium for insurance of house

Note: If the building is owned by the Assessee, he is not allowed to debit rent on notional basis.

Rather he is allowed to debit depreciation.

Note: Capital expenditure on repairs incurred by the owner shall be added to the cost of the building.

Note: Capital expenditure on repairs incurred by the tenant is deemed as building in the hands of the tenant on

which depreciation is allowed to tenant.

Note: No income shall be computed with regard to this house property under the head Income from House

Property.

3. DEDUCTIBILITY OF EX PENDITURE RELATING TO BUILDI NGS [SECTION 31]

The following expenses in respect of plant and machinery and furniture and fixtures are allowed as

deduction u/s 31 provided these assets are used for the purposes of business/profession. The Assessee

need not be the owner of the assets.

Following expense are allowed:

Revenue expense on repairs

Insurance premium relating to the asset

Note: Capital expenditure on repairs incurred by the owner shall be added to the cast of the assets.

1. DEP RECIATIO N [SECTION 32]

Depreciation under Income Tax Act is allowed on the basis of written down value method. Rate of depreciation

shall be as given below:

Particulars Rate

Building

Residential Building 5%

Commercial building including roads/bridges etc. 10%

Purely temporary erections 40%

Furniture and Fittings

Furniture and fittings (including electrical fittings) 10%

Plant and Machinery

Machinery and plant (like air-conditioner, generator, fire-extinguisher etc.) 15%

Oil wells (grouped as Plant and machinery) 15%

Motor cars 15%

Motor buses, motor lorries and motor taxis used in a business of running them on hire 30%

Computers including computer software and computer peripherals like printer 40%

Books (Annual Publications as well as other books) 40%

Pollution control equipment 40%

Energy saving devices 40%

Life saving medical equipment 40%

Others


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Particulars Rate

Intangible Assets viz. Goodwill, Patent, Copyright etc. 25%

Ships 20%

Aeroplane 40%

Note: As per section 32, set off of depreciation or loss is compulsory and not voluntary i.e. if

depreciation or loss can be adjusted, it has to be adjusted.

Computation of Depreciation

Asset is purchased and put to

use during the same year

Put to use for less than 180 days - Depreciation is allowed at half the

normal rate.

Put to use for 180 days or more - Depreciation is allowed at normal

rate.

Asset is purchased but not

put to use during the same

year

Depreciation shall not be allowed in the year of purchase.

However, in subsequent year, whenever the asset is put to use, full

depreciation shall be allowed irrespective of period of use.

Note: "Put to use" does not mean putting the asset to actual use; rather it means making an asset ready for

use i.e. installing an asset so that it is ready to be used.

Example

Tax Ltd. has purchased one machinery on 01.07.2018 for INR 30,00,000. It was installed on 01.10.2018, but it was

brought into actual use wef. 01.03.2019. In this case, depreciation allowed shall be INR 4,50,000, because the asset

was put to use for 180 days or more.

In above case, if the asset was installed on 10.10.2018, depreciation allowed shall be INR 2,25,000.

If the asset was not at all installed in the year 2018-19, depreciation allowed during PY 2018-19 shall be Nil.

If the asset was installed on 31.03.2020, depreciation allowed in PY 2018-19 shall be Nil, but the depreciation

allowed in the PY 2019-20 shall be INR 4,50,000.

If any asset has been sold at any time during the year, in that case, depreciation is not allowed for that year.

Example

Tax Ltd. purchased one plant and machinery on 01.10.2010. Its written down value as on 01.04.2018 is

INR 20,00,000 but it was sold on 31.3.2019. In this case, no depreciation is allowed in the previous year 2018-19.

Block concept

Under section 32, depreciation under income tax is allowed on the basis of written down value method. It is not

computed on the basis of individual assets rather on the basis of a group of assets called Block of Assets which

means a group of similar type of assets having same rate of depreciation.

The depreciation shall be computed in the manner given below:

1. Take opening written down value of the particular block of asset as on 1st day of April of the relevant year.

2. Add purchases during the year

3. Deduct monetary value of sale consideration in case of sale and amount of insurance claim in case of fire or

theft etc.


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Only the money received as insurance claim shall be deducted. If an asset is received as insurance claim,

there shall be no tax treatment.

4. Apply depreciation on the balance amount as on the last day of the year

5. If any asset was purchased and put to use for less than 180 days, depreciation shall be allowed at half the

normal rate and for this purpose actual cost shall be separated from the total written down value of the block.

If total written down value is less than actual cost of asset purchased, depreciation shall be applied on the

written down value of the block at half the normal rate.

6. If there is a negative balance at the end of the year, it will be considered to be short term capital gain as per

section 50 and no depreciation is allowed.

7. If there is no asset at the end of the year but still there is some balance, it will be considered to be short term

loss as per section 50 and no depreciation is allowed.

Note: Depreciation is allowed even in respect of assets which are actually worked or utilized by some other person

(such as lease or license).

Note: In case of animals used in business, otherwise than as stock-in-trade, no depreciation is allowed.

However, in case of its death, the difference between the actual cost of such animal and the amount realized on its

sale shall be allowed as deduction.

Note: In case of power generating unit, the Assessee has the option to compute depreciation either on the

basis of written down value method or on the basis of Straight Line Method.

Concept Problem 1

Mr. Ram started his business on 01.04.2016 and purchased various plants and machinery as given below:

He has purchased plant P1 on 01.04.2016 which was put to use on 01.06.2016 for INR 20,00,000.



He sold plant P1 on 01.01.2017 for INR 11,00,000.

He purchased plant P4 on 01.12.2017 and was put to use on 31.03.2018 for INR 20,00,000.

He sold P2 on 30.01.2018 for INR 40,00,000.

He purchased plant P5 on 01.06.2018 and put to use on 10.12.2018 for INR 10,00,000.

He sold P3, P4 and P5 on 30.03.2019 for INR 1,00,00,000.

Determine depreciation for various years. (Ignore additional depreciation)

Concept Problem 2

A newly qualified Chartered Accountant Mr. Ram commenced practice and has acquired the following assets in his

office during PY 2018-19 at the cost shown against each item. Calculate the amount of depreciation.

S. No Description Date of

acquisition

Date when

put to use

Amount

1. Computer including computer software 27 Sept, 2018 1 Oct, 2018 35,000

Computer UPS 2 Oct, 2018 8 Oct, 2018 8,500

2. Computer printer 1 Oct, 2018 1 Oct, 2018 12,500

3. Books (of which books being annual publication 1 Apr, 2018 1 Apr, 2018 13,000


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S. No Description Date of

acquisition

Date when

put to use

Amount

are of INR 12,000)

4. Office furniture (Acquired from practicing C.A) 1 Apr, 2018 1 Apr, 2018 3,00,000

5. Laptop 26 Sept, 2018 8 Oct, 2018 43,000

6. Fire extinguisher 1 Apr, 2018 1 Apr, 2019

(No instance

arose to use

during FY

2018-19)

2,500

7. Purchased practicing CA’s office in April’ 2018 who had run it for 4 years, for INR 5 lacs which

includes INR 2 lacs for goodwill and INR 3 lacs for cost of furniture (included in 4 above)

Note: Depreciation is to be provided at the applicable rates.

(Study Material)

2. ADDITIONAL DEP RECI ATION [SECTIO N 32(1)(iia)]

Additional depreciation shall be allowed @ 20%

to all the Assessee in connection with NEW plant and machinery purchased for the purpose of

manufacturing;

or

to the Assessee engaged in generation or transmission or distribution of electricity.

Additional depreciation shall be allowed only once for plant and machinery i.e. it is not allowed every year.

Additional depreciation shall not be allowed in respect of following plant and machinery:

a) Second hand plant and machinery i.e. plant and machinery shall be brand new.

b) Any machinery or plant installed in any office premises or any residential accommodation,

including accommodation in case nature of guest house.

c) Any office appliances or road transport vehicles or ships or aircrafts.

d) Any machinery or plant, the actual cost of which has been debited to profit and loss account [i.e.

plant and machinery for which deduction is claimed u/s 35, 35 AD etc].

Amount of Additional Depreciation

If the Asset has been purchased and put to use in the same year for less than 180 days, additional

depreciation shall be allowed at 10% and remaining additional depreciation shall be allowed in the subsequent

year.

If the Asset has been purchased during one previous year and subsequently put to use during a

different year, additional depreciation shall be allowed at 20%. The number of days of use for which asset has

been put to use during such subsequent year is irrelevant.

SPECIAL RATE OF ADDITIONAL DEPRECIATION FOR PLANT AND MACHINERY FOR

UNDERTAKINGS IN BACKWARD AREAS OF SPECIFIED STATES

Any Assessee who has


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set up an undertaking for manufacture of any article or thing on or after 01.04.2015

in any backward area notified by the Central Government in the states of Andhra Pradesh or

Telangana or Bihar or West Bengal; and

has installed new plant and machinery (other than ships or aircraft) during the period 01.04.2015 to

31.03.2020

additional depreciation allowed shall be 35% instead of 20%.

Note: Business of printing or printing and publishing amounts to manufacture or production of an article

or thing and is, therefore eligible for additional depreciation under section 32(1)(iia).

Concept Problem 3

Tax Ltd. is engaged in manufacturing and has submitted information as given below:

1. Factory Building - Written down value on 01.04.2018 was INR 12,00,000.

2. Plant and machinery (rate 15%) - Written down value on 01.04.2018 is INR 8,70,000.

3. Purchase of new plant (eligible for additional depreciation) on 30.06.2018 (Put to use on 01.07.2018)

INR 1,20,000.

4. Purchase of new plant (eligible for additional depreciation) on 31.12.2018 (Put to use on 01.01.2019)

INR 1,10,000.

5. Sale of old plant on 01.12.2018 INR 6,40,000.

6. Motor Car (Rate 15%) - Written down value on 01.04.2018 was INR 1,20,000.

7. Sale of car on 30.09.2018 INR 1,50,000.

Compute depreciation allowed.

Concept Problem 4

Mr. Kunal, a proprietor, engaged in the business of generation of power, furnishes the following particulars

pertaining to P.Y. 2018-19. Compute the depreciation allowable under section 32 for A.Y. 2019-20, while computing

his income under the head “Profits and Gains of Business or Profession”. The proprietor has opted for the

depreciation allowance on the basis of written down value.

S. No Particulars Amount

1. Opening Written down value of Plant and Machinery (15% block) as on 01.04.2018

(Purchase value INR 8,00,000)

5,78,000

2. Purchase of second hand machinery (15% block) on 29.12.2018 for business purpose 2,00,000

3. Purchase of machinery Y (15% block) on 12.07.2018 for business purpose 8,00,000

4. Acquired and installed for use a new air pollution control equipment on 31.7.2018 2,50,000

5. New air conditioner purchased and installed in office premises on 8.9.2018 3,00,000

6. New machinery Z (15% block) acquired and installed on 23.11.2018 for the purpose of

generation of power

3,25,000

7. Sale value of an old machinery X, sold during the year (Purchase value INR 4,80,000,

WDV as on 01.04.2018 INR 3,46,800)

3,10,000

3. DEP RECIATIO N IN CASE OF BU SINE SS RE STRUCTURING [SECTION 32]

Situations Covered

a) Amalgamation of Companies;

b) Demerger of Companies

c) Conversion of proprietary firm into a Company (private/public)


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d) Conversion of partnership firm into a Company (private/public)

e) Conversion of private limited or unlisted public company into an LLP firm.

As per section 32, in above mentioned five situations, depreciation shall be computed

considering that no amalgamation, demerger or conversion has taken place and

the depreciation so computed shall be apportioned between the predecessor and successor

in the ratio of number of days, the asset was used by each one of them.

Concept problem 5

KSA & Co., sole proprietary concern is converted into a Company, KSA Co Ltd. with effect from December 29, 2018.

The written down value of assets as on April 1st, 2018 is as follows:

Items Rate of Dep. WDV as on 1st April, 2018

Building 10% 3,50,000

Furniture 10% 50,000

Plant and Machinery 15% 2,00,000

Further, on October 15, 2018, KSA & Co purchased a plant for INR 1,00,000 (rate of depreciation 15%) and it was

put to use on the same date. After conversion, the company added another plant worth INR 50,000 (rate of

depreciation 15%) on 01.01.2019 and put to use on the same date.

Compute the depreciation available to (i) KSA & Co. and (ii) KSA Co. Ltd. for Assessment Year 2019-20.

4. DEP RECIATIO N IN CASE OF PO WE R GEN ERAT ING UNITS [SECTION 32]

A power generating unit shall have the option to claim depreciation either on the basis of

SLM method on each asset; or

or WDV method on block of the assets

However, option once selected cannot be changed subsequently.

Where Assessee has opted for ‘SLM method for each asset’, following points needs to be noted:

a) Concept of 180 days shall be applicable i.e. depreciation shall be calculated at half rate of the asset is put to use

for less than 280 days in the year of acquisition.

b) Rate of depreciation for SLM shall be as prescribed under Income Tax Act.

c) Additional depreciation shall not be available i.e. additional depreciation is available only where WDV method

on block of assets is followed.

Treatment in case of Sale of Asset

Where Assessee has opted for ‘SLM method for each asset’, tax treatment on sale of assets, shall be as given below:

Case I: If the sale price is less than its WDV

The difference between the sale price and WDV shall be considered to be terminal depreciation and shall be allowed

to be debited to the profit and loss account.

