Dpclasses DT PGBP

[DIRECT TAXATION] AY 21 - 22
PGBP – PART 01 –
DEPRECIATION AND CAPITAL GAINS
BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED 1

AY 21 - 22 [DIRECT TAXATION]
INDEX
CHAPTER TOPIC PAGE NO

1 Introduction To PGBP 2-5
2 PGBP – Deductions 6-9
3 Sec 32 – Depreciation 10-15
4 Sec 43(1) – Concept of Actual Cost 16-29
5 Depreciation – Other issues 30-40
6 Sec 32 – Depreciation for Power Sector Undertakings (PSU) 41-45
7 Sec 32 – Depreciation in Case of Succession of Business 46-49
8 Investment Allowance u / s 32AD 50-50
9 Capital Gain in Case of Depreciable Asset – Sec 50 51-55
2 BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED |

CHAPTER – 1
INTRODUCTION TO PGBP
PGBP
Dis - Procedural Presumptive

Deductions 43 Series
allowance Aspects Taxation
S.1 – DEDUCTIONS
Section Name of the Section
28 Charging Section
29 Computational Section
30 Expenditure relating to Building
31 Expenditure relating to P & M
32 Depreciation
32AD Investment Allowance (Relevant up to 31.03.2020)
33AB Tea / Coffee / Rubber
33ABA Site Restoration Fund
35 Expenditure on Scientific Research
35ABB Expenditure on Tele communication Licence
35ABA Expenditure on Spectrum Fees
35AD Specified Business
35CCA Rural Development Program
35CCC Agricultural Extension Program
35CCD Skill Development Program
35D Preliminary Expenses
35DD Amalgamation / Demerger
35DDA VRS
35E Extration of Mineral Oil
36 Other Deductions
37 General Deduction
38 Assets of Used for both business & Personal

Summary Table
28 30 33AB 35 35CCA 35D 36
29 31 33ABA 35ABB 35CCC 35DD 37
32 35ABA 35CCD 35DDA 38
32AD 35AD 35E
S.2 - DIS - ALLOWANCE
Disallowance
Sec 37(2B) 40 ASeries Sec. 43B
40 small a Series 40 Big A Series
40 SMALL a SERIES
Sec 40 small a Series
Payment to Non - Payment to Resident Taxes & Fees

Resident
40 BIG A SERIES
Sec 40 BIG A
Series
S.40 A (2) S.40 A (3) S. 40 A (7) S. 40A(9) S. 40A(13)
SECTION REFERENCE
Sec Name of the Section
37(2B) Payment made to Political Parties
40A(2) Related Party Transaction
40A(3) Cash payment exceeding Rs.10,000 or Rs.35,000 as the case may be
40A(7) Provision for Gratuity

40A(9) Contribution to Un recognised Fund
40A(13) Marked to Market Loss
43B Deduction of Actual Payment basis
S.3 - PROCEDURAL ASPECTS

44AA Compulsory maintenance of BOA
44AB Compulsory Tax Audit
41 Deemed Profit
SUB – SECTION OF SECTION 41

41(1) Remission or Cessation of Trading Liability
41(2) Balancing Charge
41(3) Sale of Asset used for Scientific Research
41(4) Bad Debts Recovered
41(4A) Withdrawal from Reserves
41(5) Profit from discontinued business
S.4 - PRESUMPTIVE TAXATION
Presumptive Taxation
Resident Non - Resident

PT FOR RESIDENT
44AD PT for Business
44ADA PT for Professional
44AE Plying / Hiring or Leasing of Goods Carriage
PT FOR NON - RESIDENT

44B Shipping Business of NR
44BB Hiring of P&M for extraction of Mineral Oil
44BBA Operation of Air Craft
44BBB Turn Key Power Project
44C Head Office Expenditure
S.5 – 43 SERIES
43 A Change in rate of Currency
43AA Taxation of Foreign Exchange Fluctuation
43B Deduction on Actual Payment Basis
43C Cost of Acquisition
43CA Deemed Consideration
43CB Income from Construction & Service Contracts
43D Income from Bad & Doubtful Debts

CHAPTER –2
PGBP - DEDUCTIONS
OVERVIEW OF PGBP
Computation Of Income Under Business Or Profession
In - Expenses or Payment
Admissible Deemed Other
admissible not deductible in
Deductions Income Provisions
Deductions certain circumstances
Sec - 30 to 37 Sec - 40 Sec - 40A Sec - 41
SEC. 28 – CHARGEABILITY
CHARGING SECTIONS
Section 28 Section 41 Section 176
S. 28 – CHARGING SECTION
S.28 Income under the head ‚Profits& Gains of Business or Profession‛
(i) Profits and Gains of Business or Profession carried on by the Assessee at any time
during the previous year.
(ii) Any compensation or other payment due to or received by any person, by whatever
name called, at or in connection with the termination or the modification of the terms
and conditions, of any contract relating to his business.
(iii) Income derived by a trade, professional or similar association from specific services
performed for its members
(iiia) Profits on sale of a license granted under the Imports (Control) Order, 1955
(iiib) cash assistance (by whatever name called) received or receivable by any person
against exports under any scheme of the Government of India
(iiic) Any duty of customs or excise re - paid or re - payable as drawback to any person
against exports
(iiid) Any profit on the transfer of the Duty Entitlement Pass Book Scheme
(iiie) Any profit on the transfer of the Duty – Free Replenishment Certificate, being the

Duty Remission Scheme
(iv) The value of any benefit or perquisite, whether convertible into money or not, arising
from business or the exercise of a profession
(v) Interest, Salary, Bonus, Commission or Remuneration receivable or received by a
partner of a Firm
(va) Sum received or receivable in Cash or in kind under an agreement for Non –
Competency both Business & Profession
(vi) Sum received under Key man Insurance Policy, including sum allocated by way of
Bonus on such policy
(via) FMV of inventory on the date on which it is converted into capital asset - Added by
FA 2018
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
(vii) Sum received or receivable (in cash or in kind) on account of any Capital Asset
(Other than Land or Good will or Financial Instrument) allowed as deduction u/s
35AD, being demolished, destroyed, discarded or transferred.
SPECULATION BUSINESS
It means a transaction in which a contract for the purchase or sales of any commodity including
stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or
transfer of the commodity or scrips
Transaction not deemed to be speculative transaction
a) Hedging contract in respect of raw materials or merchandise
b) Hedging Contract in respect of stocks & Shares
c) Forward contract
d) Trading in derivatives through recognised stock exchange.
e) Trading in commodity derivatives through recognised association, which is chargeable
to commodities transaction tax (CTT)
However, the requirement of chargeability of commodities transaction tax is not applicable in

respect of trading in agricultural commodity derivatives from AY 2019 - 20 (AMD)
SEC – 29 – COMPUTATIONAL SECTION
Particulars Amount Amount

Net Profit as per Profit & Loss Account XXXX
Add Expenses debited to P& L A/c but not allowable xxx
- Depreciation as per books of Accounts xxx
- Income Tax xxx
- 30% of payment made to resident on which tax is not
deducted at source under section 40(a)(ia)
xxx
- Any payment to partner (In case of firm only) by way of
salary, Interest, Bonus Commission or remuneration in excess
prescribed u / s 40(b) xxx
- Disallowance u / s 40A(3) for payment or aggregate

payments exceeding Rs.10,000 in a single day otherwise than xxx
by way of A / c payee Cheque / Bank draft or use of ECS xxx
through bank account xxx
- Personal Expenses
- Capital Expenditure
xxx
- Amortization of preliminary expenditure / Expenditure
incurred under VRS (4 / 5th of expenditure) xxx
- Fine or Penalty Xxxx
- All expenses related to income which is not taxable under this
head [Eg: - Municipal Taxes in respect of House property]
Less Expenditure allowable as deduction but not debited to P & L A /
c
- Depreciation as per Income Tax Rules xxx
- Investment Allowance under Section 32AD xxx
- Weighted Deduction under Section 35, 35CCC, 35CCD in xxx Xxxx
excess of the amount already debited to P & L A / c
Less Income credited to P & L A / c but not taxable / Taxable under
other head of Income
- Dividend Income exempt under section 10(34) / Taxable xxx
under section 115BBDA
- Agricultural Income exempt under section 10(1) xxx
- Interest on securities taxable under ‚IFOS‛ xxx
- Profit on sale of Capital Assets taxable under the head ‚CG‛ xxx
- Rent from House Property taxable under ‚IFHP‛ xxx
- Causal Income Eg: - Winnings from Lotteries, Horse races, xxx
Games etctaxable under the head ‚IFOS‛
- Gifts taxable under the head ‚IFOS‛ xxx
- Income Tax Refund not taxable xxx
- Interest on Income Tax Refund under the head ‚IFOS‛ xxx Xxxx
Add Deemed Income
- Bad Debt recovered xxx
- Remission or cessation of a trading Liability xxx Xxxx
SEC. 30 – RENT, RATES, REPAIR & INSURANCE FOR BUILDING
Expenses Allowable
*Repair of Other
Rent
Premises Expenses
Premises used Occupation of Only Revenue

partly for premises by Expenditure
Premises Sub - Allowed.
business & the Assesse
Let
partly for other being the No Capital
purposes owner Expenditure
NOTES: -

1. If premises used partly for business & partly for personal then only a proportionate part of the
expenses attributable to that part of premises used for purpose of business will be allowed as
deduction
2. If premises Sub – let then deduction under the section will be confined to the difference
betweenthe rent paid by the assessee& rent received from sub – tenant
3. If Assessee himself is the owner no notional rent would be allowed as deduction
4. If the Assessee is Partnership firm and firm runs its business in the premises owned by any of the
partners, the rent payable to the partners will be allowed as deduction to the extent it is
reasonable & not excessive
5. Other Expenses like Land revenue, local rates, municipal taxes and insurance in respect to the
property are also allowed
Repairs of the Premises - Important Points
Assessee is a tenant who Even if the assessee

Assessee is the Owner of has undertaken to bear the occupies the premises
the building cost of repairs to the otherwise than as a tenant
premises or owner
SEC.31 – REPAIRS & INSURANCE OF MACHINERY, PLANT & FURNITURE
Expenses related to P&M
Repair exclude Current repairs of

Usage of the Insurance
repalcement or Capital nature not
Asset Premium
reconstruction to be allowed
In respect of repairs and Insurance of machinery, plant or furniture, used for the purpose of
business or profession, the following deductions shall be allowed:
a) Amount paid on account of current repairs thereto.

b) Amount of any premium paid in respect of insurance against risk of damage or
destruction thereof.
Note: The amount paid on current repairs shall not include any expenditure in the nature of
Capital Expenditure.

CHAPTER – 3
SEC - 32 - DEPRECIATION
SEC 32 – OVERVIEW
No Sec No Name
1 32(1)(i) Dep @ SLM for Power Sector Undertaking
2 32(1)(ii) WDV method
3 32(1)(iia) Additional Depreciation
4 32(1)(iii) Terminal Depreciation
TYPES OF DEPRECIATION
Depreciation
Normal Additional Terminal

Depreciation Depreciation Depreciation
20 % of Actual 35% of Actual

As per the rates Only for Power
Cost Cost
prescribed in Sector
Income Tax Rules Undertakings
CONDITIONS
 Assessee must be the owner of the asset.
 Asset should be used for the purpose of business or profession.
 Asset must be used in the relevant previous year.
 Asset must fall under eligible class of asset.

Eligible Class of Assets
Tangible Intangible - 25%
Building - 10% Know how
Patent
Machinery - 15%
Copyright
Plant or
Furniture - 10% Trademark
License
Franchise
Any other asset of similar nature
DEPRECIATION FOR ASSET PUT TO USE FOR LESS THAN 180 DAYS
Proviso to Section Where any asset falling within a block of assets is acquired by the
32 (1) – 50% assesseeduring the previous year and is put to use for the purposes of
Depreciation business or profession for a period of less than 180 days in that previous
when asset is put year, then the deduction of depreciation in respect of such asset shall be
to use for less than restricted to fifty percent of the depreciation allowable.
180 days
This is applicable for depreciation under sections 32(1)(i), 32(1)(ii) and
32 (1)(iia).
Illustration:
Asset is purchased on 01.01.2020 for Rs. 1, 00, 000. Depreciation is allowable@ 15%. Asset is
installed and put to use on 31.12.2020.
Solution:
No AY Answer
1 2020 – 21 No depreciation shall be allowed since the asset is put to use on 31.12.2020.
2 2021 – 22 Restriction of 50% of depreciation applies only in the year in which the
asset ispurchased or acquired, therefore normal depreciation @ 15% shall
be allowed.
Hence, Depreciation on asset for Assessment Year 2021-22 = 15% of Rs.
1,00,000
= Rs. 15,000

EXPLANATION 1 TO 32(1) – DEEMED BUILDING
Particulars Explanations
Explanation 1 to Where the business or profession of the assessee is carried on in a building
Section 32 (1) – not owned by him but in respect of which he holds a lease or any other
Deemed right of occupancy, and any capital expenditure is incurred by the
Building assessee for the purposes of the business or profession on the construction
of any structure or by way of renovation or extension or improvement to
the building, then such capital expenditure will be treated as the building
owned by the assessee.
Illustration:
Assessee is a tenant in a building in which he carries on his business. On 31.12.2018 he
incurred an expenditure of Rs. 2 lakhs on constructing of a room to be used as office. On
04.12.2020, he vacated the building and receives from landlord:
Case Amount (Rs.)

I 1,20,000
II 2,50,000
Solution:
Block of building (10%)
No Particulars Amount (Rs.)

1 Deemed Building as per Explanation 1 to Section 32(1) 2,00,000
2 Less: Depreciation @ 5% for the Assessment Year 2019-20 10,000
3 Opening WDV as on 01.04.2019 1,90,000
4 Less: Depreciation @ 10% for Assessment Year 2020-21 19,000
5 Opening WDV as on 01.04.2020 1,71,000
- WDV of the block shall be Nil since, the block ceases to exist on the transfer of the deemed
building.
- Section 50 is attracted since block ceases to exist on the transfer of deemed building.
Capital Gains for Assessment Year 2021 – 22
Case - I

1 Compensation from landlord 1,20,000
2 Less: Opening WDV as on 01.04.2020 1,71,000
3 STCG (51,000)
Case – II
1 Compensation from landlord 2,50,000
2 Less: Opening WDV as on 01.04.2020 1,71,000
3 STCG 79,000

Explanation 5 to It is mandatory for the assesse to claim depreciation. Depreciation shall be
Section 32 (1) – allowed to the assessee whether or not the assessee has claimed deduction
Mandatory to in respect of depreciation in computing his total income. Therefore, in
Claim computing the profits and gains of business or profession for any previous
Depreciation year, the deduction of depreciation under section 32 shall be mandatory.
ADDITIONAL DEPRECIATION
20% O F A CTUAL C OST

1. Additional depreciation is allowed only for new machinery or plant acquired and
installed
2. Assessee must be engaged in the manufacture or production of article or thing or business
of generation, Transmission or distribution of Power
35% OF A CTUAL C OST
1. An assessee who has setup a new undertaking or enterprise for manufacture / production
of article on or after 01.04.2015.
2. Such undertaking shall be setup in any notified backward area in the state of Andhra
Pradesh, Bihar, West Bengal &Telangana
3. Acquisition & Installation of new plant & Machinery shall be made between 01.04.2015 till
31.03.2020.
PROVISO
Provided also that where an asset reerred to in clause (iia) or the first proviso to clause (iia),
as the case may be, is acquired by the assessee during the PY and is put to use for the
purposes of business for a period of less than 180 days in that PY, and the additional
depreciation in respect of such asset is restricted to 50% of the amount calculated at the %
prescribed for an asset under clause (iia) for that PY, then, the deduction for the balance 50%
of the amount calculated at the % prescribed for such asset under clause (iia) shall be allowed
in the immediately succeeding PY in respect of such asset.
NON - APPLICABILITY OF ADDITIONAL DEPRECIATION
1. Any Ship or Aircraft.

2. Any machinery or plant used earlier by any other person either in India or outside India.
3. Any Plant & Machinery installed in office or residence including guest house.
4. Any Office appliance or road transport vehicle.
5. Any P & M the whole of actual cost which is fully allowed as deduction in computing
income under the head PGBP (Sec 35, Sec 35AD etc)

ANALYSIS OF SECTION 32 (1) (iia)
1. The events of acquisition and installation do not have to take place in the same year. In
other words, if machinery is acquired in 2020 - 2021 and installed and put to use in 2021
- 22, the cost of such machinery will be eligible for additional depreciation, subject to
fulfillment of other conditions in financial year 2021 - 22 i.e., assessment Year 2022 - 23.
No depreciation shall be allowed in Assessment Year 2021 -22, since the machinery was
not installed and put to use in Assessment Year 2021 – 22.
2. Higher additional depreciation @ 35% is available if an undertaking is set up on or after
01 - 04 - 2015 in notified backward areas of Bihar, Andhra Pradesh, Telangana or West
Bengal for manufacture or production of any article or thing. It is available on new plant
& machinery acquired and installed during the period 01.04.2015 to 31.03.2020.
3. Additional depreciation is available on new imported plant and machinery. It is also
available on the new plant and machinery assembled by the assessee.
4. Where additional depreciation has been restricted to 50% on account of assets being
used for less than 180 days, then the balance 50% additional depreciation shall be
allowed in the immediately succeeding previous year.
5. In order to encourage new investment in power sector, the benefit of additional
depreciation has been given to assessee in the business of generation or distribution or
transmission of power.
6. Business of printing or printing & publishing amounts to manufacture or production of
an article or thing and is, therefore, eligible for additional depreciation as per CBDT
circular.
7. Additional depreciation is allowed only if the assessee follows WDV method. It is not
allowed to Power Sector Undertaking if they follow SLM Method.
SECTION 43(6) – WRITTEN DOWN VALUE

Up to Assessment Year 1987 - 88, the concept of individual asset was relevant and depreciation
was allowed on each asset. From Assessment Year 1988 – 89, the concept of Block of assets has
been introduced.
The written down value of the block of assets shall be calculated as under: -
W D V of block of assets in the immediately preceding Previous Year XXX
Less: Depreciation actually allowed in the immediately preceding Previous Year (XXX)
W D V of the block at the beginning of Previous Year XXX
Add: Actual Cost of the assets falling within this block acquired during the Previous XXX
Year
Less: Moneys payable in respect of assets falling in this block which are sold, XXX
discarded, demolished or destroyed during the Previous Year and the amount
of scrap value
Less: Actual Cost of the assets falling within that block transferred by way of slump (XXX)
sale referred to in section 50 B as reduced by depreciation that would have
been allowable as if the asset was the only asset in the block of assets. (From
the date, the asset was acquired and put to use) - Section 43(6)(c)(i)(C)
W D V of block for the Assessment Year XXX
However, the above reduction i.e. under section 43(6)(c)(i)(C) shall be limited to the written
down value of Block of assets.

Explanation 2C TO SECTION 43(6)
Where in any PY, any block of assets is transferred by a private company or unlisted public
company to a LLP and the conditions specified in the proviso to clause (xiiib) of section 47 are
satisfied, then, notwithstanding anything contained in clause (1), the actual cost of the block of
assets in the case of the LLP shall be the WDV of the block of assets as in the case of the said
company on the date of conversion of the company into the LLP.
Illustration:

1 Opening WDV of Block of Asset as on 1.4.2020 in the hands of 48,00,000
Company
2 Company purchases an asset in this Block on 1.6.2020 2,00,000
3 Company sells the Block of Assets to LLP on 30.8.2020 80,00,000
 Now, STCG are exempt in the hands of Company under section 47 (xiiib)
 Actual cost of Block of asset to LLP shall be Rs. 50,00,000 i.e. WDV of Block on the date
of conversion into LLP.

CHAPTER – 4
SEC – 43(1) – CONCEPT OF
ACTUAL COST IN SPECIAL CASES
Actual Cost means the actual cost of the asset to the assessee, reduced by that portion of the cost
which has been directly or indirectly met by any other person or authority.
 Provided further
 that where the assessee incurs any expenditure
 for acquisition of any asset or part thereof
 in respect of which a payment or aggregate of payments made to a person in a day,
 otherwise than by an account payee cheque drawn on a bank or an account payee bank
draft or use of electronic clearing system through a bank account or through such electronic
mode as may be prescribed (Finance Act, 2019)
 exceeds ten thousand rupees,
 such expenditure shall be ignored for the purposes of determination of actual cost.
Illustration 1:
Assessee purchases plant & machinery of Rs. 4,00,000 on 01.01.2021 and pays Rs. 4,00,000 by
cash.
Solution:
Since payment of Rs. 4,00,000 is made by cash, it shall not be considered as part of actual cost of
plant & machinery. The actual cost of plant & machinery shall be taken to be NIL and NIL shall
be added to WDV of Block of assets.
Note: As per section 269ST, the seller of machinery is liable to pay penalty of Rs. 4,00,000 for
accepting cash of Rs. 2,00,000 or more. The Penalty shall be under section 271DA.
Illustration 2:
Suppose in illustration 1, assessee makes payments as under:
Mode of
No Date Amount Tax Treatment
Payment
1 01.01.2021 Cash Rs. 5,000 x 10 Payment made on 01.01.2021 of Rs.
times = Rs. 50,000 shall not be considered for
50,000 determining actual cost since aggregate
payments in cash in a day exceeds Rs.
10,000.
2 02.01.2021 Cash Rs. 10,000 Payment of Rs. 1,50,000 made by cash
to everyday x 15 from 02.01.2021 to 16.01.2021 shall be
16.01.2021 days = Rs. considered for determining actual cost
1,50,000 since aggregate payments in a day do
not exceed Rs. 10,000.
3 24.01.2021 Cheque Rs. 2,00,000 Payment of Rs. 2,00,000 shall be added
into actual cost of asset.

Therefore, Rs. 3,50,000 shall be considered as actual cost and Rs. 3,50,000 shall be added to WDV
of Block of assets.
Note: Seller shall pay penalty of Rs. 2,00,000 under section 271DA as he has violated section
269ST since the cash payments received by him for a single transaction are Rs. 2,00,000 or more.
Penalty is equivalent to cash accepted by him.
EXPLANTION 1A TO S. 43(1) – CONVERSION OF SIT IN TO CA

Where a capital asset referred to in clause (via) of section 28 is used for the purposes of business
or profession, the actual cost of such asset to the assessee shall be the fair market value which
has been taken into account for the purposes of the said clause.
REF:
The FMV of inventory as on the date on which it is converted into, or treated as, a capital
asset determined in the prescribed manner – Added by FA 2018.
Illustration:
Assessee was holding building as stock in trade and building was purchased on 1.4.1998 for
Rs. 10, 00, 000 (FMV as on 1.4.2001 is Rs. 11, 00, 000). Stock – in-trade was valued on 31.3.2020
at cost or NRV, whichever is lower. The NRV of building as on 31.3.2020 was Rs. 9,00,000.
The assessee converts building in to capital asset on 30.11.2020 and the building is started
using as a factory building. The FMV of building on 30.11.2020 is Rs. 13, 00, 000.
Solution:
No Particulars
1 As per section 28(via), Rs. 13, 00, 000 is deemed as business income. As opening stock
will consist of building at Rs. 9, 00, 000, the resultant Rs. 4,00,000 is business income.
2 As per section 2(42A)(ba), the period of holding of the building shall be reckoned
from the date of conversion. Therefore, building is treated as having being acquired
as capital asset from 30.11.2020. since it is used for less than 180 days, depreciation @
5% (50% of 10%), shall be allowed in Assessment Year 2021 - 22.
3 The actual cost of building for adding to block of assets shall be taken to be
Rs. 13, 00, 000.
EXPLANATION 2 TO S.43(1) – GIFT / INHERITANCE

Where an asset is acquired by the assessee by way of gift or inheritance, the actual cost of the
asset to the assessee shall be the WDV in the hands of the previous owner at the time of transfer
of asset computed by assuming that the asset was the only asset in the block of assets.
Illustration:
Mr. A acquired an asset on 01.01.2004 for Rs. 5,00,000 and has not claimed any depreciation
thereon. He gifts the asset to Mr. B on 01.01.2021 [Fair Market Value as on that date is Rs.
7,00,000]. Mr. B takes the asset to the Block of assets on which depreciation rate is 15% and
WDV of the Block as on 01.04.2020 is Rs. 3,50,000.
Since Mr. A had not claimed depreciation on the asset, the actual, cost to Mr. B shall be the
actual cost to Mr. A i.e. Rs. 5,00,000.

In the hands of Mr. B
No Amount
Particulars
(Rs.)
1 Opening WDV as on 01.04.2020 3,50,000
2 Add: Actual cost of asset acquired during the previous year 5,00,000
3 WDV for Assessment Year 2021 – 22 8,50,000
4 Less: Depreciation
- On Rs. 3,50,000 @ 15% 52,500
- On Rs. 5,00,000 @ 7.5% 37,500
5 WDV as on 01.04.2021 7,60,000
KEY POINT:
Assuming that the asset gifted is machinery, section 56(2)(x) shall not be applicable in the hands
of Mr. B since section 56(2)(x) does not cover machinery.
Assuming that asset gifted is a building and the value adopted by the stamp valuation authority
is Rs. 7,00,000, Rs. 7,00,000 shall be treated as income from other sources in the hands of Mr. B in
Assessment Year 2021-22 as per section 56(2)(x). However, actual cost to Mr. B shall be taken to
be Rs. 5,00,000 as per Explanation 2 to section 43(1) since he is claiming depreciation on the said
building. (Depreciation rate shall be 10% instead of 15%). Section 49(4) which deems cost of
acquisition as Rs. 7,00,000 shall not be applicable in Chapter of P/G/B/P since section 49(4)
applies to the chapter of capital gains. Explanation 2 to section 43(1) specifically defines the
actual cost of gifted asset in the hands of donee and section 49(4) has no application.
Illustration:
Mr. X acquired a machinery on 02.02.2016 for Rs. 1,00,000. Machinery was taken to the Block
on which deprecation rate is 15% and whose WDV as on 01.04.2015 was Rs. 3,00,000. The said
machinery is gifted by Mr. X to Mr. Y on 31.12.2020. WDV of Block of Assets of Mr. X and
Mr. Y as on 01.04.2020 is Rs. 5,00,000 and Rs. 3,00,000 respectively.
Solution:
Actual Cost of machinery to Mr. Y for Assessment Year 2021 - 22 shall be worked out as under:
No Amount
Particulars
(Rs.)
1 Actual Cost to Mr. X 1,00,000
Assessment Year 2016 - 17 @ 7.5% 7,500
Assessment Year 2017 - 18 @ 15% 13,875
Assessment Year 2018 - 19 @ 15% 11,794
Assessment Year 2019 - 20 @ 15% 10,025
Assessment Year 2020 - 21 @ 15% 8,521
3 WDV 48,285

Mr. Y
1 Opening WDV as on 01.04.2020 3,00,000
2 Add: Actual cost of asset acquired during the previous year 48,285
3 WDV for Assessment Year 2021 – 22 3,48,285
4 Depreciation @ 15% on Rs. 3,00,000 45,000
5 Depreciation @ 7.5% on Rs. 48,285 3,621
6 48,621
KEY POINTS:
No Particulars
I Logically the Block of assets of Mr. X should be reduced by Rs. 48,285 for AY 2021
- 22 and the WDV of his Block should be taken as Rs. 4,51,715. However, law does
not provide for his reduction.
ii Section 56(2) (x) is not attracted in case of gift of machinery.
EXPLANATION 3 TO S.43 (1) – ASSET @ HIGHER RATE

 Where before the date of acquisition by the assessee,
 The assets were at any time used by any other person
 For the purpose of his business or profession
 And the AO is satisfied that the main purpose of the transfer of such assets, directly or
indirectly to the assessee,
 Was the reduction of income tax liability (by claiming depreciation with reference to
enhanced cost),
 The actual cost to the assessee shall be such an amount as the AO may determine with
the previous approval of JC.
Illustration:
Mr. X submits the following information:
Amount
No Particulars
(Rs.)
1 Opening WDV as on 01.04.2020 of Block (15%) 10,00,000
2 Profits & Gains from Business and Profession before depreciation 4,00,000
3 Brought forward loss under the head Capital Gains 1,20,00,000
Mr. X sells an asset out of the Block of assets to Mr. Y on 30.06.2020 for Rs. 1,30,00,000.
Mr. X files his return of income as under:
Amount Amount
No Particulars
(Rs.) (Rs.)
1 Profits & Gains from Business and Profession 4,00,000
2 Short Term Capital Gains u/s 50 1,20,00,000
3 Less: Brought Forward Loss 1,20,00,000 NIL
4 Total Income 4,00,000
5 WDV of Block NIL

The relevant information of Mr. Y is as under:

2 Opening WDV of Block of assets (15%) as on 01.04.2020 20,00,000
Mr. Y files return of income as under:

2 Less: Depreciation @ 15% on Rs. 20,00,000 plus 1,30,00,000 22,50,000
3 Total Income 27,50,000
Now, the Assessing Officer invokes Explanation 3 to section 43(1) and determines that the fair
market value of the asset transferred for Rs. 1,30,00,000 is Rs. 15,00,000. The Assessing Officer
with the permission of Joint Commissioner shall take the actual cost of asset to Mr. Y as Rs.
15,00,000 and compute the income of Mr. Y as under:

2 Less: Depreciation @ 15% on Rs. 20,00,000 plus 15,00,000 5,25,000
3 Assessed Income 44,75,000
There will be no change in income of Mr. X since Explanation 3 to section 43(1) determines the
ACTUAL COST OF THE ASSET ONLY.
EXPLANATION 4 TO 43(1) – RE – ACQUISITION OF ASSET

 Where any asset which had once belonged to the assessee
 And had been used by him for the purposes of his business or profession
 And thereafter ceased to be his property by reason of transfer or otherwise,
 Is re – acquired by him,
 Then the actual cost of the asset to the asseessee shall be the lower of the following:
a) WDV of asset at the time of transfer by the assessee computed by assuming that
the asset was the only asset in the block of assets.
b) The actual price for which the asset is re – acquired by him.
Illustration
Mr. A acquired an asset on 01.01.2015 for Rs. 1,00,000 and the asset was taken to the Block of
asset on which depreciation rate is 15%. Mr. A sold the asset to Mr. B on 01.01.2017 for Rs.
1,50,000 and Mr. B sold the asset to Mr. C on 01.01.2018 for Rs. 2,00,000. Mr. C sell the asset to
Mr. A on 01.01.2021 for Rs. 4,50,000.
Solution:
Explanation 4 to section 43(1) shall be attracted in hands of Mr. A in Assessment Year 2021 - 22.
Actual cost to Mr. A for Assessment Year 2021 - 22 shall be the lower of the following:
i. Actual price for which the asset is reacquired by him i.e. Rs. 4,50,000
ii. WDV of asset at the time of transfer which shall be computed as under:

Amount Amount
No Particulars
(Rs.) (Rs.)
1 Actual cost to Mr. A when he first acquired the asset 1,00,000
3 Previous Year 2014 - 15 @ 7.5% 7,500
4 Previous Year 2015 - 16 @ 15% 13,875 21,375
5 Actual Cost 78,625
Actual Cost to Mr. A for Assessment Year 2021 - 22 shall be Rs. 78,625 on which depreciation
shall be allowed @ 7.5%.
KEY POINTS:
No Particulars
i If in the above Illustration, Mr. C had transferred the asset to Mr. A for Rs. 25,000
then the actual cost to Mr. A shall be Rs. 25,000 being the lower of Rs. 25,000 and Rs.
78,625.
ii For Mr. B and Mr. C in the above case, the Assessing Officer can invoke Explanation 3
to section 43(1) and take the FMV as the actual cost in hands of Mr. B and Mr. C
Explanation 3 cannot be invoked for Mr. A on transfer of asset by Mr. C to him since
Explanation 4 is specific.
EXPLANATION 4A TO 43(1) – SALE & LEASE BACK

 Where before the date of acquisition by the assessee (referred as first person),
 The assets were at any time used by any other person (referred as second person) for the
purposes of his business or profession
 And depreciation has been claimed in respect of such assets by the second person
 And such second person acquires on lease, hire or otherwise, assets from the first –
mentioned person,
 Then notwithstanding anything contained in explanation 3, the actual cost of the
transferred assets, in case of first person, shall be
 The WDV of the said assets at the time of transfer thereof by the second person.
Illustration:
No Particulars
1. Triveni Engineering Ltd. is a loss - making company having losses of Rs. 200
Lakhs.
2. Triveni Engineering Ltd. purchased Air Pollution Control Equipment for Rs. 100
lakhs and claimed depreciation @ 100% on Rs. 100 lakhs. WDV of Block is NIL.
[Upto Assessment Year 2017-18, the depreciation rate on air pollution control
equipment was 100%]
3. Reliance Industries Ltd. is a profit - making company. Triveni Engineering Ltd.
sells the Air Pollution Control Equipment to Reliance Industries Ltd. for Rs. 100
Lakhs on 1.4.2020.
4. Reliance Industries Ltd. leases back to Triveni Engineering Ltd. the said
equipment on 1.4.2020.
Now, the following are the tax implications of the above - said transaction:

No Particulars
i Triveni Engineering Ltd. earns a STCG of Rs. 100 lakhs which can be set - off against
current year business losses.
ii Explanation 3 to section 43(1) shall not apply in present case as Explanation 4A
overrides Explanation 3.
iii Reliance Industries Ltd. is the owner of the asset and will claim depreciation.
However, as per Explanation 4A the actual cost of the asset to Reliance Industries
Ltd. shall be taken as NIL.
EXPLANATION 5 TO S.43(1) - BUILDING

Where a building previously the property of the assessee is brought into use for the purpose of
the business or profession of the assessee, 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 calculated at
the rate in force on that date that would have been allowable had the building been used for the
purposes of business or profession since the date of its acquisition.
KEY POINTS:
1. Explanation 5 is applicable only for building and not for any other asset.
2. Section 45(2) is not attracted as building is not covered into SIT.
Illustration 1:
Assessee purchased a car on 01.01.2015 for Rs. 2 lakhs for his personal use. Car is brought
into the business on 01.01.2021 when its fair market value is Rs. 50,000.
Solution:
Explanation 5 to section 43(1) is applicable only to a building. Therefore, in the present case
Explanation 5 is not applicable. The actual cost of the car for AY 2021-22 shall be taken to be Rs.
2, 00, 000. (Restriction of 50% depreciation shall not apply since car was not acquired during the
previous year 31.03.2021 and the assessee has not changed.
Illustration 2:
Mr. X purchased a building on 01.01.2017 for his personal residence for Rs. 10, 00, 000. The
building is converted into factory building on 01.01.2021 when its fair market value is
Rs. 8, 00, 000. Assume that Depreciation rate on building was 7.5% upto Assessment Year
2018-19 and depreciation rate on building is 10% from Assessment Year 2019-20.
Solution:
As per Explanation 5 to section 43(1), the actual cost of building to Mr. X shall be as under:

1 Actual Cost 10,00,000
2 Less: Depreciation AY 2017 - 18 @ 5% 50,000
3 Depreciation AY 2018 - 19 @ 10% 95,000
4 Depreciation AY 2019 - 20 @ 10% 85,000
5 Depreciation AY 2020 - 21 @ 10% 76,950
6 Actual cost for AY 2021 – 22 6,92,550

EXPLANATION 6 TO 43(1) – HC TO SC TRANSACTIONS

Where a capital asset is transferred by a holding company to its subsidiary company, then the
actual cost of the transferred asset to the subsidiary company shall be taken to be the same as it
would have been if the transferor company had continued to hold the capital asset for the
purposes of its business, provided that the following conditions are satisfied:
i. The whole of the share capital of the subsidiary company is held by the holding
company and
ii. The subsidiary company is an Indian company.
However, explanation 2 to section 43(6) provides that notwithstanding anything contained

in section 43(1), where any block of assets is transferred by the holding company to
subsidiary company and conditions of section 47 are satisfied, then the actual cost of the
block of assets in case of transferee company shall be the WDV of the block of assets in the
hands of the holding company on the date on which such transfer took place.
KEY POINTS:
Asset transferred from a block of assets comprising of number of assets, by a Holding company
to the subsidiary company and the conditions of section 47 are satisfied then, the actual cost of
such asset to the subsidiary company shall be the WDV of such asset to the subsidiary company
and the conditions of section 47 are satisfied then, the actual cost of such asset to the subsidiary
company shall be the WDV of such asset in the hands of the transferor. Such WDV is to be
computed by assuming that such asset was the only asset in the block of assets.
Illustration 1:
WDV of Block of assets (15%) as on 01.04.2020 in the hands of holding company H Ltd. is Rs.
2, 00, 000. The Block is transferred by H Ltd. to its 100% subsidiary company S Ltd. on
30.01.2021 for Rs. 10, 00, 000.
Case Particulars
I S Ltd. is a foreign company
II S Ltd. is an Indian company
Solution:
Case I – If S Ltd. is a foreign company
No Particulars
i Exemption under section 47 is not available. Therefore, short term capital gains of
Rs. 8, 00, 000 shall be taxable in the hands of H Ltd. in assessment year 2021 - 22. The
WDV of Block of assets of H Ltd. for assessment Year 2021 - 22 shall be NIL.
ii In hands of S Ltd. the actual cost of the assets acquired during the previous year shall
be taken as Rs. 10, 00, 000. Explanation 2 to section 43(6) shall not apply since the
conditions of section 47 are not satisfied.

Case II – If S Ltd. is an Indian company
No Particulars
i Exemption under section 47 shall be available. Therefore, the capital gains under
section 50 are exempt. The WDV of Block of assets of H Ltd. for assessment Year 2021 -
22 shall be NIL.
ii As per Explanation 2 to section 43(6), the actual cost of the assets acquired during the
previous year in hands of S Ltd. shall be taken to be Rs. 2,00,000 being the WDV of
assets in hands of H Ltd. in the beginning of the previous year.
Illustration 2:
Holding company H Ltd. holds 100% shares of subsidiary company S Ltd. being an Indian
company. The WDV of Block of assets (15% Rate) of H Ltd. as on 01.04.2020 is Rs. 10, 00, 000.
H Ltd sells an asset X out of this block to S Ltd. on 30.06.2020 for Rs. 3,00,000. Asset X was
acquired by H Ltd. on 30.06.2018 for Rs. 1, 00, 000.
Solution:
Actual cost of asset X in hands of S Ltd for AY 2021 - 22 shall be calculated as under:

1 Actual cost to H Ltd 1,00,000
4 Actual cost 72,250
Illustration 3:
Holding company H Ltd. holds 100% shares of an Indian company S Ltd. The WDV of Block
of assets (15% Rate) of H Ltd. as on 01.04.2020 is Rs. 3, 00, 000. H Ltd. purchases an asset P on
30.06.2020 in this Block for Rs. 5, 00, 000. H Ltd. transfers the entire Block of assets to S Ltd.
on 31.07.2020 for Rs. 10, 00, 000.
Solution:
No Particulars
i In hands of H Ltd. exemption under section 47 is available and therefore the short - term
capital gains under section 50 are exempt. The WDV of Block of assets in hands of H Ltd.
for AY 2021 - 22 shall be taken as NIL.
ii In hands of S Ltd. for AY 2021 - 22, the actual cost of the assets acquired during the
previous year should be taken as Rs. 8,00,000 [Rs. 3,00,000 plus Rs. 5,00,000] i.e. WDV at
the time of transfer.