Case II: If the sale price is more than its WDV but does not exceed the actual cost of the assets


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The difference between the sale price and WDV shall be taxable as income u/h PGBP as per section 41 (2) (Such

income is referred to as balancing charge)

Case III: If the sale price is more than its WDV and also exceeds the actual cost of the asset

The difference between the actual cost of the assets and its WDV shall be taxable as income u/h PGBP as per section

41(2) (such income is called as ‘balancing charge’)

The difference between the sale price of the asset and its actual cost shall be taxable as capital gains as per section

50A

Concept Problem 6

Tax Ltd. is a power generating unit and the company has purchased one plant and machinery on 01.07.2015 for

INR 20 lakhs (not eligible for additional depreciation) and it was put to use on 01.11.2015 and rate of depreciation is

7.8%.

In this case depreciation allowed shall be

PY 2015-16 20,00,000 x 7.8% x 1/2 = INR 78,000

PY 2016-17 20,00,000 x 7.8% = INR 1,56,000

PY 2017-18 20,00,000 x 7.8% = INR 1,56,000

If this plant is sold on 01.10.2018

1. For INR 7,00,000.

2. For INR 19,00,000.

3. For INR 23,00,000.

The tax treatment shall be as given below:

a. Written down value of the asset as on 01.04.2018 is INR 16,10,000 but it was sold for INR 7,00,000. In this

case, terminal depreciation is 7,00,000 - 16,10,000 = INR 9,10,000 and it will be allowed to be debited to

profit loss account.

b. If the assets are sold for INR 19,00,000 there will be profit of 19,00,000 -16,10,000 = INR 2,90,000 and it will

be called "balancing charge" under section 41 (2) and shall be considered to be deemed income under the head

Business/ Profession.

c. There will be gain of 23,00,000 - 16,10,000 = INR 6,90,000. There will be balancing charge to the extent

depreciation has been debited i.e. 3,90,000 and balance amount i.e. INR 3,00,000 shall be short term capital

gain as per section 50A.

Concept Problem 7

Mr. Abhimanyu is engaged in the business of generation and distribution of electric power. He always opts to claim

depreciation on written down value for income-tax purposes. From the following details, compute the depreciation

allowable as per the provisions of the Income-tax Act, 1961 for the assessment year 2019-20:

Particulars Amount (In Lacs)

Opening WDV of block (15% rate) 42

New machinery purchased on 12.10.2018 10

Machinery imported from Colombo on 12.4.2018. This machine had been used only in

Colombo earlier and the Assessee is the first user in India.

9

New computer installed in generation wing of the unit on 15-7-2018 2


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(Study Material)

5. UNABSO RBED DEPREC IATION [SECTIO N 32(2)]

Meaning of unabsorbed depreciation

Assessee carrying business/profession are allowed to debit the depreciation expenditure while calculating their

income u/h business profession. However, such expenditure can be debited only to the extent income is

available u/h business/profession. The balance amount of depreciation that cannot be debited is referred to as

unabsorbed depreciation.

Example: PGBP income before debiting current year depreciation is INR 1,00,000 and current year

depreciation expenditure turns out to be INR 1,60,000. In this case, depreciation to the extent of INR

1,00,000 would be debited to P&L A/c and balance INR 60,000 would be referred to as unabsorbed

depreciation.

Treatment of unabsorbed depreciation

Unabsorbed depreciation of a particulars year is allowed to be set-off in the same year against income under

any other head except casual income.

If unabsorbed depreciation cannot be adjustment in the same year, it is allowed to be C/F for indefinite period

of time (i.e. for an unlimited period) and in the subsequent years, such unabsorbed depreciation shall be

allowed to be set-off against any income other than causal income.

If any Assessee has B/F business losses as well as b/f unabsorbed depreciation, a rational taxpayer would first

adjust business losses and unabsorbed depreciation afterwards.

Example: Mr. X has business income of INR 10,00,000 for PY 17-18 and has B/F business losses of INR

8,00,000 and B/F unabsorbed depreciation for INR 5,00,000 pertaining to post periods. In this case, b/f

business loss would be adjusted first and unabsorbed depreciation would be adjusted subsequently to the

extent of INR 2,00,000. Unabsorbed depreciation of INR 3,00,000 would be carried forward to the next AY.

6. INV ESTME NT AL LOWANCE FOR NOTIFI ED BACKWARD AREA S [SECTION 32AD]

Any Assessee (corporate as well as non-corporate) who has

set up an undertaking for manufacture of any article or thing on or after 01.04.2015

in any backward area notified by the Central Government in the states of Andhra Pradesh or

Telangana or Bihar or West Bengal; and

has acquired and installed new plant and machinery (other than ships or aircraft) during the period

01.04.2015 to 31.03.2020

investment allowance shall be allowed @ 15% in the year of acquisition and installation.

Points to Note

The investment allowance allowed @ 15% under this section is in addition to the depreciation and

additional depreciation allowable under section 32.

Further, the investment allowance would not be reduced to arrive at the written down value of plant

and machinery.

"New plant or machinery'' does not include-


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a) Second hand plant and machinery i.e. plant and machinery should be brand new

b) any plant or machinery installed in any office premises or any residential accommodation, including

accommodation in the nature of a guest house;

c) any office appliances including computers or computer software;

d) any vehicle;

e) ship or aircraft; or

f) any plant or machinery, the actual cost of which has been debited to profit and loss account.

Lock in Period of 5 yeas: The new plant and machinery in respect of which investment allowance has been

claimed under section 32AD cannot be sold a period of 5 years from the date of installation.

If it is sold or transferred within this period, the deduction allowed earlier would be deemed as income

chargeable to tax under the head "Profits and Gains from Business or Profession" of the previous year

in which such new plant and machinery is sold or otherwise transferred.

Concept Problem 8

Tax Ltd. is engaged in manufacturing and company has purchased new plant and machinery during the PY 2018-19

1. INR 20.00 crore (purchased and put to use on 01.07.2018)

2. INR 30.00 crore (purchased and put to use on 01.11.2018)

Compute depreciation, addition depreciation and investment allowance along with WDV as on 01.04.2019.

Concept Problem 9

Raju Ltd set up a manufacture unit in notified backward area in the state in the state of Telangana on 01.06.2018. It

invested INR 90 Crore in New Plant and Machinery on 01.06.2018. Further, it invested INR 75 Crore in the plant

and machinery on 01.11.2018, out of which INR 15 crores was second hand plant and Machinery.

Compute the depreciation allowable u/s 32. Is Raju Ltd entitled for any other benefit in respect of such Investment?

If so, what is the benefit available?

7. EXPENDITU RE ON SCI ENTIFIC RE SEA RCH [SECTION 35]

If any person has incurred expenditure; whether revenue or capital; in connection with scientific research

relating to business, such expenditure is allowed to be debited without any restriction.

Note: Capital expenditure incurred on land is not allowed. If the Assessee has incurred expenditure on

purchase /construction of building, expenditure is allowed for building portion excluding the value of

land.

Example

Tax Ltd. engaged in manufacturing of cement has incurred INR 2 lakhs on scientific research. In this case,

expenditure is allowed, but if the research is not related to the business of the Assessee, expenditure is not allowed.

Example

Tax Ltd. has purchased one plant and machinery on 01.07.2018 for the purpose of scientific research for INR 30

lakhs. In this case, entire amount is allowed to be debited to the profit and loss account in the year 2018-19.

If the company has purchased land for the purpose of scientific research, expenditure is not allowed.

Similarly, if a building has been purchased for INR 40,00,000 and cost of land is INR 25,00,000, expenditure

allowed shall be INR 15,00,000.


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Expenditure before commencement of business

If expenditure is incurred before commencement of business but within 3 years prior to commencement,

capital expenditure is allowed without any limit in the year of commencement of business

revenue expenditure is allowed only to the extent permitted by prescribed authority. Similarly,

payment of salary except perquisites (facilities) is allowed only to the extent permitted by the prescribed

authority.

Example

Tax Ltd. has commenced its business on 01.07.2018 but before commencement, the company has incurred revenue

expenditure of INR 2 lakhs on scientific research from 01.07.2015 onwards and the prescribed authority has

certified expenditure of INR 1.5 lakhs.

In this case, INR 1.5 lakhs shall be allowed in the previous year 2018-19 but if any expenditure has been incurred

prior to 01.07.2015, expenditure is not allowed.

DONATION/ CONTRIBUTION TO RESEARCH ASSOCIATIONS

If any Assessee has given donation to the notified research association, Assessee shall be allowed to debit the

amount to the profit and loss account in the manner given below:

i) As per section 35(1)(ii), an amount equal to 1.5 times of donation given to an approved scientific

research association like approved university and college etc. shall be allowed to be debited to profit and

loss account.

Example

Tax Ltd. has donated INR 10,00,000 to an approved research association for scientific research. In this case,

company is allowed to debit INR 15,00,000 to profit and loss account.

ii) As per section 35(2AA), any sum paid by an Assessee to a National Laboratory or University or Indian

Institute of Technology or a specified person for carrying out programmes of scientific research

approved by the prescribed authority will be eligible for weighted deduction of 1½ times (i.e.,150%) of the

amount so paid.

iii) As per section 35(1) (iia), if donation is given to an Indian company approved by prescribed authority for the

purpose of scientific research, deduction allowed shall be equal to the amount of the donation.

iv) As per section 35(1)(iii), deduction allowed shall be equal to the amount of the donation if donation is given

to any approved institution for the purpose of research in social science or statistical research.

Further, there is no condition that the research should be related to the business or profession of the Assessee.

Note: If Assessee do not have business/profession, such Assessee can claim 100% deduction u/s 80GGA.

Concept Problem 10

Mr. Ram has furnished the following particulars relating to payments made towards scientific research for the year

ended 31.03.2019.

Particulars Amount

(i) Payments made to K Research Ltd. 20

(ii) Payment made to LMN College 15


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Particulars Amount

(iii) Payment made to OPQ College 10

(iv) Payment made to National Laboratory 8

(v) Machinery purchased for in-house scientific research 25

(vi) Salaries to research staff engaged in in-house scientific research 12

Compute the amount of deduction available under section 35 of the Income-tax Act, 1961 for arriving at the

business income of the Assessee.

Note: K Research Ltd. and LMN College are approved research institutions.

Concept Problem 11

Mr. A, furnishes the following particulars for the P.Y.2018-19. Compute the deduction allowable under section 35

for A.Y.2019-20, while computing its income under the head “Profits and gains of business or profession”.


1. Amount paid to Indian Institute of Science, Bangalore, for scientific research 1,00,000

2. Amount paid to IIT, Delhi for an approved scientific research programme 2,50,000

3. Amount paid to X Ltd., a company registered in India which has as its main object

scientific research and development, as is approved by the prescribed authority

4,00,000

4. Expenditure incurred on in-house research and development facility as approved by the

prescribed authority

a. Revenue expenditure on scientific research 3,00,000

b. Capital expenditure (including cost of acquisition of land INR 5,00,000) on scientific

research

7,50,000

(Study Material)

SPECIAL PROVISION WITH REGARD TO COMPANIES [SECTION 35(2AB)]

If any Company is engaged in the business of

bio-technology; or

in manufacturing of any product except the goods mentioned in eleventh schedule of Income-tax Act; and

company is engaged in approved research

in such cases, the Assessee shall be allowed to debit 150% of the amount of expenditure incurred on scientific

research.

Points to Note

a) Expenditure incurred on land shall not be allowed under this section.

b) Expenditure on building is allowed at 100%

c) In case of expenditure incurred before commencement of business, Assessee shall be allowed to debit 100% of

expenditure incurred i.e. deduction @ 150% is not allowed on pre-commencement expenditure.

Example

Tax Ltd. is engaged in manufacturing chemicals and the company has incurred INR 50 lakhs on purchasing raw

materials for the purpose of research; INR 10 lakhs on purchasing land and INR 15 lakhs on purchasing the plant

and machinery for the purpose of approved scientific research.


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In this case, expenditure allowed shall be INR 97.5 lakhs (65 lakhs x 1.5).

TREATMENT OF SCIENTIFIC ASSET NO LONGER USED FOR SCIENTIFIC RESEARCH

1) Sale of assets used for scientific research without using for purpose of any other business

If any Assessee has acquired any capital asset for scientific research and amount was debited to profit and loss

account but

subsequently the asset was sold; in this case

amount received shall be income under the head Business/Profession but only to the extent amount was debited

to profit and loss account.

If the Assessee has closed down his business/ profession at that time, still it is income under the head Business/

Profession.

Example

Tax Ltd. purchased one plant and machinery for INR 25 lakhs on 01.10.2008 for scientific research and entire

amount was debited to the Profit and Loss account. Subsequently, the asset was sold for 28 lakhs in the PY 2018-19.

In this case, deemed income under section 41(3) shall be INR 25 lakhs i.e. the amount recovered on sale maximum

to the extent of the amount debited and excess over it i.e. INR 3 Lakhs shall be short term capital gain.

2) Transfer of asset to the normal business

If any asset was used for scientific research and subsequently it was transferred to the normal business, in such

cases, it will be entered in the respective block of assets and its Actual Cost shall be taken to be Nil.

Concept Problem 12

XY Bio-medicals Ltd. is engaged in the business of manufacture of bio-medical item. The following expenses were

incurred in respect of activities connected with scientific research.

Year ended Item Amount (INR)

31.03.2016

(Incurred after 01.09.2015)

Land 10,00,000

Building 25,00,000

31.03.2017 Plant and machinery 5,00,000

31.03.2018 Raw materials 2,20,000

The business was commenced on 01.09.2018 and expenditure incurred on raw materials and salaries is

INR 1,80,000.