EXPLANATION 6 TO 43(1) – SC TO HC TRANSACTIONS

Where a capital asset is transferred by a subsidiary company to its holding company, then the
actual cost of the transferred asset to the holding company shall be taken to be the same as it
would have been if the transferor company had continued to hold the capital asset for the
purposes of its business, provided that the following conditions are satisfied:
i. The whole of the share capital of the subsidiary company is held by the holding
company and
ii. The holding company is an Indian company.
However, explanation 2 to section 43(6) provides that notwithstanding anything contained

in section 43(1), where any block of assets is transferred by the subsidiary company to
holding company and conditions of section 47 are satisfied, then the actual cost of the block
of assets in case of transferee company shall be the WDV of the block of assets in the hands
of the subsidiary company on the date on which such transfer took place.
KEY POINTS:
Asset transferred from a block of assets comprising of number of assets, by a subsidiary

company to the holding company and the conditions of section 47 are satisfied then, the actual
cost of such asset to the holding company shall be the WDV of such asset in the hands of the
transferor. Such WDV is to be computed by assuming that such asset was the only asset in the
block of assets.
EXPLANATION 8 TO 43(1) – INT ON BORROWED CAPITAL

No Particulars
1 Challapali Sugar Mills Ltd. (SC): It was held that the interest paid before the
commencement of production on the amounts borrowed by the assessee for the
acquisition and installation of plant and machinery, buildings, furniture and fixture
forms part of the actual cost.
2 Explanation 8 to section 43(1) provides that where any interest is paid or is payable as
interest in connection with the acquisition of an asset, so much of the amount as is
relatable to any period after such asset is first put to use shall not be included in the
actual cost of the asset.
3 Hindustan Polymers Ltd. Salaries, expenses of guest house maintained for erection staff,
travelling, vehicle and general expenses pertaining to setting up of the plant forms part of
the actual cost.
4 Extract from “Income Computation and Disclosure Standard v relating to Tangible Fixed
Assets”
Administration and other general overhead expenses are to be excluded from the cost of
tangible fixed assets if they do not relate to a specific tangible fixed or to the acquisition of a
tangible fixed asset or bringing it to its working condition, shall be included as a part of the
cost of the project or as a part of the cost of the tangible fixed asset.
5 Food Specialties Ltd: Expenses on test runs of machinery prior to production are part of
the actual cost of plant & machinery.
6 Extract from “Income Computation and Disclosure Standard V relating to Tangible Fixed

Assets”.
The expenditure incurred on start-up and commissioning of the project, including the
expenditure incurred on test runs and experimental production, shall be capitalized. The
expenditure incurred after the plant has begun commercial production, that is,
production intended for sale or captive consumption, shall be treated as revenue
expenditure.
7 Section 36(1)(iii) provides that while computing the income under the head P/ G/ B/ P,
deduction shall be allowed for the amount of interest paid in respect of capital borrowed for
the purposes of business or profession. The following proviso to section 36(1)(iii) has been
added.
“Provided that the amount of the interest paid, in respect of capital borrowed for acquisition
of an asset (whether capitalized in the books of account or not); for any period beginning
from the date on which the capital was borrowed for acquisition of the asset till the date on
which such asset was first put to use, shall not be allowed as deduction.”
Illustration:
Tata Chemicals an existing company manufacturing salt sets up a new factory at Mithapur
for manufacturing salt. The following data is given to you:
No Particulars Date
1 Construction of a factory started on 01.01.2014
2 Commercial Production in factory started on 23.01.2020
3 Plant - I put to use on 23.01.2020
4 Plant II - put to use on 30.07.2020
Loan taken on interest on 01.01.2014 to acquire Plant – I and Plant – II. Discuss the
allowability of interest from the business income of Tata Chemicals.
Solution:
Interest from 01.01.2014 to 22.01.2020 shall be added to the cost of Plant I and Plant II, as per
proviso to section 36(1)(iii).
Interest on loan for acquiring Plant - I, for the period 23.01.2020 and onwards, cannot be added
to actual cost of the plant but has to be claimed as revenue expenditure under section 36(1)(iii),
as per Explanation 8 to section 43(1).
Interest on loan for acquiring Plant - II, for the period 23.01.2020 to 29.07.2020, has to be added
to the cost of Plant - II and cannot be claimed as revenue expenditure as per proviso to section
36(1)(iii).
Interest on loan for acquiring Plant - II, for the period 30.07.2020 and onwards, has to be claimed
as revenue expenditure under section 36(1)(iii), as per Explanation 8 to section 43(1).

EXPLANATION 11 TO 43(1) – FOREIGN ASSETS

Where an asset which was acquired outside India by an assessee being a non – resident, is
brought by him to India and used for the purposes of his business or profession, the actual cost
of the asset to the assessee shall be the actual cost to the assessee, as reduced by an amount
equal to the amount of depreciation calculated at the rate in force that would have been
allowable had the asset been used in India for the said purposes since the date of its acquisition
by the assessee.
Illustration:
A non - resident purchased a computer in U.S.A on 01.01.2016 for Rs. 10,00,000. It was used
for his business outside India. On 01.01.2021, he starts a business in India and computer is
brought into India on that date when its FMV is Rs. 2,00,000.
Solution:
The actual cost of the computer for assessment year 2020 - 21 shall be calculated as under:

1 Actual Cost 10,00,000
2 Less: Depreciation AY 2016 - 17 @ 30% 3,00,000
Depreciation AY 2017 - 18 @ 60% 4,20,000
Depreciation AY 2018 - 19 @ 40% 1,12,000
Depreciation AY 2019 - 20 @ 40% 67,200
Depreciation AY 2020 - 21 @ 40% 40,320
3 Actual Cost for AY 2021 – 22 60,480

SUMMARY OF EXPLANATIONS TO SECTION 43(1) –
DETERMINATION OF ACTUAL COST IN SPECIAL CASES
Expl. Mode of Acquisition Actual Cost

1 Asset acquired for scientific research Actual cost less deduction availed
subsequently brought into business use under section 35
1A Stock in trade is converted into capital Fair Market value on the date of
asset transfer.
2 Asset acquired by way of gift or WDV in the hands of the previous
inheritance owner at the time of transfer.
3 Asset acquired at higher price from any Actual cost to be determined by the
other person using the asset for his Assessing Officer with prior approval
business or profession with a view to of Joint Commissioner.
claim depreciation on enhanced cost and
reduce tax liability
4 Asset once belonged to the assessee The WDV at the time of original
which was used by him for business & is transfer or the price paid for
transferred and reacquired by him reacquiring the asset, whichever is less.
4A Asset acquired by an assessee from The written down value of the asset to
another person who had claimed the transferor at the time of transfer to
depreciation on such asset and the asset is the assessee.
leased back to such other person.
5 Building used for private purpose The cost of purchase or construction of
subsequently brought into business use. the building as reduced by the notional
depreciation calculated upto the year
of bringing the asset to business use at
the depreciation rate applicable to that
year.
6& Asset transferred by a Holding Co. to its WDV to the transferor company will
Exp. 2 Subsidiary Co. or by a Subsidiary Co., to be adopted as the actual cost to the
to Holding Co. if the following two transferee company.
section conditions are satisfied:
43(6) 1. Shares of the Subsidiary Co.
should be wholly owned by the
Holding Co. or its nominees.
2. The transferee co. should be an
Indian company.
Note: If transferor company was not
claiming depreciation since it was not used
for its business, then the actual cost to the
transferee company shall be the actual cost
to the transferor company.

7& Transfer of asset in a scheme of WDV to the amalgamating company
Exp. 2 amalgamation by amalgamating company will be adopted as the actual cost to
to to amalgamated Indian company. the amalgamated company.
section
43(6) Note: If amalgamating company was not
claiming depreciation since it was not used for
its business, then actual cost to the
amalgamated company shall be the actual cost
to the amalgamating company.
7A Asset transferred by a demerged company Actual cost shall be the written down
to the resulting Indian company. value in the hands of the demerged
company.
8 Asset acquired out of borrowed funds. Interest on loan borrowed relating to
the period after the asset is first put
to use shall never form part of actual
cost.
9 Asset acquired subject to levy of excise So much of the duty in respect of
duty or customs duty in respect of which which a claim of credit has been
CENVAT credit is availed. made and allowed under the Central
Excise Rules, 1944 shall not form part
of the actual cost.
10 A portion of the cost of an asset acquired is So much of the cost as is relatable to
met directly or indirectly by Government or such subsidy or grant or
any statutory authority or any other person reimbursement shall not form part of
in the form of a subsidy or grant or the actual cost. If subsidy is not
reimbursement. directly relatable to the asset
acquired, but subsidy is with
reference to the assets then the
subsidy shall be proportionately
reduced from the actual cost of the
assets with reference to which
subsidy has been granted.
11 Asset brought into India by a Non - Actual cost as reduced by the
resident assessee or a foreign company for amount of depreciation calculated at
use in his business or profession. the rate in force as if the asset was
used in India since the date of
acquisition.
12 Any capital asset acquired under a scheme The amount, which would have been
of corporatisation of a recognised stock regarded as actual cost, had there
exchange in India, approved by SEBI. been no such corporatisation shall be
deemed to be the actual cost.
13 Actual cost of capital asset has been The actual cost of such asset to the
allowed as deduction under section 35AD transferee shall be NIL.
and capital asset is transferred by way of
transactions referred to in section 47.

CHAPTER – 5
DEPRECIATION – OTHER ISSUES
SECTION 32(2) – SET OFF & CARRY FORWARD OF UAD
No Particulars
1 The current year depreciation for any assessment year shall be set off
a) against the profits and gains of any business or profession carried on by the assessee
assessable for that assessment year and
b) the balance if any, against the income under any head assessable for that assessment
year. (It can be set - off against income under the head Capital Gains, Income from
other sources, Income from House Property except Salaries).
2 Depreciation to the extent not set off shall be carried forward to the next assessment year
and set off against
a) profits and gains of any business or profession carried on by the assessee and
b) the balance if any against the income under any head. (It can be set-off against income
under the head Capital Gains, Income from other sources, Income from House
Property except Salaries).
3 The unabsorbed depreciation can be carried forward indefinitely. Depreciation shall be
carried forward even if business or profession has been discontinued.
4 Priority of set – off
Current Year Brought Forward Brought Forward

Depreciation Business Losses Depreciation
5 Set - off and carry forward of depreciation is not governed by section 80 but by section
32(2). Therefore, unabsorbed depreciation can be carried forward and set - off, even if the
return is filed after the time prescribed under section 139(1).
SECTION 38(2) – ASSETS NOT EXCLUSIVELY USED FOR BUSINESS / PROFESSION
Where any building, machinery, plant or furniture is not exclusively used for the purposes of
the business or profession, then the deduction under section 30 (repairs & insurance premium
of the building), deduction under section 31 (repairs and insurance premium of machinery,
plant and furniture) and the deduction under section 32 shall be restricted to a fair
proportionate part thereof which the Assessing Officer may determine having regard to the use
of such building, machinery, plant or furniture for the purposes of business or profession.

Illustration:
Amount Amount
No Particulars
(Rs.) (Rs.)
I Assessment Year – 2020 – 21
1 Actual Cost of Car 1,00,000
2 Depreciation @ 15% 15,000
3 Less: Disallowed for personal usage, u/s 38(2), @
4,500
30%
4 Depreciation actually allowed 10,500 10,500
5 WDV as on 01.04.2020 89,500
II Assessment Year – 2021 – 22
1 Opening WDV 89,500
2 Depreciation @ 15% 13,425
3 Less: Disallowed for personal usage, u/s 38(2), @
4,028
30%
4 Depreciation actually allowed 9,398 9,398
5 WDV as on 01.04.2021 80,103
RATES OF DEPRECIATION
PART A - TANGIBLE ASSETS Rates
I. BUILDING %
Block 1 Building which are used mainly for residential purposes except hotels & 5
boarding houses
Block 2 Building which are not used mainly for residential purposes and which 10
are not covered by sub-item (1) above and sub-item (3) below
Block 3 Buildings acquired on or after for 1st September, 2002 installing 40
machinery and plant forming part of water supply project or water
treatment system and which is put to use for the purpose of business of
providing infrastructure facilities
Block 4 Purely temporary erections such as wooden structures 40
II. FURNITURE AND FITTINGS
Block 1 Furniture and fittings including electrical fittings (electrical wiring, 10
switches, sockets, other fittings and fans etc.,)
III. MACHINERY AND PLANT
Block 1 Motor buses, motor lorries and motor taxis used in a business of 45
running them on hire, acquired on or after 23.08.2019 but before
1.04.2020 and put to use before 1.04.2020.
Block 2 Motor cars, other than those used in a business of running them on 30
hire, acquired on or after the 23 day of August, 2019
rd
Block 3 Motor cars, other than those used in a business of running them on hire, 15
acquired or put to use on or after 01.04.1990.
Block 4 Motor buses, motor lorries and motor taxis used in a business of 30
running them on hire
Block 5 Moulds used in rubber and plastic goods factories 30

Block 6 Aeroplane – Aeroengines 40
Block 7 Specified air pollution control equipment, water pollution control 40
Equipments, solid waste control equipment and solid waste recycling
Block 8 Plant & Machinery used in Semi - Conductor industry covering all 30
Integrated Circuits (ICs)
Block 9 Life Saving Medical Equipments 40
Block 10 Machinery and plant, acquired and installed on or after the 1 st day of 40
September, 2002 in water supply project or a water treatment system
and which is put to use for the purpose of business of providing
infrastructure facility
Block 11 Oil Wells other than plant used in field operations above and below 15
ground
Assets installed before 31.03.2014 in the nature of:
a) Windmills and any specially designed devices which run on 15
Block 12 windmills.
b) Any special devices including electric generators and pumps 15
running on wind energy.
Block 13 Computers including computer software 40
Block 14 Books (annual publications or other than annual publications) owned by 40
assessees carrying on a profession.
Block 15 Booked owned by assessees carrying on business in running lending 40
libraries
Block 16 Plant & Machinery (General Rate) 15
Assets installed on or after 31.03.2014 in the nature of:
a) Windmills and any specially designed devices which run on 40
Block 17 windmills.
b) Any special devices including electric generators and pumps 40
running on wind energy.
IV. SHIPS
Block 1 Ocean - going ships 20
Block 2 Vessels ordinarily operating on inland waters, not covered by block 3 20
below
Block 3 Speed boats operating on inland waters 20
PART B INTANGIBLE ASSETS
Know - how, patents, copyrights, trademarks, licenses, franchises or any 25
other business or commercial rights of similar nature
Note: The new rates given above shall be applicable to all assets, whether old or new, failing in
the relevant block of assets.
KEY POINTS
a) Buildings include roads, bridges, culverts, wells and tubewells.

b) A building shall be deemed to be used mainly for residential purposes if the built – up
floor area used for residential purposes is not less than 66.67% of the total built up floor
area.
SECTION 43(3) – DEFINITION OF PLANT

Section 43(3) defines “Plant” to include ships, vehicles, books, scientific apparatus, and surgical
equipment used for the purposes of B / P but does not include tea bushes or livestock OR
BUILDINGS OR FURNITURE AND FITTINGS. Therefore, specially designed building such
as hospital, cinema hall, theatre, shall not be treated as plant & machinery but shall be treated as
buildings. Similarly, furniture and fittings specially designed for a hotel, cinema hall, hospital
shall not be treated as plant and machinery but shall be treated as furniture and fittings.
QUESTIONS FOR PRACTICE
1) Mr. X a Proprietor engaged in manufacturing business, furnishes the following

particulars:
No Particulars Amount
1 Opening WDV of plant and machinery as on 1.4.2020 30,00,000
2 New plant and machinery purchased and put to use on 08.06.2020 20,00,000
3 New plant and machinery acquired and put to use on 15.12.2020 8,00,000
4 Computer acquired and installed in the office premises on 3,00,000
2.1.2021
Compute the amt of depreciation & additional depreciation as per the Income – tax Act,
1961 for the A.Y. 2021 - 22? Assume that all the assets were purchased by way of Account
payee Cheque
Solution
Computation of depreciation and additional depreciation for A. Y. 2021 - 22
Plant & Computer
No Particulars Machinery (15%) (40%) Rs.
Rs.
1 Normal depreciation
 @15% on Rs 50,00,000 - See Working 7,50,000 -
Notes 1 & 2
 @ 7.5 % (50% of 15%, since put to use 60,000 -
for less than 180 days) on Rs 8,00,000
 @ 20% (50 % of 40%, since put to use - 60,000
for less than 180 days) on 3,00,000
2 Additional Depreciation
 @ 20% on Rs 20,00,000 (new plant and 4,00,000 -
machinery put to use for more than 180
days)
 @ 10% (50% of 20%, since put to use for 80,000 -
less than 180 days) on Rs 8,00,000
3 Total depreciation 12,90,000 60,000
Working Notes

1) Computation of written down value of Plant & Machinery as on 31.03.2021
Plant & Machinery Computer
No Particulars
(Rs.) (Rs)
1 Written down value as on 01.04.2020 30,00,000 -
Add: Plant & Machinery purchased on
2 20,00,000 -
08.06.2020
Add: Plant & Machinery acquired on
3 8,00,000 -
15.12.2020
Computer acquired and installed in the
4 - 3,00,000
office premises
5 Written down value as on 31. 03. 2021 58,00,000 3,00,000
2) Composition of plant and machinery included in the WDV as on 31.03.2021

Plant &
Computer
No Particulars Machinery
(Rs)
(Rs.)
1 Plant &Machinery put to use for 180 days or 50,00,000 -
more (Rs 30,00,000 (Opening WDV) + Rs
20,00,000 (purchased on 08.06.2020)]
2 Plant and machinery put to use for less than 180 8,00,000 -
days
3 Computers put to use for less than 180 days - 3,00,000
Total 58,00,000 3,00,000
Notes:
No Explanation
As per the second proviso to section 32 (1)(ii), where an asset acquired during the
1 previous year is put to use less than 180 days in that previous year, the amount of
deduction allowable as normal depreciation and additional depreciation would be
restricted to 50% of amount computed in accordance with the prescribed
percentage.
Therefore, normal depreciation on plant and machinery acquired and put to use on
15.12.2020 and computer acquired and installed on 02.01.2021, is restricted to 50%
of 15% and 40%, respectively. The additional depreciation on the said plant and
machinery is restricted to Rs 80,000, being 10% (i.e., 50% of 20%) of Rs 8 lakh
As per third proviso to section 32 (1)(ii), the balance additional depreciation of Rs
2 80,000 being 50% of 1,60,000 (20% of Rs 8,00,000) would be allowed as deduction in
the AY 2022 – 23
As per section 32 (1)(iia), additional depreciation is allowable in the case of any new
3 machinery or plant acquired and installed after 31.03.2005 by an assessee engaged,
inter alia, in the business of manufacture or production of any article or thing @
20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia, any
machinery or plant installed in office premises, residential accommodation or in
any guest house.

Accordingly additional depreciation is not allowable on computer installed in the
office premises.
2) A newly qualified Chartered Accountant Mr. Danish, commenced practice and has
acquired the following assets in his office during F.Y. 2020 - 21 at the cost shown
against each item. Calculate the amount of depreciation that can be claimed from his
professional income for A.Y. 2021 - 22. Assume that all the assets were purchased by
way of account payee Cheque.
Date of Date when Amount

No Description
acquisition put to use Rs.
1. Computer 27 Sept, 20 1 Oct, 20 35,000
2. Computer UPS 2 Oct, 20 8 Oct, 20 8,500
3. Computer printer 1 Oct, 20 1 Oct, 20 12,500
4. Books (of which books being annual 1 Apr, 20 1 Apr, 20
13,000
publications are of Rs.12,000)
5. Office furniture (Acquired from a 1 Apr, 20 1 Apr, 20
3,00,000
practicing C.A.)
6. Laptop 26 Sep, 20 8 Oct, 20 43,000
Solution:
Computation of depreciation allowable for AY 2021 - 22
Block Asset Rate Depreciation
1 Furniture - See working note below 10% 30,000
2 Plant (Computer including computer software,
40% 34,500
computer UPS, laptop, computer printer & Books)
Total depreciation allowable 64,500
Working Notes
Computation of depreciation
Block of Assets Rs
Block 1: Furniture – [Rate of depreciation – 10%]
Put to use for more than 180 days [ Rs 3,00,000 @ 10%] 30,000
Block 2: Plant [Rate of depreciation – 40%]
a) Computer including computer software (put to use for more than 180 14,000
days) - Rs 35,000 @ 40%
b) Computer UPS (put to use for less than 180 days) [Rs 8,500 @ 20%] - See 1,700
note below
c) Computer Printer (put to use for more than 180 days) - Rs 12,500 @ 40% 5,000
d) Laptop (put to use for less than 180 days) [Rs 43,000 @ 20%] - See note 8,600
below
e) Books being annual publications or other than annual publications)(Put 5,200
to use for more than 180 days) - Rs 13,000 @ 40%
Total 34,500

Note: - Where an asset is acquired by the assessee during the previous year and is put to
use for the purpose of business or profession for a period of less than 180 days, the
deduction on account of depreciation would be restricted to 50% of the prescribed rate. In
this case, since Mr Danish commenced his practice in the P Y 2020 - 21 and acquired the
assets during the same year, the restriction of depreciation to 50% of the prescribed rate
would apply to those assets which have been put to use for less than 180 days in that year,
namely, laptop and computer UPS.
2) Mr. Gamma, a proprietor started a business of manufacture of tyres& tubes for motor
vehicles on 01.01.2020. The manufacturing unit was set up on 1.5.2020. He commenced
his manufacturing operations on 01.06.2020. The total cost of the plant and machinery
installed in the unit is Rs.120 Crore. The said plant & machinery included second hand
plant and machinery bought for Rs. 20 Crore and new plant and machinery for scientific
research relating to the business of the assessee acquired at a cost of Rs.15 Crore.
Compute the amount of depreciation allowable under section 32 of the Income tax act
1961, in respect of the assessment year 2021 - 22. Assume that all the assets were
purchased by way of account payee Cheque.
Solution:
Computation of depreciation of Gamma for AY 2021 – 22
No Particulars Rs (in Crores)

1 Normal Depreciation – Sec 32 (1) (ii) [WN - 1] 15.75
2 Additional Depreciation – Sec 32 (1) (iia) [WN - 2] 17.00
3 Depreciation allowable u / s. 32 32.75
W.N: 1 – Calculation of Normal Depreciation

No Particulars Rs (in Crores)
1 Cost of Plant and Machinery 120.00
2 Less : Plant and Machinery for Scientific research 15.00
3 Cost of plant and machinery eligible for depreciation 105.00
4 Depreciation @ 15% of the above 15.75
W.N: 2 – Calculation of Additional Depreciation

New Second hand Block
No Particulars
machinery machinery Total
1 Cost of Plant and Machinery 100.00 20.00 120.00
2 Less: Plant and Machinery for 15.00 - 15.00
Scientificresearch - Note i
3 Sub – total 85.00 20.00 105.00
4 Additional Depreciation on Rs 85 17.00 Nil 17.00
crores @ 20% - Note ii
Notes:
No Particulars
I Where deduction is allowed u / s 35 for any previous year in respect of a capital

asset, then no depreciation shall be allowed on such asset u / s. 32.
Ii While computing this additional depreciation, cost of second hand machinery and
cost of machinery or plant fully allowed as adeduction u / s. 35 shall not qualify.
3) Compute the quantum of Depreciation available under Section 32 of the Income - Tax
Act, 1961 in respect of the following items of Plant and Machinery purchased by PQR
Textile Ltd., by paying through account payee cheque, which is engaged in the
manufacture of textile fabrics, for the year ended 31 – 03 - 2021:
Amount
No Particulars (In
Crores)
1 New machinery installed on 1 – 5 – 2020 84
2 New Windmill purchased and installed on 18 – 6 – 2020 22
3 Lorries for transporting goods to sales depots (Purchased & put to use
3
in July, 2020)
4 Items purchased after 30th November 2020
5 Fork – lift - trucks, used inside Factory 4
6 Computers installed in office premises 1
7 Computers installed in Factory 2
8 New imported Machinery 12
The new imported Machinery arrived at Chennai port on 30 – 03 - 2021 and was installed
on 03.04.2021. All other items were installed during the year ended 31 – 03 - 2021. The
Company was newly started during the year. Also, compute the WDV of the various
blocks of assets as on 01. 04. 2021.
Note: As per sec 2(28) of the motor Vehicles Act 1988 the definition of a vehicle excludes
inter alia, a vehicle of special type adopted for use only in a factory in a enclosed premises.
Therefore Fork lift trucks used inside the factory would not fall within the definition of
vehicle. Hence it is eligible for additional depreciation u / s 32(1) (iia).
Solution:
Computation of depreciation allowance under section 32 for the A. Y. 2021 – 22
A. Plant and Machinery (15 % block) (put to use for 180 days or more)
Additional
Normal Depreciatio
No Particulars Depreciation n
[u / s 32 (1)(ii)] [u / s 32 (1)
(iia)]
1 New machinery installed on 01.05.2020 84.00 84.00
2 Lorries for transporting goods to depots 3.00 -
3 Sub – total 87.00 84.00
4 Normal Depreciation @ 15 % and additional 13.05 16.80
depreciation @ 20%

B. Plant and Machinery (15 % block) (Put to use for less than 180 days – hence, depreciation
is restricted to 7.5 % being 50% of 15%)
Additional
Normal
Depreciation
No Particulars Depreciation
[u / s 32 (1)
[u / s 32 (1)(ii)]
(iia)]
1 Fork lift trucks, used inside a factory 4.00 4.00
2 Normal Depreciation @ 7.5% & additional 0.30 0.40
depreciation @ 10%
C. Plant & Machinery (40% block) (Put to use for less than 180 days, hence depreciation
restricted to 20% i.e 50% of 40%
Additional
Normal
Depreciation
[u / s 32 (1)
[u / s 32 (1)(ii)]
(iia)]
1 Computers installed in office premises 1.00 -
2 Computers installed in factory 2.00 2.00
3 Sub – total 3.00 2.00
4 Normal depreciation @20% & additional depreciation 0.60 0.20
@10%
D. Plant and Machinery (40% block)(Put to use for 180 days or more) - See Note 1
Additional
Normal
Depreciation
[u / s 32 (1)
[u / s 32 (1)(ii)]
(iia)]
1 New windmill purchased and installed on 18.06.2020 22.00 22.00
2 Normal Depreciation @ 40% & additional 8.80 4.40
depreciation @ 20%
Total and additional depreciation:

Additional
Normal
Depreciation
[u / s 32 (1)
[u / s 32 (1)(ii)]
(iia)]
1 Plant and Machinery (15% block)(A + B) 13.35 17.20
2 Plant and Machinery (40% Block)(C + D) 9.40 4.60
Depreciation available under section 32 = Rs 44.55 crores

Computation of Written Down Value (WDV) as on 01.04.2021

Plant &
Machinery
No Particulars
15% 40%
(Rs in crores)
1 WDV as on 01.04.2020 (The company was started during Nil Nil
the year – as given in question)
2 Add: Plant and Machinery acquired during the year
 New Machinery installed on 01.05.2020
84.00
 Lorries for transporting goods to sales depots
3.00
 Fork lift trucks, used inside factory
4.00
 New imported machinery 103.00 -
12.00
 New Windmill purchased and installed on - 22.00
18.06.2020
 Computers installed in office premises - 1.00
 Computers installed in factory - 2.00
Sub – Total 103.00 25.00
3 Less: Asset sold during the year Nil Nil
4 WDV as on 31.03.2021 (before charging depreciation) 103.00 25.00
5 Less: Depreciation for the P Y 2020 – 21
 Normal depreciation 13.35 9.40
 Additional depreciation 17.20 4.60
6 WDV as on 01.04.21 72.45 11.00
Notes:
Windmills and any specially designed devices which run on windmills installed on or
1 after 01.04.2014 would be eligible for depreciation @ 40%.
New imported machinery was not installed during the previous year 2020 - 21. Hence
2 it would not be eligible for additional depreciation for A Y 2021 - 22. It would be also
not be eligible for normal depreciation for A Y 2021 - 22, since it was not put to use in
the P Y 2020 - 21 being the year of acquisition.
It may be noted that investment in the following plant and machinery would not be
3 eligible for additional depreciation under section 32 (1)(iia).
a) Lorries for transporting goods to sales depots, being vehicles/road transport
vehicles: and
b) Computers installed in office premises.

CHAPTER – 6
SEC - 32 – DEPRECIATION FOR
POWER SECTOR UNDERTAKINGS - PSU
S.32(1)(i) S.32(1)(iii) S.41(2) S.50 A
As per Income Tax Act recognized method of Depreciation is written down Value method.
Only exception is in case of Power Sector Units.
 Eligible Assessee:
Power sector units engaged in business of generation and distribution of power can charge
depreciation on their tangible assets on Straight Line Method.
 Eligible Assets:
Power Sector units can apply SLM Method only for Tangible Assets and not to Intangible
assets. For Intangible Assets only WDV method will be applicable
ASSESSEE
Buisness of Generation or Generation

& Distribution of Power Other Assesses
Option to Follow SLM / WDV for

Tangible Assets Always follow WDV Method
If they follow SLM, Individual Assets

System apply Only Block System will apply


1) Lights and Power Ltd. engaged in the business of generation of power, furnishes the
following particulars pertaining to P.Y. 2020 - 21. Compute the depreciation allowable
under Section 32 for A.Y. 2021 - 22, while computing its income under the head ‚PGBP‛.
The company has opted for the depreciation allowance on the basis of written down
value. Assume that all the assets were purchased by way of account payee cheque.
Particulars Rs.
1. Opening Written down value of Plant and Machinery (15% block) as on 5,78,000
01.04.2020 (Purchase value Rs.8,00,000)
2. Purchase of second hand machinery (15% block) on 29.12.2020 for 2,00,000
business purpose
3. Machinery Y (15% block) purchased and installed on 12.07.2020 for the 8,00,000
purpose of power generation
4. Acquired and installed for use a new air pollution control equipment on
2,50,000
31.7.2020
5. New air conditioner purchased and installed in office premises on
3,00,000
8.9.2020
6. New machinery Z (15% block) acquired and installed on 23.11.2020 for
3,25,000
the purpose of generation of power
7. Sale value of an old machinery X, sold during the year (Purchase value
3,10,000
Rs.4,80,000, WDV as on 01.04.2020 Rs.3,46,800)
Solution:
Computation of Total Depreciation for the AY 2021 - 22
No Particulars P&M (15%) P&M (40%)

1 Opening WDV as on 01.04.2020 5,78,000 -
2 Add: Plant and Machinery acquired during the year
Second hand machinery 2,00,000 -
Machinery Y 8,00,000 -
Air conditioner for office 3,00,000 -
Machinery Z 3,25,000 -
Air pollution control equipment - 2,50,000
3 Sub Total 22,03,000 2,50,000
4 Less: Asset sold during the year 3,10,000 -
5 Written down value before charging depreciation 18,93,000 2,50,000
6 Less: Normal Depreciation
[40% on air pollution control equipment (Rs. 2,50,000 - 1,00,000
x 40%)
7 Less: Depreciation on plant and machinery put to
use for less than 180 days @ 7.5% (i.e., 50% of 15%)
Second hand machinery (Rs. 2,00,000 × 7.5%) 15,000
Machinery Z (Rs. 3,25,000 × 7.5%) 24,375

15% on the balance WDV being put to use for more
2,05,200
than 180 days (Rs. 13,68,000 × 15%)
8 Less:Additional Depreciation
Machinery Y (Rs. 8,00,000 × 20%) 1,60,000
Machinery Z (Rs. 3,25,000 × 10%, being 50% of 20%) 32,500
Air pollution control equipment (Rs. 2,50,000 × 20%) - 50,000
9 Total Depreciation 4,37,075 1,50,000
Notes:
1) Power generation equipments qualify for claiming additional depreciation in respect

of new plant and machinery.
2) Additional depreciation is not allowed in respect of second hand machinery.
3) No additional depreciation is allowed in respect of office appliances. Hence, no
depreciation is allowed in respect of air conditioner installed in office premises.
4) The balance 50% additional depreciation in respect of Machinery Z of Rs. 32,500
(10% x Rs. 3,25,000) can be claimed as deduction in subsequent financial year i.e., F.Y.
2021 - 22.
Illustration:
A power generating unit purchased a machinery of Rs. 10, 00, 000 on 01.01.2020 on which
the depreciation rate is 7.84% on SLM basis. The machinery is sold on 31.12.2020 for:
Case Particulars
1 5,00,000
2 9,60,800
3 9,80,000
4 12,00,000
Now, depreciation for Assessment Year 2020 - 21 shall be Rs. 39,200. The WDV as on
1.4.2020 is Rs. 9, 60, 800
Solution:
Case Answer
1 Terminal depreciation of Rs. 4,60,800 shall be allowed under section 32(1)(iii)
in assessment year 2021-22 provided the same is written off in the books of
account. Section 41(2) is not applicable. No capital gains as section 50A is not
attracted.
2 Terminal depreciation is nil and also the balancing charge under section 41(2)
is nil. No capital gains as section 50A is not attracted.
3 Terminal depreciation is nil. The balancing charge under section 41(2) is Rs.
19,200. No capital gains as section 50A is not attracted.
4 Terminal depreciation is nil. The balancing charge under section 41(2) is Rs.
39,200. As per section 50A, capital gains are Rs. 2,00,000.

2) A Ltd, engaged in the business of generation and distribution of power has claimed
depreciation on Straight Line Method for Income - tax purposes. You are informed that a
second hand Diesel Electric and Gas Plant was acquired for Rs. 60, 00,000 and
depreciation at 8.24% was claimed for 2 years on Straight Line Method. Assuming that
the said Plant is sold for a consideration of
a) Rs. 36, 00,000; or
b) Rs 55, 00,000; or
c) Rs. 62, 00,000 during the Previous year 2020 - 21 examine the treatment under tax
law.
Solution:
Depreciation = (Rs.60, 00, 000 x 8.24% x 2) = Rs.9, 88, 800
No Case Particulars
1 Sale price The actual cost of the plant is Rs. 60,00,000. The depreciation
Rs. 36,00,000 claimed is Rs. 9,88,800 and consequently, the depreciated
value after 2 years is Rs. 50,11,200. The sale consideration of
Rs. 36,00,000 being less than the depreciated value, the short
fall of Rs. 14,11,200 shall be allowed to be written off u / s
32(1)(iii). This is normally known as Terminal Depreciation.
2 Sale price The sale consideration of Rs. 55,00,000 is more than the
Rs. 55,00,000 depreciated value of Rs. 50,11,200 but not more than the
actual cost of Rs. 60,00,000. Therefore, the surplus of
Rs.4,88,800 shall be assessed to tax u/s 41(2) as Balancing
Charge.
3 Sale price The sale consideration of Rs.62,00,000 is not only more than
Rs. 62,00,000 the depreciated value of Rs. 50,11,200 but is also more than
the actual cost of Rs. 60,00,000. Therefore, the surplus of Rs.
9,88,800 [Rs. 60,00,000 less Rs.50,11,200] shall be assessed to
tax u/s 41(2) as balancing charge under the head ”PGBP” and
the remaining surplus of Rs. 2,00,000 [Rs.62,00,000 – Rs.
60,00,000] shall be assessed to tax as STCG u/s 50A.
Students may note that in respect of cases, other than the
undertakings engaged in power sector, “block of assets”
concept applies and depreciation shall be computed only on
WDV basis. The concept of “Terminal Depreciation” u / s 32,
“Balancing Charge” u / s 41(2) and the provisions of section
50A do not apply in such cases.

Notes:
No Particulars Explanation
1 Terminal  In case of Power Concern if any asset is sold, discarded,
Depreciation demolished or otherwise destroyed in the previous year
(Other than the PY in which it is first brought in to
use) the depreciation amount will be the amount by
which the moneys payable in respect of such building,
machinery, plant or furniture together with the amount
of scrap value, if any, falls short of the WDV thereof.
 The depreciation will be available only if the deficiency
is actually written off in the books of the assessee
 If the asset is sold in the same previous year in which it
was acquired, then there will be Short term capital
gains on sale of such Asset
 If the asset is sold in the same previous year in which it
was acquired, then section 41(2) shall not be applicable
and the profit on sale of asset shall be short term capital
gains
2 SECTION 50A –  Where the capital asset being an asset in respect of

Special Provision for which a deduction on account of depreciation under
Cost of Acquisition in section 32(1)(i) has been obtained by the assessee in any
Case of Depreciable previous year, is sold during any PY and the sale price
Asset exceeds the actual cost of the asset, then the following
shall be short term capital gains chargeable to tax in the
Previous Year in which asset is sold:
Sale price – Actual cost of the asset = Short
Term Capital Gains
SUMMARY - DEPRECIATION FOR POWER SECTOR UNDERTAKINGS:

No Situation Treatment
1 Sale Value < Original Terminal Depreciation u / s 32 = WDV (-) Sale Value
Cost & Sale Value <
WDV
2 Sale Value < Original Balancing Charge u / s 41(2) = Sale Value (-) WDV
Cost and Sale Value >
WDV
3 Sale Value > Original Balancing Charge u / s 41(2) = Original Cost (-) WDV
cost Capital Gains u / s 50A = Sale Value (-) Original Cost

CHAPTER – 7
SEC - 32 – DEPRECIATION IN CASE OF
SUCCESSION OF BUSINESS
Proviso to The aggregate deduction, in respect of depreciation of:

Section 32 (1) –
a. buildings, machinery, plant or furniture, being tangible assets or
Depreciation in
b. know – how, patents, copy rights, trademarks, licenses, franchises or
case of any other business or commercial rights of similar nature, being
Succession, intangible assets.
Amalgamation Allowable to :
and Demerger
i. the predecessor and the successor in case of succession referred to
in section 47 (xiii) or section (xiiib) or section 47(xiv) or section 170,
or
ii. the amalgamating company and the amalgamated company in
case of amalgamation or
iii. the demerged company and the resulting company in case of
demerger
as the case may be, shall not exceed in any previous year, the deduction
calculated at the prescribed rates as if the succession or the amalgamation
or the demerger had not taken place. Such deduction shall be apportioned
between the predecessor and the successor, or the amalgamating company
and the amalgamated company or the demerged company and the
resulting company, as the case may be, in the ratio of the number of days
for which the assets were used by them.
Circumstances
a) Succession of partnership firm by a company u / s 47 (xiii)
b) Succession of private company or unlisted public company by a LLP 47(xiiib)
c) Succession of a proprietary concern by a company u / s 47 (xiv)
d) Succession of a business otherwise than on death u / s 170
e) Amalgamation / Demerger of companies and co - operative banks u / s 44DB
Computation of Depreciation
a) Compute depreciation at prescribed rate as if succession / amalgamation / demerger had
not taken place.
b) The computed depreciation shall be apportioned between predecessor & successor in
the ratio of actual number of days for which the assets were used by them.


1) Alpha Co - operative Bank amalgamated with Beta Co - operative Bank on 1.12.2020. The
depreciation for the year ended 31.3.2021 calculated as per Income - tax Rules, 1962,
allowable to Alpha Co-operative Bank had the amalgamation had not taken place
amounts to Rs. 2,40,000. Compute the deduction on account of depreciation allowable in
the hands of Alpha Co - operative Bank and Beta Co - operative Bank for A.Y. 2021 - 22.
Solution:
No Particulars
(a) The amount of deduction allowable to the amalgamating co - operative bank (i.e.
Alpha Co - operative bank, in this case) under section 32 has to be determined in
accordance with the following formula –
AxB/C
A = the amount of deduction allowable to the predecessor co - operative bank (i.e.

Alpha Co - operative bank, in this case) if the business reorganization had not taken
place. In this case, the amount of deduction is Rs. 2,40,000.
B = the number of days comprised in the period beginning with the 1st day of the
financial year (i.e., 1.4.2020, in this case) and ending on the day immediately
preceding the date of business reorganization (i.e., 30.11.2020, in this case); and
C = the total number of days in the financial year in which the business
reorganization has taken place (i.e., 365 days).
(b) The amount of deduction allowable to the amalgamated co - operative bank (i.e. Beta
Co - operative bank, in this case) under section 32 has to be determined in accordance
with the formula –
AxB/C
A = the amount of deduction allowable to the predecessor co - operative bank (i.e.

Alpha Co - operative bank, in this case) if the business reorganization had not taken
place. In this case, the amount of deduction is Rs. 2,40,000.
B = the number of days comprised in the period beginning with the date of business
reorganization (i.e. 1.12.2020, in this case) and ending on the last day of the
financial year (i.e. 31.3.2021); and
C = the total number of days in the financial year in which the business
reorganization has taken place (i.e. 365 days).
(c) In this case, the deduction that would have been allowable under section 32 to Alpha
co - operative bank had the business reorganization had not taken place is Rs.
2,40,000 and the business re - organisation took place on 1.12.2020. Therefore, the
deduction allowable to Alpha co - operative bank under section 32 would be Rs.
1,60,438 i.e., Rs. 2,40,000 x 244 / 365. The deduction allowable to Beta co - operative
bank would be Rs. 79,562 i.e., Rs. 2,40,000 x 121 / 365.

Illustration:
Company ‘P’ is amalgamated with Company S on 30.08.2020. Opening WDV of the Block of
Assets which are transferred in the hands of P as on 01.04.2020 is Rs. 48,00,000. Company P
acquires an asset in this block on 01.06.2020 Rs. 2,00,000.
Opening WDV of the Block of assets in the hands of Company S as on 01.04.2020 is Rs.
30,00,000. Company S acquires an asset on 31.12.2020 for Rs. 5,00,000. Company P sells the
Block of assets to Company S on 30.08.2020 in the scheme of amalgamation for Rs. 80,00,000.
Depreciation Rate on Block of assets is 15%.
Solution:
Amount
No Particulars Computation
(Rs.)
1 Depreciation allowable had 15% on (Rs. 48,00,000 + Rs. 7,50,000
amalgamation not taken place 2,00,000)
Apportionment of Depreciation
Amount
No Company Computation
(Rs.)
1 P 7,50,000 x 151/ 365 3,10,274
2 S 7,50,000 x 214 /365 4,39,726
In case of amalgamation for assessment year 2021 - 22
In hands
No Particulars
of
1 Amalgamating No capital gains shall arise to the amalgamating company by virtue of
Company section 47. Depreciation allowable to amalgamating company = Rs.
3,10,274.
2 Amalgamated
Company Amount
Particulars
(Rs.)
Opening WDV as on 01.04.2020 30,00,000
Add: Actual cost of the assets acquired during the 5,00,000
previous year
Add: Actual cost of the assets acquired from the
amalgamating company
WDV in the hands of amalgamating company on 50,00,000
the date of transfer as per Explanation 2 to section
43(6) 50,00,0
WDV for Assessment Year 2021 - 22 85,00,000
Less: Depreciation
@ 15% on Rs. 30,00,000 4,50,000
@ 7.5% on Rs. 5,00,000 37,500
On Rs. 50,00,000 apportioned depreciation 4,39,726
WDV as on 01.04.2021 75,72,774

Note: Same treatment as in case of amalgamation shall apply when an unlisted company is
converted into a LLP.
In case of conversion of an unlisted company into LLP
In hands
No Particulars
of
1 Unlisted No capital gains shall arise to the unlisted company by virtue of section
Company 47(xiiib). Depreciation allowable to unlisted company = Rs. 3,10,274.
2 LLP
Amount
Particulars
(Rs.)
Opening WDV as on 01.04.2020 30,00,000
Add: Actual cost of the assets acquired during the 5,00,000
previous year
Add: Actual cost of the assets acquired from the unlisted
company
As per Explanation 2C to section 43(6), the WDV of Block 50,00,000
of assets on the date of conversion is deemed as actual cost
WDV for Assessment Year 2021 - 22 85,00,000
Less: Depreciation
@ 15% on Rs. 30,00,000 4,50,000
@ 7.5% on Rs. 5,00,000 37,500
On Rs. 50,00,000 apportioned depreciation 4,39,726
WDV as on 01.04.2020 75,72,774
2) Mr.Gopi carrying on business as proprietor converted the same into limited company by
name Gopi pipes (P) Ltd., from 1 – 7 – 2020 the details of the assets are given below;
No Particulars Rs.
1 Block – I WDV of Plant and machinery (rate of depreciation @ 15%) 12,00,000
2 Block – II WDV of building (rate of depreciation @ 10%) 5,00,000
The company Gopi pipes (P) Ltd., acquired the plant and machinery in December 2020
for Rs.10, 00, 000 it has been doing the business from 01 – 7 - 2020.
Compute the quantum of depreciation to be claimed by Mr.Gopi and successor Gopi
pipes (P) Ltd For the assessment year 2021 - 22. Assume that plant & machinery were
purchased by way of Account payee cheque.
Note: Ignore Additional Depreciation
Solution:
Computation of depreciation allowable to Mr. Gopi for AY 2021 - 22
Amount Amount
No Particulars
(Rs.) (Rs.)
1 Block 1 Plant and Machinery (15% rate)
WDV as on 1.4.2020 12,00,000
Depreciation @ 15% 1,80,000
2 Block 1 Building (10% rate)
WDV as on 1.4.2020 25,00,000

Depreciation @ 10% 2,50,000
3 Total depreciation for the year 4,30,000
4 Proportionate depreciation allowable to Mr. Gopi for 91
days (i.e., from 1.4.2020 to 30.6.2020) (i.e., 91 / 365 x Rs.
1,07,205
4,30,000)
Computation of depreciation allowable to Gopi Pipes (P) Ltd. for AY 2021 - 22:
Amount
No. Particulars
(Rs.)
1 Depreciation on building and plant and machinery
Proportionately for 274 days (i.e, from 1.7.2020 to 31.3.2021) 3,22,795
(274 / 365 x Rs. 4,30,000)
2 Depreciation @ 50% of 15% on Rs. 10 lakh, being the value of plant &
machinery purchased after conversion, which was put to use for less than
180 days during the PY 2020-21 75,000
3 Depreciation allowable to Gopi Pipes (P) Ltd. 3,97,795
Note:
In the case of conversion of sole proprietary concern into a company, the depreciation should
be first calculated for the whole year as if no succession had taken place. Thereafter
depreciation should be apportioned between the sole proprietary concern and the company
in the ratio of the no. of days for which the assets were used by them. It is assumed that in
this case, the conditions specified in section 47(xiv) are satisfied.
3) Harish Jayaraj Pvt. Ltd is converted into Harish Jayaraj LLP on 1.1.2020. The following
Particulars are available to you:
No Particulars Rs.
1 Cost of land 5,00,000
2 WDV of machinery as on 1 – 4 – 2020 3,30,000
3 Patents acquire on 1.6.2020 3,00,000
Building acquired on 12. 3. 2019 for which deduction was allowed u / s
4 7,00,000
35AD
5 Above building was revalued as on the date of conversion into LLP 12,00,000
6 Unabsorbed Business loss as on 1.4.2020 (Related A.Y. 2017 - 18) 9,00,000
Though the conversion into LLP took place on 1 – 1 - 2021, there was disruption of
business and the assets were put into use by the LLP only from 1st March 2021 onwards.
The company earned profit of Rs. 8 lacs prior to computation of depreciation.
Assuming that the necessary conditions laid down in Section 47(xiiib) of the income tax -
Act, 1961 have been complied with; explain the tax treatment of the above in the hands of
the LLP.

CHAPTER – 8
INVESTMENT ALLOWANCE U / S 32AD
– RELEVANT UP TO AY 20 - 21
Particulars Sec 32 AD
Financial Year FY 2015 – 16 to FY 19 – 20
Eligible Assessee All Assesseesi.e Corporate & Non – Corporate
Period of 01.04.2015 to 31.03.2020
acquisition and
installation
Conditions Undertaking should be set up in any notified back ward area in the
state of Andhra Pradesh , Bihar, Telangana or West Bengal
Deduction Flat rate of 15% of the actual cost of new asset
Last year of Assessment Year 2020 – 21
deduction
Notes:
1. This deduction is not available from AY 2021 – 22.
2. This deduction is in addition to normal & Additional depreciation.
3. To claim deduction under section 32AD, there is no condition that plant & machinery shall
actually put to use.
4. The amount of deduction computed u / s 32AD shall not go to reduce the WDV of the
asset.
5. Where the assessee transfers the new asset, within 5 years from the date of installation, by
sale or otherwise, on which deduction has been allowed previously u / s 32AD, the amount
allowed as deduction shall be taxable under the head PGBP in the previous year in which
such sale / transfer take place.
6. However such taxability doesnot arise in case of transfer of new asset is on account of
amalgamation or demerger or business reorganization, provided the amalgamated or
resulting company or the successor does not transfer such new asset within 5 years from
the date of installation.
7. 32AD is allowed as deduction in addition to the normal depreciation u / s 32 and
additional depreciation u / s 32(1)(iia), irrespective of number of days for which the asset is
put to use.

CHAPTER – 9
CAPITAL GAIN IN CASE OF
DEPRECIABLE ASSET – SEC 50
Notwithstanding anything contained in section 2(42A), where the capital asset is an asset
forming part of block of assets in respect of which depreciation has been allowed under the Act,
then the provisions of section 48 and 49 shall be subject to the following modifications:
Conclusion:
In case of depreciable Asset, it will always be Short Term Capital Gain / Short Term
Capital Loss.
Section 50
If one or some of the

When all Assets
Assets has been sold more
Transferred
than Value of block
STCG
For a consideration which
For a consideration more
is less than the value of the
than the value of the block
block
STCG STCL

1) K industries have 8 machines eligible for depreciation at 15%. The written down value as
on 01.04.2020 is Rs. 9 lakhs. During December 2020, new machinery was purchased for Rs.
4 lakhs which falls in the same block.
Compute the depreciation/capital gain for AY 2021 - 22 if 2 of the old machines are sold
for
a) Rs. 10 Lakhs
b) Rs. 16 lakhs.
Expenses incurred for such transfer is Rs. 20,000.

Solution:
Computation of depreciation and Capital gain of K Industries for AY 2021 – 22
(a) If the sale consideration is Rs 10 lakhs:
No Particulars Rs
1 WDV as on 01.04.2020 9,00,000
2 Additions made during December 2020 4,00,000
3 TOTAL 13,00,000
4 Less: Sale consideration of 2 machines (net of expenses) 9,80,000
5 WDV as on 31.03.2021 3,20,000
6 Depreciation on Rs. 3,20,000 x 15 % x ½ (Refer Note i & ii) 24,000
Notes
(i) WDV is less than the actual cost of asset purchased and the asset is used for less than 180
days. Hence 50 % of normal depreciation is claimed.
(ii) It is assumed that the assessee is not engaged in the manufacture or production of any
article or thing. Hence, additional depreciation of 20% is not available.
(b) If the sale consideration is Rs 16 lakhs:

No Particulars Rs Rs
1 Sale Consideration 16,00,000
2 Less:
i. Expenses incurred for transfer 20,000
ii. Opening WDV 9,00,000
iii. Additions made during the year 4,00,000 13,20,000
3 Short term capital gains 2,80,000
2) Singhania & Co., a sole proprietorship own six machines, put in use for business in
March, 2020. The depreciation on these machines is charged @ 15%. The written down
value of these machines as on 1st April, 2020 was Rs. 8, 50,000. Three of the old machines
were sold on 10th June, 2020 for Rs.11, 00,000. A second hand plant was bought for Rs. 8,
50,000 on 30th November, 2020.
You are required to:
a) Determine the claim of depreciation for Assessment Year 2021 - 22.
b) Compute the capital gains liable to tax for Assessment Year 2021 - 22.
c) If Singhania& Co. had sold the three machines in June, 2020 for Rs. 21,00,000, will
there be any difference in your above workings? Examine?

Solution:
i. Computation of depreciation for AY 2021 – 22
1 WDV of the block as on 1.4.2020 8,50,000
2 Add: Purchase of second hand plant during the year 8,50,000
3 17,00,000
4 Less: Sale consideration of old machinery during the year 11,00,000
5 WDV of the block as on 31.03.2021 6,00,000
Since the value of the block as on 31.03.2021 comprises of a new asset which has been put to
use for less than 180 days, depreciation is restricted to 50% of the prescribed % of 15% i.e.,
depreciation is restricted to 7 ½ %. Therefore, the depreciation allowable for the year is Rs.
45,000, being 7 ½ % of Rs. 6,00,000.
ii. The provisions u / s 50 for computation of capital gains in the case of depreciable assets
can be invoked only under the following circumstances:
a) When one or some of the assets in the block are sold for consideration more than
the value of the block.
b) When all the assets are transferred for a consideration more than the value of the
block.
c) When all the assets are transferred for a consideration less than the value of the
block.
Since in the first two cases, the sale consideration is more than the WDV of the block,
the computation would result in STCG.
In the third case, since the WDV exceeds the sale consideration, the resultant figure
would be a STCL.
In the given case, capital gains will not arise as the block of asset continues to exist,
and some of the assets are sold for a price which is lesser than the WDV of the block.
iii. If the three machines are sold in June, 2020 for Rs. 21,00,000, then STCG would arise,
since the sale consideration is more than the aggregate of the WDV of the block at the
beginning of the year and the additions made during the year.
No Particulars Rs. Rs.
1 Sale consideration 21,00,000
2 Less: WDV of the machines as on 1.4.2020 8,50,000
3 Purchase of second hand plant durig the year 8,50,000 17,00,000
4 STCG 4,00,000
3) Details regarding the opening WDV, additions during the year and deletions during the
year of 5 blocks of assets are given below. You are required to compute the depreciation
or capital gain / loss for the purpose of Income Tax:

Asset put to Asset put to

Rate Sold
Category of WDV as on use for less use for 180
Block (in during
Asset 01.04.2020 than 180 days or
%) the year
days more
A Building 5 4,00,000 - 1,00,000 -
B Building 10 12,50,000 2,50,000 - -
C Furniture 10 2,00,000 - 75,000 -
D Motor Car 3,00,000 50,000 - 3,10,000

15
E Machinery 15 4,00,000 - 2,20,000 7,50,000
In respect of block D above the entire assets in that block is sold during the year and the
expenses on transfer is Rs. 15,000. In respect of block E above there are still some assets
remaining in that block and expenses incurred for transfer is Rs. 20,000.
Solution:
Computation of depreciation and capital gain / loss for AY 2021 - 22
Building Furniture Motorcar Machinery

No Particulars Block A Block B @ Block C Block D @ Block E @
@ 5% Rs 10% Rs @10% Rs 15% Rs 15% Rs
1 Opening WDV 4,00,000 12,50,000 2,00,000 3,00,000 4,00,000
2 Add: Additions 1,00,000 2,50,000 75,000 50,000 2,20,000
made during the
year
5,00,000 15,00,000 2,75,000 3,50,000 6,20,000
3 Less: Sales (net of - - - 2,95,000 7,30,000
expenses)
4 WDV for 5,00,000 15,00,000 2,75,000 Nil Nil
depreciation
5 Depreciation for 25,000 1,37,500 27,500 Nil Nil
the year
i. Block B @10% on 12,50,000 + 1 / 2 of 10% on 2,50,000 = Rs 1,37,500
ii. Total depreciation = Rs 1,90,000 (Block A + B + C)
iii. In respect of Block D & E, depreciation cannot be claimed since the provisions of Sec. 50
become applicable. Consequently, the short - term capital gain or loss in respect of these
2 blocks are computed here under
No Particulars Block D Block E
1 Full value of consideration (1) 3,10,000 7,50,000
2 Less:
i. Expenses for transfer 15,000 20,000
ii. WDV of the block 3,00,000 4,00,000

iii. Assets acquired during the year 50,000 2,20,000
3 Total (II) 3,65,000 6,40,000
4 Short term capital gain / loss (I) - (II) (55,000) 1,10,000
Note: Block E – when one or more of theasset in the block are sold for consideration which
exceeds the WDV of the block. Sec 50 will apply.

OTHER DEDUCTIONS

INDEX

10 Sec – 33AB / 33ABA – Tea / Coffee / Rubber 59-70
11 Sec 35 - Expenditure on S.R. 71-86

CHAPTER – 10
SEC – 33AB / 33ABA
S. 33AB R.7A R.7B R.8
SEC – 33AB - GROWING & MANUFACTURING OF TEA, COFFEE & RUBBER
1 Applicability Assessee carrying the business of growing and manufacturing tea /
coffee or rubber in India
2 Pre - Deposit the amount in NABARD or special deposit A / c
Condition
3 Time limit for Within 6 months from the end of relevant PY or before due date offiling
deposit ROI whichever is earlier
4 Quantum of Least of amount deposited or 40% of current year PGBP whichever is
deduction lower
Note: Such deduction being allowed before brought forward losses i.e.,
after current year depreciation
5 Audit of No deduction u / s 33AB shall be admissible unless the accounts of such
accounts business of the assessee for the previous year for which the deduction is
claimed, have been audited by a practicing CA before the specified
date i.e., the date one month prior to the due date of furnishing of
ROI u / s 139(1) and the assessee furnishes by that date the report of
such audit in the prescribed form – Finance Act 2020.
GROWING & MANUFACTURING OF TEA, COFFEE & RUBBER

1) Compute Income under PGBP as per Chapter IV - D after applying Section 33AB
2) Computation of agricultural & non-agricultural income as a percentage of profit of business
in the following manner.
RULE NATURE OF BUSINESS AGRI N – AGRI
7A Sale of centrifuged latex or Sentex manufactured from rubber 65% 35%

(i) Sale of grown and cured coffee in India 75% 25%
7B
(ii) Sale of grown, cured, roosted & grounded coffee in India 60% 40%
8 Growing & Manufacturing of tea 60% 40%

EXPLANATION 7 TO SECTION 43(6)
For the purposes of this clause, where the income of an assessee is derived, in part from
agriculture and in part from business chargeable to income – tax under the head ‚Profits and
gains of business or profession‛, for computing the written down value of assets acquired
before the previous year, the total amount of depreciation shall be computed as if the entire
income is derived from the business of the assessee under the head ‚PGBP‛ and the
depreciation so computed shall be deemed to be the depreciation actually allowed under this
Act.
Analysis of explanation 7 to section 43(6) :
Explanation 7 to section 43(6) has been introduced by FA, 2009 to nullify the judgement of
Commissioner of Income – Tax vs. Doom Dooma India Ltd. (Supreme Court – 2009)
1. In this case, the assessee company was engaged in the business of growing and
manufacturing tea in India. During the PY, the income was computed as under:
Amount (Rs. in
No Particulars
lakhs)
1 Composite income from growing & manufacturing tea in India 3,000
before depreciation
2 Less: Depreciation on actual cost of assets of Rs. 1,000 lakhs @ 150
15%
3 Total Income 2,850
2. Out of which 60% is agricultural income and 40% of Rs. 2,850 lakhs i.e., Rs. 1,140 lakhs is
taxable business income.
3. The question before the SC was whether in cases where Rule 8 applies and income which is
brought to tax as ‘business income’ is only 40% of composite income, only 40% of
depreciation allowed at prescribed rate is required to be taken into account for computing
WDV of Block of Assets because that is depreciation ‘actually allowed’.
4. SC held that in case where Rule 8 applies, the income which is brought to tax as ‘business
income’ is only 40 per cent of the composite income and, consequently, proportionate
depreciation is required to be taken into account because that is the depreciation ‘actually
allowed’. Therefore WDV of block of asset shall be taken as Rs. 940 lakhs.
5. As per the SC, the WDV of block of assets for the next year shall be:
Amount (Rs.
No Particulars
in lakhs)
1 Actual cost 1000
2 Less: Depreciation 60
3 WDV 940
6. After the insertion of Explanation 7 to section 43(6), the WDV of block of assets for the next
year shall be:

Amount (Rs.
No Particulars
in lakhs)
1 Actual cost 1000
2 Less: Depreciation 150
3 WDV 850

1) Mr.Tisengaged in composite business of growing and curing (further processing) coffee
in Coorg, Karnataka. The whole of coffee grown in his plantation is cured. Relevant
information pertaining to the year ended 31.3.2021are given below:
1 WDV of car as on 1.4.2020 3,00,000
2 WDV of machinery as on 1.4.2020 (15% rate) 15,00,000
3 Expenses incurred for growing coffee 3,10,000
4 Expenditure for curing coffee 3,00,000
5 Sale value of cured coffee 22,00,000
Besides being used for agricultural operations, the car is also used for personal use;
disallowance for personal use may be taken at 20%. The expenses incurred for car
running and maintenance are Rs. 50,000. The machines were used in coffee curing
business operations.
Compute the income arising from the above activities for the Assessment year 2021 -22.
Show the WDV of the assets as on 1.4.2021.
Solution:
Where an assessee is engaged in the composite business of growing and curing of coffee,
the income will be segregated between agricultural income and business income, as per
Rule 7B of the Income – tax Rules, 1962.
As per the above Rule, income derived from sale of coffee grown and cured by the seller
in India shall be computed as if it were income derived from business, and 25% of such
income shall be deemed to be income liable to tax. The balance 75% will be treated as
agricultural income.
No Particulars Rs. Rs. Rs.
1 Sale value of cured coffee 22,00,000
2 Less:Expenses for growing coffee 3,10,000
3 Car expenses – 80% of Rs. 50,000 40,000
4 Depreciation on car (80% of 15% of Rs. 3,00,000) – 36,000
See computation below
5 Total cost of agricultural operations 3,86,000
6 Expenditure for coffee curing operations 3,00,000
7 Add: Depreciation on machinery (15% of Rs.
15,00,000) - See computation below 2,25,000
8 Total cost of the curing operations 5,25,000
9 Total cost ofcomposite operations 9,11,000

10 Total profits from composite activities 12,89,000
11 Business Income – 25% of above 3,22,250
12 Agricultural Income – 75% of above 9,66,750
Computation of value of depreciable assets as on 31.03.2021

No Particulars Rs. Rs. Rs.
I Car
1 Opening value as on 1.4.2020 3,00,000
2 Depreciation thereon at 15% 45,000
3 Less: Disallowance @ 20% for personal use 9,000
4 Depreciation actually allowed 36,000
5 WDV as on 1.4.2021 2,64,000
II Machinery
1 Opening value as on 1.4.2020 15,00,000
2 Less: Depreciation @ 15% 2,25,000
3 WDV as on 1.4.2021 12,75,000
Explanation 7to section 43(6) provides that in cases of ‘Composite income’ for the purpose
of computing written down value of assets acquired before the previous year, the total
amount of deprecation shall be computed as if the entire composite income of the
assessee(and not just 25%) is chargeable under the head PGBP. The depreciation so
computed shall be deemed to have been “actually allowed” to the assessee.
2) The business profit of TATA Tea Ltd, a tea growing and manufacturing company, is Rs.
240 lakh (before claiming deduction u/s 33AB) for the Assessment year 2021 - 22. It
deposits Rs.100 Lakh with NABARD for claiming deduction u/s 33AB. It wants to claim
set off of brought forward business loss of Rs 80 Lakh. Find out the taxable income of
TATA Tea Ltd for the AY 2021 - 22.
Solution:
Computation of Taxable Income of Tata Tea Ltd. for the A.Y. 2021 – 22
Amount Amount
No Particulars
(Rs. in lakhs) (Rs. in lakhs)
1 Profit before allowing deduction under section 33AB 240
2 Less: Deduction under section 33AB for deposit to the
account with NABARD, being lower of the following:
a.Amount deposited with NABARD 100
b.40% of the business profits – Rs. 240 lakhs x 40% 96 96
3 Sub – total 144
4 Taxable under PGBP – Rs. 144 lakhs x 40%
(Refer note 1) 57.60
5 Less:Set – off of brought forward loss as per section
72(Note 2 & 3) 57.60
6 Taxable business income Nil

Notes:
1. The assessee is in the business of growing and manufacturing tea and therefore, as
per Rule 8, 60% of such income will be treated as agricultural income and the same
will be exempt.
2. It is assumed that the assessee has deposited in the special account within 6 months
from the end of the previous year or before the due date of filing ROI, whichever is
earlier.
3. Deduction shall be allowed before set off of any loss brought forward u / s 72.
4. Balance business loss of Rs. 22.40 (80 – 57.60) lakhs can be carried forward to the next
year assuming that the time limit of 8 years for carry forward of business loss has not
expired.
3) Miss Vivitha, a resident & ordinarily resident in India, has derived the following income
from various operations (relating to plantations & estates owned by her) during the year
ended 31 – 3-2021:
Amount
No Particulars
(Rs.)
1 Income from sale of centrifuged latex processed from rubber plants 3,00,000
grown in Darjeeling.
2 Income from sale of coffee grown and cured in Yercaud, Tamil Nadu. 1,00,000
3 Income from sale of coffee grown, cured, roasted and grounded, in 2,50,000
Colombo. Sale consideration was received at Chennai.
4 Income from sale of tea grown and manufactured in Shimla 4,00,000
5 Income from sapling and seedling grown in a nursery at Cochin. 80,000
Basic operations were not carried out by her on land.
You are required to compute the business income and agricultural income of Miss
Vivitha for the Assessment year 2021 -22.
Solution:
Computation of business income and agricultural income of Ms. Vivitha for the
AY 2021 - 22
Business Agricultural
No. Particulars Gross %
Income Income
Sale of centrifuged latex from rubber
1 plants grown in India. 3,00,000 35% 1,05,000 1,95,000
2 Sale of coffee grown and cured in India. 1,00,000 25% 25,000 75,000
Sale of coffee grown, cured, roasted and
3
grounded outside India(Note 1) 2,50,000 100% 2,50,000 -
Sale of tea grown and manufactured in
4
India 4,00,000 40% 1,60,000 2,40,000
Saplings and seedlings grown in nursery
5
in India(Note2) 80,000 - - 80,000
6 Total 5,40,000 5,90,000

Notes:
1. Where income is derived from sale of coffee grown, cured, roasted and grounded by
the seller in India, 40% of such income is taken as business income and the balance as
agricultural income. However, in this question, these operations are done in Colombo,
Sri Lanka. Hence, there is no question of such apportionment and the whole income is
taxable as business income. Receipt of sale proceeds in India does not make this
agricultural income. In the case of an assessee, being a resident and ordinarily
resident, the income arising outside India is also chargeable to tax.
2. Explanation 3 to section 2(1A) provides that the income derived from saplings or
seedlings grown in a nursery would be deemed to be agricultural income whether or
not the basic operations were carried out on land.
4) Mr.T has estates in Rubber, Tea and Coffee. He derives income from them. He has also
a nursery wherein he grows and sells plants. For the previous year ending 31.3.2021, he
furnishes the following particulars of his sources of income from estates and sale of
plants. You are requested to compute the taxable income for the Assessment Year 2021 -
22:
No. Particulars Rs.
1 Manufacture of Rubber 5,00,000
2 Manufacture of Coffee grown and cured 3,50,000
3 Manufacture of Tea 7,00,000
4 Sale of plants from Nursery 1,00,000
RESTRICTION ON UTILISATION OF THE AMT DEPOSITED (BOTH FOR SEC

33AB/33ABA)
1 Restriction on utilization When an amount is released or withdrawn from such
of the amount deposited deposit, the same shall be utilized, in accordance with
(Both for section 33AB / the scheme specified. However, no deduction shall be
33ABA) allowed in respect of any amount utilized for the
purchase of -
a) Any machinery or plant to be installed in any
office premises or residential accommodation,
including any accommodation in the nature of
guest house;
b) Any office appliances excluding computers;
c) Any machinery or plant, actual cost of which
is allowed as a deduction (whether by way of
depreciation or otherwise) in computing the
income chargeable under the head ‚PGBP‛;
d) Any new machinery or plant to be installed in
an industrial undertaking for purposes of
business of construction, manufacture, or

production of any article or thing specified in
the Eleventh schedule;
Where the amount so released or withdrawn is
utilized for the purposes specified in (a) to (d) above
in a previous year, the whole of such amount utilized
shall be deemed to be profits and gains of business or
profession of that previous year and shall be subject
to tax in that previous year.
2 Utilisation as per the Where amount in the NABARD / Deposit Account is
scheme utilised as per the scheme for the purposes of any
expenditure, such expenditure shall not be allowed as
a deduction in computing P / G / B / P.
3 Not utilised during the PY If the amount is withdrawn for the purposes of
scheme and is fully / partly not utilised in the PY in
which it is withdrawn, then the amount not utilised
shall be deemed to be the income under P / G / B / P
of that PY – utilization should be in the same PY in
which withdrawn.
WITHDRAWAL OF DEPOSIT FROM NABARD
For the purpose of Section 33 AB

withdrawal of Deposit.
Liquidation
Closure of Dissolution Death of an Partition of
of
business of the firm Assessee HUF
Company
Taxable Taxable Not Taxable Not Taxable Not Taxable

1) X Ltd. engaged in the business of growing and manufacturing tea in India has derived a
total income from growing and manufacturing tea of Rs. 200 lakhs for previous year
31.3.2021. The said income is computed before allowing deduction under section 33AB.

The company has deposited Rs. 60 lakhs with NABARD on 23.5.2021 for claiming
deduction under section 33AB. The company also has brought forward business losses of
Rs. 12 lakhs.
The assessee withdraws Rs. 30 lakhs from NABARD Account on 30.6.2021 and utilizes as
follows:
No Particulars
1 Rs. 5 lakhs for meeting expenditure as per the Scheme of Tea - Board on 31.12.2021.
2 Rs. 6 lakhs for meeting expenditure as per the Scheme of Tea - Board on 4.4.2022.
3 Rs. 9 lakhs for meeting an expenditure not specified by Scheme of Tea Board on
31.1.2022.
4 Rs. 10 lakhs isutilised for purchasing machinery [Depreciation rate 15%] on

31.7.2021 as per the Scheme of Tea Board. The actual cost of machinery is Rs. 40
lakhs and Rs. 30 lakhs is paid out of the normal bank account. The said machinery
is sold on 30.6.2022 for Rs. 43 lakhs.
Compute the total income of X Ltd.
Solution:
As per Rule 8, the total income of an assessee in the business of growing and
manufacturing tea in India shall be calculated after allowing all deductions under
the Chapter of P / G / B / P.Thereafter, 40% of such income shall be taxable income.
Amount Amount
No Particulars
(Rs. in lakhs) (Rs. in lakhs)
1 Total income before deduction u / s 33AB
200
2 Less: Deduction u / s 33AB
3 Lower of the following:
i. 40% of Rs. 200 lakhs 80
ii. Amount deposited with NABARD
60 60
4 Total income 140
5 As per Rule 8, 40% of Rs. 140 lakhs is taxable
56
6 B / F business losses 12
7 Taxable income 44
If the assessee withdraws Rs. 30 lakhs from NABARD Account on 30.06.2021, the
solution will be as follows:
No Particulars
1 Rs. 5,00,000 shall not be allowed as deduction in Assessment Year 2022 - 23.
2 Rs. 6,00,000 is taxable as business income in Assessment Year 2022 - 23 since it is not
utilised in the year of withdrawal. (40% of Rs. 6,00,000 shall be taxable income).

3 Rs. 9 lakhs is taxable as business income in Assessment Year 2022 - 23. (40% of Rs.
9,00,000 shall be taxable income).
4 In Assessment Year 2022 - 23, depreciation of Rs. 6 lakhs shall be allowed on the
machinery.
Since the machinery is sold before 1.04.2030, Rs. 10 lakhs shall be taxable as business
income in Assessment Year 2023 - 24 (40% of Rs. 10,00,000 shall be taxable)
STCG under section 50 shall also be computed. For Assessment Year 2023 – 24, STCG
under section 50 = 43 lakhs – 34 lakhs = Rs. 9 lakhs.
2) G Ltd.,is engaged in the business of growing and manufacturing Tea in India. For the
Previous Year ended 31.03.2020, its composite Business profits before allowing deduction
u/s 33AB is Rs. 60,00,000. On 01.09.2020, it deposited a sum of Rs. 11,00,000 in the Tea
Development Account. During the Previous Year 2018 - 19, G Ltd. had incurred a
Business loss of Rs. 14,00,000 which has been carried forward. On 25.01.2021, it withdrew
Rs. 10 lakhs, from deposit account which is utilized as under:
a) Rs. 6,00,000 for purchase on Non-Depreciable asset as per the scheme specified.
b) Rs. 3,00,000 for purchase of Machinery to be installed in the office premises.
c) Rs. 1,00,000 was spent for the purpose of scheme on 5.4.2021.
1. You are required to determine Business Income of G Ltd. and the Tax consequences
that may arise from the above transactions in the relevant Assessment Year.
2. What will be the consequence if the asset which was purchased for Rs.6,00,000 is sold
for Rs. 8,00,000 in April, 2021. [Nov 2014]
Solution:
1. Computation of Business Income of G Ltd. for the AY 2021–22
Rs. 10,00,000being the amount withdrawn from Tea Development Account has to be
utilized in the prescribed manner, otherwise, the withdrawn amount would be
chargeable to tax as business income. In the given case, the taxability of withdrawal
amount based on their utilization is as follows:

1 Rs. 6,00,000, out of the amount withdrawn from the deposit Not Taxable
account, utilised for purchase of non-depreciable asset as per
the specified scheme
2 Rs. 3,00,000, being the amount utilized for purchase of 3,00,000
machinery to be installed in the office premises is not a
permissible utilization. Hence, the amount would be deemed
as profits and gains of business of the previous year 2020 -21
as per section 33AB.
3 Rs. 1,00,000 was spent for the purpose of scheme on 1,00,000
05.04.2021. As per section 33AB, this amount would be taxable

since the same is not utilized during the same previous year
(i.e., P.Y. 2020-21) in which the amount is withdrawn from the
deposit account.
The entire amount of Rs. 10 lakh (forming part of Rs. 11 lakhs deposited in Tea
Development Account) was deducted in the AY 2020 – 21 before segregation of agri and
non – agri income. Therefore, when any part of such amount becomes taxable, the agri and
non – agri portions of income must be segregated.
Accordingly, Rs. 1,60,000, being 40% of Rs. 4,00,000 (Rs. 3,00,000 + Rs. 1,00,000) would be
chargeable to tax as business income and the balance Rs. 2,40,000, being 60% of Rs. 4,00,000
would be agricultural income exempt from tax.
Working Note
Computation of Business Income of G Ltd. for the A.Y. 2020 – 21
Amount
No Particulars
(Rs.)
1 Composite business profits before allowing deduction under 60,00,000
section 33AB
2 Less:Deduction under section 33AB(1) would be the lower of -
a.Amount deposited in Tea Development Account on or before
30.9.2020 [i.e., Rs. 11,00,000]
b.40% of profits of such business [i.e., Rs. 24,00,000, being 40% of 11,00,000
Rs. 60,00,000]
3 Sub – total 49,00,000
4 Less: 60% of Rs. 49,00,000, being agricultural income [as per Rule 29,40,000
8]
5 Business Income 19,60,000
6 Less:Brought forward business loss of A.Y.2019 - 20 set-off as per 14,00,000
section 72
7 Business income chargeable to tax 5,60,000
2. Consequences, if asset purchased out of deposit account is sold during the P.Y 2021 -22:
As per section 33AB(8), if the asset is sold before the expiry of eight years from the end of
the previous year in which it was acquired, then, the cost of such asset shall be deemed to be
the profits and gains from business or profession of the previous year in which asset is sold.
Therefore,Rs. 6,00,000 would be deemed to be the business income (composite) for the
A.Y.2022 -23. However, since the full cost of the asset was deducted in the assessment year
2020 -21 (being part of Rs. 11 lakh deposited in Tea Development Account) before
segregation of agricultural income and non-agricultural income, the agricultural and non-
agricultural portions of income should be segregated in the year in which such amount
becomes taxable on account of sale of asset before the expiry of eight years. Therefore, Rs.

3,60,000, being 60% of Rs. 6,00,000 would represent agricultural income. The balance of
Rs. 2,40,000 being 40% of Rs. 6,00,000 would be chargeable to tax as business income.
Moreover, the difference between the sale consideration and purchase price of the asset
would be chargeable to tax as ‚Short term capital gains‛, which is computed as follows:
Amount
No Particulars
(Rs.)
1 Sales consideration 8,00,000
2 Less: COA 6,00,000
3 STCG 2,00,000

SECTION 33AB / 33ABA

33 AB: Deduction for Tea, Coffee, 33 ABA: Deduction for Petroleum &
Particulars
Rubber Business Natural Gas business
Assessee All assessee engaged in the business All assessee engaged in the business of
of Growing &Manufacturing of tea, Prospecting extraction production of
coffee, rubber in India natural gas or petroleum in India
Deposit Deductionis allowed if some amount Deductionis allowed if some amount is
is deposited in NABARD upto the deposited in SBI (Site Restoration A/C)
due date of filing the return or 6 upto the end of the P.Y.
months from end of PY, whichever is
earlier
Deduction 1. Actual amt deposited or 1. Actual amt deposited or
amount 2. 40% of PGBP [before this 2. 20% of PGBP [before this deduction]
deduction]
Utilization Deposited amount should be utilized Deposited amount should be utilized for
for purposes prescribed by Tea, purposes prescribed by Ministry of
Coffee Rubber Board Petroleum & Natural Gas Govt of India
Mis – If deposited amount is mis – utilized If deposited amount is mis – utilized
utilization then deduction allowed earlier shall then deduction allowed earlier shall be
be withdrawn & taxable under PGBP withdrawn & taxable under PGBP
Common points of Sec. 33 AB / 33ABA
1. If any amount is withdrawn from NABARD / Site Restoration A / c should be utilized in

year of withdrawal only, otherwise such amount shall be taxable.
2. When amount utilized [as per scheme] for revenue expenses then such expenses shall
not be allowed as deduction under PGBP.
3. When amount utilized (as per scheme) for purchase of any P & M then depreciation
shall be allowed on such P & M.
4. Restriction on utilization is also common for both.
5. Where asset purchased is sold / transferred before expiry of 8 years from end of P.Y in
which it was acquired, such part of asset as is relatable to deduction allowed shall be
deemed to be income of P.Y in year of sale / transfer of asset.
6. Restriction of 8 years shall NOT apply:
a) Where asset is sold / transferred to Govt / Local Authority / Statutory Corporation,
Government Company.
b) Transfer is by succession of firm to company whereby all assets and liabilities of
firm are transferred to company and all shareholders of the company were partners
of the firm immediately before succession.
7. If assessee claimed deduction u / s 33AB or 33ABA then assessee have to submit audit
report of CA upto date mentioned u / s 44AB.