In view of availability of better model of plant and machinery, the existing plant and machinery were sold for

INR 8,00,000 on 01.03.2020.

Discuss the implications of the above for AY 2019-20 along with brief computation of deduction permissible under

section 35 assuming that necessary conditions have been fulfilled.

Solution

As per section 35, where a company engaged in manufacture of bio-medical items incurs any expenditure on

scientific research during the current year, it is eligible for claiming weighted deduction of a sum equal to 150% of

the eligible expenditure.


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The eligible expenditure and quantum of deduction will be:

a) Current year capital or revenue expenditure incurred for scientific research (weighted deduction @ 150%).

b) Any expenditure incurred during earlier 3 years immediately preceding that date of commencement of

business on payment of salary or purchase of materials, or capital expenditure incurred other than expenditure

on acquisition of land (actual expenditure qualifies for deduction).

The deduction available under section 35 for scientific research will, therefore, be:

Particulars Amount

Land Nil

Building 25,00,000

Revenue expenses of last 3 years 2,20,000

Capital expenditure of last 3 years: Plant and machinery 5,00,000

Current year revenue expenditure (150% of INR 1,80,000) 2,70,000

Deduction under section 35 34,90,000

Tax treatment on sale of Plant and Machinery

Section 41(3) provides that where a capital asset used for scientific research is sold, without having been used for

other purposes, the sale proceeds shall be considered to be income under the head Business/Profession but only to

the extent the amount was debited to profit and loss account.

Hence, there will be income under the head PGBP of INR 5,00,000 and balance amount INR 3,00,000 shall be

considered to be short term capital gain.

Carried forward of unadjusted capital expenditure of scientific research

Un-adjusted capital expenditure of scientific research shall be allowed to be carried forward just like unabsorbed

depreciation i.e. carry forward shall be allowed for unlimited period and brought forward expenditure can be

adjusted from any income under any head except Casual Income.

Concept Problem 13

Tax Limited is a company engaged in the business of biotechnology. The net profit of the company for the financial

year ended 31.03.2019 is INR 15,25,890 after debiting the following items:

Particulars Amount

Purchase price of raw material used for the purpose of in-house research and development 1,80,000

Purchase price of asset used for in house research and development

1) Land

2) Building

5,00,000

3,00,000

Expenditure incurred on notified agricultural extension project 1,50,000

Expenditure on notified skill development project:

1) Purchase of land

2) Expenditure on training for skill development

2,00,000

2,50,000

Expenditure incurred on advertisement in the souvenir published by a political party 75,000

Compute the income under the head “Profit and Gains from Business / Profession” for the AY 2019-20 of Tax Ltd.

Concept Problem 14

Gamma Ltd. was incorporated on 01.01.2018 for manufacture of tyres and tubes for motor vehicles. The

manufacturing unit was set up on 1.5.2018 and the company commenced its manufacturing operations on 1.6.2018.

The total cost of the plant and machinery installed in the unit is INR 120 crore. The said plant and machinery


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included second hand plant and machinery bought for INR 20 crore and new plant and machinery for scientific

research relating to the business of the Assessee acquired at a cost of INR 15 crore.

Compute the amount of depreciation allowable u/s 32 of the Income tax act 1961 in respect of the AY 2019-20.

(Study Material)

8. DEDUCTION FOR CAPI TAL EXPE NDITURE ON SPECIFI ED BU SIN ESS [SECTIO N 35AD]

In case of certain business, the Assessee shall be allowed to debit even the capital expenditure to the profit and loss

account.

Such business shall be called specified business and amount allowed to be debited shall be 100% of the capital

expenditure incurred. Such businesses are as given below:

a) Cold chain facility for storing agricultural produce, meat and meat products, poultry and dairy products etc.

b) Warehousing facility for storage of agricultural produce.

c) Hospitals with at least one hundred beds for patients.

d) Housing project under a scheme for affordable housing.

e) Production of fertilizer including increase in installed capacity of an existing plant.

f) Pipeline network for distribution of natural gas or petroleum products.

g) Hotel of two stars or above category.

h) Housing project for slum development.

i) Inland container depot or a container freight station.

j) Bee-keeping and production of honey.

k) Warehousing facility for storage of sugar.

l) Pipeline network for the transportation of iron ore.

m) Semi- conductor wafer fabrication manufacturing unit.

n) Developing or maintaining or operating a New Infrastructural Facility comprising of road, bridge, rail,

highway projects, water supply/treatment projects, irrigation, sanitation, solid waste management system,

port, airport, inland waterways, inland port or navigational channel in sea.

Note: Where the Assessee builds a hotel of two stars or above category and subsequently, while owning the

same, transfers the operations to another person, the Assessee shall be deemed to be carrying on the

specified business.

Note: The capital expenditure incurred before commencement of business shall also be allowed to be debited in the

year in which the business has commenced.

Note: The following capital expenditure shall not be allowed

Acquisition of any land; or

Goodwill; or


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Financial instrument.

Note: Any expenditure in respect of which payment or aggregate of payment made to a person of an amount

exceeding INR 10,000 in a day otherwise than by account payee cheque drawn on a bank or an account payee

bank draft or use of electronic clearing system through a bank account would not be eligible for deduction.

No Other Deduction Possible

The Assessee shall not be allowed deductions under section 10AA and under chapter VI-A under the heading 'C' i.e.

the following deductions are not allowed.

Section 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE, 80JJA, 80JJAA, 80QQB, 80RRB and 10AA.

Tax Treatment if asset which was debited to profit and loss account is used for any other purpose

or sold

If any capital asset, which was debited to profit and loss account, has been sold; amount received on sale shall be

considered to be income under the head Business/Profession as per section 28.

If any capital asset was acquired for the said business and amount was debited to profit and loss account, it must be

used for the said business for a period of at least 8 years otherwise the amount debited shall be considered to be

income of the Assessee of the year in which the asset has been used for other purpose.

Note: However, normal depreciation shall be deducted and only balance amount shall be considered to be income.

Example

Deduction claimed u/s 35AD on a capital asset is INR 100 lakhs whereas depreciation eligible on such asset u/s 32

is INR 15 lakhs. In this case, an amount of INR 85 lakhs would be deemed as the income of the Assessee under the

head Income from Business/Profession.

Set off and Carry Forward of Losses of a Specified Business [Section 73A]

Loss of specified business can be set off only from profits and gains of any other specified business and carry

forward is allowed for unlimited periods.

However, in the subsequent years also, the loss can be set off only from income of specified business.

Concept Problem 15

Mr. Ram commenced operations of the businesses of setting up a warehousing facility for storage of food gains,

sugar and edible oil on 01.04.2018. He incurred capital expenditure of INR 80 lakh, INR 60 lakh and INR 50 lakh

respectively on purchase of land and building during the period January, 2018 to March 2018 exclusively for the

above businesses and capitalized the same in its books of account as on 1st April 2018.

The costs of land included in the above figures are INR 50 lakhs, INR 40 lakhs, and INR 30 lakhs respectively.

Further, during the PY 2018-19, it incurred capital expenditure of INR 20 lakhs, INR 15 lakhs and INR 10 lakhs

respectively for extension and reconstruction of the building purchased and used exclusively for the above

businesses.

Compute the income under the head Profit and Gains from Business or Profession for the AY 2019-20 and the loss

to be carried forward assuming that Mr. Ram has fulfilled all the conditions specified for claim of deduction under

section 35AD.

The profit from the business of setting up a warehousing facility (before claiming deduction under section 35AD

and section 32 for the AY 2019-20 is INR 16 lakhs, INR 14 lakhs and INR 31 lakhs respectively.

(Study Material)


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Concept Problem 16

Arnav is a company having two units – Unit A carries on specified business of setting up and operating a

warehousing facility for storage of sugar, Unit B carries on non-specified business of operating a warehousing

facility for storage of edible oil. Unit A commenced operations on 1.4.2017 and it claimed deductions of INR 100

lacs incurred on purchase of two buildings for INR 50 lacs each (for operating a warehousing facility for storage of

sugar) under section 35AD for A.Y. 2018-19. However, in February 2019, unit A transferred one of its buildings to

Unit B.

Examine the tax implications of such transfer in the hands of Arnav.

(Study Material)

9. DONATION FOR RU RA L DEVELOPME NT PRO GRAMMES [SECTIO N 35CCA]

If any Assessee has given donation to any

a) notified organization for the purpose of rural development; or

b) Rural Development Fund set up Central Government; or

c) National Urban Poverty Eradication Fund set up by the Central Government;

the Assessee shall be allowed to debit the amount to profit and loss account.

Points to Note

If any Assessee has incurred any expenditure on approved agricultural extension project, the Assessee

shall be allowed to debit 1.5 times of the expenditure1 (other than expenditure on land and building)

incurred under Section 35CCC.

If a Company Assessee has incurred expenditure on skill development project in manufacturing sector,

it shall be allowed to debit 1.5 times of expenditure2 (other than expenditure on land and building)

incurred.

If the Assessee does not have any business or profession, he can claim deduction under section 80GGA.

10. AMORTIZATION OF CE RTAIN PRELIMINARY EXPEN SE S [SECTION 35D]

Preliminary expenses mean expenditure incurred before commencement of business. Such expenses are allowed to

be debited in 5 annual equal instalments starting from the year of commencement of business.

Such expenses are allowed only to Resident Assessee i.e. it is not allowed to non-residents and to foreign

company.

Only the notified expenditure incurred before commencement of business shall be allowed and such

expenses are as follows:

1. Expenditure in connection with reports.

a) Preparation of feasibility report.

b) Preparation of project report.

c) Conducting market survey or any other survey necessary for the business of the Assessee.

d) Engineering services relating to the business of the Assessee.


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Note: The work in connection with the above should be carried out by the Assessee himself or by a

concern approved by the Central Board of Direct Taxes.

2. Legal charges for drafting any agreement related to setting up the business.

3. Where the Assessee is an Indian Company, following expenditures are also allowed

i) Legal charges for drafting the Memorandum and Articles of Association of the company.

ii) Printing of the Memorandum and Articles of Association.

iii) Fees for registering the company under the provisions of the Companies Act.

iv) Expenses in connection with the issue of shares or debentures of the company being underwriting

commission brokerage and charges for drafting, typing, printing and advertisement of the prospectus.

Maximum Deduction

Maximum expenditure allowed shall be upto 5% of the project cost but an Indian Company has the option to

take 5% of the capital employed.

Example

Tax Ltd. has incurred expenditure of INR 30,00,000 and its project cost is INR 100,00,000 and capital employed is

INR 120,00,000.

In this case, expense allowed to the company shall be

Maximum of (120,00,000 x 5%) i.e. INR 6,00,000.

Instalment allowed shall be = 6,00,000/5 = INR 1,20,000.

Cost of the project means

In case of new business, the actual cost of the fixed assets being land, building, plant and machinery, furniture

and fitting etc. as on the last day of the year in which the Assessee has commenced the business.

Capital employed means

In case of new business, the aggregate of the issued share capital, debentures and long term borrowing

as on the last day of the previous year in which the business of Company commences.

Extension of Business

If there is extension of business, expenses incurred in connection with such extension shall also be allowed in the

similar manner as in case of new business.

In such case, project cost and capital employed shall be taken into consideration relating to extension of business.

Concept Problem 17

Tax Ltd, an Indian Company, has incurred expenditure before commencement of business as under:

Expenditure on advertisement INR 3 Lakhs.

Expenditure in preparation of project report and the report was prepared by a concern which is approved by

the Board INR 85,000.

Expenditure in connection with travelling and stay in hotels INR 45,000.

Expenditure on drafting and printing of memorandum and articles INR 4 Lakhs.


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All the above expenses have been debited to the profit and loss account and the Company has computed income to

be INR 7 Lakhs. The Company has commenced its business on 01.06.2018.

Company’s project cost is INR 50 Lakhs and capital employed is INR 57 Lakhs.

Compute the tax liability for AY 2019-20.

11. AMORTIZATION OF EX PENDITURE IN CE RTAI N CASE S

Amortization of expenditure in case of Amalgamation or Demerger (Section 35DD)

If an Indian company has incurred expenditure in connection with amalgamation or demerger, Assessee shall be

allowed to debit such expenditure in 5 annual equal installments.

Amortization of expenditure incurred under Voluntary Retirement Scheme (Section 35 DDA)

If any employer has given voluntary retirement to the employees and has paid any amount in connection with such

voluntary retirement,

either in the year of retirement or in any subsequent year,

it will be allowed to be debited in 5 annual equal installments

starting from the previous year in which payment was made to employee.

Example

Tax Ltd. has given voluntary retirement to 500 employees in PY 2018-19 and has paid INR 4,00,000 to each of the

employee in the PY 2019-20. In this case, total payment made is INR 2,000 lakhs and this will be allowed in 5

annual equal installments starting from the PY 2019-20.

Note: In case of amalgamation, demerger, reorganization or succession of business during the intervening period

of the said 5 years, the benefit of deduction will be available to the “new company” for the balance period including

the year in which such amalgamation/demerger/reorganization or succession takes place.

Concept Problem 18 X Ltd. made the following payments to one of its employees on account of voluntary retirement

Previous year Amount

2017-18 3,00,000 2018-19 5,00,000

Show how deduction u/s 35 DDA shall be claimed in different assessment years.

12. DEDUCTION S UND ER SECTION 36

1) Payment of premium for the insurance of stocks [Section 36(1)(i)]

If any Assessee has paid premium for insurance of raw material or finished goods etc., such premium is allowed to

be debited to profit and loss account.

2) Payment of premium in connection with medi claim policy of Employees [Section 36(1)(ib)]

If any Assessee has paid premium for medi claim policy taken in the name of employees, such premium is allowed


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to be debited to profit and loss account provided premium was paid otherwise than in cash.

3) Payment of Interest on Borrowed Capital [Section 36(1)(iii)]

If any Assessee has taken a loan for the purpose of business/profession, interest on such loan is allowed.

If loan is taken from scheduled Banks, public financial institution or any other person notified u/s 43B, deduction

for interest is available only if such interest has actually been paid till the last date of filing of ROI.

Interest on loan taken for the purpose of acquisition of an asset is to be capitalized for the period commencing from

the date of borrowing till the date the asset was first put to use.

No interest is allowed to the proprietor on his capital. Similarly, no salary or any other payment is allowed to the

proprietor.

4) Employer’s contribution to Recognized Provident Fund or Approved Superannuation Fund

[Section 36(1)(iv)]

Employer contribution to Recognized Provident Fund and Approved Superannuation Fund shall be allowed to be

debited only to the extent it has been permitted in the relevant Act/Rule provided contribution complied with

section 43B.

Example

Employer contribution to recognized provident fund is allowed maximum @ 12% of employees’ salary provided the

contribution was made before the due date of filing return of income.

5) Employer's contribution towards a Pension Scheme [Section 36(1)(iva)]

Employer’s contribution to notified pension scheme as per section 80CCD shall be allowed maximum to the extent

of 10% of the Retirement Benefit Salary of employee.

Example

If salary of employee is INR 2,00,000, employer can contribute maximum INR 20,000 towards NPS u/s 80CCD. If

employer contributes more than 10%, say 22,000, he shall be allowed to debit only 20,000 i.e. 10% of Retirement

Benefit Salary.

6) Employer's contribution towards approved Gratuity Fund [Section 36(1)(v)]

Employer’s contribution to approved gratuity fund shall be allowed to be debited to the extent allowed in the

relevant ACT/Rule provided contribution complied with section 43B.

7) Employee's contribution received by the employer [Section 36(1)(va)]

Employee’s contribution deducted by employer shall be

first treated as income of the employer; and employer is allowed to debit this contribution only if

he has deposited the amount in the relevant account within the time allowed in the relevant Act.

If the employer fails to deposit the amount within the relevant due date, employee’s contribution shall be taxable as

income of the employer.

As per paragraph 38 of The Employees' Provident Funds Scheme 1952, the employer should deposit the provident

fund maximum upto 15 days of the subsequent month.


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As per section 31 of Employees State Insurance (General) Regulations 1950, ESI contribution should be deposited

maximum upto 21st of subsequent month.

8) Deductibility of Family Planning Expenditure under [Section 36(1)(ix)]

If any Company has incurred expenditure in connection with promotion of family planning norms among the

employees; the Assessee shall be allowed to

debit the Revenue expenditure to profits and loss account in the same year and

capital expenditure shall be allowed in 5 annual equal installments.

Any other Assessee is not allowed to debit any expenditure in connection with promotion of family planning.

Expenditure is allowed to debited only to the extent income is available under the head

Business/Profession and unadjusted expenditure shall be allowed to be set off a carried forward just like

unabsorbed depreciation.

9) Securities Transaction Tax [Section 36(1)(xv)]

If the Assessee has paid securities transaction tax which is part of his business (i.e. where securities are held as

stock-in-trade), STT shall be allowed to be debited to the profit and loss account.

10) Commodities Transaction Tax [Section 36(1)(xvi)]

If the Assessee has paid commodities transaction tax which is part of his business (i.e. where commodities are

held as stock-in-trade), CTT shall be allowed to be debited to the profit and loss account.

13. DEDUCTIBILITY OF VA RIOUS TAXE S

Particulars Remarks

Income tax or advance payment of tax Disallowed as not considered to be

liability of business/profession but

personal liability of Assessee.

Interest on delay in payment of Income tax or advance tax

Interest on the loan taken for payment of Income tax

Sales tax, custom duty, excise duty, service tax, municipal taxes etc. Allowed subject to section 43B

Interest on delay in payment of sales tax, custom duty, excise duty, service

tax etc.

Allowed Interest on loan taken for the payment of sales tax, custom duty, excise

duty, etc.

Refund of Income tax Not an Income

Refund of sales tax, custom duty, excise duty, service tax etc Income

Interest on refund of any taxes Income

Penalty in relation to any taxes Disallowed

If employer has paid income tax on behalf tax on behalf of the employee,

it will also be considered to be income of the employee; and

employer is allowed to debit such amount to profit and loss account.

Example

Mr. Ram is employed in Tax Ltd. and is getting salary of INR 10,00,000 p.a. The employer has paid income tax of

INR 1,00,000 on behalf of the employee besides salary of INR 10,00,000.


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In this case, employer is allowed to debit INR 11,00,000 to profit and loss account and tax liability of the employee

shall be computed in the manner given below:

Particulars Amount

Tax at slab rate on INR 11,00,000

Add: Health and education cess @ 4%

Tax Liability

Less: Tax paid by employer

Tax Payable

If income tax has been paid by the employer on behalf of the employee in connection with

non-monetary perquisites,

it will not be considered to be income of employee under the head Salary under section 10(10CC) and

employer shall not be allowed to debit such amount to profit and loss account.

14. DEDUCTION FOR BAD DEBT S OF A BU SINE SS [SECTIO N 36(1)(vii)]

If an Assessee has written off bad debts as irrecoverable in the books of account;

he will be allowed to debit such bad debts to the profit and loss account.

Note: Deduction shall not be allowed if “Bad Debt Account” is debited and “Provision for Bad Debt Account” is

credited. To claim deduction, the debtor must be written off by name.

Note: There is no need to prove that the debt has become bad/ irrecoverable.

Recovery of bad debts Section 41(4)

If any amount was debited as bad debts and subsequently it was recovered by the Assessee,

it will be considered to the income of the Assessee under the head Business/Profession of the year in which it

has been recovered.

Note: If the Assessee does not have business or profession in that particular year, even then it will be considered to

be income under the head Business/Profession.

Note: If debt was incurred by a person but it was recovered by his successor, in that case it will not be considered to

be income of the successor.

Note: If there is bad debt with respect to a debtor acquired as a part of amalgamation etc., it will be allowed as a

deduction in Profit and Loss account.

Example

Mr. Ram has sold goods on credit amounting to INR 3,00,000 and has debited INR 50,000 as bad debts.

Subsequently, he received INR 2,10,000 on final settlement.

In this case, deficiency of INR 40,000 shall be allowed as bad debt.

If the amount received is INR 2,60,000; excess of INR 10,000 shall be considered to be income under section 41(4).


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15. GEN ERAL DEDUCTION S [SECTIO N 37(1)]

Section 37(1) is a residuary section. If any expenditure is neither allowed nor disallowed specifically under any

particular section,

such expenditure is allowed to be debited if

it is related to business or profession and is revenue in nature.

Note: If it is capital expenditure, depreciation is allowed.

Note: Personal and notional expenditure is not allowed. Example – drawings etc.

Note: Illegal expenses are not allowed. Any fine or penalty for an offence is also not allowed.

Various expenditures which may be allowed under section 37(1) are as given below:

a) Expenditure in connection with advertisement.

b) Expenditure on travelling including the expenses of boarding and lodging in connection with

business/profession.

c) Salary paid to the employees.

d) Expenditure in connection with entertainment/amusement of the employees or the customers.

e) Expenditure in connection with opening ceremony (Mahurat) of the business/profession.

Example

Tax Ltd. has incurred INR 50,000 in connection with 'shamiana' and refreshment on occasion of opening

ceremony.

f) Expenditure on carpets.

g) Demurrage charges.

h) Professional Tax paid.

i) Expenditure incurred on development of website by an Assessee engaged in Travel Business like Goibibo.

j) Annual listing fee paid to Stock Exchange.

k) Expenditure on the occasion of various festivals like Diwali etc. for employees or customers.

l) Incentives given to the articled assistance by a Chartered Accountant.

m) Interest on late payment of indirect taxes like GST.

n) Expenditure in connection with legal proceedings.

o) Profession tax paid by a person carrying on business or profession.

p) Expenditure on the filing of return of income, filing of appeal or audit fee etc. is allowed.

q) Cost of production of abandoned feature film.


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r) Any other expenditure which is revenue in nature and it is related to business or profession.

s) Any expenditure incurred by an Assessee on the activities relating to corporate social responsibility

referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred

by the Assessee for the purpose of the business or profession.

Hence, CSR expenditure shall not be allowed to be debited to profit and loss account.

Note: Expenses incurred in providing freebees to medical practitioner by pharmaceutical and allied health sector

industry shall not be allowed.

Further, a sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional

associations is also taxable as business income or income from other sources, as the case may be, depending

on the facts of each case.

Note: No allowance shall be made in respect of expenditure incurred by an Assessee on advertisement in any

souvenir, brochure, pamphlet or the like published by a political party [Section 37(2B)].

However, such expenditure as well as donation to political parties is allowed as deduction under section

80GGB/80GGC.

16. EXPENDITU RE IN RE LATION TO ASSET S USED PARTLY IN BU SI NESS AND PA RTLY IN

PE RSO NAL USE [SECTIO N 38]

If any person has any asset in business or profession as well as in personal use, expenditure is allowed only to the

extent the asset is in the use of the business or profession.

Example

Mr. Ram has one motor car which is used to the extent of 70% in business and 30% for personal use. In this case, all

expenditure related to car shall be allowed to be debited in the profit and loss account to the extent of 70%.

17. DEDUCTIBILITY IN RE SPECT OF PROVISIO N FOR GRATUITY FUND [SE CTION 40A(7)]

In general, no provision is allowed under Income Tax Act. However, as a special case, provision for gratuity is

allowed provided

the gratuity has become due for payment or

the Assessee can make provision for contribution towards approved gratuity fund. Such provision should

be actuarial provision i.e. it should not be hypothetical.

Example

Mr. Ram retired on 28.03.2019 from Tax Ltd. and gratuity of INR 3,00,000 is payable but company has not made

the payment till 31.03.2019. In this case, company is allowed to make provision for gratuity.

18. EMPLOYER ’S CONTRIB UTION TO VARIOU S FUNDS [SECTION 40A(9)]

Employer's contribution to various funds is allowed only if such funds are notified under any Act.

If the employer has contributed to the

recognized provident fund or


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approved superannuation fund or

approved gratuity fund or

any other similar fund required under any other Act,

such contribution is allowed but payment has to be made upto the last date of filing of return of income as per

section 43B.

Note: If the employer has contributed to any other fund like unrecognized provident fund or unapproved

gratuity fund or unapproved superannuation fund etc., expenditure shall not be allowed.

19. DEDUCTIBILITY OF EX PENDITURE ON WH IC H TAX HAS NOT BEEN DEDUCTED AT SOURC E .

I. Tax deduction at source for payment of interest, royalty etc., outside India or to a non-resident/

Foreign Company in India [Section 40(a)(i)]

If any person has paid any

interest, royalty or technical fee or other sum chargeable to income tax and

the amount is being paid outside India or

it has been paid in India to a non-resident or to any foreign company,

amount shall be allowed to be debited only if tax has been deducted at source upto the end of the year

and also tax has been paid to the government upto the last date of filing of return of income.

In case the Assessee either fails to deduct the tax at source on such payments by end of the year or fails to deposit

the amount with Govt. upto the last date of filing of return of income,

expenditure is disallowed.

However, it is allowed in the year in which tax has been paid to the Government.

Note: As per section 195, every person has to deduct tax at source on every payment made outside India.

Example

Tax Ltd. has paid INR 20 lakhs as interest outside India on 03.01.2019 and tax was deducted at source on

10.03.2019 and it was paid to the Government on 30.09.2019.

In this case, expenditure is allowed in PY 2018-19.

In the above case, if tax was deducted at source on 01.04.2019, expenditure would not be allowed in PY 2018-19 but

it would be allowed in PY 2019-20.

Similarly, if tax was deducted at source on 10.03.2019 and paid to the Government on 01.10.2019, expenditure is

not allowed in previous year 2018-19. However, it would be allowed in PY 2019-20.

II. Tax deduction at source for any payment to a Resident in India [Section 40(a)(ia)]

If any person has to pay any sum to a resident on which tax is to be deducted at source, in that case

such person must deduct tax at source by end of the relevant previous year; and

payment to Government should be made upto the last date of ROI;


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otherwise, 30% of such expenditure is disallowed.

However, this 30% of the expenditure shall be allowed in the year in which tax is paid to the Government.

Example

Tax Ltd. has paid rent of INR 10 lakhs to XYZ Ltd. in India on 31.12.2018 and tax was deducted at source on

31.03.2019 and was paid to the Government on 30.09.2019.

In this case, expenditure is allowed in previous year 2018-19.

However, if tax is deducted at source after 31.03.2019 or payment is made to the Government after 30.09.2019,

expenditure allowed in previous year 2018-19 shall be 10,00,000 x 70% = 7,00,000 and balance INR 3,00,000 is

disallowed. However, it will be allowed in the year in which tax has been paid to the Government.