CHAPTER – 11
SEC – 35 - EXPENDITURE ON S.R
CHAPTER OVERVIEW
Sec Name
35(2AA) Deduction on payment made to Approved Specified Persons or Scientific
Reserch
35(2AB) Higher Deduction to Companies which are engaged in Business of Bio –
Technology or manufacture or production of Specified Articles for
conducting in House Reasearch
Explanation Determination of Actual Cost
1 to Sec 43(1)
35(1A) Finance Act 2020
234G Fees for Default – FA 2020
271K Penalty – FA 2020
SECTION 35 – EXPENDITURE ON SCIENTIFIC RESEARCH
Sec 35
Sec 35(1) Sec 35(2AA) Sec 35(2AB)
Sec 35(1)(i) Sec 35(1)(ii) Sec 35(1)(iia) Sec 35(1)(iii) Sec 35(1)(iv)
PART 01 – IN – HOUSE RESEARCH : -
Particulars Explanation
Section 35(1)(i) –  Any revenue expenditure laid out or expended on scientific research
Revenue related to the business carried on by the assessee.
expenditure  Where any such expenditure has been incurred before the
commencement of the business on -
 payment of salary to employees engaged in scientific research or
 purchase of materials used in such scientific research,
 the aggregate of such expenditure incurred within the three years
immediately preceding the commencement of business, shall be
 allowed as a deduction in the PY in which business is

commenced,
provided that the said expenditure is certified by the prescribed
authority.
Note: “Salary‛ shall not include perquisite.
Section 35(1)(ii) – An amount equal to 150% / 100% of any sum paid to
Contribution to  a research association which has as its object the undertaking of
Outsiders for SR scientific research or to
 a university,
 college or
 other institution
to be used for scientific research.
Provided that such association, university, college or other institution for
the purposes of this clause –
a) Is for the time being approved, in accordance with the guidelines, in
the manner and subject to such conditions as may be prescribed; and
b) Such association, university, college or other institution is specified as
such, by notification in the Official Gazette, by the Central
Government;
Section 35(1)(iia) –  Any sum paid to a company to be used by it for scientific research:
Contribution to  Provided that such company –
Company for SR a) Is registered in India,
b) Has as its main object the scientific research and development,
c) Is, for the purposes of this clause, for the time being approved by
the prescribed authority in the prescribed manner, and
d) Fulfils such other conditions as may be prescribed.
Section 35(1)(iii) – An amount equal to 100% of any sum paid to a
Contribution to  research association which has its object the undertaking of
Outsiders for research in social science or statistical research or to a
Social or
 university,
Statistical
 college, or
Research
 other institution to be used for research in social science or statistical
research.
Provided that such association, university, college or other institution for
the purposes of this clause –
a) Is for the time being approved, in accordance with the guidelines, in
the manner and subject to such conditions as may be prescribed; and
b) Such association, university, college or other institution is specified as
such, by notification in the Official Gazette, by the Central
Government;
Explanation The deduction, to which the assessee is entitled in respect of any sum
paid to a
 research association,
 university,

 college or
 other institution
to which
 clause (ii) or clause (iii) applies or to a company to which clause
(iia) applies,
shall not be denied merely on the ground that, subsequent to the
payment of such sum by the assessee, the approval granted to the
 association, university, college or other institution
referred to in
 clause (ii) or clause (iii) or to a company referred to in clause
(iia),
has been withdrawn;
Section 35(1)(iv) -  Capital expenditure on scientific research related to the business
Capital carried on by the assessee.
expenditure on  However, no deduction is admissible in respect of expenditure
scientific research
incurred on
 acquisition of any land,
whether the land is acquired
 as such or
 as part
of any property.
 Also,
 where any capital expenditure
 is incurred
 before the commencement of the business,
 the aggregate of the expenditure so incurred
 within the three years immediately preceding the
commencement of business
 shall be allowed as deduction
 in the PY in which the business is commenced.

SUMMARY : -
Expenditure on Scientific Resaerch
In - house Research Conbtribution to Outsiders
Before After
Commencement Commencement
of Business of Business
IHR - Before
commencement
of business
Revenue Capital
expenses - Sec. expenses - Sec.
35(1)(i) 35(1)(iv)
Salary
(excluding
perks) Other expenses Land Other than land
Material
100% deduction Not allowed Not allowed 100% deduction
IHR After commencement of business
Sec 35(2AB) Other assessee

SECTION 35(2AB) – HIGHER DEDUCTION TO COMPANIES WHICH ARE ENGAGED IN
BUSINESS OF MANUFACTURE OR PRODUCTION OF ARTICLES FOR CONDUCTING
IN HOUSE SCIENTIFIC RESEARCH
Section 35(2AB)  Where a company
 Engaged in the business of bio – technology or in any business of
manufacture or production of any article or thing, not being an
article or thing specified in the list of the Eleventh Schedule
 Incurs any expenditure (not being expenditure in nature of cost of
land or building)
 On in - house research and development facility as approved by the
prescribed authority
 Then it shall be allowed a deduction of 150% 100% of the
expenditure so incurred.
 This deduction shall be allowed only if the company has entered into
an agreement with the prescribed authority for co – operation in such
research and development facility and fulfils such conditions with
regard to maintenance of accounts and audit thereof and furnishing
of reports in such manner as may be prescribed.
Explanation  For the purposes of this clause, expenditure on scientific research in
relation to drugs and pharmaceuticals shall include expenditure
incurred
 on clinical drug trials,
 obtaining approval from any regulatory authority,
under any
 Central,
 State or
 Provincial Act and
 Filing an application for a patent under the Patents Act.

SUMMARY: -
Sec. 35(2AB)
Revenue Capital
expenses expenses
100% Other capital

Land Building
deduction expenses
100%
No 100%
deduction
deduction deduction
u / s 35(1)(iv)
Other
assessee
Revenue Capital
expenses - expenses -
Sec. 35(1)(i) Sec. 35(1)(iv)
100% Other capital

Land
deduction expenses
No 100%
deduction deduction

PART 02 – CONTRIBUTION TO OUTSIDERS : -
SECTION 35(2AA) – HIGHER DEDUCTION ON PAYMENT MADE TO APPROVED

SPECIFIED PERSONS FOR SCIENTIFIC RESEARCH
Section 35(2AA)  Where the assessee pays any sum to a
 National Laboratory or a
 University or an
 IIT or
 specified persons as approved by the prescribed authority,
with a specific direction that the said sum shall be used for
scientific research undertaken under a programme approved in
this behalf by the prescribed authority, then
a) There shall be allowed a deduction of a sum equal to 150%
100% of the sum so paid and
b) No deduction in respect of such sum shall be allowed under
any other provision of the income – tax Act.
Explanation  The deduction, to which the assessee is entitled in respect of any sum
paid to a
 National Laboratory,
 University,
 IIT or a
 specified person
 for the approved programme referred to in this sub – section,
 shall not be denied merely on the ground that, subsequent to the
payment of such sum by the assessee, the approval granted to –
a) Such Laboratory, or specified person has been withdrawn; or
b) The programme, undertaken by the National Laboratory,
University, IIT or specified person, has been withdrawn.

SUMMARY: -
Part B - Contribution to
outsiders
To Approved To Approved
To IIT Indian Co. - Co.
R - Research association
engaged in R & D
I - Institute
C - College
U - University For Scientific For Scientific
research - research -
Sec. 35(2AA) Sec. 35(1)(iia)
For Social &

For Scientific
Statistical
Research - 100% 100%
Research - Sec.
Sec. 35(1)(ii) deduction deduction
35(1)(iii)
100% 100%
deduction deduction
Notes:
1. The deduction u / s 35(1)(ii) / (iii) / 35(2AA) shall not be denied if approval of such
institution has been withdrawn after payment of sum by assessee.
2. No depreciation allowed on assets if deduction claimed u / s 35 claimed.
3. If L & B purchased through a composite agreement then the cost of L & B shall be
bifurcated on the basis of FMV because cost of land is not allowed as deduction.
4. Unabsorbed research capital expenditure can be set off and carried forward same as un –
absorbed depreciation.
5. Deduction u / s 35(1)(ii), 35(2AA) & 35(2AB) earlier was 150% upto AY 20 – 21.

CHAPTER SUMMARY
Sec CONTRIBUTION MADE TO PURPOSE DEDN

35(1)(i) Revenue Expenditure incurred for Assesses business Sci. Research 100%
35(1)(ii) Research Association Sci. Research 100%
35(1)(iia) Company Sci. Research 100%
35(1)(iii) Research Association Social / 100%
Statistical
Research
35(1)(iv) Capital Expenditure Other than Expenditure on - 100%
Land
35(2AA) National Laboratory / university / IIT *Sci. Research 100%
35(2AB) Expenditure incurred by a Company engaged in Bio - 100%
– technology or any business of production or
manufacturing.
*Scientific Research under a programme approved by the prescribed authority
Notes: -
1. Company should be engaged in
a. business of Bio – technology or in any
b. business of manufacture or production of any article or thing, not being article
specified in the list of the Eleventh Schedule on an Approved In – house research &
development facility.
2. Expenditure (Both Capital & Revenue) incurred within 3 years immediately preceding
the commencement of business will be allowed as deduction in the year in which the
business is commenced.
3. No depreciation will be admissible on any capital asset represented by expenditure
which has been allowed as deduction under section 35.
4. There is no lock in period prescribed for Scientific Research Asset. Once the asset is sold
we should check whether the asset is sold -
a. after put to use for other business purpose or
b. without put to use.
EXPLANATION 1 TO SECTION 43(1)

Where an asset is used in the business after it ceases to be used for scientific research, the
actual cost of the asset to the assessee shall be the actual cost to the assessee as reduced by the
amount of deduction under section 35(1)(iv).

FINANCE ACT 2020 AMENDMENTS
1 Conditions for approval
 Section 35 provides for deduction in respect of
and deduction to payer
expenditure on scientific research, contribution to
under section 35(1)(ii) /
scientific research institution, etc.
35(1)(iia) / 35(1)(iii)
 Section 35(1)(ii) / (iii) provide for deduction for any sum
paid to a
 scientific research association,
 university,
 college or
 other institutions, etc.
(hereinafter referred to as ‚research institution‛) subject
to fulfilment of the conditions mentioned therein.
 Section 35(1)(iia) provides that subject to fulfilment of the
conditions, any sum paid to a
 company (herein after called as research company)
 to be used by it for scientific research
 is allowable as a deduction.
2 Section 35(1) has been amended with effect from 1.10.2020 to
Existing research
provide that the notification under section 35(1)(ii) / (iia) /
institution / research
(iii) issued on or before 1.10.2020 shall be deemed to have
company
been withdrawn unless the following conditions are
fulfilled:
a) The research institution / research company, referred to
in the aforesaid provisions makes intimation in
prescribed form and manner.
b) The intimation is made to the prescribed Income - tax
Authority.
c) The intimation is made within three months from the
date on which the amendment comes into force, that is,
within three months from 1.10.2020, that is, intimation
has to be made by 31.12.2020.
Once the intimation is made, the notification shall be valid
for a period of five consecutive assessment years,
beginning with assessment year 2021 - 22.
3
New research institution/  If any new notification under section 35(1)(ii) / (iia) / (iii)
research company is issued
notified after 27.3.2020  after the date on which the Finance Bill, 2020 receives
assent of the President (i.e.27.3.2020),
 then, it shall have effect for such assessment year or
years as may be specified in the notification,
 but not exceeding five assessment years.
 In other words, any new notification shall have effect for
maximum five assessment years.

SEC 35(1A)
1 New sub section Section 35(1A) has been inserted with effect from 1.10.2020 to
35(1A) - new provide that a donor / payer shall not be entitled to deduction
compliances under section 35(1)(ii) / (iia) / (iii) unless the following conditions
required for are satisfied –
claiming deduction Section Explanation
35(1A)(i) The donee research institution / payee research
company prepares and files a statement in
electronic form
35(1A)(ii) The donee research institution / payee research
company furnishes a certificate to the donor /
payer
 The statement in electronic form:

2 Section 35(1A)(i) -
the research a) Has to be for the prescribed period;
institution or b) Should be in the prescribed form;
research company c) Should be verified in prescribed manner;
prepares and files a d) Should set forth the prescribed particulars including
statement details of donations / payments received, name and PAN
of donor / payer etc;
e) Should be delivered or cause to be delivered to the
prescribed income tax authority or the person
authorized by such authority;
f) Should be filed within the prescribed time.
 If there is any mistake in the aforesaid statement or any
 addition,
 deletion or
 updation
is warranted in it,
 then the research institution or research company may
also deliver to the said prescribed authority a correction
statement for rectification of the information furnished
in the statement
 delivered in prescribed form and
 verified in prescribed manner;
3 Section 35(1A) (ii) - The certificate should,
the research a) Specify the amount of donation / payment in prescribed
institution or manner;
research company b) Contain prescribed particulars;
furnishes to the c) Be furnished within prescribed time from the date of receipt
donor / payer a of donation / payment.
certificate

S. 35(1A) Statement in E - Certificate to the

Requirement form by Donee donor
SECTION 234G - Fee for Default Relating to Statement or Certificate
No Particulars
1. Without prejudice to the provisions of this Act,
a) where,
 the research association,
 university,
 college, or
 other institution
referred to in
 clause (ii) or clause (iii) or the company referred to in clause (iia) of section
35(1), fails to -
 deliver or cause to be delivered a statement within the time prescribed
under clause (i), or
 furnish a certificate prescribed under clause (ii) of sub-section (1A) of that
section; or
b) The institution or fund
 fails to deliver or cause to be delivered a statement within the time prescribed
under clause (viii) of sub-section (5) of section 80G, or
 furnish a certificate prescribed under clause (ix) of the said sub-section,
It shall be liable to pay, by way of fee, a sum of two hundred rupees for every
day during which the failure continues.
Fees u / s 234G Rs. 200 for every day
2. The amount of fee referred to in sub - section (1) shall –

a) Not exceed the amount in respect of which the failure referred to therein has
occurred;
b) Be paid before delivering or causing to be delivered the statement or before
furnishing the certificate referred to in sub - section (1).

SECTION 271K - Penalty for Failure to Furnish Statements, etc.
Without prejudice to the provisions of this Act, the Assessing Officer may direct that a sum not
less than ten thousand rupees but which may extend to one lakh rupees shall be paid by way
of penalty by –
No Particulars
I  The research association,
 university,
 college or
 other institution
referred to in
 clause (ii) or clause (iii) or the company referred to in clause (iia), of section 35(1),
if it fails to
 deliver or cause to be delivered a statement within the time prescribed under
clause (i), or
 furnish a certificate prescribed under clause (ii) of sub - section (1A) of that
section; or
II The institution or fund, if it fails to -
 deliver or cause to be delivered a statement within the time prescribed under clause
(viii) of sub - section (5) of section 80G, or
 furnish a certificate prescribed under clause (ix) of the said sub - section.‛
Penalty u / s Minimum Rs. Maximum Rs.

271K 10,000 1,00,000

1) The following are the details furnished by XYZ India Ltd. engaged in the business of
pharmaceutical products for the year ending 31.03.2021 :
Rs. In
No Particulars
Lakhs
1 Sale of the year 500
2 Manufacture & Administration Expenses (Including depreciation on 105
research Equipments – Rs. 5 lakhs)
3 Research & Development for in - house training
1. Research Equipments acquired during the year 60
2. Remuneration to Scientists 10
3. Expense of research & development 30
4. Contribution to approved scientific research institution 10
Compute the taxable income of the company for the AY 2021 – 22.
Solution:
Computation of total income of Orchid India Ltd for AY 2021 - 22
No Particulars Rs in Lakhs
1 Net Profit (Rs 500 lakhs – Rs 105 lakhs) 395
2 Add: Depreciation on research equipments 5
3 Sub – total 400

4 Less: Deduction allowable u / s 35 (2AB)
 Research equipment acquired during the year - 60
 Remuneration to scientists –10
 Expenses for Research & Development - 30
5 Amount eligible for deduction u / s. 35 (2AB) –100
6 Deduction eligible u / s. 35 (2AB) – Rs 100 lakhs x 100%(since the (100)
company is engaged in specified business)
7 Sub – total 300
8 Less: Contribution to approved scientific research institution
9 Deduction eligible u / s. 35(1)(ii) – Rs 10 L x 100% 10
10 Total taxable Income 290
2) A Ltd engaged in business of manufacturing, furnishes the following particulars for the
P.Y. 2020 - 21. Compute the deduction allowable under section 35 for A.Y. 2021 - 22, while
computing its income under the head “Profits and gains of business or profession”.
No Particulars Rs.
Amount paid to notified approved Indian Institute of Science, 1,00,000
1
Bangalore, for scientific research
Amount paid to IIT, Delhi for an approved scientific research 2,50,000
2
programme
Amount paid to X Ltd., a company registered in India which has as 4,00,000
3 its main object scientific research and development, as is approved
by the prescribed authority
Expenditure incurred on in - house research and development
4 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 Rs. 7,50,000
5,00,000) on scientific research
Solution:
Computation of deduction under section 35 for the A Y 2021 – 22
Amount
% of
of
No Particulars Rs Section weighted
deduction
deduction
(Rs)
I Payment for scientific research
1 Indian Institute of Science 1,00,000 35(1)(ii) 100% 1,00,000
2 IIT , Delhi 2,50,000 35(2AA) 100% 2,50,000
3 X Ltd 4,00,000 35(1)(iia) 100% 4,00,000
II Expenditure incurred on in -
house research and
development facility
1 Revenue expenditure 3,00,000 35(2AB) 100% 3,00,000
2 Capital expenditure (excluding 2,50,000 35(2AB) 100% 2,50,000
cost of acquisition of land Rs
5,00,000)
3 Deduction allowable under section 35 13,00,000

3) Arya Bio - medicals Ltd. is engaged in the business of manufacture of bio - medical items.
The following expenses were incurred in respect of activities connected with scientific
research:
Year ended Item Amount (Rs.)
31.03.2018 Land 10,00,000
(Incurred after 1.9.2017) Building 25,00,000
31.03.2019 Plant and machinery 5,00,000
31.03.2019 Raw materials 2,20,000
31.03.2021 Raw materials and salaries 1,80,000
The business was commenced on 01 – 09- 2020.

In view of availability of better model of plant and machinery, the existing plant and
machinery were sold for Rs. 8,00,000 on 1.03.2021.
Discuss the implications of the above for the Assessment year 2021– 22 along with brief
computation of deduction permissible under section 35 assuming that necessary
conditions have been fulfilled.
SALE OF ASSET USED FOR SCIENTIFIC RESEARCH
Sale of Asset
Sold after having been used Sold without having been

for the purpose of business used for other purpose
Provisions of Sec 43(6) & Provisions of Sec 41(3) will

Section 50 will be applicable be applicable

SUMMARY: -
1. Asset Sold  Generally, gains arising from the sale of asset are chargeable
without used for to capital gains.
other purpose  However, an asset used for scientific research is sold without
being used for other purpose,
then the
a. Net Sale price of the asset; or
b. Cost of the asset, which was allowed as deduction u / s
35 earlier
 whichever is lower
 shall be chargeable as business income in the
previous year in which the asset is sold.
 Any excess of sale price over the cost of the asset shall
be treated as capital gains.
2. Asset Sold after  This is a case where an asset having been sold after it was
being used for used for scientific research purpose subsequently used for
other purpose / other business activities of the assessee.
business  In such other business, the asset shall be included with Nil
Cost under the respective block of assets in view of the entire
cost being already allowed as deduction u / s 35.
 Where the asset is sold later by the assessee, sale
Consideration shall be reduced from the said block of asset.

OTHER DEDUCTIONS

PGBP

S.1 – DEDUCTIONS
28 Charging Section
32 Depreciation
32AD Investment Allowance(Relevant up to 31.03.2020)
35DDA VRS
36 Other Deductions

Summary Table
28 30 33AB 35 35CCA 35D 36
29 31 33ABA 35ABB 35CCC 35DD 37
32 35ABA 35CCD 35DDA 38
32AD 35AD 35E

INDEX

12 Sec 35ABB & Sec 35ABA - Exp. On Tele communication 5 - 11
licence & spectrum fees

CHAPTER – 12
SEC 35ABB & SEC 35ABA
SECTION 35ABB – EXPENDITURE ON TELECOMMUNICATION LICENCE
1. Assessee should incur expenditure for obtaining Tele Communication Licence
2. Expenditure should be of Capital nature
3. Deduction will be allowed on Actual Payment basis
4. Expense may be incurred either before commencement of business or any time during the
previous year
5. Deduction is allowed in Equal Installments over the life of the Asset
If Payment made
Before Commencement of After Commencement of

In case of Transfer
Business Business
Deduction allowed from

the year of From the year of Actual Based on amount of
Commencement of Payment Consideration received
Business
TAX TREATMENT : -
CONCEPT - 01
In respect of any expenditure, being in the nature of capital expenditure, incurred for acquiring
any right to operate telecommunication services either before the commencement of the
business or thereafter at any time during any previous year and for which payment has
actually been made to obtain a licence, there shall, subject to and in accordance with the
provisions of this section, be allowed for each of the relevant previous years, a deduction equal
to the appropriate fraction of the amount of such expenditure.
KEY POINTS
1 Relevant previous year (i) in case where the licence fee is actually paid before
means the commencement of business to operate
telecommunication services, the previous years
beginning with the previous year in which such
business commenced
(ii) in any other case, the previous years beginning with
the previous year in which the licence fee is actually paid
And the subsequent previous year or years during which
the licence, for which the fee is paid, shall be in force.

2 Appropriate fraction It means the fraction the numerator of which is one and
the denominator of which is the total number of relevant
previous years.
3 Payment has actually been It means the actual payment of expenditure irrespective
made of the previous year in which the liability for the
expenditure was incurred according to the method of
accounting regularly employed by the assessee.
Question for understanding : -
A telecommunication licence is obtained on 1.12.2015. Fees of Rs. 960 crores chargeable by

the Ministry of Telecommunication. The said licence is operative or eight years i.e. upto
30.11.2023. The assessee makes the payment of Rs. 400 crores on 1.12.2015. The business of
telecommunication is commenced on 30.06.2016. The assessee pays Rs. 560 crores on
2.04.2017.
Solution:
Now deduction under section 35ABB is available for Rs. 400 crores from previous year 2016 - 17
to previous year 2023 - 24. The deduction shall be 400 crores/ 8 i.e. 50 crores every year.
Now deduction under section 35ABB is available for Rs. 560 crores from previous year 2017-18
to previous year 2023 - 24. The deduction shall be 560 crores / 7 i.e. 80 crores every year.
Therefore, the deduction under section 35ABB for previous year 31.03.2017 shall be Rs. 50 crores
and thereafter Rs. 130 crores per annum from previous year 31.03.2018 to previous year
31.03.2024.
CONCEPT - 02
Where the licence is transferred and the proceeds of the transfer (so far as they consist of
capital sums) are less than the expenditure incurred remaining unallowed, a deduction equal to
such expenditure remaining unallowed, as reduced by the proceeds of the transfer, shall be
allowed in respect of the previous year in which the licence is transferred.
The licence is transferred on 1.1.2021 for Rs. 500 crores. Now the deduction allowed till date
shall be Rs. 440 crores and the expenditure remaining unallowed shall be Rs. 520 crores.
Solution:
Now, Rs. 20 crores shall be allowed as deduction in assessment year 2021 - 22.
CONCEPT - 03
Where a part of the licence is transferred in a previous year and the proceeds of the transfer (so
far as they consist of capital sums) are less than the expenditure incurred remaining unallowed,
the deduction to be allowed under this section for expenditure incurred remaining unallowed
shall be arrived at by –

a) Subtracting the proceeds of transfer (so far as they consist of capital sums) from the
expenditure remaining unallowed; and
b) Dividing the remainder by the number of relevant previous years which have not expired
at the beginning of the previous year during which the licence is transferred.
The part of the licence is transferred on 1.1.2021 for Rs. 200 crores. Now Rs. 520 crores minus
200 crores shall be allowed from assessment year 2021 - 22 to assessment year 2024 - 25 i.e. Rs.
320 crores / 4 = Rs. 80 crores every year.
CONCEPT - 04
Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far
as they consist of capital sums) exceed the amount of the expenditure incurred remaining
unallowed, then the least of the following shall be chargeable to income – tax as profits and
gains of the business in the previous year in which the licence has been transferred:
i. Sale price – Expenditure remaining unallowed
ii. Deduction allowed till date under section 35ABB.
CONCEPT - 05
Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far
as they consist of capital sums) are not less than the amount of expenditure incurred remaining
unallowed, no deduction for such expenditure shall be allowed under this section in respect of
the previous year in which the licence is transferred or in respect of any subsequent previous
year or years.
1. FULL LICENCE TRANSFERRED
Suppose in the above case, the licence is transferred on 1.1.2021 for Rs. 1200 crores. Now as
per the section, Rs. 440 crores shall be taxable as P / G / B / P of the previous year 31.03.2021.
Also, capital gains will arise on the transfer of the licence only when sale price is more than
the cost of acquisition. Sale price is Rs. 1,200 crores and cost of acquisition is Rs. 960 crores.
Period of holding is from 1.12.2015 to 31.12.2020 and therefore long term. Benefit of
indexation shall be available.
If for example in the above case, the licence is transferred on 1.1.2021 for Rs. 700 crores. Now
as per the section, Rs. 180 crores shall be taxable as P / G / B / P of the previous year
31.03.2021. There will be no capital gains.
2. PART LICENCE TRANSFERRED
Suppose in above case, 50% of the licence is sold on 01.01.2021 for Rs. 2,100 crores. Now,
income under the head Profits and Gains from Business or Profession shall be the least of:
a) Sales Price – Unamortised Expenses
= Rs. 2,100 crores – Rs. 520 crores = Rs. 1,580 crores
b) Deduction allowed till date

Hence, income under the head Profits and Gains from Business or Profession in Assessment
Year 2021 - 22 would be Rs. 440 crores. Income under the head Capital Gains would be
computed as under:
No Particulars Amount (Rs. in crores)

1 Sale Price 2,100
2 Less: Cost of Acquisition 960
3 Long Term Capital Gain – subject to indexation 1,140
CONCEPT - 06
Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers
the licence to the amalgamated company (being an Indian company),
i. The provisions of this section (namely points B, C, D & E) shall not apply in the case of
the amalgamating company; and
ii. The provisions of this section shall, as far as may be, apply to the amalgamated company
as they would have applied to the amalgamating company if the latter had not
transferred the licence.
CONCEPT - 07
Where, in a scheme of demerger, the demerged company sells or otherwise transfers the licence
to the resulting company (being an Indian company),
i. The provisions of this section (namely points B, C, D & E) shall not apply in the case of
the demerged company; and
ii. The provisions of this section shall, as far as may be, apply to the resulting company as
they would have applied to the demerged company if the latter had not transferred the
licence.
CONCEPT - 08
Where a deduction for any previous year is allowed under section 35ABB in respect of
expenditure on telecommunication licence, no deduction shall be allowed under section 32 in
respect of the said expenditure in the same or any subsequent previous year.
SEC 35ABA - EXPENDITURE ON SPECTRUM FEES

1) Where any capital expenditure is incurred by the assessee for acquiring any right to use
spectrum for telecommunication service either before the commencement of business or
thereafter at any time during any previous year for which payment is actually made, there
shall be allowed a deduction equal to appropriate fraction of the amount of such
expenditure – Sec 35ABA (1)
2) The deduction shall be computed as follows:
Expenditure incurred for acquiring right to use spectrum
Number of relevant previous years


1) “Easy Call Ltd.”, to provide telecom services in Mumbai, obtained a Licence on 1.4.2018
for a period of 10 years ending on 31.03.2028 against a Fee of Rs. 27 Lacs to be paid in 3
installments of Rs. 9 Lacs each by April 2018, April 2019 and April 2020, respectively. The
Company has commenced Business on 01.05.2019.
Explain, how the payment made for Licence Fee shall be dealt with under the Income -
Tax Act, 1961 and the amount, if any, deductible for A.Y. 2021 – 22.
Solution:
The payment made for acquiring the licence to operate telecom services in Mumbaishall be
subject to deduction as per the scheme in section 35ABB. As per section 35ABB, any amount
actually paid for obtaining licence to operate telecommunication services shall be allowed as
deduction in equal instalments during the number of years for which the licence is in force.
If the payment is made before the commencement of business:

Thededuction shall be allowed beginning with the year of commencement of business.
In any other case:
It will be allowed commencing from the year of payment. Deduction shall be allowed up to
the year in which the licence shall cease to be in force.
The amount of deduction available for AY 2021 - 22 is worked out below:
1 2 3 4=3/2
Deduction in
Previous Year of Unexpired Period of
Installment Paid respect of each
Payment Licence
Installment
2018 – 19 9 Years 9,00,000 1,00,000
2019 – 20 9 Years 9,00,000 1,00,000
2020 – 21 8 Years 9,00,000 1,12,500
Total 27,00,000 3,12,500
The deduction under Section 35ABB from Assessment year 2021 -22 shall be Rs. 3,12,500.
2) M / s Jio Ltd, obtained a 10 year licence for operating the international telephonic/voice
mail services, from Telecom Regulatory Authority of India. This licence was obtained on
29.03.2020. However, the commencement of business took place effectively only from
01.10.2020. The total commitment includes a down payment of Rs.110 crores, for licence
fees and an operating fee of Rs. 60 Paise per minute of usage time.
No Particulars
1 On 20.03.2023, 30% of the licence was sold by M / s Jio Ltd to another company. The
total consideration received was Rs. 40 crores.
2 On 01.10.2024, another 50% of the total licence was sold by M / s Jio Ltd to
Vodafone for a consideration of Rs. 75 Crores.
3 Compute the deduction allowable u / s 35ABB to M / s Jio Ltd from AY 2021 - 22 to

AY 2025 - 26.
What would be the position if on 01.10.2024 the sale consideration received is Rs.125
Crores?

Solution:
If the sale consideration is Rs. 75 crores:

I Deduction for AY 2021 – 22
1 Cost of licence 110
2 Less: Deduction u / s 35ABB (Rs. 110 cr. / 10 years) 11
3 Closing balance as on 31.03.2021 99
II Deduction for AY 2022 – 23
1 Opening balance of licence 99
III Deduction for AY 2023 – 24
2 Less: Sale of 30% of total licence 40
3 Balance 48
4 Less: Deduction u / s 35ABB (Rs. 48 cr. / 8 years) – Refer Note 6
IV Deduction for AY 2024 – 25
V Deduction for AY 2025 – 26
3 Surplus 39

Taxability of the surplus u / s 35ABB
1 Taxed under the head PGBP to the extent of deduction already
34
availed u / s 35ABB (Rs. 11+11+6+6)
2 Taxed under the head Capital Gains – the surplus over and above
the deduction already availed [Rs. 39 cr. – Rs. 34 cr. (income from
business)] 5
3 Total 39
Note:
Sec. 35ABB provides that, if part of the licence is sold for a consideration which is less than
amount remaining to be allowed as deduction, then the balance shall be allowed as
deduction during the remaining no. of years in equal installments. In this case, since the sale
consideration received (Rs. 40 cr.) is less than the amount remaining to be allowed (Rs. 88 cr.)
as deduction, the same should be reduced from Rs. 88 cr. and the balance should be allowed
for the remaining licence period of 8 years. This sum works out to Rs. 6 crores every year.

If the sale consideration is Rs. 125 crores:

1 Deduction for AY 2025 – 26
4 Balance 89
5 Taxability of the surplus u / s 35ABB
a) Taxed under the head PGBP to the extent of deduction already
availed u/s 35ABB (Rs. 11+11+6+6) 34
b) Taxed under the head Capital Gains – the surplus over and above
the deduction already availed [Rs. 89 cr. – Rs. 34 cr. (income from
55
business)]
6 Total 89

OTHER DEDUCTIONS

PGBP

S.1 – DEDUCTIONS
28 Charging Section
32 Depreciation
35DDA VRS
36 Other Deductions

Summary Table
28 30 33AB 35 35CCA 35D 36
29 31 33ABA 35ABB 35CCC 35DD 37
32 35ABA 35CCD 35DDA 38
32AD 35AD 35E

INDEX

13 Sec 35 AD – Specified Business 12 - 23

CHAPTER – 13
SEC – 35 AD – SPECIFIED BUSINESS
An assessee shall, IF HE OPTS (Finance Act, 2020), be allowed deduction under section 35AD
to the extent of 100% of capital expenditure incurred exclusively for carrying on the following
“Specified Business” during the previous year in which such expenditure is incurred by him:
No. Nature of Business - Deduction 100%

1 Setting up of cold chain facility
2 Setting up and operating a warehousing facility for storage of agricultural produce
3 Building and operating anywhere in India a new hospital with at atleast 100 beds for
patients.
4 Developing and building a housing project under a scheme for affordable housing
framed by the Central or State Government and notified by the CBDT.
5 Production of fertilizers in India.
6 Laying and operating a cross country: (i) Natural Gas; or (ii) Crude or (iii) petroleum
oil pipeline network for distribution, including storage facilities being an integral part
of such network.
7 Building and operating in India, a new hotel of two star or above category as classified
by the Central Government.
8 Developing and building a housing project under the scheme for slum redevelopment
or rehabilitation framed by the Central or State Government and notified by the CBDT
in accordance with the prescribed guidelines.
9 Setting up and operating an inland container depot or a container freight station
notified or approved under the Customs Act.
10 Bee Keeping and production of honey and beewax.
11 Setting up and operating a warehousing facility for storage of sugar.
12 Laying and operating a slurry pipeline for the transport of iron ore.
13 Setting up and operating a semi - conductor wafer fabrication manufacturing unit
notified by the board in accordance with the prescribed guidelines.
14 Developing or operating and maintaining; or developing; operating and maintaining,
any infrastructure facility.
SUMMARY : -
Part – 1 Part – 2 Part - 3

 Cold chain facility  Housing project  Infrastructure
 WHF for agricultural  Hotel  Inland container depot
produce
 WHF for sugar  Fertilizer  Cross country (natural gas)
 Honey and beewax  Hospital  Slurry pipeline
 Semi – conductor wafer
fabrication

CONDITIONS TO BE SATISFIED
Conditions
General Other
Conditions Conditions
General Conditions:
 Business should not be set up by splitting up, or the reconstruction, of a business already
in existence.
 Business should not be setup by the transfer of the specified business of machinery or
plant previously used for any purpose.
Other Conditions: -
No Particulars Notes
1 Transfer of goods & Services At Fair Market Value
2 Audit of Accounts By a CA
3 Lock in Period Asset to be used for specified
business for eight years
4 Asset demolished / destroyed / discarded or Receipt will be taxed under
transferred for which a deduction is claimed section 28
5 Asset used for any other business other than specified Sec. 35AD(7B) Provisions will
business be applicable
Notes:
No Topic Explanation
1 Chapter VI – A No deduction under Section 10AA or Chapter VI – A under the
Deductions heading C - Deductions in respect of certain incomes
2 Deductions No deduction allowable under the Act in respect of expenditure
for which deduction allowed this section
3 Set Off & Carry Loss from one specified business can be set – off against profit
Forward of Loss from another specified business. Unabsorbed loss can be carry
forward to indefinite period u/s 73A for indefinite period.
4 Transfer of Hotel The assessee shall be deemed to be carrying on the specified

Built by the business of building and operating hotel if
assessee a) The assessee builds a hotel of two - star or above category.
b) Thereafter, he transfers the operation of the hotel to another
person.
c) He, however, should continue to own the hotel.

DATE OF COMMENCEMENT
Date of Commencement
No Specified Business
of Business
Laying & Operating a cross country natural gas pipeline On or After 1st April 2007
1
network for distribution
a. Building & Operating anywhere in India, a hotel of two On or after 1st April 2010
- star or above category as specified by the Central
Government
2 b. Building & Operating a hospital with at least 100 beds
for patients
c. Slum re – development or rehabilitation housing
Projects
a. Affordable Housing Projects On or after 1st April 2011
3 b. Production of fertilizer in a new plant or in an newly
installed capacity in an existing plant
a. Setting up and operating an Inland Container depot or On or after 1st April 2012
a container freight station
4 b. Bee – Keeping & production of honey & bees wax
c. Setting up and Operating warehousing facility for
storage of sugar
a. Laying and Operating a Slurry pipe line for On or after 1st April 2014
transportation of iron ore
5
b. Setting up and operating a semi - conductor water
fabrication manufacturing unit
Developing or Operating and maintaining or developing, On or after 1st April 2017
6
operating and maintaining, any infrastructure facility
In any other case namely On or after 1st April 2009
a. Setting and operating “Cold Chain facilities for
7
specified products”
b. Ware housing facilities for storing agricultural produce
CONNECTED PROVISIONS - EXPENDITURE ELIGIBLE FOR DEDUCTION
For Specified Business

1 Capital 100% Deduction shall be allowed in respect of any expenditure of
Expenditure capital nature incurred wholly and exclusively for the purposes of
any specified business carried on by him during the previous year
in which such expenditure is incurred by him. Therefore, capital
expenditure incurred after the commencement of specified business
is allowed as deduction to the extent of 100% of such expenditure,
in the year in which such expenditure is incurred, where the
assessee opts for such deduction.
2 Revenue Revenue Expenditure will also be allowed as 100% deduction
Expenditure under section 30 to 37 and are not allowed under section 35AD.
3 Expenditure Expenditure incurred wholly and exclusively, for the purposes of
Incurred Before any specified business, shall be allowed as deduction to the extent
Commencement of of 100% of such expenditure during the previous year in which he
Business commences operations of his specified business if:
a) The expenditure is incurred prior to the commencement of
its operations; and
b) The amount is capitalized in the books of account of the
assessee on the date of commencement of its operations, and
c) Assessee opts for deduction under section 35AD - Finance
Act, 2020
Therefore, expenditure incurred before the commencement of
specified business shall be allowed as deduction to the extent of
100% of such expenditure, in the previous year in which business is
commenced provided such expenditure has been capitalized in the
books of account and the assessee opts for deduction under
section 35AD.
EXPENDITURE NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 35AD
No Particulars
1. Any expenditure of capital nature shall not include any expenditure incurred
 Acquisition of any land; or
 Goodwill; or
 Financial instrument
Therefore, expenditure on acquisition of land, goodwill and any finance instrument is not
eligible for deduction under section 35AD whether such expenditure is incurred before or
after the commencement of business.
Sec. 35AD Not Applicable to
Goodwill Instruments Land
2. Any expenditure in respect of which the payment or aggregate of payments made to a

person in a day, otherwise than by an account payee cheque drawn on a bank or an
account payee bank draft or use of electronic clearing system through a bank account or
through such electronic mode as may be prescribed, exceeds Rs. 10,000 – FA 2019
KEY NOTES : -
No Particulars
1. Expenditure incurred on acquisition of goodwill or any land or financial instruments is
not to be allowed under section 35AD under any circumstances even if it is paid by
banking channels.
2. Expenditure incurred on acquisition of other capital assets shall not be allowed under
section 35AD if in respect of such capital expenditure, payments or aggregate of payments
made in a day otherwise than by account payee cheque / draft / banking channels exceeds
Rs. 10,000

3. Needless to say that revenue expenditure shall be disallowed under section 40A(3) if
payments/ aggregate payments for such expenditure in a day otherwise than by account
payee cheque / draft / banking channels exceed Rs. 10,000
Illustration:
Discuss whether the following expenditure is allowed as deduction under section 35AD or not:
Issues Tax Treatment
Land of Rs. 10 lakhs purchased by account payee Not allowed under section 35AD
cheque
Goodwill of Rs. 50 lakhs purchased by account payee Not allowed under section 35AD
cheque
Financial instruments of Rs. 60 lakhs purchased by Not allowed under section 35AD
accounts payee cheque
Plant & Machinery of Rs. 50 lakhs purchased and Rs. 1,50,000 paid on 01.01.2021 and Rs.
payments made as under: 40,000 paid on 04.01.2021 will not be
Date Amount (Rs.) Particulars allowed under section 35AD. 100% of
01.01.2021 1,50,000 30 Cash Payments Rs. 48,10,000 will be allowed under
of Rs. 5,000 each section 35AD.
02.01.2021 9,000 Cash Payment Section 269ST shall be attracted and
03.01.2021 1,000 Cash Payment receiver of cash shall pay penalty of
04.01.2021 40,000 Cash Payment Rs. 2 lakhs.
05.01.2021 48,00,000 Payment by
account payee
cheque
Revenue expenditure of Rs. 1,00,000 paid as under: Revenue expenditure in any case is not
Date Amount (Rs.) Particulars allowed under section 35AD but is
01.01.2021 30,000 Cash Payment allowed under section 30 to 37.
02.01.2021 61,000 Payment by In this case, Rs. 30,000 shall be
account payee disallowed under section 40A(3). And
cheque Rs. 70,000 shall be allowed under
03.01.2021 9,000 Cash Payment sections 30 to 37(1)
DOUBLE DEDUCTION IS NOT PERMITTED
No Particulars
1. Where a deduction under section 35AD is claimed and allowed in respect of specified
business for any assessment year, then the assessee shall not be allowed any deduction in
respect of the specified business under the provisions of section 10AA and Chapter VIA
under the heading “C. – Deductions in respect of certain incomes” in relation to such
specified business for the same or any other assessment year.
2. No deduction shall be allowed under any other section of the Income Tax Act, 1961 in any
previous year in respect of the expenditure for which deduction is claimed or opted for
by the assessee and thereafter allowed under section 35AD. Therefore, the capital
expenditure which is allowed as deduction under section 35AD is not eligible for
depreciation - Section 35AD(4) - Amendment by Finance Act, 2020

S. 73A – CARRY FORWARD & SET - OFF OF LOSSES BY SPECIFIED BUSINESS
No Particulars
1 Any loss, computed in respect of any specified business referred to in Section 35AD shall
not be set off except against profits and gains, if any, of any other specified business.
2 Where for any assessment year any loss computed in respect of the specified business
referred to in sub - section (1) has not been wholly set off under sub - section (1), so much
of the loss as is not so set off or the whole loss where the assessee has no income from
any other specified business, shall, subject to the other provisions of this Chapter, be
carried forward to the following assessment year, and
a) it shall be set off against the profits and gains, if any, of any specified business carried
on by him assessable for that assessment year; and
b) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried
forward to the following assessment year and so on.
3 The Loss can be carried forward indefinitely and restriction of carry forward of loss for 8
Assessment Years is not applicable.