If any person has not deducted tax at source but

person who received the payment has paid tax on such amount and

filed return and it is confirmed by the Chartered Accountant,

in that case it will be presumed that such person has deducted and paid tax on the date of filing of ROI

by the person receiving payment.

Note: In such case, Assessee shall not be deemed to be an Assessee in default. Therefore, 30% of the payment will

be disallowed in the year of payment and allowed in the subsequent year.

Example

Tax Ltd. has paid rent of INR 10 lakhs to XYZ Ltd. in India on 31.12.2018 and company has not deducted tax at

source. However, XYZ Ltd. has deposited the tax and filed return on 30.09.2019.

In this case, it will be presumed that tax has been deducted on 30.09.2019 and paid to the Government on

30.09.2019 and 70% expenditure shall be allowed to Tax Ltd. in previous year 2018-19 and balance 30% in previous

year 2019-20.

Example

Tax Ltd. has paid INR 1,00,000 to XYZ Ltd, being the amount of rent, and no tax has been deducted at source. In

this case, expenditure is allowed because as per section 194-I, TDS is not applicable if rent payable is upto

INR 1,80,000.

Concept Problem 19

Delta Ltd. credited the following amounts to the account of resident payees in the month of March, 2019 without

deduction of tax at source. What would be the consequence of non-deduction of tax at source by Delta Ltd. on these

amounts during the financial year 2018-19, assuming that the resident payees in all the cases mentioned below,

have not paid the tax, if any, which was required to be deducted by Delta Ltd.?


1. Salary to its employees (credited and paid in March, 2019) 12,00,000

2. Directors’ remuneration (credited in March, 2019 and paid in April, 2019) 28,000

Would your answer change if Delta Ltd. has deducted tax on directors’ remuneration in April, 2019 at the time of

payment and remitted the same in July, 2019?


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(Study Material)

Concept Problem 20

Tax Ltd. has computed its income to be INR 20,00,000 and some of the entries noted from profit and loss account

are as given below:

a) Company has debited the amount of opening stock INR 33,00,000 which is overvalued by 10%

b) Company has received duty drawbacks of INR 7,00,000 but the amount has not been credited to the profit and

loss account.

c) The company has received import entitlement license from the Government and it was sold it at a profit of INR

3,00,000. The amount has not been credited to the profit and loss amount.

d) Interest expenses of INR 50,000 was debited in the books out of which INR 12,000 was payable outside India

on which tax was not deducted at source; INR 15,000 was payable to a resident on which no tax was deducted.

e) Drawings INR 50,000.

f) Stipend paid to articled assistants INR 40,000 and incentive to articled assistant for clearing CA Final exams

in first attempt INR 10,000.

g) Rental expense of the building in which office is located in INR 25,000 per annum. 20% of the building is used

for residence of the Assessee.

h) INR 1,40,000 was incurred in relation to repairs and maintenance of building which includes INR 1,00,000

being cost of raising a compound wall for the own business premises.

Compute the taxable income of Tax Ltd. Turnover of Tax Ltd. in PY 2016-17 is 50 crores.

20. PAYMENT OF REMUNE RATION OR INTE RE ST TO TH E PARTN ERS [SE CTION 40(b)]

If any partnership firm has paid remuneration/bonus/commission/salary or interest to the partners,

it is allowed provided it has complied with the provision of section 184 and section 40(b).

As per section 184, partnership firm should be evidenced by an instrument i.e. there should be some legal

document like Partnership deed confirming the existence of partnership firm.

Such legal document should give the Firm power to pay remuneration to Partners.

Points to Note

a) A copy of such instrument is also to be submitted with the first return of income.

b) As per section 40(b), interest to the working partner is allowed but maximum 12% p.a. simple interest.

c) Payment of salary, bonus, commission or any other remuneration is allowed but only to the working

partner.

d) Maximum amount of salary, bonus, commission etc. allowed to a partner shall be computed as given below:

Maximum amount of remuneration allowed shall be as given below

First INR 3,00,000 of the book profits 90% of the book profit or 1,50,000 whichever is more

On balance amount of book profit 60% of book profit


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Example

A partnership firm has book profits of INR 5 lakhs. In this case, maximum amount of salary etc. allowed to all the

partners shall be

Upto INR 3,00,000 90% of 3,00,000 or INR 1,50,000 whichever is more 2,70,000

Next INR 2,00,000 60% of 2,00,000 1,20,000

Total 3,90,000

Meaning of Book Profits

Book profit means profit and gains of business profession but before charging any salary, bonus, commission etc. to

the partners.

Further, if the Assessee has brought forward depreciation and losses;

brought forward depreciation will be allowed to be adjusted while computing the book profits; but

brought forward business loss shall not be adjusted.

Share received by a partner from income of Partnership Firm [Section 10(2A)]

If any partner has received share out of the profits of the partnership firm, such share shall be exempt from income

tax in the hands of partner since such share of profit is already post tax i.e. tax has already paid by the Firm on this

profit.

As per section 28, interest or salary received by a partner shall be taxable under the head Business / Profession.

Concept Problem 21

KSA & Co, a partnership firm has computed net profit of INR 5,00,000 and some of the amount debited and

credited given below:

a) Debited INR 1,00,000 being salary paid to one of the employees by crossed cheque

b) Debited INR 4,00,000 being the cost of motor car purchased and put to use 31.03.2019

c) Debited INR 3,00,000 being interest paid to Mr. Ram @ 15% p.a.

d) Debited INR 4,50,000 being interest paid to Mr. Shyam @ 15% p.a.

e) Debited salary of INR 10,00,000 paid to Mr. Ram

f) Debited salary of INR 500,000 paid to Mr. Shyam

g) Debited INR 80,000 being advance income tax

h) Credited INR 6,00,000 being long term capital gain (LTCG)

i) The firm has b/f business loss of INR 30,000 and b/f depreciation of INR 40,000.

j) The firm has donated INR 40,000 by cheque to charitable institution notified u/s 80G

k) Firm has complied with conditions of section 184/40(b) and payment of salary and interest to its partners,

Ram and Shyam, is allowed as per the instrument.

Compute tax liability of partners & partnership firm AY 2019-20.

Concept Problem 22

X, Y and Z are the partners in a firm with profit sharing ration 5:3:2 and profit and loss account of the partnership

firm is as given below:


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Particulars Amount Particulars Amount

Purchases 90,00,000 Sales 102,00,000

Salary and bonus to partners

X

Y

Z

3,00,000

2,50,000

1,50,000

Discount 10,000

Municipal tax payable 30,000 Interest from Indian company 60,000

General expenses 1,00,000 Interest on drawings 10,000

Expenditure on technical know-how

(purchased and put to use on 01.01.2019)

40,000 Income tax refund 5,000

Advance Income Tax 70,000

Expenses on VAT proceedings 10,000

Expenses on income tax proceedings 8,000

Advertisements 50,000

Interest on capital to partners @ 13% p.a.

X

Y

Z

65,000

39,000

26,000

Rent of building owned by partnership firm 1,20,000

Net Profit 27,000

Total 102,85,000 102,85,000

Additional information:

1. The partnership firm has complied with all the conditions of section 184.

2. Salary to the partners is allowed as per partnership deed and interest is allowed @ 10% p.a.

3. Capital contributed by Mr. X is INR 5,00,000; by Mr. Y is INR 3,00,000 and by Mr. Z is INR 2,00,000.

4. The partnership firm has brought forward business loss for AY 2015-16 amounting to INR 1,00,000.

5. Municipal tax was paid on 01.11.2019.

Personal incomes of partners:

a) Mr. X has income from house property INR 5,00,000 and amount invested in NSC INR 80,000.

b) Mr. Y has income from house property INR 2,00,000 and amount invested in NSC INR 1,00,000.

c) Mr. Z has loss from house property INR 2,00,000.

Compute tax liability of the partnership firm and also that of its partners for the Assessment Year 2019-20.

21. PAYMENT TO RELATIV E/RELAT ED PERSON [SECTIO N 40A(2)]

If the Assessee incurs any expenditure and

payment has been given to any person mentioned below and

such expenditure is excessive or unreasonable having regard to the fair market value of the goods,

service or facilities

the excessive or unreasonable amount shall not be allowed as a deduction.

Note: There will be no change in the income of the recipient on account of any disallowance u/s 40A(2).

Example


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Mr. Ram has purchased raw material for his business from his brother and has paid INR 5,00,000 but market value

is INR 3,00,000.

In this case, expenditure disallowed shall be INR 2,00,000.

It should be noted that income in the hands of the brother shall remain INR 5,00,000 i.e. brother cannot claim that

since INR 2,00,000 has been disallowed to Mr. Ram on account of excessive payment, there should be

corresponding decrease in his income as well.

The person covered in this category are-

1. If any individual has made any payment to his relative.

2. If the Assessee is a Company, Firm, Association of Persons or Hindu Undivided Family etc. and it has made

payment to any director of the Company, partner of the Firm or member of the Association or Family or any

relative of such director, partner, member etc.

3. If any person made payment to any other person who has substantial interest in the business of the Assessee.

Example

Tax Ltd. has paid legal fee of INR 5,00,000 to Taxedu Ltd. which is holding 20% shares of Tax Ltd. In this

case, excessive payment, if any, shall be disallowed.

4. Any other person covered under section 40A (2).

22. CASH PAYMENT IN EX CESS OF INR 10,000 [SECTION 40A (3) / RUL E 6DD]

If an Assessee has incurred any revenue or capital expenditure and

the payment or the aggregate of the payments made to a person with regard to such expenditure

on any single day exceeds INR 10,000 and

payment was made otherwise than through ECS, account payee cheque or account payee bank draft

in such cases, entire expenditure is disallowed.

Treatment of Capital Expenditure where payment in excess of INR 10,000 is made otherwise than

through ECS, account payee cheque

Such payment will not be considered for determining actual cost of asset as per Sec. 43(1).

Therefore, depreciation will not be allowed on such payment exceeding INR 10,000/-.

Note: In case of payment made to a goods transport agency for plying, hiring or leasing goods carriages, the

ceiling of ten thousand rupees shall be enhanced to thirty-five thousand rupees.

Example

Mr. Ram has incurred an expenditure of INR 35,000. He makes separate payments of INR 5,000 in cash, INR

16,000 through bearer cheque and INR 12,000 through crossed cheque to the person concerned in a single day.


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The aggregate amount of payment made to a person in a day in this case is INR 33,000 and since this aggregate

payment by cash exceeds INR 10,000, INR 35,000 will not be allowed as a deduction in computing the total income

of Mr. Ram.

Example

a) If Tax Ltd. has paid INR 60,000 in cash, expenditure disallowed shall be INR 60,000.

b) If Mr. Ram has paid INR 12,000 by a bearer cheque, amount disallowed shall be INR 12,000.

c) If Tax Ltd. has paid INR 10,100 by a crossed cheque, amount disallowed shall be INR 10,100

d) If Tax Ltd. has paid INR 30,000 by an account payee cheque, entire amount is allowed.

e) If Mr. Ram pays a salary to his employee INR 15,000 by crossed cheque, entire expenditure is disallowed.

f) If Tax Ltd. has paid INR 30,000 in cash to a goods transport agency for transportation of goods, expenditure is

allowed.

g) Mr. Ram purchased goods worth INR 75,000 on 01.01.2019 and payment was made INR 60,000 on

03.01.2019 by account payee cheque and INR 5,000 in cash on 03.01.2019 and INR 10,000 in cash on

05.01.2019. In this case, entire expenditure is allowed.

h) Mr. Ram purchases goods worth INR 8,000 and INR 5,000 against two bills from Mr. Shyam and makes the

payment INR 13,000 in cash in a single day. In this case, entire expenditure is allowed.

i) Mr. Ram purchases goods worth INR 18,000 from Mr. Shyam against one bill but makes payment of INR

10,000 and INR 8,000 at different times on the same date. In this case, entire expenditure is disallowed.

j) Tax Ltd. has purchased one plant for INR 1,00,000 and the payment was made in cash. In this case, Assessee

is not allowed to claim depreciation.

Note: If an Assessee following mercantile system of accounting

has claimed an expenditure in any previous year on due basis, and

payment has been made in a subsequent year otherwise than as required u/s 40A(3),

then the payment so made shall be deemed to be the income of the subsequent year

if such payment or aggregate of payments made to a person in a day exceeds 10,000.

Example

Bhaskar has claimed a deduction of INR 25,000 for rent expenses during PY 2018-19 on accrual basis. Payment for

this expenditure was made on 01.05.2019 in cash. In this case, the amount of INR 25,000 shall be deemed to be the

PGBP income of Mr. Bhaskar for PY 2019-20.

Exceptions under rule 6DD

As per rule 6DD, the above provisions are not applicable with regard to following payments:

1. Payment made to Reserve Bank of India, State Bank of India or other banking institutions, LIC, UTI, Central

/State Government etc.

2. If the payment is made in a village or town and there is no bank at such place on the date of making the

payment and payment is being given to any person who ordinarily resides at that place or has his business or

profession at that place.


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3. Where the payment is made for the purchase of

a) Agricultural or forest produce; or

b) The produce of animal husbandry or dairy or poultry farming; or

c) Fish or fish products; or

d) The products of horticulture or apiculture.

4. Where the payment is made for the purchase of the products manufactured in a cottage industry to the

producer of such products.

5. Where the payment is made by transferring funds from one bank account to the other or payment is being

made by any credit card/ debit card/ letter of credit/ electronic clearing system etc.