Assessee is manufacturing pumps since 1987. The assessee starts business of setting up and
operating a warehousing facility for agricultural produce on 1.6.2020. Following information
is given to you:
1 Profits from manufacturing pump 10,00,000
2 Profits from operating warehousing facility 25,00,000
The following assets have been purchased for warehousing facility and the profit of Rs.
25,00,000 is computed without giving effect to the following:

1 Machinery purchased on 30.6.2019 5,00,000
2 Land purchased on 30.6.2019 11,00,000
4 Building Purchased on 31.12.2019 8,00,000
5 Building Constructed on 31.5.2020 17,00,000
6 Goodwill purchased on 31.05.2020 7,00,000
Solution:
Deduction allowable under section 35AD

3 Building Purchased on 31.12.2019 8,00,000
4 Building Constructed on 31.5.2020 17,00,000
5 Total 36,00,000


1 Profits of specified business 25,00,000
2 Less: Deduction under section 35AD @ 100% 36,00,000
3 Loss to be carried forward indefinitely 11,00,000
Loss of Rs. 11,00,000 shall not be set off against the profits of the manufacturing pump. The loss
of Rs. 11,00,000 can be set-off only against the profits of specified business in the current year
and next years. Such loss can be carried forward indefinitely.
Illustration 2:
Suppose in illustration 1 above, the machinery of Rs. 6,00,000 is sold in previous year
31.03.2022 for Rs. 9,00,000, then Rs. 9,00,000 shall be taxable as Profits & Gains of Business or
Profession in previous year 31.3.2022.


1) Mr. A commenced operations of the businesses of setting up a warehousing facility for
storage of food grains, sugar and edible oil on 1.4.2020. He incurred capital expenditure of
Rs. 80 lakhs, Rs. 60 lakhs and Rs. 50 lakhs, respectively, on purchase of land and building
during the period January 2020 to March 2020 exclusively for the above businesses, and
capitalized the same in its books of account as on 1st April 2020. The cost of land
included in the above figures are Rs. 50 lakhs, Rs. 40 lakhs and Rs. 30 lakhs, respectively.
Further, during the P.Y. 2020 - 21, he incurred capital expenditure of Rs. 20 lakhs, Rs. 15
lakhs & Rs. 10 lakhs, respectively, for extension / reconstruction of the building
purchased and used exclusively for the above businesses.
The profits from the business of setting up a warehousing facility for storage of food
grains, sugar and edible oil (before claiming deduction under section 35AD and Section
32) for the A.Y. 2021 - 22 is Rs. 16 lakhs, Rs. 14 lakhs and Rs. 31 lakhs, respectively.
Compute the income under the head “Profits and gains of business or profession” for the
A.Y. 2021 - 22 and the loss to be carried forward, assuming that Mr. A has fulfilled all the
conditions specified for claim of deduction under section 35 AD and has not claimed any
deduction under Chapter VI - A under the heading “C –Deductions in respect of certain
incomes”. Assume in respect of expenditure incurred, the payments are made by account
payee cheque or use of ECS through bank account.
Solution:
Computation of PGBP for AY 2021 – 22

1 Profit from business of setting up of warehouse for storage of edible 31
oil (before providing for depreciation u / s 32)
2 Less: Depreciation u / s 32 [10% of Rs. 30 lakh, being (Rs. 50 lskh – Rs. 3
30 lakh + Rs. 10 lakh)]
3 Income chargeable under “PGBP” 28
Computation of income / loss from specified business u / s 35AD
Food
Sugar Total
No Particulars Grains
(Rs. in lakhs)
1 Profits from the specified business of setting up a 16 14 30
warehousing facility (before providing deduction u / s
35AD)
2 Less: Deduction u / s 35AD
a. Capital expenditure incurred prior to 1.4.2020 (i.e., prior 30 20 50
to commencement of business) and capitalized in the
books of account as on 1.4.2020 (excluding the
expenditure incurred on acquisition of land) = Rs. 30 lakh
(Rs. 80 lakh – Rs. 50 lakh) and Rs. 20 lakh (Rs. 60 lakh –
Rs. 40 lakh)
b. Capital expenditure incurred during the PY 2020 – 21 20 15 35
3 Total capital expenditure (a + b) 50 35 85
4 Deduction u / s 35AD

100% of capital expenditure (food grains / sugar) 50 35 85
5 Total deduction u / s 35AD for AY 2021 – 22 50 35 85
6 Loss from the specified business of setting up and (34) (21) (55)
operating a warehousing facility (after providing for
deduction u / s 35AD) to be carried forward as per section
73A (1 - 6)
Notes:
No Particulars
1 Deduction of 100% of the capital expenditure is available u / s 35AD for AY 2021 – 22
in respect of specified business of setting up and operating a warehousing facility for
storage of sugar and setting up and operating a warehousing facility for storage of
agriculture produce where operations are commenced on or after 01.04.2012 or on or
after 01.04.2009, respectively.
2 However, since setting up and operating a warehousing facility for storage of edible
oils is not a specified business, Mr. A is not eligible for deduction u / s 35AD in respect
of capital expenditure incurred in respect of such business.
3 Mr. A can, however, claim depreciation @ 10% u / s 32 in respect of the capital
expenditure incurred on buildings. It is presumed that the buildings were put to use
for more than 180 days during the PY 2020 – 21.
4 Loss from a specified business can be set - off only against profits from another
specified business. Therefore, the loss of Rs. 55 lakh from the specified businesses of
setting up and operating a warehousing facility for storage of food grains and sugar
cannot be set – off against the profits of Rs. 28 lakh from the business of setting and
operating a warehousing facility for storage of edible oils, since the same is not a
specified business. Such loss can, however, be carried forward indefinitely for set – off
against profits of the same or any other specified business.
2) XYZ Ltd commenced operations of the business of a new three - star hotel in Madurai,
Tamil Nadu on 1.4.2020. The company incurred capital expenditure of Rs. 50 lakh during
the period January 2020 to March 2020 exclusively for the above business, and capitalized
the same in its books of account as on 1st April, 2020. Further, during the P.Y. 2020 - 21, it
incurred capital expenditure of Rs. 2 crore (out of which Rs. 1.50 crore was for acquisition
of land) exclusively for the above business.
Compute the income under the head “Profits and gains of business or profession” for the
A.Y.2021 - 22, assuming that XYZ Ltd. has fulfilled all the conditions specified for claim
of deduction under section 35AD and has not claimed any deduction under Chapter VI -
A under the heading “C. – Deductions in respect of certain incomes”.
The profits from the business of running this hotel (before claiming deduction under
section 35AD) for the A.Y.2021 - 22 is Rs. 25 lakhs.Assume that the company also has
another existing business of running a four - star hotel in Coimbatore, which commenced
operations fifteen years back, the profits from which are Rs. 120 lakhs for the A.Y. 2021 -
22. Also, assume that expenditure incurred during the previous year 2020 - 21 were paid
by account payee cheque or use of ECS through bank account.

Solution:
Computation of PGBP for AY 2021 – 22
Amount(Rs. in
No Particulars
lakhs)
1 Profits from the specified business of new hotel in Madurai (before 25
providing deduction u / s 35AD)
2 Less: Deduction u / s 35AD
Capital expenditure incurred during the PY 2020 – 21 (excluding the 50
expenditure incurred on acquisiton of land) = Rs. 200 lakh – Rs. 150
lakh
Capital expenditure incurred prior to 1.4.2020 (i.e., prior to 50
commencement of business) and capitalized in the books of account
as on 1.4.2020
3 Total deduction u / s 35AD for AY 2021 – 22 100
4 Loss from the specified business of new hotel in Madurai (75)
5 Profit from the existing business of running a hotel in Coimbatore 120
6 Net profit from business after set – off of loss of specified business 45
against profits of another specified business u / s 73A
TRANSFER OF 35AD ASSET
Transfer of 35AD Asset
Demolished, Destroyed , Discarded

Transfer from SB to NSB
or transferred
Provisions of Sec 35AD(7B) will be

Sec 28 (vii) will be applicable
applicable
1 Any asset in respect of which a deduction is claimed and allowed
Additional
under this section shall be used only for the specified business, for a
Conditions –
period of eight years beginning with the PY in which such asset is
Conditions for
acquired or constructed.
retention of
assets for 8 years
– Section 35AD
(7A)

2 Asset used for If asset is used for any purpose other than the specified business
any other during 8 years beginning with the previous year in which such asset
business other is acquired, the total amount, of deduction so claimed and allowed
than specified in any previous year in respect of such asset, as reduced by the
business during amount of depreciation allowable in accordance with the provisions
8 years - Section of section 32 as if no deduction had been allowed under section
35AD (7B) 35AD, shall be deemed to be income of the assessee chargeable
under the head 'Profits and gains of business or profession' of the
previous year in which the asset is so used.
3 Explanation 13 Provided that where any capital asset in respect of which deduction
to Section 43(1) or part of deduction allowed under section 35AD is deemed to be the
- proviso income of the assessee in accordance with the provisions of sub -
section (7B) of the said section, the actual cost of the asset to the
assessee shall be the actual cost to the assessee, as reduced by an
amount equal to the amount of depreciation calculated at the rate in
force that would have been allowable had the asset been used for the
purposes of business since the date of its acquisition.
4 Section 28(vii) – The following income shall be chargeable to income tax under the
Charging head “Profits & Gains of Business or Profession”
section Any sum, whether received or receivable, in cash or kind, on account
of any capital asset (other than land or goodwill or financial
instrument) being demolished, destroyed, discarded or transferred,
if the whole of the expenditure on such capital asset has been
allowed as a deduction under section 35AD.
Therefore, if the asset whose cost has been allowed as deduction
under section 35AD is sold, demolished or destroyed then,
No Particulars
a) the sale price of such asset shall be taxable as “Profits &
Gains of Business or Profession”.
b) the insurance compensation on destruction of such asset

shall be taxable as “Profits & Gains of Business or
Profession”.
Illustrations : -
Plant & machinery purchased and put to use on 30.6.2019 for Rs. 200 crores for warehouse
facilities for storage of agricultural produce. Deduction @ 100% of Rs. 200 crores was allowed in
Assessment Year 2020 - 21. Now on 31.01.2022, this machinery is ceased to be used for the
specified business and is used for some other non-specified business. Now following shall be
taxable as P / G / B / P in Assessment Year 2022 - 23:
Amount (Rs. in
No Particulars
crores)
1 Deduction allowed in Assessment Year 2020 – 21 200
2 Less: Depreciation @ 15% for Assessment Year 2020 - 21 30
3 Less: Depreciation @ 15% for Assessment Year 2021 – 22 25.50
4 P / G / B / P in Assessment Year 2022 – 23 144.50
Had the specified business being manufacture of fertilizers, then following shall be taxable as
P / G / B / P in Assessment Year 2022 - 23.

Amount (Rs. in
No Particulars
crores)
1 Deduction allowed in Assessment Year 2020 – 21 200
2 Less: Depreciation @ 15% for Assessment Year 2020 – 21 30
3 Less: Additional Depreciation @ 20% for Assessment Year 2020 - 21 40
4 Less: Depreciation @ 15% for Assessment Year 2021 – 22 19.50
5 P / G / B / P in Assessment Year 2022 - 23 110.50
As per amendment made by Finance Act, 2017 in Explanation 13 to section 43(1), Rs. 144.50
crores / Rs. 110.50 crores will be added to block of assets for Assessment Year 2022 - 23 and
depreciation be allowed on that amount.
QUESTION FOR PRACTICE

1) ABC Ltd 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 1.4.2019 and it claimed deduction of Rs.100 Lacs
incurred on purchase of two buildings for Rs. 50 Lacs each (for operating a warehousing
facility for storage of sugar) under section 35AD for A.Y. 2020 - 21. However, in February
2021, Unit A transferred one of its buildings to Unit B.
Examine the tax implications of such transfer in the hands of ABC Ltd.
Solution:
Since the capital asset, in respect of which deduction of Rs. 50 lacs was claimed u / s 35AD, has
been transferred by Unit A carrying on specified business to Unit B carrying on non - specified
business in the PY 2020 - 21, the deeming provision u / s 35AD(7B) is attracted during the AY
2021 - 22.

1 Deduction allowed u / s 35AD for AY 2020 – 21 50,00,000
2 Less: Depreciation allowable u / s 32 for AY 2020 - 21 [10% of Rs. 50 lacs] 5,00,000
3 Deemed income u / s 35AD(7B) 45,00,000
ABC Ltd., however by virtue of proviso to Explanation 13 to section 43(1), can claim
depreciation u / s 32 on the building in Unit B for AY 2021 - 22. For the purpose of claiming
depreciation on building in Unit B, the actual cost of the building would be:

1 Actual cost to the assessee 50,00,000
2 Less: Depreciation allowable u / s 32 for AY 2020 - 21 [10% of Rs. 50 lacs] 5,00,000
3 Actual cost in the hands of ABC Ltd. in respect of building in Unit B 45,00,000

OTHER DEDUCTIONS

PGBP

S.1 – DEDUCTIONS
28 Charging Section
32 Depreciation
35DDA VRS
36 Other Deductions

Summary Table
28 30 33AB 35 35CCA 35D 36
29 31 33ABA 35ABB 35CCC 35DD 37
32 35ABA 35CCD 35DDA 38
32AD 35AD 35E

INDEX

14 Sec 35 CCA / 35CCC / 35 CCD 24-33
Sec - 35d / Dd / Dda / E

CHAPTER – 14
SEC – 35 CCA / 35CCC / 35 CCD
SEC - 35D / DD / DDA
Sec No Name
35CCA Rural Development Programme
35CCC Agricultural Extension Programme
35CCD Skill Development Programme
35DD Amalgamation or Demerger
35DDA VRS
DEDUCTIONS FOR ELIGIBLE PROJECTS / PROGRAM
Eligible Projects /
Programs
Rural development Agricultural Skill development

program u / s extension project program u / s
35CCA u / s 35CCC 35CCD
100% 150% 100% 150% 100%

Particulars 35CCA 35CCC 35CCD
Applicability All Assessees All Assessees All Assessees
Nature of Contribution made to the Any expenditure on Any expenditure other than
Expenditure following funds set up Agricultural extension cost of Land and Building
and notified by Central Project, as notified by on Skill Development
Government – CBDT, as per prescribed project, as notified by CBDT
(a) National fund for guidelines. as per prescribed guidelines.
Rural Development
(b) National Urban
Poverty Eradication Fund
Deduction 100% of Expenditure 100% of Expenditure 100% of Expenditure

incurred. incurred. incurred.
No No deduction will be No deduction will be No deduction will be

Deduction available under any other available under any available under any other
section, in respect of other section, in respect section, in respect of
expenditure claimed and of expenditure claimed expenditure claimed and
allowed u / s 35CCA. and allowed u / s 35CCC. allowed u / s 35CCD.

1) Isac limited is a company engaged in the business of bio - technology. The net profit of
the company for the FY ended 31.03.2021 is Rs. 35,25,890 lakhs after debiting the
following items:
No Particulars Rs.
1 Purchase price of Raw Material used for purpose of in - house research and 11,80,000
development
2 Purchase price of assets used for in – house research and development
- Land 5,00,000
- Building 3,00,000
3 Expenditure incurred on notified agricultural extension project 25,50,000
4 Expenditure on notified skill development project
- Purchase of land 40,00,000
- Expenditure on training for skill development 32,50,000
5 Expenditure incurred on advertisement in the Souvenir published by a 75,000
Political party
6 Expenditure incurred on issue of right shares 80,000
7 Expenditure incurred on issue of debentures 50,000
8 Penalty paid under GST Act 35,000
9 Penalty paid for breach of contract with a customer 40,000
10 Interest paid on loan taken from bank for payment of advance income – tax 60,000
11 Provision for loss of subsidiary 85,000
Compute the income under the head PGBP for the AY 2021 – 22 of Isac Ltd assuming that the
company does not opt for the provisions of section 115BAA.

Solution:
Computation of profits and gains from business of Isac Ltd for AY 2021 - 22
Amount Amount
No Particulars
(Rs.) (Rs.)
1 Net profit as per P & L Account 35,25,890
2 Add: Amount debited to P & L but to be disallowed
3 Purchase price of land used in in – house research and
development – being capital expenditure not allowable as 5,00,000
deduction u / s 35
4 Purchase price of building used in in – house research and
development – being capital expenditure, 100% of which is -
allowable as deduction u / s 35(1)(iv) read with section 35(2)
5 Purchase price of raw material used for the purpose of in –
house research and development – qualifies for 100% -
deduction u / s 35(2AB)
6 Expenditure incurred on notified agricultural extension
-
project – 100% deduction is allowed u / s 35CCC
7 Expenditure incurred on notified skill development project –
Purchase of land – being capital expenditure not qualifying 40,00,000
for deduction u / s 35CCD
8 Expenditure incurred on notified skill development project –
Expenditure on training for skill development – 100% -
deduction is allowed u / s 35CCD
9 Expenditure incurred on advertisement in the souvenir
published by a political party not allowed as deduction as 75,000
per section 37(2B)
10 Expenditure incurred on issue of right shares not allowed as 80,000
deduction since expenses is of capital nature
11 Expenditure incurred on issue of debentures (allowable) -
12 Penalty paid under GST law not allowed as deduction 35,000
13 Interest paid on loan taken from bank for payment of

advance income – tax not allowed as deduction since the 60,000
same is not for the purpose of business or profession
14 Provision for loss of subsidiary not allowed as deduction 85,000 48,35,000
12 Profits & gains from business 83,60,890
Notes:
1. GST on which ITC is not admissible is an expense and can be claimed as an expense u / s 37.
2. The expenditure incurred on advertisement in souvenir published by political party is
disallowed as per section 37(2B) while computing income under the head “PGBP” but the
same would be allowed as deduction u / s 80GGB from the GTI of the company.

AMORTISATION OF EXPENSES
PRELIMINARY, AMALGAMATION & DEMERGER

EXPENSES
35D 35DD 35DDA 35E
Preliminary Expenditure in case of VRS Extraction of

expenses amalgamation or Compensation Mineral Oil
demerger
No Particulars 35D 35DD 35DDA 35E

1 Name of the Preliminary Expenditure VRS Extraction of
section expenses incurred for compensation Mineral Oil
Amalgamation /
Demerger
2 Applicable to Resident Indian Company Any Assessee Any Assessee
Assessee
3 Quantum of As below Expenditure Expenditure Expenditure
Deduction incurred incurred actually incurred
limited to PGBP
income
4 Amount of 1/5th of 1/5th of expenditure 1/5th of 1/10th of
Deduction expenditure expenditure expenditure
AMORTIZATION OF CERTAIN PRELIMINARY EXPENDITURE 35D
PRELIMNARY
EXPENSES
For Indian Resident Non

Company corporate
5% of cost of project Which ever is

or 5% of capital higher or actual 5% of Cost of
employed which expense incurred project
ever is higher which ever is lower

35D INCLUDES :-
The expenditure on specif ied purposes means the following expenditure incurred on :-
No Explanation
(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 his business
However, the work in connection with such preparation ect. reffered to in (a) to (d) above
should be done by assessee himself or by an approved concern
(e) Legal charges for drafting any agreement between the assessee and any other person for
any purpose relating to the setting up or conduct of the business of assessee.
(f) In the case of a company, also expenditure on:

(A) Legal charges of drafting Memorandum and Articles of Association of the company.
(B) Printing of Memorandum and Articles od Association
(C) Legal fees for registering the company
(D) In connection with the issue, for public subscription, of shares in or debentures of the
company, being underwriting commission, brokerage, charges for drafting, printing and
advirtisment of the prospectus. (It has been held in case of Shree Synthetics Limited that
the expenditure incurred on refunding the excess amount over subscription of shares or
debentures is also covered by this clause.
(E) Such other expenditure as may be prescribed.
Notes :-
Capital Employed “Capital Employed” is defined as aggregate of the issued share capital,
debentures and long term borrowings. Share premium collected on
subscribed issue share capital will not be part of “capital employed in the
business of the company’ for the purpose of section 35D.
Audit Mandatory
In the case of an assessee other than a company or co – operative society,
the deduction shall be allowed only if the accounts of the assessee for the
year or years in which such expenditure is incurred have been audited and
audit report is furnished one month prior to the due date of furnishing of
the return of income under section 139(1) for the first year in which
deduction u / s 35D is claimed – Finance Act, 2020.
COP = Cost of
Amount invested in fixed asset of new project or extention or setup new
project
unit
CE = Capital
Share capital + debentures + long term borrowing for new project or
employed
extention or setup new unit
Reserves &
Reserve and surplus (including security premium) shall not be part of CE
Surplus

XYZ Ltd. is incorporated on September 3, 2020. It commences its production on 14.3.2022.

During the previous year 2020 - 21, the following preliminary expenses are incurred by it:

1 Registration fees for incorporation 17,600
2 Printing expenses of memorandum, articles, prospectus, etc. 28,000
3 Legal charges for drafting the memorandum and articles 36,000
4 Underwriting commission for issue of shares 75,000
5 Cost of advertisements for prospectus 92,000
6 Expenditure on the refund of the amount of over subscription of shares 81,000
Besides, the company has incurred the following expenses before commencement of
business:
1 Preparation of feasibility report (the work is undertaken by the 97,000
assessee)
2 Preparation of the project report (the work is undertaken by an 1,45,000
approved concern)
3 Expenditure on conducting market survey necessary for the business 62,000
for the company (the work is undertaken by a concern which is not
approved for this purpose)
4 Legal charges for entering into a foreign collaboration 43,000
5 Engineering services in connection with the erection of plant and 3,12,900
machinery
6 Cost of plant and machinery 87,92,000
Determine the amount deductible under section 35D for the assessment years 2021 - 22 and
2022 - 23 assuming the following figures of fixed assets and capitals:
On March 31, On March 31,
No Particulars
2021 (Rs.) 2022 (Rs.)
1 Cost of fixed assets 51,00,000 96,01,850
2 Share Capital 26,00,000 57,00,000
3 Debentures 9,00,000 11,00,000
4 Long - term borrowing from a financial institution 3,08,000 24,00,000
Solution:
Since the company commences its business by starting commercial production on March
14,2022, the benefit of amortization of pre-commencement expenses under section 35D is
available in 5 assessment years beginning with the assessment year 2022 - 23. The expenditure
qualified for this purpose is as follows:

1 Registration fees 17,600
2 Printing charges 28,000
3 Legal charges for drafting 36,000
4 Underwriting commission 75,000
5 Cost of advertisement 92,000

6 Expenditure on refund of amount of over – subscription 81,000
7 Cost of preparation of feasibility report 97,000
8 Cost of preparation of project report 1,45,000
9 Cost of conducting market survey - not included as the work is NIL
undertaken by an unapproved concern
10 Legal charges for foreign collaboration 43,000
11 Engineering services for erection of plant 3,12,900
12 Total qualifying amount 9,27,500
Maximum qualifying amount:
No Particulars Computation Amount (Rs.)

1 Cost of project - being cost of fixed assets 96,01,850
on March 31, 2022
2 Capital employed on March 31,2022 Rs 57,00,000 + Rs. 11,00,000 + 92,00,000
Rs. 24,00,000
3 5% of cost of project or capital employed 5% of Rs. 96,01,850 4,80,093
at the option of the assessee
4 Amount to be amortized in 5 assessment 96,018.50
years beginning with the assessment
year 2022 – 23
KEY POINT
Since the entire qualification amount is not eligible for amortization, it is advisable to include
cost of engineering service for erection of plant in the “actual cost” of plant, which will be
eligible for depreciation under section 32. If the company includes such cost in “actual cost” of
the plant, the same will be excluded from qualifying amount which will be reduced to Rs.
6,14,600. However, the maximum amount eligible for amortization will be increased to Rs.
99,14,750 (i.e. Rs. 96,01,850 + Rs. 3,12,900) and, consequently, the amount to be amortized in 5
installments will become Rs. 99,147.50 (i.e. 1/5 of 5% of Rs. 99,14,750).
AMORTIZATION OF AMALGAMATION OR DEMERGER EXPENSES

SEC – 35DD
No Explanation
1 Where an assessee being an Indian company, incurres any expenditure, wholly and
exclusively for the purposes of amalgamation or demerger of an understanding, the
assessee shall be allowed a deduction of an amount equal to 1/5th of such expenditure for
each of the five successive previous years beginning with the previous year in which the
amalgamation or demerger takes place.
2 No deduction shall be allowed in respect of the expenditure mentioned in subsection (1)
under any other provision of this Act.

AMORTIZATION OF EXPENDITURE INCURRED UNDER VRS – SEC. 35DDA
No Explanation
1 Where an assessee incurs any expenditure in any previous year by way of payment of any
sum to an employee in connection with his voluntary retirement, in accordance with any
scheme of voluntary retirement, one fifth of the amount so paid shall be deducted in
computing the PGBP for the previous year, and the balance shall be deducted in equal
installments for each of the four immediately succeeding previous years.
2 No deduction shll be allowed in respect of the expenditure mentioned in subsection (1)
under any other provision of this Act.
Questions for understanding : -
1) M / s. A company pays VRS compensation of Rs. 10 lakhs for 2 of its employees during
the FY 2020 - 21. Compute the deduction allowable for AY 2021 - 22.
Solution:
Deduction allowable u / s 35DDA will be Rs. 2 lakhs (Rs. 10 lakhs / 5 years) for the
AY 2021 - 22. The balance of Rs. 8 lakhs will be claimed as deduction in equal installments
(Rs. 2 lakhs) in each of the 4 succeeding AYs till AY 2025 – 26.
2) In the above case, what if M / s. A company pays the same Rs. 10 lakhs in 3 installments –
Rs. 5 lakhs in the year 2020 - 21; Rs. 3 lakhs in the year 2021 - 22; and Rs. 2 lakhs in year
2022 - 23. Ascertain the deduction admissible u / s. 35DDA
Solution :
Deduction allowable u / s 35DDA (Rs. in lakhs)

FY 2020 – 21 2021 – 22 2022 - 23 2023 - 24 2024 - 25 2025 - 26 2026 - 27 Total
2020 – 21 1 1 1 1 1 - - 5
2021 – 22 - 0.6 0.6 0.6 0.6 0.6 - 3
2022 – 23 - - 0.4 0.4 0.4 0.4 0.4 2
Total Ded 1 1.6 2.0 2.0 2.0 1 0.4 10
3) In a scheme of voluntary retirement, the company shall pay the following amount to the
employees who take VRS on 31.01.2021.
No Date Amount (Rs.)
1 31.03.2021 10,00,000
2 31.03.2022 15,00,000
3 31.03.2023 6,00,000
Now as per the amendment in section 35DDA:

Amount
No Period
allowed (Rs.)
1 From AY 2021 – 22 to AY 2025 – 26 2,00,000
2 From AY 2022 – 23 to AY 2026 – 27 3,00,000
3 From AY 2023 – 24 to AY 2027 – 28 1,20,000

OTHER DEDUCTIONS

PGBP

S.1 – DEDUCTIONS
28 Charging Section
32 Depreciation
35DDA VRS
36 Other Deductions

Summary Table
28 30 33AB 35 35CCA 35D 36
29 31 33ABA 35ABB 35CCC 35DD 37
32 35ABA 35CCD 35DDA 38
32AD 35AD 35E

INDEX

15 Sec 35E 34 - 40

CHAPTER – 15
SEC – 35 E
Section 35E – Amortisation of Expenditure on Prospecting etc. of Certain
Minerals
Applicability It applies to an assessee who is engaged in the operation of –
 Prospecting for, or
 Extraction of, or
 Production of
any mineral like coal, limestone, iron, zinc, gold, etc.
Provision It provides for the amortization of expenditure incurred wholly and
exclusively on any operation relating to prospecting for the minerals or
on the development of a mine or other natural deposit of any such
minerals (herein after called as qualifying expenditure).
QE – When it The QE should be incurred during the “year of commercial production”
should be and four years immediately preceding that year. The term “year of
incurred? commercial production” means the previous year in which commercial
production of the specified minerals commences.
QE – What does Expenditure incurred wholly and exclusively on
it include?
 Any operations relating to prospecting for any mineral, or
 On the development of a mine or other natural deposit of any mineral,
 Is QE
(Expenditure met by Govt. or any other authority shall not be considered
as QE)
QE - What it does The following are not included in “QE” –
not include?
i. Expenditure on the acquisition of the site of the source of any
minerals or of any rights in such site.
ii. Expenditure on the acquisition of the deposits of any minerals or of
any rights in such deposit.
iii. Expenditure of a capital nature in respect of any building,
machinery, plant or furniture for which depreciation is admissible u
/ s 32.
Amount and The amortization of QE is allowed in equal installments over a period of 10
period of years. The amount deductible for each year is –
deduction
a) 1 / 10th of “QE”; or
b) Income (before deduction u / s 35E) of the PY arising from commercial
exploitation of any mine (income of all mines shall be taken)
Whichever is less.

Question for Understanding : -
X Ltd., an Indian company, is engaged in the business of production of minerals since 1962.
During the year ending 31.03.2020, it starts commercial exploitation of a new mine at
Hazaribag. Compute the amount deductible u/ s 35E for the AYs 2020 – 21 and 2021 – 22 from
the given information –
PY 2019 – 20 PY 2020 – 21
No Particulars
(Rs.) (Rs.)
1 Income from mining before sec. 35E
deduction
 From old mining 20,000 4,00,000
 From new mining at Hazaribag 25,000 75,000
2 Other business income 4,00,000 3,90,000
No Qualifying expenditure Amount (Rs.)

1 Expense for the purpose of exploring and locating mineral incurred 7,20,000
up to 31.03.2015
2 Expenses for the purpose of exploring and locating mineral from 9,36,000
April 1, 2015 to March 31, 2020 (out of which Rs. 6,000 is met by the
State Govt.)
3 Acquisition of site on June 30, 2015 4,00,000
4 Purchase of plant, machinery and building on July 31, 2016 6,00,000
Solution :
Computation of qualifying expenditure
1 Rs. 7,20,000 incurred prior to April 1, 2015 is not part of qualifying Nil
expenditure (Expenditure incurred during 2019 – 20 and earlier 4 years
will be considered)
2 Out of Rs. 9,36,000, Rs. 6,000 is met by the Govt; only Rs. 9,30,000 shall 9,30,000
be included
3 Expenditure on acquisition of site is not qualifying amount Nil
4 Building, Plant & Machinery are qualified for depreciation; deduction Nil
u / s 35E is not available
5 Qualifying expenditure 9,30,000
6 Amount deductible during 10 years; AYs 2020 – 21 to 2029 – 30 93,000
Assessment Year 2020 – 21

1 Income from mining – old and new 45,000
2 Less: Deduction u / s 35E - i.e., Rs. 45,000 or Rs. 93,000 WIL 45,000
3 Mining income Nil
4 Other income 4,00,000
5 Net income 4,00,000
Note :
The amount of unabsorbed deduction u / s 35E of Rs. 48,000 (i.e., Rs. 93,000 – Rs. 45,000) will
become the part of deduction for the next year.

1 Mining income – old and new 4,75,000
2 Less: Deduction u / s 35E - i.e., Rs. 93,000 + Rs. 48,000, subject to a 1,41,000
maximum of mining income
3 Balance 3,34,000
4 Other business income 3,90,000
5 Net income 7,24,000

OTHER DEDUCTIONS

INTRODUCTION TOPGBP
PGBP

S.1 – DEDUCTIONS
28 Charging Section
31 Expenditure relating to P&M
32 Depreciation
35DDA VRS
36 Other Deductions

Summary Table
28 30 33AB 35 35CCA 35D 36
29 31 33ABA 35ABB 35CCC 35DD 37
32 35ABA 35CCD 35DDA 38
32AD 35AD 35E

INDEX

16 Sec 36 – Other Deductions 5 – 14
17 Sec 37 - General Deductions 15 – 15
18 Other entity based deduction 16 - 22

CHAPTER – 16
SEC – 36 – OTHER DEDUCTIONS
Deduction
u/s 36
Applicable Applicable
Entity based
to all to
deductions
Assessee Employers
APPLICABLE TO ALL ASSESSEE
No Section Explanation
1 36(1) (i) - Premium for Amount of premium paid in respect of insurance against risk
Insurance of Stock – of damage or destruction of stocks or stores used for the
In – Trade purpose of business or profession.
2 36(1) (iii) - Interest on The amount of interest paid in respect of capital borrowed for
Borrowed Capital the purpose of business or profession.
However, any amount of interest paid, in respect of capital borrowed
for acquisition of asset (whether capitalized in the books of account or
not); for any period beginning from the date on which the capital was
borrowed for acquisition of th asset till the date on which such asset
was first put to use, shall not be allowed as deduction. (Discussed in
chapter of Depreciation).
36(1)(iii) Subject to 43 B
3 36(1) (vii) - Bad debts A bad debt shall be allowed as deduction if the following
conditions are satisfied:
i. The bad debt should be written off as irrecoverable in the
books of accounts of the assessee for the previous year in
which deduction is claimed.
ii. The debt should have been taken into account in
computing the income of the previous year in which
deduction is claimed or any earlier previous year; OR the
debt represents the money lend in the ordinary course of
business of the money lending or banking carried on by
the assessee.

Provided further that where the amount of such debt or part
thereof has been taken into account in computing the income of
the assessee of the previous year in which the amount of such
debt or part thereof becomes irrecoverable or of an earlier
previous year on the basis of income computation and
disclosure standards notified under subsection (2) of section
145 without recording the same in the accounts, then, such debt
or part thereof shall be allowed in the previous year in which
such debt or part thereof becomes irrecoverable and it shall be
deemed that such debt or part thereof has been written off as
irrecoverable in the accounts for the purpose of this clause.
(Added by the Finance Act, 2015)
Explanation:
For the purpose of this clause, any bad debt or part thereof
written off as irrecoverable in the accounts of the assessee,
shall not be include any provision for bad and doubtful
debts made in accounts of the assessee.
36(1)(vii) 41 (4)
4 36(1)(vi) - Animals In respect of animals which have been used for the purpose of
Used in Business business or otherwise than as stock - in –trade and have died or
Otherwise Than as become permanently useless for such purposes, the difference
Stock in Trade between the actual cost of animals to the assessee and the
amount, if any, realised in respect of animals or carcasses.
5 36(1) (xv) - Securities An amount equal to the STT paid by the assessee in respect of
Transaction Tax taxable securities transactions entered into in the course of his
business during the previous year, if the income arising from
such taxable securities transactions is included in the income
computed under the head PGBP.
36(1)(xv) Subject to 43B

6 36(1) (xvi) - An amount equal to the CTT paid by the assessee in respect of
Commodity taxable commodities transactions entered into in the course of
Transaction Tax his business during the previous year, if the income arising
from such taxable commodities transactions is included in the
income computed under the head PGBP.
36(1)(xvi) Subject to 43B

SUMMARY :-
Animals
Interest on used in
Stock Bad debts -
Borrowed Business STT - CTT -
Insurance - 36(1)(vii)
Capital - otherwise 36(1)(xv) 36(1)(xvi)
36(1) (i)
36(1) (iii) than SIT -
36(1) (vi)
Questions forUnderstanding: -
1) M / s X Ltd, purchased a machinery on 01.04.2020 for 10 cr. By availing 80% loan facility
from bank. This machinery was put to use on 01.01.2021 into effective production. The
interest on loan works out to 10% p.a. Advise X Ltd on the treatment of interest payments
made on this loan.
Solution:
Details AY
No Particulars
2021– 22
1 Actual date of purchase of asset 01.04.2020
2 Actual date of put to use of asset 01.01.2021
3 No. of months for which the asset was not put to use 9 months
4 Total interest for the year – Rs. 10 crores x 80% x 10% p.a. Rs. 80 lakhs
5 Interest to be capitalized with the asset cost – (Rs. 80 lakhs x 9 / 12) – Rs. 60 lakhs
As per proviso to sec. 36(1)(iii)
6 Interest to be claimed as deduction u / s 36(1)(iii) Rs. 20 lakhs

APPLICABLE TO EMPLOYERS
1 36(1) (ib) - Premium for The amount of any premium paid by any mode of payment
Insurance on Health of other than cash by the assessee as an employer to effect or to
employees keep in force an insurance on the health of his employees
under a scheme framed in this behalf by –
A. the General Insurance Corporation of India and approved
by the Central Government; or
B. any other insurer and approved by the Insurance
Regulatory and Development Authority
2 36(1) (ii) - Bonus or Any sum paid to an employee as bonus or commission for
Commission Paid To services rendered where such sum would have not been
Employees payable as profits to the employee
(There is no restriction on the amount of bonus and it may exceed
the bomnuspoayable under The Payment of Bonus Act 1965);
36(1)(ii) Subject to 43B
3 36(1) (iv) - Employer’s Any sum paid by the employer by way of contribution
contribution towards towards RPF or an approved superannuation fund subjects to
RPF or an Approved the limits prescribed in the recognition of provident fund or
Super annuation Fund the approval of the superannuation fund accorded by the
Chief Commissioner or Commissioner of Income – tax.
36(1)(iv) Subject to 43B

4 36(1) (iva) - Employer’s Any sum paid by the assessee as an employer by way of
Contribution towards contribution towards a pension scheme, as referred to in
Pension Scheme section 80 CCD, on account of an employee to the extent it
does not exceed 10% of the salary of the employee in the
previous year.
Explanation:
For the purpose of this clause, “salary” includes dearness allowance,
if the terms of the employment so provide, but excludes all other
allowance and perquisites.
Subject to Disallowance
36(1)(iva)
43B 40A (9)
5 36(1) (v) - Employer’s Any sum paid by the employer by way of contribution
Contribution towards towards an approved gratuity fund created by him for the
Approved Gratuity exclusive benefit of his employees under an irrevocable trust;
Fund Disallowance
36(1)(v) Subject to 43B
40 A (7)

6 36(1) (va) - Employee’s Any sum received by the assessee from any of his employees
contribution towards as contributions to any provident fund or superannuation
RPF or an Approved fund or any fund setup under the provisions of the Employees
Superannuation Fund State Insurance Act, 1948 or any other fund for the welfare of
such employees provided that such sum s credited by the
assessee to the employee’s account in the relevant fund on or
before the due date under the relevant fund.
36(1)(va) Not Subject to 43B
SUMMARY :-
Bonus or Contribution EE'S

Insurance on Contribution Contribution
Commission to Approved Contribution
Health of to RPF or to NPS u/s
to Gratuity towards RPF
Employees A.SAF - 80CCD -
Employees Fund - or A.SAF -
36(1)(ib) 36(1)(iv) 36(1)(iva)
36(1) (ii) 36(1)(v) 36(1)(va)

Questions for understanding:-
1) X Ltd. contributes 20% of basic salary to the account of each employee under a pension
scheme referred to in section 80CCD. Dearness Allowance is 40% of basic salary and it
forms part of pay of the employees. Compute the amount of deduction allowable under
section36 (1)(iva), if the basic salary of the employees aggregate to Rs.10 lakh. Would
disallowance under Section 40A (9) be attracted, and if so, to what extent?
Solution:
Computation of deduction u/s 36(1)(iva) and disallowance u/s 40A(9):
1 Basic salary 10,00,000
2 DA @ 40% of basic salary - DA forms part of pay 4,00,000
3 Salary for the purpose of section 36(1)(iva) (Basic Salary + DA) 14,00,000
4 Actual contribution (20% of basic salary i.e., 20% of Rs. 10 lakh) 2,00,000
5 Less: Permissible deduction u / s 36(1)(iva) (10% of basic salary + dearness
pay = 10% of Rs. 14,00,000 = Rs. 1,40,000) 1,40,000
6 Excess contribution disallowed u / s 40A(9) 60,000

ENTITY BASED DEDUCTIONS
No Sections Explanation
1 36(1) (ia) - Insurance Deduction is allowed in respect of the amount of premium
Premia paid by a paid by a Federal Milk Co – operative Socity to effect or to
Federal Milk Co – keep inforce an insurance on the life of the cattle owned by a
operative Socity member of a Co – operative Socity, being a primary society
engaged in supply of milk raised by its member of such
Federal Milk Co – operative Socity. The deduction is
admissible without any monetary or other limits.
2 36(1) (iiia) - Discount The pro rata amount on discount on a zero coupon bond
on zero coupon Bond having regard to the period of life of such bond calculated in
the manner as may be prescribed.
3 36(1) (ix) - Expenditure Any revenue expenditure bonafide incurred by a company for
on promotion of family the purpose of promoting family planning amongst its
planning employees.
4 36(1)(xii) - Deduction Any expenditure (not being in the nature of capital

for expenditure expenditure) incurred by a corporation or a body corporate, by
incurred by the entities whatever name called, if –
established under any
Central, State or  It is constituted or established by a central, State or
Provisional Act Provisional Act;
 Such corporation or body corporate is notified by the
central Government in the official Gazette for this purpose
having regard to the objectives and purposes of the Act;
 The expenditure is incurred for the objects and purposes
autherised by the Act under which it is constituted or
established.
Accodingly, the Central Government has notified the Oil

industry Development Board for the purpose of deduction
under section 36(1) (xii)
SUMMARY :-
Deduction on
Expenditure
Insurance Premia
Expenditure on incurred by the
Doscount on paid by a Federal
promotion of Entities
Zero Coupon Milk Co -
Family Planning - established under
Bond - 36(1) (iiia) operative Society
36(1)(ix) Central, State
- 36(1)(ia)
Provisional Act -
36(1)(xii)

1. Zero coupon bonds are issued by X Ltd. an infrastructure capital company on October 10,
2019 (issue price Rs. 85, Face Value as well as amount payable at the time of redemption
Rs. 100). Redemption date July 9 2024, Number of bonds subscribed by public: 100,000.
These bonds have been notified as ZCB by notification by the Central Govt.
Solution :
Pro rata deduction available to X Ltd.
No Particulars Computation Amount (Rs.)