6. If payment is being made to an employee after retirement or to his family member after the death of the

employee and payment is in connection with gratuity etc. and payment is not exceeding INR 50,000

7. If salary is being paid to any employee who has been transferred temporarily to some other place for a

period of 15 days or more and the employee does not have any bank account at that place and tax has

been deducted at source, in such cases also payment can be made in any manner.

8. If payment is to be made on a particular day but banks are closed on that day because of holiday or strike.

9. Any other situation given under Rule 6DD.

23. INCOMES UNDE R SECT ION 41

In general, a person cannot have income under the head Business/Profession without business/profession.

However, as per section 41(1), 41(2), 41(3) and 41(4); certain incomes shall be taxable under the head

Business/Profession even if the Assessee does not have any business /profession.

Such cases are as follows:

As per section 41(1), if Assessee has debited any amount to the profit and loss account and subsequently it was

recovered by him, it will be considered to be his income under the head Business/Profession of the year in which it

has been recovered even if the Assessee do not have any business or profession in that year.

Example

Mr. Ram has debited INR 20,000 to profit and loss account being the municipal tax paid but in the subsequent year

there was refund of INR 3,000.

In this case, INR 3,000 will be considered to be income under the head Business/Profession in the year of recovery.

If amount has been recovered by the successor of business in that case, it will be considered to be income of such

successor.

“Successor in business” means the amalgamated company/the resulting company/where a firm is succeeded by

another firm, the other firm etc.

(Section 41(2), 41(3) and 41(4) have been discussed in the relevant concepts.)


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24. ACTUAL COST [SECTIO N 43(1)]

In case of depreciable assets, depreciation is allowed on actual cost. As per section 43(1), actual cost means

total expenses incurred upto the date of putting the asset to use.

Example

If Tax Ltd. has taken a loan of INR 40 lakhs @ 10% pa on 01.01.2018 for purchasing a particular plant and

machinery and the company has made additional payment as under.

1. Transportation charges INR 2 lakhs.

2. Loading and unloading expenses INR 25,000.

3. Payment for the expert staff to install the plant and machinery INR 3 lakhs.

4. Company has incurred INR 4 lakhs for construction of a platform for installing the plant and machinery.

The asset was put to use on 01.01.2019.

In this case, actual cost of the asset shall be INR 53,25,000 (40,00,000 + 4,00,000 + 2,00,000 + 25,000 +

3,00,000 + 4,00,000).

Receipt of Subsidy

If the Assessee has received any subsidy from the Government or other similar agency,

In relation to an asset - The subsidy so received shall be deducted from the actual cost.

Any other case – Shall be treated as Income under the head Profit and Gains from Business/Profession.

Example

If in the above case, Assessee has received a subsidy of INR 2 lakh in connection with plant and machinery as it was

a non-polluting plant, actual cost of the asset shall be INR 51,25,000

Treatment of interest subsequent to putting the asset to use

Any interest in connection with the acquisition of an asset relating to any period after such asset is first put to

use shall not be included in the actual cost of such asset.

Such interest is revenue expenditure and is allowed to be debited to profit and loss account.

Note: Interest prior to putting the asset to use shall be added in the actual cost.

Actual cost in certain special situations

1) Asset used for business after it ceases to be used for scientific research:

Where an asset is used for the purposes of business after it ceases to be used for scientific research related to that

business, the actual cost to the Assessee for depreciation purposes shall be the actual cost to the Assessee as

reduced by any deduction allowed under section 35(1)(iv) [Explanation 1].

2) Stock-in-trade converted into capital asset and used for business or profession:


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Where inventory is converted or treated as a capital asset and is used for the purpose of business or profession, any

gain is taxable under the head PGBP.

Sale Price: Fair Market Value on the date of conversion

Cost: will be considered as actual cost of purchase of stock-in trade.

3) Composite Income:

In cases of ‘composite income’, for the purpose of computing written down value of assets acquired before the

previous year, the total amount of depreciation shall be computed as if the entire composite income of the Assessee

is chargeable under the head “Profits and Gains of business or profession”. The depreciation so computed shall be

deemed to have been “actually allowed” to the Assessee i.e. there will be no impact on the depreciation allowed to

Assessee.

Example

Income derived from the sale of tea grown and manufactured by seller is computed as if it were income derived

from business and 40% of such income shall be deemed to be income liable to tax. If the turnover is, say, INR 20

lakh, the depreciation INR 1 lakh and other expenses INR 4 lakh, then the income would be INR 15 lakh. Business

income would be INR 6 lakh (being 40% of INR 15 lakh). In this case, INR 1 lakh, being the amount of depreciation

would be deemed to have been actually allowed.

Accordingly, the WDV is required to be computed by deducting the full depreciation attributable to composite

income i.e. INR 1 lakh.

4) Buildings in personal use subsequently used in business/ profession

If a building was previously the property of the Assessee and it is

brought into use for the purpose of the business or profession;

the Actual Cost to the Assessee shall be;

the actual cost of the building to the Assessee as reduced by an amount equal to the depreciation that

would have been allowable had the building been used for the business/profession since the date of its acquisition.

Note: In case of asset other than buildings, the purchase price of the Asset shall be considered to be Actual

Cost for charging depreciation. No notional depreciation is allowed in such cases.

IMPACT OF CHANGES IN THE EXCHANGE RATE OF CURRENCY ON ACTUAL COST [SEC 43A]

If an Assessee has acquired any asset

from a foreign country for the purpose of his business or profession and

there is an increase or decreases in the amount payable (expressed in Indian rupees)

due to a change in the exchange rate of the two currencies involved;

the actual cost of the asset under section 43(1) shall be changed accordingly

Losses arising on principal repayments due to foreign exchange fluctuations shall be added to the WDV of the Asset

and depreciation shall be computed at the increased value in future years.


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Similarly, gains arising on principal repayments due to foreign exchange fluctuations shall be reduced from the

WDV of the Asset and depreciation shall be computed at the reduced value in future years.

Concept Problem 23

N Textiles Ltd, purchased machinery from Germany for Euro 1,00,000 on 3.09.2017 through a term loan from

Fortune Bank Ltd. The exchange rate on the date of acquisition was INR 65 per Euro. The Assessee took a forward

exchange rate on 05.10.2018 when the rate specified in the contract was INR 67 per Euro.

Compute depreciation for the assessment years 2018-19 and 2019-20. Ignore additional depreciation and assume

normal depreciation @ 15%.

Concept Problem 24

Mr. Ram purchased a residential building on 01.12.2016 for INR 12,00,000 and it was put to use on the same date.

Till 01.12.2018, the same was self-occupied as residence. On this date, the building was brought into use for the

purpose of his medical profession (it was used as residential building).

What would be the depreciation allowable for the Assessment year 2019-20?

Concept Problem 25

A car purchased by Dr. Soman on 10.08.2016 for INR 5,25,000 for personal use is brought into professional use on

01.07.2018 by him, when its market value was INR 2,50,000. Compute the actual cost of the car and the amount of

depreciation for the assessment year 2019-20 assuming the rate of depreciation to be 15%. (Study Material)

Solution

As per section 43(1), the expression “Actual Cost” would mean the actual cost of asset to the Assessee. The purchase

price of INR 5,25,000 is, therefore, the actual cost of the car to Dr. Soman. Market value (i.e. INR 2,50,000) on the

date when the asset is brought into professional use is not relevant.

Therefore, amount of depreciation on car as per section 32 for the AY 2019-20 would be INR 78,750, being INR

5,25,000 x 15%.

Note: The provision regarding reduction of notional depreciation from the date of acquisition of asset for personal

use to determine actual cost of the asset is applicable only in case of building which is initially acquired for personal

use and later brought into professional use. It is not applicable in respect of other assets.

25. FULL VALUE OF CO NSIDE RATION FO R TRANSF ER OF ASSET S OTHE R THAN CAPIT AL

ASSET S IN CE RTAIN CASE S [SECTIO N 43CA]

If any person has sold land or building which was held as stock-in-trade and

it was sold at a value less than the stamp duty value; in such cases

sale value shall be considered to be stamp duty value.

However, if the stamp duty value

does not exceed 105% of the consideration received or accruing then,

such consideration shall be deemed to be the full value of consideration

for the purpose of computing profits and gains from transfer of such asset.

Relevant Date for determining Stamp Duty Value If the seller has entered into an


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agreement to sell the property

at an earlier date and

some advance was received through

account payee cheque/ account payee bank draft or use of ECS through a bank account, then

SDV on the date of agreement shall be taken into consideration.

Example

Case Actual

Consideration

Stamp duty

value on the date

of agreement

Stamp duty

value on the date

of registration

Consideration which will be

applicable

1 100

(INR 10 lakhs received

by Account payee

cheque on 1/9/2017)

120 (1/9/2017) 210 (1/5/2018)

2 100


by cash on 1/9/2017)

104 (1/9/2017)

210 (1/5/2018)

3 100


by A/c payee cheque on

1/9/2017)

104

(1/9/2017)

210 (31/1/2019)

4 100

(Full amount received on the date of registration)

120

(1/5/2018)

210

(31/3/2019)

26. CE RTAIN DEDUCTION TO BE ALLO WED ONL Y ON ACTUAL PAYMEN T [SECTION 43B]

If any Assessee has maintained books of accounts on the basis of mercantile system of accounting, all the

expenditures are allowed on due basis.

Section 43B does not apply in situations where the Assessee follows cash basis of accounting because under cash

accounting system, all expenses are allowed on actual payment basis.

But the expenditures listed under section 43B are allowed only on actual payment basis. These are:

a) Any sum payable by the Assessee by way of tax, duty, cess or fee, by whatever name called, under any law

like Municipal Tax, Professional Tax, Composition Tax etc.

b) Employer’s contribution to any provident fund or superannuation fund or gratuity fund, Employees

State Insurance (ESI) or any other fund for the welfare of employees.

c) Bonus or commission or leave salary to the employee.

d) Interest on any loan or borrowing from any Public Finance Institution or a State Financial Corporation or a

State Industrial Investment Corporation or Coperative Banks other than a Primary Agricultural Credit

Society or a Primary Cooperative Agricultural and Rural Development Bank or scheduled bank.

e) Any sum payable by Assessee to the Indian Railway for use of Railway assets.

The Assessee is allowed to make the payment till the last date of filing of return of income relating to the

previous year in which the expenditure was incurred.


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If the payment is made after the last date of filing of return of income, expenditure is allowed in the year in

which the Assessee has made the payment.

Conversion of Outstanding Interest into a Fresh Loan

If any outstanding interest payable by the Assessee is converted into a fresh loan, the interest so converted and not

“actually paid” shall not be deemed as actual payment, and hence would not be allowed as deduction.

Deduction shall be allowed in the year in which such converted asset has been actually paid.

Example

Tax Ltd. has debited bonus of INR 3,00,000 in the Profit and Loss A/c for the previous year 2018-19 and it was paid

on 07.12.2018. In the case, expenditure is allowed in the previous year 2018-19.

If in the above case, company paid the bonus on 07.06.2019, expenditure is allowed in the previous year 2018-19 as

the bonus has been before the due date of filing of return under section 43B.

If in the above case, company paid the bonus on 07.12.2019, expenditure is not allowed in the previous year

2018-19 as the bonus has been paid after the due date of filing of return as per section 43B. Rather expenditure is

allowed in the previous year 2019-20.

Similarly, if the payment is made by the company on 07.05.2020, expenditure shall be allowed in the PY 2021-22.

Concept Problem 26

Assume due date of filing of Return of Income for PY 2018-19 is 30.09.2019.

Financial Year Expenditure Payment Allowability [FY]

2018-19 Municipal Tax 24.06.2019

2018-19 Sales Tax 01.10.2019

2018-19 Service Tax 01.04.2020

2018-19 Interest to Bank 28.04.2020

2018-19 Rent 20.04.2019

2018-19 Advertisement expense 20.04.2020

27. COMPULSO RY MAINTE NANCE OF ACCOUNT S [SECTION 44AA]

Provision regarding maintaining of book of accounts shall be as given below:

1. Persons having specified profession

The person having specified profession has to maintain any books of accounts which may enable the Assessing

Officer to computer his total income.

However, they have to maintain prescribed books of accounts if gross receipt exceeds INR 1,50,000 in all the three

years immediately preceding the previous year.

Example

Mr. Ram is engaged in medical profession and his gross receipt during the various years is as under:

1. PY 2017-18 = 1,40,000

2. PY 2016-17 = 1,70,000


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3. PY 2015-16 = 1,25,000

In this case, during the PY 2018-19, Mr. Ram is not required to maintained prescribed books of accounts because

gross receipt has not exceeded INR 1,50,000 during all the three years immediately preceding the relevant previous

year.

However, if receipt during PY 2017-18 is INR 1,75,000 and during PY 2015-16 it is INR 1,55,000, he has to maintain

prescribed books of accounts during PY 2018-19.

If profession has been newly setup in the previous year and gross receipt are likely to exceed INR 1,50,000, he

should maintain prescribed books of accounts.

Specified Profession shall include

1. Legal profession 2. Medical profession 3. Engineering profession 4. Architectural professional 5. Profession of

accountancy 6. Technical consultancy 7. Interior decoration 8. Authorised representatives 9. Film artists

10. Company Secretary 11. Information Technology.

2. Individual and HUF carrying on business or any profession, not specified above

Generally, Individual and HUF are not required to maintain accounts. However, if their

income from business or profession exceeds two lakhs fifty thousand rupees; or

their sales turnover or gross receipt, as the case may be, from business or profession exceeds INR 25

lakhs;

in any one of the three years immediately preceding the previous year;

they will be required to maintain any books of accounts.

In case of newly set up business or profession in any previous year, obligation to maintain accounts will arise if

the income is likely to exceed INR 2,50,000 or total sales turnover or gross receipts, as the case may be, in

business or profession are likely to exceed INR 25 lakhs during such previous year.

3. Person other than Individual and HUF carrying on business or any profession, not specified

above

Generally, such other persons are not required to maintain accounts. However, if their

income from business or profession exceeds one lakh twenty thousand rupees; or

their sales turnover or gross receipt, as the case may be, from business or profession exceeds INR 10

lakhs;

in any one of the three years immediately preceding the previous year;

they will be required to maintain any books of accounts.

In case of newly set up business or profession in any previous year, obligation to maintain accounts will arise if

the income is likely to exceed INR 1,20,000 or total sales turnover or gross receipts, as the case may be, in

business or profession are likely to exceed INR 10 lakhs during such previous year.

4. Persons whose business income is to be computed on presumptive basis u/s 44AD/AE/ADA

If income of any person is to be computed under section 44AD, 44AE, 44ADA on presumptive basis but


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such person has rejected presumptive income; and

the total income of the Assessee exceeds the basic exemption limit,

such person shall be required to maintain any books of accounts (also audit is required as per section 44AB).

Further, Eligible Assessee to whom provisions of section 44AD(4) applies and whose income exceeds the maximum

amount not chargeable to tax shall also be required to maintain books of accounts and get them audited u/s 44AB.

Preservation of the books of accounts

The books of accounts are to be kept and maintained for the period of at least 6 years from the end of the

relevant assessment year.

Note: Failure to maintain/retain books of accounts etc. in accordance with section 44AA will attract a penalty of

INR 25,000.

28. COMPULSO RY TA X AU DIT [Section 44AB]

Audit of accounts of certain persons carrying on business or profession

Following persons have to get their accounts audited.

a) Every person carrying on business, if his sales turnover in business exceeds INR 100 lakhs3 during the

previous year.

b) Every person carrying on profession if his gross receipt in profession exceeds INR 50 lakhs during the

previous year.

c) If income of any person carrying out business or profession is to be computed under section 44AD, 44ADA or

44AE on presumptive basis but such person has rejected presumptive income, in such cases such person

shall be required to get the accounts audited.

d) Assessee carrying on business for whom provisions of section 44AD(4) are applicable.

The accounts should be audited by Chartered Accountant and Tax Audit Report should be submitted latest by the

last date of filling of return of income u/s 139(1).

Forms of Report

Nature of persons Audit Report Statement of Particulars

Person liable to be audited under any law Form 3CA Form 3CD

Other person Form 3CB Form 3CD

Penalty for violating provisions of section 44AB [Section 271B]

If any person fails to get his accounts audited or fails to submit audit report within specified time, penalties may be

imposed under section 271B equal to ½% of total turnover/gross receipt subject to a maximum of INR

1,50,000.

Example

3 In case a person opts for presumptive taxation scheme under section 44AD, threshold for audit of accounts shall be amount exceeding INR 200 Lakhs instead amount exceeding INR 100 Lakhs.


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Mr. Ram has turnover of his business INR 210 lakhs but he has failed to get his accounts audited. In this case,

penalties may be imposed amounting to INR 105,000 but if his turnover was INR 400 lakhs, penalties imposable

shall be INR 1,50,000.

29. SPECIAL PRO VISIO N FOR COMPUTING PROFI T AND GAIN S OF BU SI NESS ON PRE SUMPTIVE

BASI S [SECTION 44AD]

If any Resident Individual, Firm or HUF has turnover of his business upto INR 200 lakhs,

such Assessee is allowed to compute income on presumptive basis @ 8% of the turnover; and

no further deduction is allowed under section 30 to 38.

However, this rate of 8% shall be reduced to 6% in respect of turnover or gross receipt received through

a) banking channel or digital means viz. by an

b) Account Payee cheque/draft or

c) use of ECS (electronic clearing system)

during the previous year or upto the due date of filing return of income u/s 139(1).

This means entire receipts from April 01, 2018 till July 31, 2019 in respect of turnover of PY 2018-19 shall

be deemed as income @ 6% instead of 8%.

Points to Note:

1) A partnership firm is not allowed to deduct salary and interest paid to the partner under section 40(b).

2) Such option is allowed only to Resident Individual/ HUF / Firm but not to LLP or Company.

3) The Assessee shall be exempt from maintaining books of accounts or audit.

4) Brought forward depreciation shall not be allowed to be adjusted but brought forward business loss shall be

allowed to be adjusted.

5) The Assessee is required to pay advance tax by March 15 of the Previous Year. Hence for PY 2018-19,

Assessee should pay advance tax by March 15, 2019.

6) If an Assessee u/s 44AD fails to pay advance tax or the advance tax paid on or before 15th March is less

than the tax due on the returned income; then the Assessee shall be liable to pay simple interest at the rate

of 1% on the amount of the shortfall as mentioned blow:

Interest u/s 234C = [Advance Tax payable (-) Advance Tax Paid] x 1%

7) The Assessee has the option to reject presumptive income. However, in such case, if the income so claimed

exceeds the basic exemption limit, Assessee shall be required to maintain any books of accounts

and audit is also required.

8) Assessee can change the option on year to year basis. However, following considerations are required to be

noted:

a) Where an eligible Assessee declares profit for any previous year as per section 44AD, and he

declares profit for any of the subsequent five consecutive assessment years not in accordance

with section 44AD, he shall not be eligible to claim the benefit of this section for five

subsequent assessment years. This is provided in new sub-section (4) of section 44AD.


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b) An eligible Assessee, to whom the provisions of sub-section (4) are applicable, has to maintain books of

account under section 44AA and get them audited and furnish a report of such audit under

section 44AB. This is provided in new sub-section (5) of section 44AD.

Example

Mr. A, being an eligible Assessee whose gross receipts do not exceed INR 2 crore in any of the assessment years

between AY 2019-20 to AY 2022-23 furnishes the following details

Particulars AY 2019-20 AY 2021-22 AY 2022-23

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

Income offered for taxation 14,40,000 15,20,000 12,00,000

% of gross receipts 8% 8% 6%

Offered income as per presumptive

taxation scheme u/s 44AD

Yes Yes No

In the above case, Mr. A, an eligible Assessee, opts for presumptive taxation under section 44AD for AY 2019-20

and AY 2021-22 and offers income of 14.40 lakh and 15.20 lakh on gross receipts of 1.80 crore and 1.90 crore

respectively.

However, for AY 2022-23, he offers income of only 12 lakhs on turnover of 2 crore which amounts to 6% of his gross

receipts.

In this case, he is required to maintain books of account under section 44AA and gets the same audited under

section 44AB.

Further, since he has not offered income in accordance with the provisions of section 44AD(1) for five consecutive

assessment years after AY 2020-21, he will not be eligible to claim the benefit of section 44AD for next five

assessment years succeeding AY 2022-23 i.e. from AY 2023-24 to AY 2027-28.

Note: Section 44AB makes it obligatory for every person carrying on business to get his accounts of any previous

year audited if his total sales, turnover or gross receipts exceed INR 1 crore.

However, if an eligible person opts for presumptive taxation scheme as per section 44AD(1), he shall not be required

to get his accounts audited if the total turnover or gross receipts of the relevant previous year does not exceed INR 2

crore.

Concept Problem 27

KSA partnership firm is engaged in a business and turnover from business is INR 60,00,000. The firm has paid

salary of INR 10,000 pm to each of the partners, X and Y, and has paid interest @ 13% per annum to them on the

capital of INR 5,00,000 of each of the partner.

The firm has LTCG of INR 3,00,000. The firm has donated INR 20,000 to National Children’s Fund paid by

cheque. The Firm has brought forward depreciation of INR 10,000 and brought forward business loss of INR

20,000.

The firm has complied with all the conditions of section 184 and salary and interest is allowed as per the

instrument.

Compute the Tax Liability of the firm and also that of the partners for AY 2019-20.

Concept Problem 28


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Mr. Praveen engaged in retail trade, reports a turnover of INR 1,98,50,000 for the financial year 2018-19. His

income from the said business as per books of account is computed at INR 13,20,000. Retail trade is the only

source of income for Mr. Praveen.

i) Is Mr. Praveen eligible to opt for presumptive determination of his income chargeable to tax for the

assessment year 2019-20?

ii) If so, determine his income from retail trade as per the applicable presumptive provision.

iii) In case Mr. Praveen does not opt for presumptive taxation of income from retail trade, what are his obligations

under the Income-tax Act, 1961?

iv) What is the due date for filing his return of income under both the options?

(Study Material)

Solution

i) Yes. Since his total turnover for the F.Y. 2018-19 is below INR 200 lakhs, he is eligible to opt for presumptive

taxation scheme under section 44AD in respect of his retail trade business.

ii) His income from retail trade, applying the presumptive tax provisions under section 44AD, would be INR

15,88,000, being 8% of INR 1,98,50,000.

Alternative view: It can be assumed that Mr. Praveen has received whole the amount of turnover by cheque

or bank draft or use of electronic clearing system. In that case, his income from retail trade, applying the

presumptive tax provisions under section 44AD, would be ` 11,91,000, being 6% of INR 1,98,50,000.

iii) Section 44AB makes it obligatory for every person carrying on business to get his accounts of any previous year

audited if his total sales, turnover or gross receipts exceed INR 1 crore. However, if an eligible person opts for

presumptive taxation scheme as per section 44AD(1), he shall not be required to get his accounts audited if

the total turnover or gross receipts of the relevant previous year does not exceed INR 2 crore.

In this case, if Mr. Praveen does not opt for the presumptive taxation scheme under section 44AD, he has to

get his books of accounts audited and furnish a report of such audit under section 44AB, since his turnover

exceeds INR 1 crore during the P.Y.2018-19.

iv) In case he opts for the presumptive taxation scheme under section 44AD, the due date would be 31st July,

2019.

In case he does not opt for the presumptive taxation scheme, he is required to get his books of account audited,

in which case the due date for filing of return would be 30th September, 2019.

30. SPECIAL PROVISIO N FOR COMPUTING PROFIT AND GAINS OF PROFE SSION ON

PRESUMPTIVE BA SIS [SECTIO N 44ADA]

If any Resident Assessee, engaged in profession such as legal, medical, engineering, architectural, accountancy,

technical consultancy or interior decoration, has Total Gross Receipts upto INR 50 lakhs,

such Assessee is allowed to compute income on presumptive basis @ 50% of Total Gross Receipts; and

no further deduction is allowed under section 30 to 38.

Points to Note

1) A partnership firm is not allowed to deduct salary and interest paid to the partner as per section 40(b).



119 | P a g e



4) The Assessee has the option to reject presumptive income. However, in such case, if the income so claimed

exceeds the basic exemption limit, Assessee shall be required to maintain any books of accounts

and audit is also required.

5) The Assessee is required to pay advance tax by March 15 of the Previous Year. Hence for PY 2018-19,

Assessee should pay advance tax by March 15, 2019.

6) If an Assessee u/s 44AD fails to pay advance tax or the advance tax paid on or before 15th March is less

than the tax due on the returned income; then the Assessee shall be liable to pay simple interest at the rate

of 1% on the amount of the shortfall as mentioned blow:

Interest u/s 234C = [Advance Tax payable (-) Advance Tax Paid] x 1%

31. SPECIAL PROVISION FOR COMPUTING PROFIT AND GAI NS OF BUSI NE SS OF PLYIN G ,

HIRING OR LEA SING GOODS CA RRIAG ES [SECTION 44AE]

If any person is engaged in the business of plying, hiring or leasing goods carriages,

he will have the option to compute income under the head Business/Profession on presumptive basis and

the estimated income from each goods vehicle, being a heavy goods vehicle or other than heavy goods vehicle

would be

Goods Carriage Presumptive Income

Heavy goods Vehicle

[Weight exceeding

12,000 kg]

INR 1,000 per ton of gross vehicle weight or unladen

weight, as the case may be, for every month or part of a

month

during which such

vehicle is owned by

the Assessee for the

previous year. Other than heavy

goods vehicle

INR 7,500 for every month or part of a month

The Assessee can also declare a higher amount in his return of income. In such case, the latter will be considered to

be his income;

Points to Note

1) Assessee should not have more than 10 goods carriages at any time during the year otherwise such

option is not allowed.

2) No further deduction is allowed under section 30 to 38.

3) A partnership firm is not allowed to deduct salary and interest paid to the partner as per section 40(b).




6) The Assessee has the option to reject presumptive income but in that case Assessee should maintain any books

of accounts and also audit is required.


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7) An Assessee, who is in possession of a goods carriage, whether taken on hire purchase or on instalments, shall

be deemed to be the owner of such goods carriage.

8) The Assessee is not required to pay advance tax.

9) Assessee can change the option on year to year basis.

Concept Problem 29

Mr. X commenced the business of operating goods vehicles on 1.4.2018. He purchased the following vehicles during

the P.Y.2018-19. Compute his income under section 44AE for A.Y. 2019-20.

S. No Gross Vehicle Weight

(in kilograms)

Number Date of purchase

(1) 7,000 2 10.04.2018

(2) 6,500 1 15.03.2019

(3) 10,000 3 16.07.2018

(4) 11,000 1 02.01.2019

(5) 15,000 2 29.08.2018

(6) 15,000 1 23.02.2019

Would your answer change if the goods vehicles purchased in April, 2018 were put to use only in July, 2018?