Amount of discount offered by X Ltd – (Rs. 100 – Rs, 85) x 15,00,000
1
A 1,00,000
Period of life of the bond – B July 9, 2024 minus 57
2
October 10, 2019 months
3 Pro rata deduction for 1 month – C A/B 26,316
Amount deductible in previous year C x 6 Rs.
4
2019 – 20 1,57,895
Amount deductible in previous year C x 12 Rs.
5
2020 - 21 to 2023 – 24 3,15,789
Amount deductible in previous year C x 3 78,947
6
2024 – 25
2. Mr. A applied for Deep Discounts Bonds, issued on 20.02.2021 for Rs 10,000. (Face Value
Rs. 25,000). Valuation of the said bonds as on 31.03.2021 is Rs. 11,000. Calculate the
taxable income of Mr. A for the financial year 2020-21 in respect of the deep discount
bonds.
Solution :
Taxable income in the hands of Mr. A for the financial year 2020-21 is Rs. 1000 by way of
interest on bonds.
3.
No Particulars Date Amount (Rs.)
1 Bonds issued 20.02.2020 10,000 [FV 25,000]
2 Value 31.03.2020 11,000
3 Bonds sold 03.03.2021 11,500
Solution :
No Nature of income AY Amount (Rs.)

1 Interest income 2020 – 21 1,000

Capital Gains for Assessment Year 2021 – 22

1 Sale Price 11,500
2 COA 11,000
3 STCG 500
4. Mr. X was allotted Deep Discount Bonds for Rs. 2,50,000 on 31.01.2019. Value of bonds as
on 31.03.2019 is Rs. 2,70,000 and on 31.03.2020 is Rs. 2,90,000. Mr. X sold the bonds on
08.01.2021 for Rs. 3,00,000.
Solution :
Income from other sources for Assessment Year 2019 – 20
Amount
Nature of income Computation
(Rs.)
Interest income Rs. 2,70,000 – Rs. 2,50,000 20,000
Amount
Nature of income Computation
(Rs.)
Interest income Rs. 2,90,000 – Rs. 2,70,000 20,000
Capital Gains for Assessment Year 2021-22
Amount
No Particulars
(Rs.)
1 Sale Price 3,00,000
2 COA 2,90,000
3 STCG 10,000

SEC 43B – DEDUCTION ON ACTUAL PAYMENT BASIS: -
Notwithstanding anything contained in any other provisions of the Income Tax Act, a
deduction otherwise allowable under the Act in respect of -
No Explanation
(a) Any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called,
under any law for the time being in force, or
(b) Any sum payable by the assessee as an employer by way of contribution to any provident
fund or superannuation fund or gratuity fund or any other fund for the welfare of the
employees, or
(c) Any bonus or commission payable to the employees, or
(d) Any sum payable by the assessee as interest on any loan or borrowing from any public
financial institution or a state financial corporation or a state financial industrial investment
corporation, in accordance with the terms and conditions of the agreement governing such
loan or borrowing, or
(da) Any sum payable by the assessee as interest on any loan or borrowing from a deposit
taking non – banking financial company or systematically important non – deposit taking
non – banking financial company, in accordance with the terms and conditions of the
agreement governing such loan or borrowing, or
(Inserted by Finance Act. 2019 w.e.f. AY 2020 – 21)
(e) Any sum payable by the assessee as interest on any loan or advance from a scheduled bank
in accordance with the terms and conditions of the agreement governing such loan or
advance, (“Scheduled bank” includes a co – operative bank other than a primary
agricultural credit society or a primary co – operative agricultural or rural development
bank)
(f) Any sum payable by the assessee as an employer in lieu of any leave to the credit of his
employee. (i.e. provision for leave encashment)
(g) Any sum payable by the assessee to the Indian Railways for the use of Railway Assets.
(Added by Finance Act, 2016)
Shall be allowed as deduction only in the previous year in which sum is actually paid to
him. This is irrespective of the previous year in which the liability to pay such sum was
incurred by the assessee according to the method of accounting employed by him.
SUMMARY: -
Tax, duty, cess or any fee payable
BEFORE DUE DATE OF FILING
RETURN OF INCOME [Sec 43B]
Interest payable on loan or borrowing from a public financial institution

PAYMENTS NOT MADE
Interest on any loan or advances payable to a scheduled bank / NBFC
Bonus or commission payable to employees
Any sum payable by an employer by way of contribution to provident

fund or super annuation fund or other fund for the welfare of employees.
Any sum payable by an employer in lieu of leave at the credit of his
employee
Sum Payable to Indian Railways for use of railway Assets

CHAPTER – 17
SEC – 37 – GENERAL DEDUCTIONS
1 Section 37(1) Any expenditure other than specifically mentioned in the preceding
– General paragraphs (i.e. sections 30 to 36) shall be allowed as deduction provided
clause for the following conditions are satisfied:
Deductions
i. It is not in the nature of capital expenditure
ii. It is not in the nature of personal expenses of the assessee; and
iii. It is laid out wholly and exclusively for the purposes of the
business or profession of the assessee.
2 Explanation 1 “For the removal of the doubts, it is hereby declared that any
to section 37 expenditure incurred by an assessee for any purpose which is an offence
(1) – Illegal or which is is prohibited by law shall not to be deemed to have been
Payments incurred for the purpose of business or profession and no deduction or
allowance shall be made in respect of such expenditure.”
The above amendment will result in disallowance of claims made by
certain assessees in respect of payments on account of protection money,
extortion, hafta, bribes, etc as business expenditure. It is well decided
that unlawful expenditure is not allowable expenditure in computation
of income.
3 Explanation 2 For the removal of the doubts, it is hereby declared that for the purposes
to section 37 of subsection (1), any expenditure incurred by an assessee on the
(2) – CSR activities relating to CSR refered to in section 135 of the Companies Act,
Expenses 2013 shall not be deemed to be an expenditure incurred by the assessee
for the purposes of the business or profession.

CHAPTER – 18
OTHER ENTITY BASED DEDUCTIONS
1 36(1)(viia) - For Banks- For Banks, Non-scheduled Banks , Co – Operative Bank
& Specified Entities other than Primary Agricultural credit society or Primary co
– operative Agricultural and Rural development bank
- Banks – 8.5% of GTI+ 10% of Aggregate Average Rural
Advances
- Banks Incorporated outside India, Public Financial
Institutions -5% of GTI
2 36(1)(viii) - Transfer Quantum of Deduction:
to special reserve Lower of-
a. The amount transferred during the previous year to the
special reserve account created for the purpose of section
36(1)(viii) or
b. 20% of the profits derived from the business activities or
c. 200% of the paid up share capital and general reserves as
on the last day of the previous year minus the balance of
the special reserve account on the first day of the previous
year
Deemed Income u/s

36(1)(viii)
41(4A)
3 36(1)(xiv) - - Applicable only for Public Financial Institutions

Contribution to - The trust may be notified by the Central Government
Credit Guarantee
Fund Trust for Small
industries
4 36(1) (xvii) - The amount of expenditure incurred by a co – operative society
Purchase of engaged in the business of manufacture of sugar for purchase
Sugarcane of sugarcane at a price which is equal to or less than the price
fixed or approved by the Government.
5 36(1)(xviii) - Marked Marked to market loss or other expected loss as computed in
to market loss or accordance with the income computation and disclosure
other expected loss standards (ICDS) notified under section 145(2).
MTM Loss / Expected Loss
As per ICDS Other
Not Allowed As per Sec

Allowed
40A(13)

Section 41(4A) – Amount Withdrawn from Special Reserve Account u/s 36(1)(viii)
If any amount is withdrawn from the aforesaid reserve account, in respect of which deduction
was allowed earlier under section 36(1)(viii), it will be chargeable to tax in the year in which it
the amount is withdrawn, under section 41(4A), regardless of the fact whether business is in
existence in that year or not.
SUMMARY :-
Contribution to
For Banks & Credit Marked to
Transfer to Purchase of Market loss or
Specified Guarentee Fund
Special Reserve Sugarcane - other expected
Entities - Trust for Small
- 36(1) (viii) 36(1)(xvii) loss - 36(1)(xviii)
36(1)(viia) Industries -
36(1)(xiv)

PROVISION FOR BAD & DOUBTFUL DEBTS
1) XYZ Bank Ltd. an Indian Bank submits the following information for computation of its
income for financial year ended 31.3.2021:
Profit as per Profit & Loss A/c - Rs. 1,000 Lakhs
The above profit has been computed after debiting the following items:
No Particulars Amount (Rs. in lakhs)

1. Actual bad debts written off 50
2. Provision for bad and doubtful debts 160
3. Expenses disallowable under section 28 to 44D 20
You are given that as on 1.4.2020, the credit balance in Provision for bad & doubtful debt
is Rs. 40 lakhs. You are also given that the Aggregate Average Advances made by the
rural branches of XYZ Bank Ltd. are Rs. 500 lakhs.
Solution :
The income of the Bank shall be computed as under:
Amount (Rs. in
No Particulars
lakhs)
1 Profit as per Profits & Loss A / c 1,000
2 Add: Expenses disallowable under section 28 to 44D 20
3 Add: Actual bad debts written off 50
4 Add: Provision for bad and doubtful debts 160
5 GTI 1,230
6 Less: Deduction under section 36(1)(viia)
i. 8.5% of GTI (i.e., 8.5% of Rs. 1,230 lakhs) 104.55
ii. 10% of aggregate average advances made by the rural 50
branches (i.e., 10% of Rs. 500 lakhs)
7 Deduction u / s 36(1)(via) 154.55
8 Total Income 1,075.45
2) The bank has an opening balance as on 1.4.2020 of Rs. 40 lakhs in the provision for bad &
doubtful debts. The Provision for bad & doubtful debts allowable under section
36(1)(viia) for the year ended 31.3.2021 is Rs. 200 lakhs. The Bank has actually incurred
bad debts of Rs. 70 lakhs during the year ended 31.3.2021.
Solution :
Provision for Bad & Doubtful Debts A/c
Amount (Rs. Amount (Rs.
No Particulars Particulars
in lakhs) in Lakhs)
1 To Actual Bad debts 70 By Balance b / d 40
2 To Balance c / d 170 By Profit & Loss A 200
/c
3 Total 240 Total 240

The bank will be allowed deduction for provision of bad & doubtful debts of Rs. 200 Lakhs.
Deduction for bad debts shall not be allowed.
1) Suppose in Illustration 3 above, the bad debts amount to Rs. 270 lakhs.
Solution :
Provision for Bad & Doubtful Debts A/c
Amount
Amount (Rs.
No Particulars (Rs. in Particulars
in Lakhs)
lakhs)
1 To Actual Bad debts 240 By Balance b/d 40
2 To Balance c/d NIL By Profit & Loss 200
A/c
3 Total 240 Total 240
The bank shall be allowed deduction as under:
i. 200 lakhs under section 36(1) (viia) for provision for bad & doubtful debts
ii. Actual bad debts of Rs. 30 lakhs under section 36(1)(vii).
1) The following are the particulars in respect of a scheduled bank incorporated in India –
No Particulars Rs (in lakhs)
Provision for bad and doubtful debts under Section 36(1)(viia) up to

1 100
A.Y. 2020 – 21
2 Gross Total income of AY 2021 - 22 before deduction u / s 36 (1) (viia) 800
3 Aggregate average advances made by rural branches of the bank 300
Bad debts written off (for the first time) in the books of account (in
4 210
respect of urban advances only) during the previous year 2020 – 21
Compute the deduction allowable under section 36(1)(vii) for the A.Y.2021 - 22.
Solution:
Computation of deduction allowable u / s 36(1) (vii) for the AY 2021 - 22
No Particulars Rs. in lakhs

1 Bad debts written off (for the first time) in the books of account 210
2 Less: Credit balance in the “Provision for bad and doubtful debts” u/ s
36(1)(viia) as on 31.03.2021
i. Provision for bad & doubtful debts u/ s 36(1)(viia) upto AY 100
2020 – 21
ii. Current year provision for bad and doubtful debts u / s
36(1)(viia) 8.5% of Rs. 800 lakhs + 10% of Rs. 300 lakhs 98 198
3 Deduction u/s 36(1)(vii) in respect of bad debts written off for 12
AY 2021 – 22

2) The profit and loss account of NS Bank Ltd. Operating in India for the FY 2020 - 21
contains inter alia, the following particulars:
Rs. (in
No Particulars
crores)
1 Profit before taxation 100
2 Depreciation as per books 25
3 Depreciation admissible as per IT Rules 40
4 Corporation tax disputed by the bank and not paid 10
5 Bad Debts written off 45
6 Provision for non - performing assets as per prudential norms of RBI 250
7 Provisions for Standard Assets at 2% of such advance as per the above
5
norms
8 Net Depreciation on investments under “held for trading” and “available
for sale” categories calculated on lower of cost price or market price basis 30
as per guidelines of RBI
Other information:
a) In AY 2019 - 20 provision for doubtful debts allowed in assessment amounted to Rs.
35 Crores only.
b) The Assessment for AY 2020 - 21 resulted in a loss and unabsorbed depreciation
amounting to Rs. 30 crores and Rs. 40 Crores respectively and the bank was not
allowed deduction on account of provision for doubtful debts.
c) Unrealized interest income not recognised in the accounts in FY 2020 - 21 in respect
of non - performing assets as per asset classification norms of RBI amount to Rs. 65
Crores.
d) The aggregate average rural advances calculated as per Section 36 (1)(viia) read with
Rule 6ABA amounts to Rs. 30 Crores.
From the above information compute total income of the bank for the AY 2021 - 22.
Solution:
Computation of income for North South Bank Ltd for AY 2021 - 22
No Particulars Amount(Rs.)
1 Profit before taxation 100.00
2 Add: Inadmissible expenses
3 Depreciation as per books 25.00
4 Corporation tax – debited in P&L A/c and not paid (Disallowed u/s 10.00
43B)
5 Provision for standard assets 5.00
6 Provision for non- Performing assets 250.00
7 Depreciation on Investment Nil
8 Bad debts written off (Refer note 1) 45.00 335.00
9 Sub – Total 435.00

10 Less: Admissible Depreciation as per IT Rules 40.00
11 Sub – Total 395.00
12 Provision for bad & doubtful debts u/s. 36(1)(viia)
13 8.5% of the gross total income (i.e., (Rs. 395 – 70) x 8.5%) (Refer note 27.63
2)
14 10% of the aggregate average advances of the rural branches 3.00 30.63
15 Sub – Total 364.37
16 Less: Brought forward losses
17 Unabsorbed business loss 30.00
18 Unabsorbed depreciation 40.00 70.00
19 Total Income 294.37
Notes:
No Explanation
1 As per the section 36(1)(vii) in case of banks, deduction under this clause shall be
allowed only when the bad debts exceeds the provision for bad debts. Since the
provision for bad and doubtful debts of the earlier year as well as for the current year
is Rs. 65.63 (35 + 30.63) crores, which exceeds Rs. 45 crores of bad debts incurred
during the year, therefore bad debts will not be allowed as deduction in the current
year.
2 According to section 36(1)(viia), the bank can claim,
a) 8.5% of the total income before claiming deduction under this clause and Chapter
VIA; and
b) 10% of the aggregate average advances made by the rural branches.
3 Gross total income for this purpose means total income before making deductions
under this clause and Chapter VIA. But effect of set off of brought forward losses and
unabsorbed depreciation can be made.
4 As per the RBI guidelines, interest on NPAs shall be included in the taxable income of
the previous year in which such amount is realized or credited to P & L A / c
whichever is earlier u / s 43D. Hence, unrealized investment income is not included in
the total income of AY 2021 - 22.

TRANSFER TO SPECIAL RESERVE
1) X Ltd. is a financial corporation for the purpose of Section 36(1)(viii). Income of the
taxpayer for the previous year 2020 - 21 from different sources is as follows –
Rs. (in
No Particulars
Lakhs)
1 From providing long - term finance for industrial / agriculture or
Development of infrastructure facility (before deduction under 1,120
Section 36)
2 Business income from other activities 105
Compute the amount of deduction under section 36(1)(viii) for the assessment year 2021 -
22 taking into consideration the following data –
Amount (Rs.
No Particulars
in lakhs)
1 Paid up capital and general reserve on March 31, 2021 610
2 Balance standing to the credit of special reserve account as on April 1050
1, 2020(and the same was allowed as deduction in the earlier years).
3 Amount transferred to special reserve account during 2020 - 21 220
Solution:
The amount of deduction under section 36(1)(viii) is the least of the following –
No Particulars
1 Rs. 220 lakhs (being the amount transferred to the special reserve account during 2020 -
21);
2 Rs. 224 Lakhs (being 20% of the Rs. 1120 Lakhs); or
3 Rs. 170 Lakhs (being 200% of Rs. 610 Lakhs – Rs. 1050 Lakhs).
Rs. 170 Lakh (being the least) is deductible.

DISALLOWANCES

PGBP

S.2 - DIS - ALLOWANCE
Disallowance
Sec 37(2B) 40 ASeries Sec. 43B
40 small a Series 40 Big A Series
40 SMALL a SERIES
Sec 40 small a Series
Payment to Non - Payment to Resident Taxes & Fees

Resident
40 BIG A SERIES
Sec 40 BIG
A Series
S.40 A (2) S.40 A (3) S.40 A(4) S. 40 A (7) S. 40A(9) S. 40A(13)

SECTION REFERENCE
Section 37(2B)

37(2B) Payment made to Political Parties
Section 40 small a Series

40 (a)(i) Payment to NR
40 (a)(ia) Payment to Resident
40 (a)(ib) Payment to NR for Specified Services
40 (a)(ii) Payment on account of tax levied on Profits
40 (a)(iib) Amount paid by way of royalty, license fee, service fee etc.
40 (a)(iii) Salaries payable outside India
40 (a)(iv) Any contribution to PF
40 (a)(v) Tax paid on perquisites on behalf of employees is not deductable
Section 40 Big A Series

40A(2) Related Party Transaction
40A(3) Cash payment exceeding Rs.10,000 or Rs.35,000 as the case may be
40A(4) Payment made by Account Payee Cheque in Violation of a Contract
40A(7) Provision for Gratuity
40A(9) Contribution to Un recognised Fund
40A(13) Marked to Market Loss
Section 43B

43B Deduction of Actual Payment basis

INDEX
Chapter No Particulars Page no.
17 PGBP – Disallowances 5 – 17
18 40 Big A Series 18 – 24
19 43B Deduction on Actual Payment Basis 25 – 29

CHAPTER - 17
PGBP - DISALLOWANCES
OVERVIEW
Disallowance
Sec 37(2B) 40 Series Sec. 43B
40 Small a Series 40 Big A Series
SECTION - 37(2B)
Section Particulars
Payment made Any expenditure on advertisement in any souvenir, broucher, tract
to political pamphlet or the like published by a political party shall not be allowed as
parties: - Sec deduction.
37(2B)
SECTION - 40 Small a SERIES
Sec 40 Small a
Series
Payment to Non -
Payment to Resident Taxes & Fees
Resident

SECTION - 40 Small a SERIES
No Section Particulars
1 40 (a)(i) Payment to NR
2 40 (a)(ia) Payment to Resident
3 40 (a)(ib) Payment to NR for Specified Services
4 40 (a)(ii) Payment on account of tax levied on Profits
5 40 (a)(iib) Amount paid by way of royalty, license fee, service fee etc.
6 40 (a)(iii) Salaries payable outside India
7 40 (a)(iv) Any contribution to PF
8 40 (a)(v) Tax paid on perquisites on behalf of employees is not deductable
SECTION - 40(a)(i) – PAYMENT TO NR

Non –  Any interest,
Compliance of  Royalty,
provisions of TDS  Fees for technical services or
where payment is  Other sum chargeable under the Act,
made to Non –  Which is payable,
Resident a. Outside India, or
b. In India to a non – resident, or to a foreign company,
 On which tax is deductible at source under Chapter XVII - B
 And such tax has not been deducted or,
 After deduction, has not been paid on or before the due date
specified in section 139(1).
Proviso  Provided that where in respect of any such sum, tax has been
deducted in any subsequent year,
 or has been deducted during the PY but paid after the due date
specified in section 139(1),
 Such sum shall be allowed as deduction in computing the income of
the PY in which such tax has been paid.
Second Proviso  Provided further that were an assessee fails to deduct the whole or
any part of the tax in accordance with the provisions of Chapter XVII
– B on any such sum but is not deemed to be an assessee in default
under the first proviso to section 201(1),
 Then, for the purposes of this sub – clause, it shall be deemed that the
assessee has deducted and paid the tax on such sum on the date of
furnishing of ROI by the payee referred to in the said proviso.
Payment to NR - Non compliance 100%

IFRS of TDS Provisions Disallowance

Question for understanding: -
Date on which Time Limit as per Date of

Actual date PY in which
No TDS should have section 200(1) for payment of
of deduction deductible
been deducted depositing TDS TDS
1 26.06.2020 26.06.2020 07.07.2020 31.03.2021 2020 – 21
2 26.07.2020 26.07.2020 07.08.2020 02.09.2020 2020 – 21
3 31.03.2021 31.03.2021 30.04.2021 30.06.2021 2020 – 21
4 31.03.2021 31.03.2021 30.04.2021 31.12.2021 2021 – 2022
5 16.05.2020 16.05.2020 07.06.2020 Not Not
deposited deductible
6 01.12.2020 Not deducted 07.01.2021 31.05.2021 Not
deductible
7 10.06.2020 20.04.2021 07.07.2020 20.07.2022 2022 – 23
SECTION 40(a)(ia) – PAYMENT TO RESIDENT
Non – compliance of  30% of any sum payable to a resident
Provision of TDS  On which tax is deductible at source under Chapter XVIIB and
where payment is made  Such tax has not been deducted or,
to a resident  After deduction, has not been paid on or before the due date
specified in section 139(1).
Proviso  Provided that where in respect of any such sum, tax has been
deducted in any subsequent year, or
 has been deducted during the PY but paid after the due date
specified in section 139(1),
 30% of such sum shall be allowed as a deduction in computing
the income of the PY in which such tax has been paid.
Second Proviso  Provided further that where an assessee fails to deduct the whole
or any part of the tax in accordance with the provisions of
Chapter XVII – B on any such sum but is not deemed to be an
assessee in default under the first proviso to section 201(1),
 Then, for the purpose of this sub – clause, it shall be deemed that
the assessee has deducted and paid the tax on such sum on the
date of furnishing of ROI by the payee referred to in the said
proviso.
Payment to Non compliance of

30% Disallowance
Resident - Any sum TDS Provisions

SECTION REFERENCE
1 Section 201(1) a. Fails to deduct TDS; or

provides that if b. After deduction, fail to pay the TDS, then ha shall be deemed to be
an assessee an assessee in default u/s 220 & 221. Consequently be is liable to
pay:
i. Penalty u/s 221 which can be up to the amount of TDS not
deducted / not paid.
ii. Interest under section 220 @ 1% p.m. from the date of the tax was
deductable/ payable till the date of passing of an order u/s 201.
AID Penalty u/s 221 Interest u/s 220
2 First proviso to If the deductor fails to deduct the whole or any part of the tax in
Section 201(1) accordance with the part of Chapter TDS.
- Relaxation to  On the sum paid to a resident or non - resident,
 On the sum credited to the account of the resident or non –
treating
resident,
assesse in
 Then such deductorshall not be deemed to be an assessee in
default default in respect of such TDS if:
 The resident payee or non – resident payee has furnished his
return of income u/s 139.
 The resident payee or non – resident payee has taken into
account such sum for computing income in such return of
income; and
 The resident payee or non – resident payee has paid the tax due
on income declared by him in such return of income.
The deductor has to furnish a certificate to this effect from CA of the
payee in the prescribed form
3 Interest  The amendment also provides that deductor shall have to pay
interest under section 201(1A) @ 1% per month or part of the month
from the date the tax was so deductible to the date of furnishing of
return of income by the payee.
 The interest shall be levied on the amount of TDS not deducted /
Short deducted by the deductor

Question for understanding: -
Illustration 1
A company A Ltd. whose due date of filing of return is 31st October pays the following sums
without deduction of TDS:
No Particulars
i Rs. 4,00,000 to Mr. X, a resident, as rent (Due date of filing of return for Mr. X is 31st July)
ii Rs. 5, 00,000 to Y Ltd., a resident company, as professional fees (Due date of filing of
return for Y Ltd. is 30th Nov.)
iii Rs. 10, 00,000 to Z Inc., a non – resident company, as royalty (due date of filing a return
by Z Inc., is 31st Oct.)
The above sums were paid on 1st July, 2020 without deduction of TDS.
For PY 31.03.2021, X, Y Ltd., and Z Inc., have included the above sums in their respective return
of income and have paid tax thereon. Returns have been filed by X, Y Ltd and Z Inc. on 31st Aug
2021, 30th Nov 2021 and 31st Oct 2021 respectively.
Company A Ltd has taken certificate from Chartered Accountant to the above effect. Now
following are the consequences:
No Consequences
i  Company A Ltd. shall not be treated as an assessee in default for payment of Rs.
4,00,000 made to Mr. X without deducting TDS.
 Company A Ltd. shall pay interest at 1% p.m. from 1st July, 2020 to 31st August, 2021
on TDS of Rs. 30,000.
 The expenditure of Rs. 4,00,000 shall be allowed to company A Ltd., in PY 31.03.2021
as per provision of section 40(a)(ia)
ii  Company A Ltd shall not be treated as an assessee in default for payment of Rs.
5,00,000 to Y Ltd without deducting TDS.
 Company A Ltd shall pay interest @ 1% p.m. from 1stJuly 2020 to 30th Nov 2021 on
TDS of Rs. 37,500.
 30% of expenditure of Rs. 5,00,000 shall be allowed to Company A Ltd. in previous
year 31.03.2022 as per provisions of section 40(a) (ia)
 30% of the said expenditure shall be disallowed in previous 31.03.2021 since
deduction and payment of TDS is deemed to be made on 30.11.2021 i.e. after the due
date 31.10.2021 of Company A Ltd.
iii  Company A Ltd shall not be treated as an assessee in default for payment of Rs.
10,00,000 to Z Inc without deducting TDS.
 Company A Ltd shall pay interest @ 1% p.m. from 1st July 2020 to 31st Oct 2021 on
TDS of Rs. 1,00,000. The expenditure of Rs. 10,00,000 shall be allowed to company A
Ltd. in previous years 31.03.2021 as per provision of section 40(a)(i).

Illustration 2:
Date on which TDS Time limit as Date of Previous year

Actual Date
should have been per section Payment of which expense is
of Deduction
deducted 200(1) TDS deductible
26.06.2020 26.06.2020 07.07.2020 17.07.2020 2020 – 21
26.07.2020 31.03.2021 07.08.2020 02.04.2021 2020 – 21
31.03.2021 31.03.2021 30.04.2021 31.07.2021 2020 – 21
01.03.2021 01.03.2021 30.04.2021 30.06.2021 2020 – 21
16.05.2020 16.05.2020 07.06.2020 Not Not deductible
deposited
10.6.2020 20.04.2021 07.07.2020 20.07.2023 2023 – 24
Due date of filing of return u / s 139(1) for the PY 31.03.2021 is 31.10.2021
SECTION 40(a)(ib) – Payment to NR for Speciied Services
Non – Any consideration paid or payable to a non – resident for a specified
compliance service on which Equalisation Levy is deductible under the provisions of
with the Chapter VIII of the FA 2016, and such levy has not been deducted or after
Provisions of deduction, has not been paid on or before the due date specified in section
Equalisation 139(1).
Levy
Proviso  Provided that where in respect of any such consideration, the
Equalisation Levy has been deducted in any subsequent year or has been
deducted during the previous year
 but paid after the due date specified in section 139(1), such sum shall be
allowed as a deduction in computing the income of the PY in which such
levy has been paid.
Note Payment to non – resident e – commerce operator for e – commerce
activities is not covered by section 40(a)(ib).
Non - Compliance
S. 40(a) (ib) of Equalisation 100% Disallowance
levy

SECTION 40(a)(ii) – Payment on account of tax levied on Profits
Income Tax Any sum paid on account of any rate or tax levied on assessee at a
proportion of or on the basis of PGBP.
Under section 40(a)(ii), the income tax paid under the Indian Income Tax
Act, 1961 is not allowed as deduction.
Explanation 1 It seeks to clarify retrospectively that even the following taxes shall not be
allowed as deduction:
i. Tax paid in foreign country for which relief or credit is available
under DTAA under section 90.
ii. Tax paid in foreign country with which India does not have a DTAA
but which is allowed as deduction from Indian Income Tax Payable
under section 91.
Explanation 2 It seeks to provide that tax paid in a foreign country for which relief or
credit is available under an agreement entered u / s 90A by any specified
association in India with any specified association outside India shall also be
not allowed as deduction.
Tax paid in foreign

country for which relief
S. 40(a) (ii) Income tax
or rebate claimed u/s
90/90A/91
SECTION 40(a)(iib) – Amount paid by way of Royalty, License fee, Service fee etc.
Fee or Any amount –
charges paid A. Paid by way of royalty, licence fee, service fee, privilege fee, service
by State charge or any other fee or charge, by whatever name called, which is levied
Govt. exclusively on; or
Undertaking B. Which is appointed, directly or indirectly, from, a State Govt.
undertaking by the State Govt.
Royalty, License fee,

BY Central Govt
S. 40(a) (iib) Service fee,
Undertaking
Privillage fee

SECTION 40(a)(iii) – Salaries payable Outside India
TDS on Salary Any payment which is chargeable under the head ‚Salaries‛ if it is payable
Payable A. Outside India or
outside India B. To a non – resident
or to a non – and if tax at source has not been paid thereon nor deducted therefrom as
resident per the provisions of the IT Act.
Salaries
payable TDS not 100%
S. 40(a) (iii) outside India paid Disallowance
or to a NR
SECTION 40(a) (iv) – Any Contribution to PF
Employer’s Any payment to a PF or other fund established for the benefit of employees of
contribution the assessee, unless the assessee has made effective arrangements to secure
towards PF that the tax shall be deducted at source from any payments made from the
or any other fund which are chargeable to tax under the head ‚Salaries‛.
fund
Employer's TDS Deduction

100%
S. 40(a) (iv) Contribution facility not
arranged Disallowance
to PF
SECTION 40(a)(v) – Tax paid on perquisites on behalf of employees is not deductable
Payment of Any tax actually paid by an employer referred to in section 10(10CC).
tax on behalf
of employee
Tax on Non monetry

S. 40(a) (v) 100% Disallowance
Perquisites

TDS CHART
Type of New rate w.e.f.
Threshold Rate of TDS to be
Section Payment / 14.05.2020 to
Limit Deducted
Income 31.03.2021
BEL as
192 Salary Average rate of Tax Average Rate of Tax
applicable
Premature More than or
192A withdrawal equal to 10% 10%
from RPF 50,000
Interest on
193 5,000 10% 7.5%
Securities
Dividend more
194 5,000 10% 7.5%
than
Interest other
than Interest
on Securities
5000
In case of
194A 10% 7.5%
Banking
40,000
Companies or
Co – Operative
Societies
Winning from
Lottery or
Cross Word
194B 30% 30%
Puzzle or Card 10,000
Games of any
sort
Winning from
194BB 10,000 30% 30%
Horse race
Single
payment
Payment to In Case of
exceeds
Contractor or Individual or HUF
194C Rs.30,000 or 0.75% / 1.5%
Sub – – 1%
Aggregate
Contractor Other Payees – 2%
payments
Rs.1,00,000
194H Commission 15,000 5% 3.75%
Rent for Plant &

Machinery – 2%
Rs. 2,40,000
194 – I Rent Rent for Land, 1.5% & 7.5%
P.A
Building or Both –
10%

Fees for
Professional or
10%
Technical
If payment made
194J Services, 30,000 7.5% / 1.5%
to call center, then
royalty, non-
TDS rate is 2%
compete fees
Etc. -
Any Interest
(Other than
As Specified by
194LB, 194LC, As Specified by
Finance Act or
194 LD) or any Finance Act or under
195 ----- under an
sum an Agreement u/s 90
Agreement u/s 90
Chargeable as or Sec.90A
or Sec.90A
Income other
than Salaries
QUESTION FOR PRACTICE

1) M/s. M Pvt. Ltd., furnishes the details of the following expenditure incurred during the year
2020-21:
Nature of
No Amount Details of tax deduction
payment
a. Contract 2,40,000 Tax not deducted at source
payment
b. Salary to a 7,00,000 Tax not deducted at source
resident
c. Rent 10,00,000 Tax deducted at source on 31.12.2020. Actual
remittance made on 28.09.2021.
d. Interest 2,00,000 Tax deducted only on 01.04.2021 and remitted on
07.04.2021.
e. Professional 5,00,000 Liability towards this expense was accounted in the
charges books on 31.03.2021 and TDS was remitted on
18.11.2021.
f. Non-compete 10,00,000 Tax not deducted at sources
fee
Advise the company on the allowability of the above expenses for the AY 2020 - 21.
Solution
According to section 40(a)(ia) where tax has not been deducted or the amount of tax deducted
has not ben remitted to the credit of Central govt as per provision of tax deduction at source,
then, 30% of such expenditure shall be disallowed while computing the income under the head
‚PGBP‛. Accordingly, in respect of various situations given in question, following shall be the
consequences under section 40(a)(ia).

No Nature of Compliance /
Tax consequences
Payment Violation
(a) Contract Tax not deducted at Rs 72,000 shall be disallowed(Rs 2,40,000 X 30%)
payment source
(b) Salary to a Tax not deducted at Rs 2,10,000 shall be disallowed (Rs 7,00,000 X
resident source 30%)
(c) Rent TDS remitted within Assessee has remitted the amount of TDS on
stipulated time limit 28.09.2021 within the time limit for filing the
return of income i.e. 31.10.2021. Accordingly, no
disallowance of expenditure under section
40(a)(ia)
(d) Interest Tax not deducted at Rs 60,000 shall be disallowed in the Assessment
source during the year of2021 - 22. However, thr same shall be
financial year allowed as deduction in the A.Y 2022 – 23. (Rs
2,00,000 X 30% )
(e) professional Deley in remittance of Rs 1,50,000 shall be disallowed in A.Y 2021 – 22.
charges TDS Since the same is not remitted within the time
limit stipulated u/s 139(1). However, the same
shall be allowed as a deduction in A.Y. 2022 –
23(Rs 5,00,000 X 30%)
(f) Non- Tax not deducted at Rs 3,00,000 shall be disallowed (Rs 10,00,000 X
compete fee source 30%)
2) Delta Ltd. credited the following amounts to the account of resident payees in the month of
March, 2021 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 2020 -
21,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, 2021) 12,00,000
2 Directors ‘remuneration (credited in March, 2021 and paid in April, 2021) 28,000
Would your answer change if Delta Ltd. has deducted tax on directors ‘remuneration in
April, 2020 at the time of payment and remitted the same in July, 2020?
Solution
 Non- deduction of tax at source on any sum payable to a resident on which tax is deductable
at source as per provision of chapter XVII-B would attract disallowance under section
40(a)(ia).
 Therefore, non-deduction of tax at source on any sum paid by way of salary on which tax is
deductable under section 192 or any sum credited or paid by way of director’s remuneration
on which tax is deductible under section 194J, would attract disallowance @30% under
section 40(a)(ia).

 whereas in case of salary, tax has to be deducted under section 192 at the time of payment,
in case of director’s remuneration, tax has to be deducted at the time of credit of such sum
to the account of the payee or at the time of payment, which ever is earlier.
 Therefore, in both the case i.e., salary and director’s remuneration, tax is deductible in the
P.Y. 2020-21, since salary was paid in that year and director’s remuneration was credited in
that year, therefore, the amount to be disallowed uner section 40(a)(ia) while computing
business income for A.Y 2021-22 is as follows-
Amount paid Disallowance u/s 40(a)(ia)

No Particulars
in RS @30%
(1) Salary [ tax is deductible under section 12,00,000 3,60,0000
192]
(2) Director’s remuneration [tax is 28,000 8,400

deductible unders section 194J without
any threshold limit]
Disallowance under section 40(a)(ia) 3,68,400
If the tax is deducted on director’s remuneration in the next year i.e., P.Y 2021-22 at the time of
payment and remitted to the government, the amount of RS. 8,400 would be allowed as
deduction while computing the business income of A.Y 2022-23.
In case assessee fails to to deduct the whole or any part of tax on any such sum but is not
deemed as assessee in default under the first proviso to section 201(1) by reason that such
payee,
No Particulars
(i) Has furnished his return of income under section 139
(ii) Has taken into account such sum for computing income such return of income; and
(iii) Has paid the tax due to on the income declared by him in such return of income, and the
payer furnishes a certificate to this effect from an accountant in such form as may be
prescribed,
It would be deemed that the assesee has deducted and paid the tax on such sum.
The date of deduction and payment of taxes by the payer shall be deemed to be the date
on which return of income has been furnished by the payee.
Since the date furnishing the return of income by the payee is taken to be the date on which the
payer has deducted tax at source and paid the same, 30% of such expenditure\payment in
respect of which the payer has failed to deduct tax at source shall be disallowed under section
40(a)(ia) in the year in which the said expenditure is incurred. However, 30% of such
expenditure will be allowed as deduction in the subsequent year in which the return of income
is furnished by the payee, since tax is deemed to have been deducted and paid by the payer in
that year.

TDS DISALLOWANCE IN CASE OF INDIVIDUAL/HUF

1) During the financial year 2020-21, the following payments/expenditure were made/
incurred by Mr.Yuvan Raja, a resident individual (whose turnover during the year ended
31.3.2020 was Rs. 99 Lacs) :
No Particulars
a) Interest of Rs. 45,000 was paid to Rehman&Co, a resident partnership firm, without
deduction of tax at source;
b) Rs. 3,00,000 was paid as salary to a resident individual without deduction of tax at
source;
c) Commission of Rs. 16,000 was paid to Mr. Vidyasagaron 2.7.2020 without deduction
of tax at source.
Briefly discuss whether any disallowance arises under the provisions of section40(a)(ia) of
the Income-tax Act,1961 assuming that the payees in all the cases mentioned above, have
not paid the tax, if any, which was required to be deducted by Mr. Raja?
Solution – Sec. 40(a)(ia)
Disallowance under section 40(a)(ia) of the Income Tax Act, 1961 is attracted where the
assessee fails to deduct tax at source as is required under the Act, or having deducted tax at
source, fails to remit the same to the credit of the Central Govt. within the stipulated time
limit.
No Answer
i. The obligation to deduct tax at source from interest paid to a resident arises under
section 194A in the case of an individual, whose total turnover in the immediately
preceding previous year, i.e., PY 2019-20 exceeds Rs. 100 lakhs. Thus, in present case,
since the turnover of the assessee is less than Rs. 100 lakhs, he is not liable to deduct tax
at source. However, disallowance u/s 40(a)(ia) is not attracted in this case.
ii. The disallowance of 30% of the sums payable u/s 40(a)(ia) would be attracted in respect
of all sums on which tax is deductible under Chapter XVII – B. Section 192, which
requires deduction of tax at source from salary paid, is covered under Chapter XVII – B.
The obligation to deduct tax at source under section 192 arises, in the hands of all
assessee- employer even if the turnover amount does not exceed Rs. 100 lacs in the
immediately preceding previous year.Therefore, in the present case, the disallowance
u/s 40(a)(ia) is attracted for failure to deduct tax at source u/s 192 from salary payment.
However, only 30% of the amount of salary paid without deduction of tax at source
would be disallowed i.e. Rs 90,000 (3,00,000 X 30%)
iii. The obligation to deduct tax at source u/s 194H from commission paid in excess of Rs.
15,000 to a resident arises in the case of an individual, whose total turnover in the
immediately preceding previous year, i.e., PY 2019-20 exceeds Rs. 100 lakhs. Thus, in
present case, since the turnover of the assessee is less than Rs. 100 lakhs, he is not liable
to deduct tax at source. Mr. Raja is not required to deduct tax at source u/s 194M also
since the aggregate of such commission to Mr. Vidyasagar does not exceed Rs. 50 lakh
during the PY 2020-21. Therefore, disallowance u/s 40(a)(ia) is not attracted in this case.

CHAPTER - 18
40 BIG A SERIES
No Section Particulars
1 40A(2) RPT
2 40A(3) Cash payments exceeding rs.10,000/ 35,000 as the case may be
3 40A(4) Payment made by Account Payee Cheque in Violation of a Contract
4 40A(7) Provision for gratuity
5 40A(9) Contribution to un rf
6 40A(13) Marked to market loss/ other expected loss
40A (2) – PAYMENT TO RELATIVES & ASSOCIATES
Section Explanaion
40A(2) Provides that where the assessee incurs any expenditure in respect of which
apayment has been or is to be made to a specified person so much of the
expenditure as is considered to be excessive or unreasonable shall be disallowed
bytheAssessing Officer, While doing so he shall have due regard to:
a) The fair market value of the goods, service of facilities for which the payment is
made, or
b) The legitimate needs of the business or profession carried on by the assessee or
The benefit derived by or accruing to the assessee from such a payment.
Excessive / Unreasonable
40A (2) Incurrs any expenditure
will be disallowed
SPECIFIED PERSONS
No Assessee Specified Person
1. Individual Relatives
2. Company Director / Relative
Firm Partners/ Relative
AOP BOI Members/ Relative
HUF Members/ Relative
3. Individual Co/ Firm/ AOP/ BOI/ HUF
i.e., any person in whose business such individual or his relative has
substantial interest.
4. Company, Any person in whose business substantial interest is held by:
Firm, a) Assessee Company, Firm, AOP/ BOI or HUF or
AOP/ BOI, b) Any director, partner, member or their relative
HUF c) Any other company carrying on business or profession in which the

first mentioned company has substantial interest.
5. Company, An individual who has substantial interest in the business of the assessee
Firm, AOP/ or his relatives.
BOI,HUF
6. Company, a) Any Co., Firm, AOP / BOI, HUF, which has substantial interest in
Firm, AOP/ the business of the assessee
BOI, HUF b) Its director, Partner, Member or
c) Their relatives
7. Company, a) Any Co., firm, AOP / BOI, HUF whose director, partner, member
Firm, AOP/ has substantial interest in the business of the assessee; or
BOI, HUF b) Any other director / partner / member; or
c) Their relatives.
Questions for Understanding :-
No Illustration Answer
1 Assessee company sells goods Section 40A(2) can be invoked where
manufactured by it to its directors expenditure has been incurred by the assessee
for Rs. 1,00,000. The market price of for which payment has been or is required to be
such goods is Rs. 1,75,000. Assessing made to certain specified persons. Since in the
Officer wants to invoke section present case no expenditure has been incurred
40A(2). Advise. by the company for which payment has to be
made section 40A(2) cannot be invoked.
2 A company pays salary of Rs. 30,000 If the assessee company proves that salary and
p.m. to its director. The company commission are reasonable having regard to the
decides to pay further 1% of its net services rendered by the director, then section
profits to the director in addition to 40A(2) cannot be invoked.
the salary payment. Advise.
If however the A.O. proves that the salary and
commission paid is unreasonable having regard
to the services rendered by the director, then the
A.O. can disallow the unreasonable portion
under section 40A(2).
40A (3) – CASH PAYMENT EXCEEDS RS. 10,000 OR RS 35,000 AS THE CASE M AY BE
No Explanation
Section Where the assessee incurs any expenditure in respect of which a payment or
40A(3) aggregate of payments made to a person in a day, otherwise than by
 An account payee cheque drawn on a bank or
 Account payee bank draft or
 Use of electronic clearing system through a bank account or
 Through such electronic mode as may be prescribed,
Exceeds Rs. 10,000, no deduction shall be allowed in respect of such expenditure.
Proviso Provided that no disallowance shall be made and no payment shall be deemed to be
the profits and gains of business or profession under sub-section (3) and this sub-
section where a payment or aggregate of payments made to a person in a day,
otherwise than by
 An account payee cheque drawn on a bank or
 Account payee bank draft or
 Use of electronic clearing system through a bank account or

 Through such electronic mode as may be prescribed,
exceeds Rs. 10,000, in such cases and under such circumstances as may be prescribed,
having regard to the nature and extent of banking facilities available, considerations
of business expediency and other relevant factors.
Second Provided further that in the case of payment made for plying, hiring or leasing
Proviso goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if
for the words ‚Rs. 10,000‛, the words ‚Rs. 35,000‛ had been substituted.
Note:
In case where payment is made to the transporters for plying, hiring or leasing goods
carriages, per day limit for payment to a single person is Rs. 35,000 instead of Rs. 10,000
40A(3A) Cash payment made in excess of Rs 10,000 deemed to be the income of the
subsequent year, if expenditure has been allowed as deduction in any previous
year on due basis.
RULE 6DD – Exception to 40A (3)
Rule 6DD
Payement Payment Payment Payment

made to made for made in made by
Payment made to Payment made for Payment made in Payment made by

RBI / Banking Agricultural or Forest Village / Town on Letter of credit
company Produce which there is no
Banking Facility
SBI Produce of Animal Retirement Benefits to Telegraphic
Husbandry employees Up to Rs. Transfer
50,000
Any Co – Operative Fish or Fish Products Salary to employees Debit Card
Bank who are Temporarily
posted for a continuous
period of 15 Days or
more in a place other
than his normal place of
duty or on ship.
Any Primary Product of Payment made to Agent Credit Card
Agricultural Credit Horticulture /
Society Apiculture
LIC Products Payment made by Adjusting Entry

manufactured Authorized dealer or

without aid of power money changer against
in cottage Industry purchase or Foreign
Currency
Government
Questions For Understanding :-
No Illustrations Answers
1 A Bill is raised for expenditure of Rs 2,00,000 Rs 1,60,000 shall be disallowed under
Cash Payments are made as under: section 40A(3)
No Date Amount In this case section 269ST will be

1 1.8.2020 10,000 attracted in hands of receiver of cash
2 2.8.2020 10,000 since he receives Rs 2,00,000 or more in
3 3.8.2020 10,000 cash in respect of a single transaction.
4 4.8.2020 10,000 He shall be liable to pay penalty of Rs
5 5.8.2020 1,60,000 2,00,000 under section 269DA.
2 Bill raised for expenditure of Rs 90,000. Rs 90,000 will be disallowed under

Payments made in one day 10,000 X 9 at section 40A(3).
different points of time in a day.
3 Bill raised for 95,000 by transporter for hiring In case the transporter, the cash
of truck for carriage of goods payments made payment in delay to the person in
to him in cash as under: respect of an expenditure should not
Date Amount exceed Rs 35,000, therefore, on payment
1.8.2020 38,000 of Rs 22,000 and 35,000, section 40A(3) is
2.8.2020 22,000 not attracted. However, Rs 38,000 shall
3.802020 35,000 be disallowed under section 40A(3)
since the payments exceeds Rs. 35,000.
4 Section 40A(3) is not attracted. For the
Bill no Amount applicability of section 40A(3), the
1 9,000 expenditure as well as the payment
2 9,000 should exceed 10,000.
3 10,000
Cash of Rs 28,000 is paid on 1.1.2021.
Whether section 40A(3) is attracted
5 Assessee gave advance of Rs 3,00,000 in cash In the hands of the receiver of cash of Rs
on 20.2.2020 for supply of goods. The goods ae 3,00,000, Section 269ST shall be attracted
supplied on 30.6.2021 for Rs 3,00,000, and the on 20.2.2020 and he shall be liable to
advance is adjusted. Section 40A(3) will be penalty of Rs 3,00,000 under section
attracted and Rs 3,00,000 will be disallowed in 271DA.
Assessment Year 2022- 2023.

6 Assessment Year 2018 – 19 Now, Rs 2,50,000 will be deemed to be
the income under the head P / G / B / P
No Particulars Debit Credit of Previous year 31.3.2021. Section
1 Expense 2,50,000
269ST also attracted in hands of receiver
To Expense
2,50,000 of cash. The receiver of cash shall be
payable
(Expenses liable to pay penalty of Rs 2,50,000
allowed as under section 271 DA.
deduction in A.Y
2018 – 19)
Rs 2,50,000 paid in cash on 1.1.2021.

1) Mari Pvt. Ltd. provides the following information for the AY 2021 - 22:
No Particulars
(a) Payment in cash for a bill amounting to Rs. 1 lakhs on a single day.
(b) Payment in cash on 01.04.20Rs. 9,000 and on 01.01.21Rs. 81,000 towards one single
bill.
(c) Payment in cash on 01.10.2020, a sum of Rs. 1, 00,000 for different bills each Rs.
7,500 to a single creditor.
(d) Payment of Rs. 32,500 is made in cash to AnandhiTransport Agencies on 05.10.2020
towards lease charges for goods carriage.
(e) An amount of Rs. 35,000 stood as audit fees payable, claimed on accrual for the
A.Y. 2020 - 21 was paid through crossed cheque during the current previous year.
(f) Purchase of scrap amounting to R 60,000 on 26.12.2020 and the payment was made
by crossed chequeRs 20,000 and 25,000 by electronic clearing system through bank
and balance of rupees 15,000 by cash on same day two payment vouchers of Rs
7,500 each
Discuss the allowability of the above payments in the hands of Mari Pvt. Ltd for A.Y
2021 – 22 assuming none if the above payments are covered under Rule 6DD.
Answer
No Explanation
(a) Rs. 1 lakh shall be disallowed u/s 40A(3) as the payment was made in cash which is in
excess of Rs. 10,000/-
(b) Rs. 81,000 shall be disallowed. Since Rs. 9,000 paid on 01.04.2020 is below the
specified limit u/s 40A(3), the same shall not be disallowed.
(c ) The entire amount of Rs. 1,00,000 is disallowed as sec. 40A(3) disallows if a payment
made to a person in a day, otherwise than by way of specified mode exceeds Rs.
10,000.
(d) The amount paid of Rs. 32,500 to Anandhi Transport Agencies shall not be disallowed
as the payment made to the goods carriage does not exceed Rs. 35,000.
(e) The entire amount is deemed to be the business income in the AY 2021-22 as the
payment for which the deduction was allowed on accrual basis in AY 2020-21, was

made otherwise than by way of account payee cheque or accout payee draft.
(f) Payment made by way of ECS Rs. 25,000 shall be allowed as deduction. Whereas Rs.
35,000 made on a single day otherwise than by specified mode shall be disallowed for
the reason that Rs. 20,000 is paid by way of crossed cheque and Rs. 15,000 by way of
cash.
2) During the previous year 2020 - 21 the assessee incurred the following business expenditure
in respect of which the payment was made in cashin a single day:
No Particulars
1 Rs. 3 lakhs towards freight to Railways
2 Rs. 2 lakhs towards purchase of agriculture produce; and
3 Rs. 62,000 towards consultancy services rendered by technician.
Advice whether the above are admissible
Answer
Refer clause (b) and (e) of Rule 6DD – (i) and (ii) deductible;( iii) Rs. 62,000 is to be disallowed as
it is not covered by any of the exceptions specified under Rule 6DD.
Section 40A(4)
Payments Made by Account Payee Cheque or Bank Draft or Use o Electronic Clearing System
Through a Bank Account in violation of a Contract.
 Notwithstanding anything contained in any other law for the time being in force or in any
contract,
 Where any payment in respect of any expenditure has to be made by an account
payeecheque or account payee bank draft or use of electronic clearing system through a
bank account or through such electronic mode as may be prescribed,
 In order that such expenditure may not be disallowed as deduction under section 40A(3),
 Then the payment may be made such cheque or draft or electronic clearing system, and
where the payment is so made,
 No person shall be allowed to raise, in any suit or proceeding a plea on the ground that the
payment was not made in cash or in any other manner.
Question for Understanding:-
1 An assessee enters into a contract for purchase of goods with Mr. Y. The In view of
contract provides that the assessee will make the payments to Mr. Y only Section 40A
in cash, and if the payment is made otherwise than by cash, then it shall (4), Mr. Y
be considered as breach of contract and the assessee shall be liable to cannot sue
pay a penalty of Rs 1,00,000. The assessee makes a payment of Rs the assessee.
2,00,000 by account payee cheque so that the section 40A(3) is not
attracted. Mr. Y wants to sue the assessee and recover penalty of Rs
1,00,000. Advise

40A (7) DISALLOWANCE OF PROVISION FOR GRATUITY
Section 40A (7) (a) provides that no deduction would be allowable to any taxpayer carrying on
anybusiness or profession in respect of any provision (whether called asnames) made by him
towards the payment of gratuity to his employers on their retirement or on the termination of
their employment for any reason.
36(1)(v) - OR 40 (a) (iv) - 40A(7) - Provision 43B - deduction on

contribution to Arrangements for for gratuity Actual payment
AGF TDS deduction disallowed basis
40 A(9) CONTRIBUTIONS BY EMPLOYERS TO FUNDS, TRUST, ETC.

This sub-section has been introduces to curb the growing practice amongst employers to claim
deductions from taxable profits of the business of contributions made apparently to the welfare
of employees from which, however, no genuine benefit flows to the employee.
36(1)(iva) - OR 40 (a) (iv) - 40A(9) - 43B - deduction on

contribution to NPS Arrangements for Contribution to Un Actual payment
u/s 80 CCD TDS deduction recognised fund basis
40 A (13) MARKED TO MARKET LOSS OR OTHER EXPECTED LOSS
Section 40A (13) provides that no deduction or allowance in respect of any marked to market
loss or other expected loss shall be allowed except as allowable under Section 36(1)(xviii).
36(1)(xviii) provides that marked to market loss or other expected loss as computed in
accordance with the ICDS notified under Section 145 (2), would be allowed as deduction. ICDS I
provide that marked to market losses would not be allowed unless the same is in accordance
with any other ICDS. Therefore, only marked to market losses specifically permitted under any
other ICDS would be allowable as deduction under Section 36. Other marked to market losses
would not be allowed as deduction as per section 40A (13). This amendment is effective from A.
Y. 2017-18.
Deduction
MTML MTML not Deduction
u/s
as per ICDS as per ICDS u/s 40 A (13)
36(1)(xviii)

CHAPTER - 19
43B – DEDUCTION ON ACTUAL
PAYMENT BASIS
Notwithstanding anything contained in any other provisions of the Income Tax Act, a
deduction otherwise allowable under the Act in respect of -
No Explanation
(a) Any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name
called, under any law for the time being in force, or
(b) Any sum payable by the assessee as an employer by way of contribution to any
provident fund or superannuation fund or gratuity fund or any other fund for the
welfare of the employees, or
(c) Any bonus or commission payable to the employees, or
(d) Any sum payable by the assessee as interest on any loan or borrowing from any public
financial institution or a state financial corporation or a state financial industrial
investment corporation, in accordance with the terms and conditions of the agreement
governing such loan or borrowing, or
(da) Any sum payable by the assessee as interest on any loan or borrowing from a deposit
taking non – banking financial company or systematically important non – deposit
taking non – banking financial company, in accordance with the terms and conditions
of the agreement governing such loan or borrowing, or
(e) Any sum payable by the assessee as interest on any loan or advance from a scheduled
bank in accordance with the terms and conditions of the agreement governing such loan
or advance, (‚Scheduled bank‛ includes a co – operative bank other than a primary
agricultural credit society or a primary co – operative agricultural or rural
development bank)
(f) Any sum payable by the assessee as an employer in lieu of any leave to the credit of his
employee. (i.e. provision for leave encashment)
(g) Any sum payable by the assessee to the Indian Railways for the use of Railway
Assets.
Shall be allowed as deduction only in the previous year in which sum is actually paid
to him. This is irrespective of the previous year in which the liability to pay such sum
was incurred by the assessee according to the method of accounting employed by
him.
SUMMARY: -

Tax, duty, cess or any fee payable
FILING RETURN OF INCOME

PAYMENTS NOT MADE
BEFORE DUE DATE OF Interest payable on loan or borrowing from a public financial institution
[Sec 43B] Interest on any loan or advances payable to a scheduled bank
Bonus or commission payable to employees
Any sum payable by an employer by way of contribution to provident

fund or super annuation fund or other fund for the welfare of employees.
Any sum payable by an employer in lieu of leave at the credit of his
employee
Sum Payable to Indian Railways for use of railway Assets
Key Points:
1 - The provisions of section 43B shall not be in relation to any sum
whch is actually paid by the assessee on or before the duedate
applicable in his case for furnishing the return of income under
section 139 (1) in respect of the previous year in which liability to
pay such sum was incurred by the assessee.
2 Explanation 3C It is hereby declared that any deduction of any sum, being interest
payable under clause (d) if this section, shall be allowed if such
interest has been actually paid and any interest referred to in the
clause which has been converted into a loan or borrowing shall not
be deemed to hae been actually paid.
3 Explanation 3D It is hereby declared that a deduction of any sum, being interest
payable under clause (e) of this section, shall be allowed if such
interest has been actually paid and any interest referredto in the
clause which has been converted into a loan or advance shall not be
deemed to have been actually paid.
4 Explanation 3AA For the removal of doubts, it is hereby declared that where a
deduction in respect of any sum referred to in clause (da) is allowed
in computing the income referred to in section 28, of the previous
year (being a previous year relevant to the assessment year 2019-20
or any earlier assessment year) in which the liability to pay such sum
was incurred by the assessee, the assessee shall not be entitled to any
deduction under this section in respect of such sum in computing the
income of the previous year in which the sum is actually paid by
him.
5 Explanation 3CA For the removal of doubts, it is hereby declared that a deduction of
any sum, being interest payable under clause (da), shall be allowed if
such interest has been actually paid and any interest referred to in
that clause which has been converted into a loan or borrowing shall
not be deemed to have been actually paid.
6 Explanation 4- a) “Deposit taking non-banking financial company”means a non-
For the purposes banking financial company which is accepting or holding public
of this section deposits and is registered with the Reserve Bank of India under

the provisions of the Reserve Bank of India Act, 1934;
b) “Non-banking financial company”shall have the meaning
assigned to it in clause (f) of section 45-I of the Reserve Bank of
India Act, 1934;
c) “Systematically important non-deposit taking non-banking
financial company”means a non-banking financial company
which is not accepting or holding public deposits and having
total assets of not less than five hundred crore rupees as per the
last audited balance sheet and is registered with the Reserve
Bank of India under the provisions of the Reserve Bank of India
Act, 1934.
Exception to Section 43B
Deduction is allowed in the previous year in which sumis actually paid.
Exception :-
If such sum is actually paid on or before the duedate of filing of return under section 139(1) in
respect of the previous year in which the liability was incurred, then deduction shall be allowed
in the previous year in which liability was incurred (If the assessee is following accrual system
of accounting).
Questions for understanding :-
Illustration 1:
- GST for the month of March 2020 – Rs. 1,00,000
- Due date of filing of return is 31st October of Assessment Year.
- Rs. 1,00,000 is paid in cash on:
Case Date Particulars

I 28.10.2020 Rs. 1,00,000 is allowed in Assessment Year 2020-21
II 28.10.2021 Rs. 1,00,000 is allowed in Assessment Year 2022-23
III 28.03.2022 Rs. 1,00,000 is allowed in Assessment Year2022-23
Illustration 2:
Assessment Year 2021-22
PGBP before Section 43B = 5,00,000
Sales tax paid on 20.3.2021 as under:
1 For Assessment Year 2000-2001 2,00,000
Allowed under
Section 43B
5 P/G/B/P (-) 2,00,000

1) Ms. Apoorva, who maintains books of account on accrual system of accounting, debited the
following expenses in the P&L A/c for the previous year 2020 - 21 (Due date for filing return
of income is 31st July). An analysis of Sec. 43B is made hereunder in respect of certain
situations:
Accrued and
Date of
accounted in Description Amount Treatment u/s 43B
payment
the books on
Though the expenses pertain to PY

2019 - 20, the same was actually paid
after the due date of filing of return of
income and accordingly would have
01.03.2020 14.09.2020 GST 50,000 been disallowed u/s 43B for the AY
2021 - 22. In the year of actual payment,
being the PY 2020 - 21 relevant to AY
2021 - 22 the same shall be allowed as
deduction.
Interest on Such interest expense is disallowed u/s
loan 43B in the AY 2021 - 22 as it was not
received paid on or before the due date for filing
31.03.2021 30.09.2021 from a 2,50,000 of return of income of such assessment
Deposit year. But it can be claimed in the
taking previous year of actual payment i.e.,
NBFC AY 2022 - 23.
Employer’s Eligible for deduction for the PY 2020 -
01.03.2021 30.07.2021 contribution 1,20,000 21 as the expenditure is actually paid
to PF before the due date of filing of return of
income.
Fee for use For the PY 2020 - 21, the payment made
10.04.2021 25.03.2021 of railway 2,50,000 to railway shall be treated as advance
asset and not an expenditure since the same
is accrued only on 10.04.2021. For the
PY 2021 - 22 the same shall be allowed
as deduction.

2) Hari, an individual, carried on the business of purchase and sale of agricultural commodities like
paddy, wheat, etc. He borrowed loans from Andhra Pradesh State Financial Corporation
(APSFC) and Indian Bank and has not paid interest as detailed hereunder:
No Particulars Rs
1 Andhra Pradesh State Financial Corporation (P.Y. 2019 – 20 & 2020 - 21) 15,00,000
2 Indian Bank (P.Y. 2020 - 21) 30,00,000
3 Total 45,00,000
Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during the year 2020
-21, converted the above interest payable by Hari to them as a loan repayable in 60 equal
installments. During the year ended 31.3.2021, Hari paid 5 installments to APSFC and 3
installments to Indian Bank.
Hari claimed the entire interest of Rs.45, 00,000 as expenditure while computing the income from
business of purchase and sale of agricultural commodities. Discuss whether his claim is valid
and if not what is the amount of interest, if any, allowable.
Solution:
According to Section 43B any interest payable on the term loans to specified financial institutions
and any interest payable on any loans or advances to, interalia, scheduled banks shall be allowed
only in the year of payment of such interest irrespective of the method of accounting followed by
the assessee. Where there is default in the payment of interest by the assessee, such unpaid
interest may be converted into loan.
Such conversion of unpaid interest into loan shall not be constructed as payment of interest for
the purpose of section 43B. The amount of unaid interest so converted as loan shall be allowed as
deductions only in the year in which the conversion of loan is actually paid.
In the given case of Hari, the unpaid interest of Rs 15,00,000 due to APSFC and of Rs 30,00,000 to
Indian Bank was converted into loan. Such conversion would not amount to payment of interest
and would not, therefore, be eligible for deduction in the year of such conversion. Hence, claim
of Hari that the entire income of Rs 45,00,000 is to be allowed as deduction in the year of
convertion is not tenable.
Deduction shall be allowed only to the extent of the repayment made during the FY.
Accordingly, the amount of interest eligible for deduction in AY 2021 - 22 shall be calculated as
follows:
Interest Total Amount per Installments Interest

Bank
Outstanding Installments Installments Paid allowable
AP State
Financial
15,00,000 60 25,000 5 1,25,000
Corporation
Indian Bank 30,00,000 60 50,000 3 1,50,000
Amount of deduction for AY 2021 – 22 2,75,000

PROCEDURAL ASPECTS

PGBP

SECTION REFERENCE
Section Particulars
44AA Compulsory Maintenance of Books of Accounts
44AB Compulsory Tax Audit
271A Penalty for Failure to Keep or Maintain Books of Accounts or Documents
271B Penalty for Failure to get Accounts Audited u/s 44AB
41 Deemed Income
SUB SECTIIONS OF SECTION 41
Sec No Name
41(2) Balancing Charge
41(3) Sale of Asset used for Scientic Resaerch
41(4) Recovery of Bad Debts Written Off
41(4A) Withdrawal from Reserves Created
41(5) Profit from Discontinued Business

CHAPTER - 20
PROCEDURAL ASPECTS
MAINTENANCE OF BOOKS OF ACCOUNTS U/S 44AA
Sec 44 AA
Part A Part B
12 Notified Professionals - Other Assessee - Section

Section 44AA(1) 44AA(2)
I Persons carrying on i. Every person carrying on
specified  Legal or
profession required  Medical or
to maintain books  Engineering or
of accounts –  Architectural profession or
Section 44AA(1)  Profession of accountancy or
 Technical consultancy or
 Interior decorator or
 Authorised representative or
 Film artist or
 Profession of a company secretary or
 Profession of Information Technology
 Any other profession notified by CBDT.
ii. Books are required to be maintained only if total gross

receipts exceeds Rs. 1,50,000 in all the three years
immediately preceding the previous year.
iii. In case of a profession which has been newly setup in the

previous year, the total gross receipts are likely to exceed Rs.
1,50,000 in the year of setup.

Section – 44AA (2) – Other Assessee
Section -
44AA(2)
Incase of Other than Section - 44AE Section - Section -

Individual / Individual / 44BB / 44AD(4) 44ADA
HUF /HUF 44BBB Cases Applies Applies
II Other persons In the following cases, assessee is required to keep and maintain
carrying on business such books of account and other documents as may enable the
or profession (other Assessing Officer to compute his total income in accordance with
this Act:
than professions
i. Where the total income from business or profession exceeds
given in I above)
Rs. 1,20,000 or the total sales turnover or total gross receipts
required to maintain exceeds Rs. 10,00,000 in anyone of the three immediately
books of accounts – preceding years.
Section 44AA(2)
However, in case of Individual and HUF, Limit will be
Rs. 2,50,000 for total income from business or profession
and Rs. 25,00,000 for turnover or gross receipts.
ii. In case of newly setup business or profession, total income

likely to exceed Rs. 1,20,000 or the total sales turnover or
total gross receipts is likely to exceed Rs. 10,00,000.
However, in case of Individual and HUF, Limit will be

Rs. 2,50,000 for total income from business or profession
and Rs. 25,00,000 for turnover or gross receipts.
iii. Where the profits and gains from the business are deemed
profits u/s 44AE, 44BB or 44BBB and the assessee has
claimed his income to be lower than the profits or gains so
deemed.
iv. Where the provision of section 44AD(4) are applicable and

the income exceeds the maximum amount which do not
chargeable to Income – tax for the previous year.
v. Where he has claimed his income to be lower than the

deemed profits under section 44ADA, in the previous year
and his income exceeds the maximum amount which is not
chargeable to Income - tax for the previous year.
III Periods of The books of accounts and other documents shall be kept and
maintenance of maintained for a period of 6 years from the end of the relevant
books of accounts Assessment year.

Section 271A
Penalty For Failure To Keep or Maintain Books of Accounts or Documents Etc.
If any person fails to keep and maintain any such books of account or other documents as
required by section 44AA, in respect of any previous year, then the Assessing officer or CIT
(Appeals) may direct that such person shall pay, by way of penalty, a sum of Rs 25,000.
For non - compliance

Penalty u/s 271A Rs. 25,000
of Section - 44AA
1) Vinod is a person carrying on profession as film artist. His gross receipts from profession
are as under:
No Financial year Rs.
1 2017 – 18 1,15,000
2 2018 – 19 1,80,000
3 2019 – 20 2,10,000
What is his obligation regarding maintenance of books of accounts for A. Y. 2021 - 22 under
section 44AA of Income-tax Act, 1961?
Solution :-
Section 44AA(1) requires every person carrying on any profession, notified by the Board in
the Offcial Gazette (in additions to the professions already specified therin), to maintain
such books of accounts and other documents as may enable the Assessing Officer to
compute his total income in accordance with the provisions of Income Tax Act, 1961.
As per Rule 6F, a person carrying on a notified profession shall be required to maintain
specified books of accounts only if :
i. His gross receipts in all the three years immediately preceding the relevnt previous
year exceeded Rs. 1,50,000; or
ii. It is a new profession which is setup in the relevant previous year, it is likely to
exceed Rs. 1,50,000 in that previous year.
In the present case, Vinod is a person carrying on profession as film artist, which is a
notified profession. Since his gross receipts have not exceeded Rs. 1,50,000 in the financial
year 2017 – 18, the requirement u/s 44AA to compulsorily maintain the prescribed books of
account is not applicable to him for A.Y. 2021 – 22.
Mr. Vinod, however, required to maintain such books of accounts as would enable the
Assessing Officer to compute his total income.

AUDIT OF ACCOUNTS U/S 44AB
The following persons are required to get their accounts audited by a Practicing Charted
Accountant on or before the specified date which shall be the date one month prior to the due
date of filing of Return of Income and then furnish by that date the prescribed audit report :-
(Finance Act, 2020)
Section -
44AB
Persons
Persons Persons Persons Persons
covered u/s
carrying on carrying on coverd u/s covered u/s
44AE/44BB/44
Business Profession 44ADA 44AD (4)
BBB
(a) A Person If his total sales, turnover or gross receipts, in business exceed one
Carrying in crore rupees in the previous year.
Business Provided that in the case of a person whose –
i. Aggregate of all amounts received including amount
received for sales, turnover or gross receipts during the
previous year, in cash, does not exceed 5% of the said
amount and
ii. Aggregate of all payments made including amount incurred
for expenditure, in cash, during the previous year does not
exceed 5% of the said payment,
this clause shall have effect as if for words “one crore

rupees”, the words “five crore rupees” had been substituted.
(Finance Act, 2020)
(b) A Person If his gross receipts in profession exceeds rupees fifty lakh in the
Carrying on previous year
Profession
(c) A Person Covered Where he has claimed his income to be lower than the deemed profits
u/s 44AE, 44BB, under these sections, in the previous year.
44BBB
(d) A Person Covered Where he has claimed his income to be lower than the deemed profits
u/s 44ADA under section 44ADA, in the previous year and his income exceeds
the maximum amount which is not chargeable to Income – tax for the
previous year.
(e) A Person covered Where the provisions of section 44AD (4) are applicable and the
under section income exceeds to the maximum amount which is not chargeable to
44AD Income – tax for the previous year.

 Provided, that this section shall not apply to the person, who
declares Profits and gains for the previous year in accordance with
the provisions of section 44AD(1) and
Proviso
 His TOTAL SALES, TURNOVER OR GROSS RECEIPTS, as the
case may be, in business DOES NOT EXCEED RUPEES TWO
CRORE in such previous year.
Summary :-
If a person is carrying on business, revised threshold limits for not getting his accounts audited
are as follows,
No Senario Threshold limit (Rs.)

1 If aggregate amount of : all receipts and all payments, in
cash, during the previous year, isles than 5% of the said 5 crore
receipts and payments
2 In any other case 1 crore
SECTION 271B
Penalty for failure to get Accounts Audited under section 44AB

If any person,
i. Fails to get his accounts audited under section 44AB in respect of any previous year or
ii. Fails to furnish a report of such audit by the specified date as defined in section 44AB,
Then Assessing Officer shall direct that such person shall pay the way of penalty, a sum
equal to 1/2% of the total sales, turnover or gross receipts in the business, or of the gross
receipts in profession in such previous year or a sum of Rs. 1,50,000, whichever is less.
0.5% of total
Non - compliance of Section sales/turnover/gross receipts
Penalty u/s 271B
- 44AB or Rs. 1,50,000 whichever is
less.

% of cash
receipt/
In Other
Payment Whether
cash than in Total
Sale/ to total tax audit
Case Rs. cash Rs. in Reason
Purchase receipts / applicabl
in Rs. in crores
payments e?
crores crores
[(3) /(5) x
100]
(1) (2) (3) (4) (5) (6) (7) (8)
Case 1 Sale 0.01 0.89 0.90 1.11% Total Sales <
No
Purchases 0.10 1.60 1.70 5.88% Rs. 1 crores
Case 2 Sales 0.25 1.25 1.50 16.67% Total Sales <
Purchase Nil 1.25 1.25 0% Rs. 5 cr. but cash
Yes
receipts > 5% of
total sales
Case 3 Sales Nil 4.00 4.00 0% Total Sales <
Purchases 1.00 2.50 3.50 28.57% Rs. 5 cr. but cash
Yes payments > 5%
of total
payments.
Purchases 1.00 2.50 3.50 28.57% Rs. 5 cr. but cash
receipts/
Yes
payments > 5%
of total
sales/purchase
Purchase 0.15 4.30 4.45 3.37% Rs. 5 cr. but cash
receipts/
No payments > 5%
of total
sales/purchase
respectively
Case 6 Sales Nil 1.25 1.50 16.67% Total Sales <
/Misc. 0.25 Rs. 5 crores but
Yes
Receipt cash receipts >
Purchases Nil 1.00 1.00 0% 5% of total sales
Case 7 Sales Nil 2.00 2.00 0% Total Sales <
Purchases 0 1.00 1.50 33.33% Rs. 5 cr. but cash
other 0.50 Yes payments > 5%
payments of total
payments.
Case 8 Sales 0 10.00 10.00 0% No receipts and
Purchases 0 8.00 8.00 0% payments in
cash, but total
Yes
sales exceed
threshold limit
of Rs. 5 cr.


1) Mr. Ram is having following three businesses.
Particulars Turnover during
No
2019 – 20
1 Business I – Industrial parts 60.00 lakhs
2 Business II – Retail trade of cloth 35.00 lakhs
3 Business III –Plying of 3 lorries 8.00 lakhs
He wants to know whether he has to get his books of account audited u/s. 44AB.
Answer
Though the aggregate turnover of all the three businesses exceeds Rs. 1 crore, according to
section 44AE, for the purpose of computing monetary limit, the gross receipts from the
business reffred to in section 44AE shall be excluded. Accordingly, Rs. 8 lakh shall not forms
part of computation of limits for the purpose of Section 44AB. The aggregate turnover of other
two businesses is less than one crore (Rs. 95 lakhs in the given case), thus the books of account
of Mr. Ram is not subject to tax audit u/s 44AB.
SEC 41 – DEEMED INCOME
Sec No Name
41(2) Balancing Charge (Discussed in Depreciation in case of PSU)
41(3) Sale of Asset used for Scientic Resaerch (Dicussed in Section – 35)
41(4) Recovery of Bad Debts Written Off
41(4A) Withdrawal from Reserves Created [Discussed in Section 36(1) (viii)]
41(5) Profit from Discontinued Business
1 41(1) Where an allowance or deduction has been made in the assessment for any
year in respect of loss, expenditure or trading liability incurred by the assessee
(hereinafter reffered to as first mentioned person) and subsequently during
any previous year –
No Particulars
(a) the first mentioned person has obtained, whether in cash or in any
other manner, whatsoever, in respect of such loss or expenditure or
some benefit in respect of trading liability by way of remission or
cessation thereof the amount obtained by such person or the value of
benefit accruing to him, shall be deemed to be the income under the
head P/G/B/P and charged to tax as the income of that previous year.
This shall apply even if the business is not in existence.
(b) the successor in the business has obtained, whether in cash or in any
other manner whatsoever any amount in respect of which loss or
expenditure was incurred by the first mentioned person or some

benefit in respect the trading liability referred to in clause (a) by way
of remission or cessation thereof, the amount obtained by successor in
business or the value of benefit accruing to the successor in business
shall be deemed to the income under the head P/G/B/P of the
successor of that previous year.
2 41(4) Any amount recovered by the assessee against bad debts earlier allowed as
deduction shall be taxed as income in the year in which it is received.
3 41(5) In case an assessee is chargeable to tax in respect of any amount deemed as
profit u/s 41 relating to a discontinued business, other than a speculative
business, then, any loss incurred in the year in which the business was
discontinued shall be allowed to be setoff against such profits and only the
balance, if any, shall be taxed.