(Study Material)

Concept Problem 30

Mr. Ram is an Advocate in the Delhi High Court and he keeps his books of account on cash basis and his receipt and

payment a/c for the year 2018-19 is as given below:

Receipts Amount Payments Amount

Balance b/f 4,50,000 Rent of building in the use of

profession

2,20,000

Legal consultancy fee 9,20,000 Office expenses 30,000

Interest on units of UTI 12,000 New computer purchased on

01.11.2018 and put to use on the

same date

35,000

Remuneration from Delhi University for

setting one paper for LLB exams

4,000 Computer purchased on 10.11.2018

and put to use the same date

25,000

Honorarium for delivering lectures as guest

speaker

3,000 Motor car purchased on 01.12.2018

and put to use on the same date

4,00,000

Sales proceeds of an old computer with w.d.v

as on 01.04.2018 INR 2,300

7,000 Legal books purchased on

01.01.2019 and put to use on the

same date.

9,000

Sale proceeds of one house which was

purchased on 01.04.2016 for INR 6,70,000

9,80,000 Income tax paid being advance tax

under section 207 to 219

12,000

Subscription to Bar Association 3,000

Deposit in public provident fund in

the name of major son

12,000

Balance carried forward 16,30,000

23,76,000 23,76,000

Compute his income tax liability for AY 2019-20.

Concept Problem 31

Mr. Ram submits his profit & loss account for year ending 31st March, 2019.


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Particulars Amount

Computed net profit after debiting the following amounts to 87,000

Provision for doubtful debts 16,000

Depreciation reserve 21,000

Household expenses 20,000

Donation to poor persons 10,000

Other charitable donations 20,000

Cash payment for purchases 80,000

Additional Information

a) Advertisement expenses INR 5,000 spent on a neon sign board purchased and put to use on 01.07.2018 and

advertisement gifts to 100 customers at a cost of INR 100 each.

b) Audit fee charged INR 5,000 including expenses on income tax assessment INR 3,000.

c) Patents purchased for INR 70,000 on 01.10.2018 and put to use on 07.10.2018.

d) Preliminary expenses covered under section 35D - market survey expenses of INR 5,000 and feasibility

report expenses of INR 10,000. Project cost INR is 10,00,000.

e) Income credited to profit and loss account were:

i) Interest on company deposit INR 50,000.

ii) Opening stock is valued at cost plus 15% whereas closing stock was valued at cost minus 15% basis.

iii) Opening stock was valued at INR 1,15,000. Closing stock was valued at INR 1,70,000.

Compute his tax liability for the Assessment Year 2019-20.

Concept Problem 32

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

March, 2019:

Particulars Amount Particulars Amount

To Opening stock 90,000 By sales 1,12,11,500

To Purchases 1,10,04,000 By Closing stock 1,86,100

To Gross Profit 3,03,600

1,13,97,600

To Salary 60,000 By Gross profit b/d 3,03,600

To Rent and rates 36,000 By Income from UTI 2,400

To Interest on loan 15,000

To Depreciation 1,05,000

To Printing & stationery 23,200

To Postage & telegram 1,640

To Loss on sale of shares (Short

term)

8,100

To Other general expenses 7,060

To Net Profit 50,000

3,06,000 3,06,000

Additional Information:


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

which were:

Opening stock INR 9,000

Closing stock INR 18,000

ii) Salary includes INR 10,000 paid to his brother, which is unreasonable to the extent of INR 2,000.

iii) The whole amount of printing and stationery was paid in cash by way of one-time payment.

iv) The depreciation provided in the Profit and Loss Account INR 1,05,000 was based on the following

information:

The written down value of plant and machinery is INR 4,20,000 as on 01.04.2018. A new plant falling under

the same block of depreciation was bought on 1.7.2018 for INR 70,000. Two old plants were sold on 1.10.2018

for INR 50,000.

v) Rent and rates includes sales tax liability of INR 3,400 paid on 7.4.2019.

vi) Other general expenses include INR 2,000 paid as donation to a Public Charitable Trust.

You are required to advise Mr. Sivam whether he can opt for presumptive taxation under section 44AD and if so,

whether it would be beneficial for him to declare income as per section 44AD. Assume that he has not opted for

presumptive taxation scheme in any earlier previous year. Also, assume that the whole of the amount of turnover

received by account payee cheque or use of electronic clearing system through bank account during the previous

year.

(Study Material)

Concept Problem 33

Tax Ltd. presents the following information to you pertaining to the year ending March 31st, 2019.

a) Having regard to the vast purchase of a particular chemical by the company, the supplier of the chemical

presents a car worth INR 2,50,000 which is used for business purposes by the company.

b) Expenditure towards acquisition of technical know-how paid to a foreign company in lump sum INR 6 lakhs.

c) The company has paid tax of INR 60,000 being the tax in respect of non-monetary perquisites of its employee.

d) The company wanted to start a new plant for manufacturing of a new product. Y Ltd. paid to the company INR

10 lakh in order not to start the same and not to compete with it.

e) The company has borrowed INR 15 lakh for acquiring machinery. Interest paid is INR 90,000. The machinery

is not put to use during the year.

f) Payment of INR 40,000 is made to a Don for ensuring that the employees will not indulge in strike.

g) The company has incurred expenditure of INR 34,000 in respect of exempt income. This forms part of

administrative expenses.

h) Amount recovered from employees towards provident fund contribution INR 12,00,000 of which amount

remitted upto the end of the year was INR 7,00,000 and the balance was remitted before the 'due date' for

filing the return prescribed in Section 139(1).

i) Contribution to the account of employees as per pension scheme referred to in section 80CCD amounted to

INR 30,00,000. Amount above 10% of the salary of employees is INR 7,00,000.


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j) Gain due to change in the rate of exchange of foreign currency INR 1,00,000 related to import of machinery.

The machinery was acquired two years ago and put to regular use since then.

k) Purchase of building for setting up a warehousing facility for storage of food grains amounting to INR

4,50,000.

You are requested to briefly state with reasons as to how the above are to be dealt with in computing the total

income of the company for the assessment year 2019-20. The total income need not be computed.

Solution:

a) As per the provision of section 28, the value of any benefit or perquisite, whether convertible into money or

not, arising from business (or the exercise of a profession) is chargeable to tax under the head “Profit and

Gains from Business or Profession”.

INR 2,50,000 is chargeable to tax as business income in the present situation and “Actual cost” of car for

depreciation purpose will be cost of car to the previous owner, i.e. INR 2,50,000 [Sec. 43(1)].

b) INR 6 lakhs qualifies for depreciation under section 32 @ 25%.

c) As per section 40(a), while calculating income of the employer, the tax paid by the employer on non-monetary

perquisite to employees is not deductible.

d) As per section 28, any payment received for not pursuing any business i.e. non-compete fee shall also be

treated as Income from Business/Profession.

e) INR 90,000 should be capitalized. Depreciation can be claimed by Tax Ltd. in the year the asset is put to use

and actual cost for this purpose will include INR 90,000.

f) As per section 37(1), in order to claim deduction, the expenditure should not have been incurred for any

purpose, which is an offence or is prohibited by any law. Since the payment of INR 40,000 to Don is unlawful,

it is not allowable as deduction.

g) As per section 14A, no deduction shall be made in respected of expenditure incurred by the Assessee in relation

to income which does not form part of the total income i.e. exempted income. INR 34,000 is, therefore, not

allowable as deduction.

h) As per section 2(24)(x), the amount of provident fund contribution recovered from employees i.e. INR 12 lakhs

would be taxable as income of Tax Limited. However, the company can claim deduction under section

36(1)(va) of amount credited to the account of the employee in the provident fund before the due date under

the relevant Act.

If INR 7 lakhs has been remitted before the said due date, the same is allowable as deduction. If it has not been

so remitted, then the same is not allowable as deduction. The deduction would be restricted to the amount

remitted before the due date. The balance INR 5 lakhs remitted after the due date under the said Act but

before the due date of filing the return is not allowable as deduction.

i) The employer’s contribution to the account of an employee under a pension scheme referred to in section

80CCD, upto 10% of salary of the employee in the previous year, is allowable as deduction under section

36(1)(iva) while computing business income. Disallowance under section 40A(9) would be attracted only in

respect of the amount in excess of 10% of salary.

Accordingly, INR 23 lakhs would be allowed as deduction and INR 7 lakhs would be disallowed.

j) As per section 43A, the gain of INR 1,00,000, arising at the time of making payment in respect of an imported

machinery, due to change in rate of exchange of foreign currency, has to be reduced from the actual cost of

machinery, and depreciation would be computed on such reduced cost.


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k) Assessee would be eligible for investment-linked tax deduction under section 35AD @ 100% in respect of

amount of INR 4,50,000 invested in purchase of building for setting up a warehousing facility for storage of

food grains.

Therefore, the deduction under section 35AD while computing business income would be INR 4,50,000.

Concept Problem 34

State with reasons the deductibility or otherwise of the following expenses/payment under the Income-tax Act,

1961, while computing income under the head “Profits and Gains from Business or Profession” for the AY 2019-20:

a) Mr. Shyam paid INR 75,000 as commodity transaction tax on sale of commodity during the PY 2018-19.

b) Tax Ltd. incurred an amount of INR 2,50,000 on a notified project to enhance skill development of its

employees.

c) Mr. Achal, a hotelier, claimed expenditure on replacement of linen and carpets in his hotel as revenue

expenditure.

d) Mr. Ram has claimed deduction for bad debt. However, the debtor is still not written off in the books.

e) Provision made on the basis of actuarial valuation for payment of gratuity INR 5,00,000. However, no

payment on account of gratuity was made before due date of filing return.

f) Payment of INR 50,000 by using credit card for fire insurance

Solution

a) An amount equal to commodity transaction tax paid by the Assessee shall be allowable as deduction, under

section 36(1)(xvi), if the income arising from taxable commodities transactions is included in the income

computed under the head “Profit and Gains of Business or Profession”. In the given case, Mr. Shyam is entitled

to claim deduction in respect of commodity transaction tax of INR 75,000 paid by him.

b) Tax Ltd. is entitled to a weighted deduction of a sum equal to 150% of the expenditure incurred by it on

notified skill development project, under section 35CCD. Therefore, it can claim INR 3,75,000 (i.e. 150% of

INR 2,50,000) as deduction under section 35CCD for the section 35CCD for the PY 2018-19.

c) The expenditure on replacement of linen and carpets in a hotel are in the nature of expenses incurred for the

business and are allowable as revenue expenses under section 37(1).

d) It is mandatory to write off the amount due from a debtor as not receivable in the books of account by crediting

the debtor, in order to claim the same as bad debt under section 36(1)(vii).

e) Not allowable as deduction

As per section 40A(7), no deduction is allowed in computing business income in respect of any provision made

by the Assessee in his books of account for the payment of gratuity to his employees except in the following two

cases:

1. Where any provision is made for the purpose of payment of sum by way of contribution towards an

approved gratuity fund or;

2. Where any provision is made for the purpose of making any payment on account of gratuity that has

become payable during the previous year.

Therefore, in the present case, the provision made on the basis of actuarial valuation for payment of gratuity

has to be disallowed under section 40A(7), since, no payment has been actually made on account of gratuity.


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Note: It is assumed that such provision is not for the purpose of contribution towards an approved gratuity

fund.

f) Allowable as deduction

Payment for fire insurance is allowable as deduction under section 36(1). Since payment by credit card is

covered under Rule 6DD, which contains the exceptions to section 40A(3), disallowance under section 40A(3)

is not attracted in this case.

Concept Problem 35

Examine with reasons whether the following statements are true or false having regard to provisions of Income Tax

Act, 1961.

i) Where a person follows mercantile system of accounting, an expenditure of INR 25,000 has been allowed on

accrual basis and in a later year, in respect of the said expenditure, Assessee makes the payment of INR 25,000

through a cheque crossed as “& Co.”, disallowance of INR 25,000 under section 40A(3) can be made in the

year of payment.

ii) The medi-claim premium paid to GIC by Mr. Lokesh for his employees, by a draft, on 27.12.2018 is a

deductible expenditure under section 36.

iii) An existing Assessee engaged in trading activities, can claim additional depreciation under section 32(1)(iia) in

respect of new plant acquired and installed in the trading concern, where the increase in value of such plant as

compared to the approved base year is more than 10%.

Solution

i) True

As per section 40A(3), in the case of an Assessee following mercantile system of accounting, if an expenditure

has been allowed as deduction in any previous year on due basis, and payment exceeding INR 10,000 has been

made in the subsequent year otherwise than by an account payee cheque or an account payee bank draft, then

the payment so made shall be deemed to be the income of the subsequent year in which such payment has

been made.

ii) True

Section 36(1)(ib) provides deduction in respect of premium paid by an employer to keep in force an insurance

on the health of his employees under a scheme framed in this behalf by GIC or any other insurer. The medical

insurance premium can be paid by any mode other than cash, to be eligible for deduction under section

36(1)(ib).

iii) False

Additional depreciation can be claimed only in respect of eligible plant and machinery acquired and installed

by an Assessee engaged in the business of manufacture or production of any article or thing or in the business

of generation or transmission or distribution of power.

In this case, the Assessee is engaged in trading activities and the new plant has been acquired and installed in a

trading concern. Hence, the Assessee will not be entitled to claim additional depreciation under section

32(1)(iia).

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