PRESUMPTIVE TAXATION

PGBP


CHAPTER - 21
PRESUMPTIVETAXATION FOR RESIDENTS
OVERVIEW
PRESUMPTIVE
TAXATION FOR
RESIDENT
Section 44AD Section 44ADA Section 44AE
PRESUMPTIVE INCOME OF ELIGIBLE BUSINESS -SEC 44AD (1)
N Particulars Explanation
o
1 Notwithstandin  In case of an Eligible assessee
g anything to the  engaged in an Eligible business
contrary  a sum equal to 8% of the total turnover or gross receipts of the
contained in assessee in the previous year on account of such business
sections 28 to  or as the case may be, a sum higher than the aforesaid sum
43C claimed to have been earned by the eligible assessee,
 shall be deemed to be the income under the head “PGBP”
Eligible Eligible 8% of
D.I under
44AD (1) TO/GR or
PGBP
Assessee Business Higher sum
2 Proviso  Provided that this sub – section shall have effect as if for the
words “8%”, the words “6%” had been substituted, in respect of
the amount of total turnover or gross receipts which is received by
 an account payee cheque or
 an account payee bank draft or
 use of electronic clearing system through a bank account or
 through such electronic modes as may be prescribed,
 During the previous year or before the due date specified in
section 139(1) in respect of that previous year.
TO/GR Instead of 8%
Either during
Specified 6% will be
received the P.Y or
presumptive
modes 139(1) TL
by Rate

3 Eligible assessee i. An individual, Hindu undivided family or a partnership firm,
who is a resident, but not a limited liability partnership firm;
and
ii. Who has not claimed deduction under any of the section 10AA
or deduction under any provisions of Chapter VI A under the
heading “C. Deductions in respect of certain incomes” in the
relevant assessment year; i.e., section 44AD shall not apply
where Deductions under section 80 - IA to 80RRB are claimed
by the assessee.
Eligible Should not claim

R.I /R.HUF /
10AA Dedn and
Assessee R.PF except LLP 80IA to 80RRB Dedns
4 Eligible i. Any business except the business of plying, hiring or leasing

business goods carriage referred to in section 44AE; and
ii. Whose total turnover or gross receipts in the previous year
does not exceed an amount of two crore rupees.
TO should not
Eligible Any business
exceed Rs. 2
Business other than 44AE
crore
5 Ineligible The provisions of this section, notwithstanding anything contained in

Business the foregoing provisions, shall not apply to –
i. A person carrying on profession as referred to in section 44AA
ii. A person earning income in the nature of commission or
brokerage or
iii. A person carrying on any agency business.
Any deduction allowable under sections 30 to 38 shall be deemed to
have been already given effect to and no further deductions under
those sections shall be allowed.
Professions
Ineligible Brokerage / Agency
covered u/s
Assessee 44AA Commission Business
Q UESTIONS FOR UNDERSTANDING:-
1 The assessee is covered by provisions of Now, income on presumptive basis shall be as
section 44AD and his turnover is under:
Rs. 1, 60, 00, 000 for the year ended
31.03.2021. The breakup of turnover is
as under,

No Particulars Amount Particulars Amount

1 Cash Sales 70,00,000 On Rs. 70,00,000 @ 8% Rs. 5,60,000
2 Sales through 90,00,000 On Rs. 82,00,000 @ 6% Rs. 4,92,000
banking channel On Rs. 8,00,000 @ 8%
(including Account (Since received after the due
Rs. 64,000
payee cheques) date of filing of return of
The due date of filing of return of Income)
income is 31stJuly 2021. Out of Rs. Income from Business Rs. 11,16,000
90,00,000, the cheques of Rs. 82,00,000
are received by 31.7.2021 and cheques of
Rs. 8,00,000 are received after 31.7.2021.
2 Mr. X, who is resident Individual, has However, where Mr. X opted for section 44AD,
paid Rs. 1,00,000 to a National he cannot claim deduction under section
Laboratory for scientific research and is 35(2AA) in respect of the sum paid to the
National Laboratory, since any deduction
eligible for deduction under section
allowable under section 30 to 38 shall be
35(2AA) of a sum equal to 100% of the
deemed to have been already given effect to
expenditure. and no further deduction under those sections
shall be allowed.
3 An eligible assessee made cash payment No disallowance under section 40A(3) can be
of Rs. 25,000 to a supplier of goods on made, since section 44AD overrides section 28
1.1.2021. He opted for section 44AD. to 43C.
Notes : -
1 WDV The written down value of any asset used for the purpose of aforesaid
business shall be deemed to have been calculated as if the assessee had
claimed and had been actually allowed the deduction in respect of
depreciation in respect of each of the relevant assessment years.
2 Advance Tax The eligible assessee is required to pay advance tax. However, he is not
required to pay advance tax in installments. He has to pay whole advance
tax in one go on or before 15th March of the financial year.
100% in One On or before 15th

Advance Tax
Installment March

OTHER PROVISIONS
1 Section –  Where an eligible assessee declares profit for any previous year in
44AD (4) accordance with the provisions of this section and he declares profit
for any of the five assessment years relevant to the previous year
succeeding such previous year not in accordance with the provisions
of sub – section (1),
 He shall not be eligible to claim the benefit of the provisions of this
section for five assessment years subsequent to the assessment year
relevant to the previous year in which the profit has not been declared
in accordance with the provisions of sub – section(1).
2 Example An assessee who has been declaring income as per section 44AD, say, for
A.Y. 2021 – 22 and if he declares income of A.Y. 2022 – 23 to A.Y. 2026 –
27 less than 8%, say for A. Y. 2022 – 23 he declares income less than 8%
then for A.Y 2023 – 24 to A.Y. 2027 – 28, he cannot opt for section 44AD.
For Assessment year 2022- 23 to Assessment Year 2027 – 28, he is
i. Is required to get tax audit done under section 44AB
ii. Is required to maintain books of accounts
If his total income exceeds the taxable limit.
But if his turnover / sales exceed Rs. 1 crore, then he is get tax audit done
and maintain books of accounts even if income does not exceed taxable
limit. This is as per requirements of section 44AA and 44AB. (Tax audit
not required if conditions of proviso to section 44AB (a) are satisfied)
3 Section -  Notwithstanding anything contained in the foregoing provisions of
44AD (5) this section, an eligible assessee to whom the provisions of sub –
section (4) are applicable and whose total income exceeds the
maximum amount which is not chargeable to income - tax,
 shall be require to keep and maintain such books of account and other
documents as required under section 44AA and get them audited and
furnish a report of such audit as required under section 44AB.

1) The following particulars relates to a resident individual, Mr. A, being an eligible assessee
carrying on retail trade businesss whose total turnover do not exceed Rs. 2 Crore in any of
the previous years relevant to A.Y. 2021 - 22 to A.Y. 2023-24.
No Particulars A.Y. 2021-22 A.Y. 2022-23 A.Y. 2023-24

1 Total turnover (Rs) 1,80,00,000 1,90,00,000 2,00,00,000
2 Amount received through prescribed 1,60,00,000 1,45,00,000 1,80,00,000
electronic modes on or before 31 st
October of the A.Y.

3 Income offered for taxation (Rs) 11,20,000 12,30,000 10,00,000
4 % of gross receipts 6% on Rs. 1.60 6% on 5% on Rs. 2
crore and 8% Rs 1.45 crore
on Rs. 20 crore and
lakhs 8% on Rs. 45
lakhs
5 Offered income as per presumptive
Yes Yes No
taxation scheme u/s 44 AD
In the above case, Mr. A, an eligible assessee, opts for presumptive taxation u/s 44AD for
the A.Y. 2021 – 22 and A.Y. 2022 – 23 and offers income of Rs. 11.20 lakh and Rs. 12.30 lakh
on gross receipts of Rs. 1.80 crore and Rs. 1.90 crore, respectively.
However, for A.Y. 2023 – 24, he offers income of only Rs. 10 lakh on turnover of Rs. 2 crore,
which amounts to 5% of his gross receipts. He needs to maintain the books of accounts u/s
44AA and get the same audited u/s 44AB as his total income exceeds basic exemption limit.
Since he has not offered income in accordance with the provisions of section 44AD(1) for 5
consequtive Assessment years, after A.Y. 2021 – 22, he will not be eligible to claim the
benefit of section 44AD for next 5 assessment years succeeding A.Y. 2023 – 24 i.e. from A.Y.
2024 – 25 to 2028 – 29.
2) Yamuna furnishes the following information for the year ended 31.03.2021:
No Particulars
(a) Sales includes a sum of Rs 10 Lakhs received by way of crossed cheque on 31st March
2021.
(b) A sum of Rs 20 Lakhs included in sales was received by way of account payee
cheque on 10.04.2021.
(c) Rs 30 Lakhs representing sales was received by ECS through bank on 10.11.2021;
(d) Rs 15 Lakhs accounted as sales on 15.07.2020 was realized on the same day by way
of cash;
(e) Rs 25 Lakhs being sales made on 31.03.2021 and the proceeds was realised in cash on
20.07.2021;
(f) A sum of Rs 18 Lakhs accounted as sales on 01.01.2021 was received by ECS on the
same day.
(g) A sum of Rs 10 Lakhs was accounted as sales and the customer demised before
making the payment and the debt becomes bad.

Assuming all the conditions of Section 44AD is satisfied, compute the income chargeable
under the head Profits and Gains of Business or Profession, specifying the applicability of
8% or 6%, as the case may be (Due date for filing of return of income by Yamuna is
31.07.2021)
Would your answer differ if Yamuna made one more sale of Rs.80 lakhs in addition to the
above by way of ECS?
Answer:
Specified Amount
Scenario Remarks
% (Rs.)
Higher % is applicable since the sale consideration was not
a) 8% 80,000
received in specified modes [Rs. 10 lakhs x 8%]
Though the amount is realized after 31.03.2021, lower % is
applicable since the proceeds are received before the due
b) 6% 1,20,000
date of filing of return u/s 139(1) in the specified mode
(Rs. 20 lakhs x 6%)
Sale proceeds though received in specified mode, it is
c) 8% 2,40,000 received beyond the due date for filing of return of income
and thus, higher % shall apply (Rs. 30 lakhs x 8%)
Sale proceeds are realized otherwise than by specified
d) 8% 1,20,000
modes and thus higher % shall apply (Rs. 15 lakhs x 8%)
As the sale proceeds are received in cash higher % shall
e) 8% 2,00,000
apply irrespective of its date of receipt (Rs. 25 lakhs x 8%)
Since the sale proceeds is received in the specified mode
f) 6% 1,08,000 and within the due date lower % shall apply (Rs. 18 lakhs x
6%)
Non-realisation of sale proceeds shall warrant application
of higher % (Rs. 10 lakhs x 8%), Yamuna is not entitled to
g) 8% 80,000 claim Rs. 10 lakhs as bad debt u/s 36(1) as the same is
deemed to have been allowed while availing presumptive
taxation u/s 44AD.
Thus, the income chargeable under the head PGBP amounts to Rs. 9,48,000
Special provisions of section 44AD shall not apply to an assessee whose gross receipts or
turnover exceeds Rs. 2 crores. In the given case, with the additional sale of Rs. 80 lakhs the
turnover for the year ended 31.03.2021 is Rs. 2.08 crores and thus, presumptive taxation is not
applicable. Accordingly, Yamuna shall maintain the books of account and compute the taxable
income. She is also liable for tax audit u/s 44AB.

3) Mr. Praveen engaged in retail trade, reports a turnover of Rs.1, 98, 50,000 for the financial
year 2020-21. His income from the said business as per books of account is Rs.13, 20,000
computed as per the provisions of Chapter IV-D “Profits and gains from business or
profession” of the Income-tax Act, 1961. Retail trade is the only source of income for Mr.
Praveen. A.Y. 2020 - 21 was the first year for which he declared his business income in
accordance with the provisions of presumptive taxation under Section 44AD.
No Particulars
(a) Is Mr. Praveen also eligible to opt for presumptive determination of his income
chargeable to tax the assessment year 2021 - 22?
(b) If so, determine his income from retail trade as per the applicable presumptive
provision assuming that whole of the turnover represents cash receipts.
(c) 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?
(d) What is the due date for filing his return of income under both the options?
Solution:
No Explanation
(a) Yes, since his total turnover for the FY 2020 - 21 is below Rs. 200 lakhs, he is eligible to
opt for presumptive taxation scheme u/s 44AD in respect of his retail trade business.
(b) His income from retail trade applying the presumptive tax provisions u/s 44AD,
would be Rs. 15,88,000, being 8% of Rs. 1,98,50,000.
(c) Mr. Praveen had declared profit for the PY 2019 - 20 in accordance with the
presumptive provisions and if he does not opt for presumptive provisions for any of
the five consecutive assessment years i.e., AY 2021 - 22 to AY 2025 - 26, he would not
be eligible to claim the benefit of presumptive taxation for five assessment years
subsequent to the AY relevant to the PY in which the profit has not been declared in
accordance with the presumptive provisions i.e., if he does not opt for presumptive
taxation in say PY 2020 - 21, relevant to A.Y. 2021 - 22 then he would not be eligible to
claim the benefit of presumptive taxation for AY 2022 - 23 to AY 2026 - 27.
Consequently, Mr. Praveen is required to maintain the books of accounts and get them
audited u/s 44AB,since his income exceeds the basic exemption limit.
(d) In case he opts for the presumptive taxation scheme u/s 44AD, the due date would be
31st July, 2021.
In case he does not opt for presumptive taxation scheme, he is required to get his
books of account audited, in which case the due date for filing of return of income
would be 31st October 2021.

SEC 44ADA: PRESUMPTIVE TAXATION SCHEME FOR ASSESSEE ENGAGED IN

ELIGIBLE PROFESSION
No Explanation
1  Notwithstanding anything contained in section 28 to 43C,
 in case of an assessee, being a resident in India, who is engaged in profession
referred to in subsection (1) of section 44AA and
 whose total gross receipts do not exceed fifty lakh rupees in a previous year,
 a sum equal to fifty percent of the total gross receipts of the assessee in a previous
year on account of such profession or,
 as the case may be, a sum higher than the aforesaid sum claimed to have been earned
by the assessee,
 Shall be deemed to be the profits and gains of such profession chargeable to tax
under the head PGBP.
Notified 50% of GR
Eligible D.I under
44ADA(1) professionals or Higher
Assessee u/s 44AA (1)
PGBP
sum
2 Any deduction allowable under the provisions of the section 30 to 38 shall, for the
purpose of subsection (1), be deemed to have been already given full effect to and no
further deductions under those sections shall be allowed.
3 The written down value of any asset used for the purpose of profession shall be deemed
to have been calculated as if the assessee had claimed and had been actually allowed the
deduction in respect of the depreciation for eah of the relevant assessment years
4  Notwithstanding anything contained in the foregoing provisions of this section, an
assessee who claims that his profits and gains from the profession are lower than the
profits and gains specified in subsection (1) and
 whose total income exceeds the maximum amount which is not chargeable to
Income tax,
 shall be require to keep and maintain such books of accounts and other documents
as required under subsection (1)of section 44AA and get them audited and furnish
the report of such audit as required under section 44AB.
5 The eligible assessee is required to pay advance tax. However, he is not required to pay
advance tax in installments. He has to pay whole advance tax in one go on or before
15th March of the financial year.
100% in One On or before 15th

Advance Tax
Installment March

SEC 44 AE - PRESUMPTIVE INCOME FOR PLYING GOODS CARRIAG

No Explanation
1 1) Notwithstanding anything to the contrary contained in sections 28 – 43C,
 in case of the assessee who owns not more than ten goods carriage at anytime
during previous year and who engaged in the business of plying, hiring or leasing
such goods carriages,
 the income of such business chargeable to tax under the head P / G / B / P shall be
deemed as under:
i. being a heavy goods vehicle, shall be an amount equal to Rs 1,000 per ton of
gross vehicle weight or unladen weight, as the case may be, for every month
or part of the month during which the heavy goods vehicle is owned by the
assessee in the previous year or an amount claimed to have been actually
earned from such vehicle, whichever is higher.
Rs. 1000/ ton of GVW or ULW for
Heavy goods Presumptive every month or part of the month
Vehicle Income or higher sum declared by the
assesee
ii. Other than heavy goods vehicle, shall be an amount equal to Rs 7,500 for
every month or part of the month during which the goods carriage is owned
by the assessee in the previous year or an amount claimed to have been
actually earned from such goods carriage, whichever is higher.
Rs. 7,500 for every month or part
Other than Heavy Presumptive
of the month or higher sum
goods Vehicle Income declared by the assesee
2 2) The expression “Heavy goods vehicle” means any goods carriage, the gross vehicle
weight of which exceeds 12000 kilograms.

Q UESTIONS FOR UNDERSTANDING :-
Illustration 1
Suppose, an assessee owns 10 goods carriages during the year as under:
Vehicle Gross Weight in kg Presumptive income in Rs.
1 7,500 7,500
2 9,000 7,500
3 10,000 7,500
4 12,000 7,500
5 12,550 13,000(1000 * 13 tonnes)#
6 15,225 15,000(1000 * 15 tonnes)#
7 17,000 17,000(1000 * 17 tonnes)
8 20,000 20,000(1000 * 20 tonnes)
9 22,000 22,000(1000 * 22 tonnes)
10 25,000 25,000(1000 * 25 tonnes)
Income per month 1,42,000
No. of months 12
Total business income 17,04,000
[1000kg = 1 tonne]
# It is not clear whether only absolute no of tonnes are to be considered or it is to be rounded off
to the nearest tonne. In absence of guidance, it is rounded off to the nearest tonne.
Illustration 2
Mr. X, is engaged in the business of plying and hiring of goods carriage. An assessee has
purchased the following vehicles during the previous year 31.3.2021:
i. 3 Heavy goods vehicle on 11.07.2020 (Gross weight 20,000)

ii. 5 Light goods vehicle on 20.09.2020.
As per books maintained by him, his taxable income for the assessment year 2021 – 22 is as
under:
1 Net profit 2,60,000
2 Deduction under section 80 C 1,00,000
3 Total taxable income 1,60,000
Answer:
Case 1: Mr. X opts for section 44AE
In the given case, the income under section 44AE shall be computed as under:
1 On 3 Heavy goods vehicle 5,40,000
 For the period 11.07.2020 to 31.3.2021
(20,000 X 9 Months X 3)
2 On 5 Light goods vehicle 2,62,500
 For the period 20.09.2020 to 31.3.2021

(7,500 X 7 Months X 5)
3 Total income 8,02,500
4 Less: Deduction under section 80C (1,00,000)
5 Total taxable income 7,02,500
Case 2: Mr. X does not opt for Section 44AE
If Mr. X wants to claim the lower profit of Rs. 2,60,000 he can do so, by maintaining the books of
accounts as required under section 44AA and getting his accounts audited under section 44AB.


1) Mr. J commenced the business of operating goods vehicles on 1.4.2020. He purchased the
following vehicles during the P.Y. 2020-21. Compute his income under section 44AE for
A.Y.2021-22.
No Gross Vehicle Weight Date of
Number
(in Kilograms) Purchase
1 7,000 2 10.04.2020
2 6,500 1 15.03.2021
3 10,000 3 16.07.2020
4 11,000 1 02.01.2021
5 15,000 2 29.08.2020
6 15,000 1 23.02.2021
Would your answer change if the two goods vehicle purchased in April, 2020 were put to
use only in July, 2020?
Answer:
Since Mr. J does not own more than 10 vehicles at any time during the PY 2020 - 21, he is
eligible to opt for presumptive taxation scheme u/s 44AE. Rs. 1,000 per ton of gross vehicle
weight or unladen weight per month or part of the month for each heavy goods vehicle and
Rs. 7,500 per month or part of month for each goods carriage other than heavy goods vehicle,
owned by him would be deemed as his profits and gains from such goods carriage.
For heavy goods vehicle
No. of Date of No. of months for which vehicle No. of months x No. of
vehicles purchase is owned vehicles
2 29.08.2020 8 16
1 23.02.2021 2 2
Total 18
For other than heavy goods vehicle
No. of Date of No. of months for which vehicle No. of months x No. of
vehicles purchase is owned vehicles
2 10.04.2020 12 24
1 15.03.2021 1 1
3 16.07.2020 9 27
1 02.01.2021 3 3
Total 55
The presumptive income of Mr. J u/s 44AE for AY 2021 - 22 would be
Rs. 6,82,500, i.e., 55 x Rs. 7,500, being for other than heavy goods vehicle + 18 x Rs. 1,000 x 15
tonne being for heavy goods vehicle.

The answer would remain the same even if the two vehicles purchased in April, 2020 were put
to use only in July, 2020, Since the presumptive income has to be calculated per month or part of
the month for which the vehicle is owned by Mr. J.
PRESUMPTIVE BASIS
Special provisions for computing profits and gains on presumptive basis: A Summary
No Particulars Section 44AD Section 44ADA Section 44AE
(1) Eligible Resident individual, HUF Resident assessee engaged An assessee
Assessee or Partnership firm (but in any profession specified owning not
not LLP) engaged in u/s 44AA(1), namely, more than 10
eligible business and who
legal, medical, goods
has not claimed deduction
engineering, architectural carriages at
under section 10AA or
Chapter VIA under the profession or profession of any time
heading “C – Deductions accountancy or technical during the
in respect of certain consultancy or interior P.Y.
incomes” decoration or notified
Non - applicability of profession (authorized
section 44AD in respect of
representative, film artist,
the following persons:
 A person carrying on company secretary,
profession specified u/s profession of information
44AA(1); technology)
 A person earning
income in the nature
of commission or
brokerage;
 A person carrying on
any agency business.
(2) Eligible Any business, other than Any profession specified Business of
business/ business referred to in under section 44AA(1), plying, hiring
profession section 44AE, whose total whose gross receipts < or leasing
turnover/ gross receipts in
Rs. 50 lakhs in the goods
the P.Y. < Rs. 200 lakhs
relevant P.Y. carriages
(3) Presumptive 8% of total turnover/ 50% of gross receipts of For each
income sales/ gross receipts or a such profession or a sum heavy goods
sum higher than the higher than the aforesaid vehicle
aforesaid sum claimed to
sum claimed to have been Rs. 1,000 per
have been earned by the
earned by the assessee. ton of gross
assessee.
6% of total turnover/ gross vehicle
receipts in respect of the weight or
amount of total turnover/ unladen
sales/ gross receipts weight, as the
received by A/c payee case may be,
cheque/ bank draft/ ECS
for every
through a bank account or
through such other month or part

prescribed electronic of a month.
modes (Credit card, IMPS, For other than
UPI, RTGS, NEFT, Net heavy goods
Banking) during the P.Y.
vehicle,
or before due date of
Rs. 7,500 per
filing of return u/s 139(1)
in respect of that P.Y. or month or part
such higher sum claimed of a month
to have been earned by the during which
assessee. such vehicle is
owned by the
assessee or an
amount
claimed to
have been
actually
earned from
such vehicle,
whichever is
higher.
(4) Non- Deductions allowable under section 30 to 38 shall be deemed to have
allowability been given full effect to and no further deduction shall be allowed.
of Even in case of a firm, salary Even in case of a In case of a firm,
deductions and interest paid to partners firm, salary and salary and interest
while is not deductible. interest paid to paid to partners is
computing partners is not deductible subject
presumptive deductible. to the conditions
income and limits in
section 40(b).
(5) Written WDV of any asset of an eligible business/profession shall be deemed to
down value have been calculated as if the eligible assessee had claimed and had been
of asset actually allowed depreciation for each of the relevant assessment years.
(6) Requirement If eligible assessee declares If the eligible If the eligible
of profits and gains as per assessee declares assessee declares
maintenance section 44AD, he is not profits and gains in profits and gains
of books of required to maintain books accordance with the in accordance with
account u/s of accounts u/s 44AA or get provisions of section the provisions of
44AA and them audited u/s 44AB. 44ADA, he is not section 44AE, he is
audit u/s However, if after declaring require to maintain not require to
44AB profits as per section 44AD, books of account maintain books of
say, for A.Y. 2021 – 22, non – and other account and other
declaration of profits on documents u/s 44AA documents u/s
presumptive basis for any of and get his accounts 44AA and get his
the 5 successive assessment audited u/s 44AB. accounts audited

years thereafter (i.e., from However, if the u/s 44AB.
A.Y. 2022 – 23 to A.Y. 2026 – assessee claims his However, if the
2027) say, for A.Y. 2023 – 24, profits to be lower assessee claims his
would disentitle the assessee than the profits profits to be lower
from claiming profits on computed by than the profits
presumptive basis for 5 applying the computed by
sucessive A.Ys subsequent presumptive rate, he applying the
to the A.Y relevant to the has to maintain presumptive rate,
P.Y. of such non – books of accounts he has to maintain
declaration (i.e. from A.Y u/s 44AA(1) and get books of accounts
2024 – 25 to A.Y. 2028 – 29). his accounts u/s 44AA(2) and
In such case, the assessee audited u/s 44AB, if get his accounts
would have to maintain his total income > audited u/s 44AB
books of accounts and other basic exemption
documents u/s 44AA (2) and limit
get them audited u/s 44AB,
if his total income exceeds
the basic exemption limit in
those years.
(7) Advance tax The eligible assessee opting The eligible assessee The eligible
obligation for section 44AD is require opting for section assessee has to pay
to pay advance tax by 15th 44ADA is require to advance tax in
March of the financial year pay advance tax by four installments.
15th March of the
financial year
Note – If a person is not covered under presumptive tax provisions mentioned above, audit
of books of account u/s 44AB is mandatory, if, in a case where he carries on business, his
total sales, turnover or gross receipts in business > Rs. 1 crore or 5 crore, as the case may be,
in that P.Y. and in a case where he carries on profession, his gross receipts in profession >
Rs. 50 lakh in that P.Y.

CHAPTER - 20
SEC 43 SERIES
Sec No Name
43A Change in rate of Currency
43AA Taxation of Foreign Exchange Fluctuation
43B Deduction on Actual Payment Basis (Discussed in Disallowance)
43C Cost of Acquisition of Stock – in Trade
43CA Deemed Consideration
43CB Income from Construction & Service Contracts
43D Income from Bad & Doubtful Debts
SECTION 43A – CHANGES IN RATE OF EXCHANGE OF CURRENCY
No Particulars
1  Notwithstanding anything contained in any other provision of this Act,
 where an assessee has acquired any asset in any previous year from a country
outside India
 for the purposes of his business or profession and,
 in consequence of a change in the rate of exchange during any previous year after
the acquisition of such asset,
 there is an increase or reduction in the liability of the assessee as expressed in
Indian currency (as compared to the liability existing at the time of acquisition of
the asset) at the time of making payment -
a) towards the whole or a part of the cost of the asset; or
b) towards repayment of the whole or a part of the moneys borrowed by him from
any person, directly or indirectly, in any foreign currency specifically for the
purpose of acquiring the asset along with interest, if any,
Assessee Consequence Increase/

For his
acquired Asset reduction in
from a country
business or of a change liability of an
profession in ROE
outside India assessee in INR
2 The amount by which the liability as aforesaid is so increased or reduced during such
previous year and which is taken into account at the time of making the payment,
irrespective of the method of accounting adopted by the assessee, shall be added to, or,
as the case may be, deducted from –
a) the actual cost of the asset as defined in section 43(1); or
b) the amount of expenditure of a capital nature referred to in section 35(1)(iv); or
c) the cost of acquisition of a capital asset (not being a capital asset referred to in

section 50) for the purposes of section 48,
Expenditure Cost of
Adjust
Actual cost of a capital acquisition of
Against nature a capital asset
3 And the amount arrived at after such addition or deduction

 shall be taken to be the actual cost of the asset or
 the amount of expenditure of a capital nature or,
 as the case may be, the cost of acquisition of the capital asset as aforesaid
1) M/s Rohit Ltd. purchased an asset worth US $ 1 Million from UK. The asset was delivered in
India on 01.07.2020. The sum was paid in 4 equal installments, each falling due on 6 months
interval starting from the date on which the asset was delivered in India. The exchange rates
prevailing on each of the installments are Rs.63.56, Rs.63.89, Rs.64.01 and Rs. 63.15
respectively. The asset was put to use on 10.10.2020. Compute the cost of asset and the
depreciation allowable for the AY 2021 - 22 and AY 2022 - 23.
Answer:
Computation of cost of Asset and depreciation allowable of M/s. Rohit Ltd - AY 2021-22
Amount
No Particulars
(Rs.)
1 Purchase cost – US$ 1 Million x Rs. 63.56 6,35,60,000
2 Add: Forex variation (US$ 0.25M x (Rs. 63.89 – Rs. 63.56)] on payment made
on 01.01.21 82,500
3 Sub – Total 6,36,42,500
4 Less: Depreciation (less than 180 days) – (Rs. 6,36,42,500 x 15% x 50%) +
(Rs. 6,36,42,500 x 20% x 50%) (less than 180 days) (Refer note) 1,11,37,438
5 WDV as on 31.03.2020 5,25,05,062
Computation of cost of asset and depreciation allowable of M/s. Rohit Ltd for AY 2022 – 23
Amount
No Particulars
(Rs.)
1 Opening WDV as on 01.04.2021 5,25,05,062
2 Add: Forex variation 1,12,500
3 Payment on 01.07.2021 – (US$ 0.25M x (Rs. 64.01 – Rs. 63.56)] 5,26,17,562
4 Less: Forex variation 1,02,500
5 Payment on 01.01.2022 – (US$ 0.25M x (Rs. 63.15 – Rs. 63.56)] 5,25,15,062
6 Less: Depreciation (entire year) – (Rs.5,25,15,062 x 15%) + (6,36,42,500 x 20%
x 50%) 1,42,41,509
WDV as on 31.03.2022 3,82,73,553
Note:
It is assumed that Rohit Ltd. is engaged in the business of manufacture or production of an
article or thing or in the business of generation, transmission or distribution of power and
eligible for additional depreciation.

ANALYSIS OF SECTION 43A
Interest on loans taken n foreign currency to acquire capital assets

from outside India
After the date asset is Upto the date asset is

put to use put to use
Allowable as revenue
Added to actual cost of
Expenditure under section
asset
36(1)(iii)
Exchange fluctuation on Exchange fluctuations on interest shall be

such interest shall be adjusted from WDV of the block of asset
allowed as revenue in previous year in which the interest is
expenditure on accrual actually paid.
basis as per ICDS.
TAXATION OF FOREIGN EXCHANGE FLUCTUATION - SEC 43AA
No Particulars
1 Subject to the provisions of section 43A, any gain or loss arising on account of any change
in foreign exchange rates shall be treated as income or loss, as the case may be, which
shall be computed in accordance with the notified ICDS i.e., ICDS VI: The effects of
changes in foreign exchange rates.
2 For the purpose of sub – section (1), gain or loss arising on account of the effects of change
in foreign exchange rates shall be in respect of all foreign currency transactions, including
those related to –
a) Monetary items and non-monetary items;
b) Translation of financial statements of Foreign operations;
c) Forward exchange contracts ;
d) Foreign currency translation reserves.

43C – COST OF ACQUISITION OF STOCK IN TRADE
No Mode of acquisition Cost of acquisition

1. Cost to the amalgamating Company
a) Amalgamation 2. Cost of improvement
3. Expenses incurred for transfer wholly and exclusively
1. Cost to the donor
2. Cost of improvement
b) Gift
3. Expenses incurred for accepting the gift and the gift tax
paid by the donor wholly and exclusively
1. Cost to the HUF
c) Partition of HUF 2. Cost of improvement
3. Expenses incurred for partition wholly and exclusively
1. Cost to the previous owner
d) Will
3. Expenses incurred for probating the will wholly and
exclusively
1. Cost to the previous owner
e) Irrevocable trust
3. Expenses incurred for establishing the trust wholly and
exclusively
43CA – CONSIDERATION FOR TRANSFER OF LAND & BUILDING HELD AS

STOCK IN TRADE
1 Section – Where a consideration received or accruing as a result of the transfer by an
43CA (1) assessee of an asset (other than a capital asset),
 being land or building or both, is less than the value adopted or
assessed or assessable by the authority of a State government for the
purpose of payment of stamp duty in respect of such transfer,
 the value so adopted or assessed or assessable shall for the purposes of
computing profits and gains from transfer of such asset,
 be deemed to be the full value of consideration received or accruing as a
result of such transfer.
2 Proviso Provided that where the value adopted or assessed or assessable by the
authority for the purpose of payment of stamp duty does not exceed 105%
110% of the consideration received or accruing as a result of such transfer
the consideration so received or accruing as a result of the transfer shall, for
the purposes of computing profits and gains from transfer of such asset, be
deemed to be the full value of consideration
3 50C The provisions of sub - section (2) and sub – section (3) of section 50C shall,
Provisions so far as may be, apply in relation to determination of the value adopted or
assessed or assessable under sub – section (1).
4 SDV on Where the date of agreement fixing in the value of consideration for transfer
DOA & of the asset and the date of registration of such transfer of asset are not the

DOR same, the value reffered in sub – section (1) may be taken as a value
assessable by any authority of State government for the purpose of payment
of stamp duty in respect of such transfer on the date of the agreement.
5 Modes of The provisions of sub - section (3) shall apply only in the case where the
Payment amount of consideration or a part thereof has been received by
of  an account payee cheque or
Advance  an account payee bank draft or
 use of electronic clearing system through a bank account or
through such electronic modes as may be prescribed, (Rule 6
ABBA) on or
 before the date of agreement for transfer of asset.

Illustration 1
Date of Stamp
Stamp duty
transfer of duty value
Actual value on the Full value of
land / on the date
consideration date of consideration
Building of Remark
registration
held as agreement
stock – in –
Rs. in lakhs
trade
Stamp duty value
on the date of
agreement to be
adopted as full
value of
consideration since
100 (Rs. 10 part of the
lakhs received consideration was
120 210
1/5/2020 by A/c payee 120 received by A/c
(1/9/2019) (1/5/2020)
cheque on payee cheque on
1/9/2019) the date of
agreement and the
stamp duty value
on the said date
exceeds 110% of the
consideration i.e.,
Rs. 110 lakhs
Stamp duty value
on the date of
registration to be
100(Rs. 10 adopted as full
lakhs received 109 130 value of
1/5/2020 130
by cash on (1/9/2019) (1/5/2020) consideration since
1/9/2019) part of the
consideration was
received by cash on
the date of

agreement and
such stamp duty
value exceeds 110%
of the consideration
i.e., Rs. 110 lakhs
Actual sales
consideration
would be the full
value of
consideration, since
stamp duty value
on the date of
100 (Rs. 10 agreement (which
lakhs received has to adopted as
109 130
31/1/2021 by A/c payee 100 full value of
(1/9/2019) 31/1/2021
cheque on consideration since
1/9/2019) part of payment
received by account
payee cheque on
the date of
agreement) does
not exceed 110% of
actual
consideration
Stamp duty value
on the date of
100 (Full
registration would
amount
be the full value of
received in 120 130
31/3/2021 130 consideration since
cash on the (1/5/2020) (31/3/2021)
the stamp duty
date of
value exceeds 110%
registration)
of the consideration
i.e., Rs. 110 lakhs.

SECTION 43CB - INCOME FROM CONSTRUCTION &SERVICE CONTRACTS

The profits and gains arising from a construction contract or a service contract shallbe
computed on the basis of percentage of completion method (POCM) in accordance with the
notified ICDS – 43CB (1). However, the following cases different method of revenue recognition
shall be applied,
Method Computation
Project completion If the duration of the contract is not more than 90 days
method
Straight line method If the contract involves indeterminate number of acts over a
specific period of time
For the purpose of percentage of completion method, Project completion method or

straight line method-
1) The contract revenue shall include retention money
2) The contract cost shall not be reduced by any incidental income in the nature of interest,
dividends or capital gains.
Section 43CB Recognition Method POCM
SECTION 43D – INTEREST INCOME ON BAD AND DOUBTFUL DEBTS

“Notwithstanding anything contained in any other provisions of this Act,
No Explanation
(a) In case of an assessee being a,
 public financial institution or
 State Financial Corporation or
 State Industrial Investment Corporation or
 a deposit taking non-banking financial company or
 a systematically important non - deposit taking non - banking financial
company or
 a Scheduled bank,
 the income by way of interest in relation to specified categories of bad or doubtful
debts, prescribed by the Reserve Bank of India;
(b) In case of a public company, the income by way of interest in relation to specified
categories of bad and doubtful debts, prescribed by National Housing Bank;
Shall be chargeable to tax
a) in the previous year in which it is credited by the assessee to its profit and loss
account for that year or
b) in the previous year in which it is actually received by the assessee
whichever is earlier.
Year in which Year of

Section Year of Whichever
Interest credited to Actual
43D Taxation is Earlier
P&L A/c Receipt

Key points:
No Explanation
1 Public company means a public company whose main object is carrying on the business of
providing long term finance for construction and purchase of houses in India for
residential purposes.
2 As per Finance Act, 2017, Scheduled Bank shall include co-operative bank other than a
primary agricultural credit society or a primary co-operative agricultural and rural
development bank
3 The expressions “deposit taking non-banking financial company” and “systematically
important non-deposit taking non-banking financial company” shall have the meanings
respectively assigned to them in of Explanation 4 to section 43B.

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[DIRECT TAXATION] AY 21 - 22

BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED 1

CHAPTER TOPIC PAGE NO

2 BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED |

Dis - Procedural Presumptive

BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED 3

S.2 - DIS - ALLOWANCE

Sec 37(2B) 40 ASeries Sec. 43B

40 small a Series 40 Big A Series

Sec 40 small a Series

Payment to Non - Payment to Resident Taxes & Fees

S.40 A (2) S.40 A (3) S. 40 A (7) S. 40A(9) S. 40A(13)

4 BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED |

S.3 - PROCEDURAL ASPECTS

SUB – SECTION OF SECTION 41

S.4 - PRESUMPTIVE TAXATION

Resident Non - Resident

BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED 5

PT FOR NON - RESIDENT

6 BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED |

Computation Of Income Under Business Or Profession

Sec - 30 to 37 Sec - 40 Sec - 40A Sec - 41

Section 28 Section 41 Section 176

BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED 7

However, the requirement of chargeability of commodities transaction tax is not applicable in

SEC – 29 – COMPUTATIONAL SECTION

Particulars Amount Amount

8 BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED |

SEC. 30 – RENT, RATES, REPAIR & INSURANCE FOR BUILDING

Premises used Occupation of Only Revenue

BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED 9

Repairs of the Premises - Important Points

Assessee is a tenant who Even if the assessee

SEC.31 – REPAIRS & INSURANCE OF MACHINERY, PLANT & FURNITURE

Expenses related to P&M

Repair exclude Current repairs of

a) Amount paid on account of current repairs thereto.

10 BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED |

Normal Additional Terminal

20 % of Actual 35% of Actual

BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED 11

Eligible Class of Assets

Tangible Intangible - 25%

Building - 10% Know how

Any other asset of similar nature

12 BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED |

Case Amount (Rs.)

No Particulars Amount (Rs.)

No Particulars Amount (Rs.)

BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED 13

20% O F A CTUAL C OST

NON - APPLICABILITY OF ADDITIONAL DEPRECIATION

1. Any Ship or Aircraft.

14 BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED |

SECTION 43(6) – WRITTEN DOWN VALUE

BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED 15

No Particulars Amount (Rs.)

16 BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED |

BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED 17

EXPLANTION 1A TO S. 43(1) – CONVERSION OF SIT IN TO CA

EXPLANATION 2 TO S.43(1) – GIFT / INHERITANCE

18 BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED |

BY CA DEEPAK PANDIAN & CA ANEESH NOOR MOHAMMED 19