TEST YOUR KNOWLEDGE

Income from the property shall be determined as under-

Llnit
Owner
Use of propey Own residence Let out Own residenoe Let ont
KS. RS
R
Gross annual value 165,000 Nd 1,65000
Nil
Les : Municapal tiax 15,000 1500
Net annual value 1,50,000 Nal 150,00
ess:Deductions under section 24
Standard deduction of net annsal valuel 45,000 Nat 45.000
interest on borrowed capital 33,750 30,000 35750
Income 30,000 71,250 930DOD 71,20
ncome trom house property otx
ncome rom house property ot Y
72-P9 Discus the log

e e H e
tcoe under the isead come fram iouse property7
3.Wiaat teil be bex trentment if income under the head "bncomne from hoese property is negatiee?
Solution: Pointwise answer-
1. Net amnautt vaizne-Can it be ncgatioe-lF the municipal ta paid by the landlord is more than the gross annual value,

the the net annual value can be negative. For instance out a property on anual rent ot Rs. ,0kD whch is
aso the tatr rent). During the previos year a1a, thelets
tolkowng epenses are pand y theKs.owne
ekT yeas Ks 0
repairs :
6O0 and interest on
tcapttal Dotro as
ined as under
under-

ATMANN
e property income shail be delermined

Gross annual value

Less: Municipal tax
Net annual vaite
000
910,000
Les:Dductions under section 24
Standard deduchion
Interest on borrowed capital 25,000
Income from propery F3500
2 Negatioe income from prperty-Whe it is possibie- As can be sen in the example given above, it is possible to hav
negative income under the head income trom house pruperty. 1he rules in the difterent situations are gven
.
below -
tfa property is let out or deemed to be let out, it can have positive or negative income
the case of one residential property fully self-occupied by the owner (if it is not let out at all), the income awayss
.in rangge
ies in o ejRs0DUU tO 2ro ;and
the case of partily selt-ocuped and partiy let out residenthal property, mcome may be negative or posittve
.im
3. Tr tretett e lees umder the fhe amefrom ouse pngprty
can any there ts a loss tunder thecurrent
head incometrom house
year can
property it be set-off against income under other heads ot income during the (no loes be
set-offagainst winnings from lotteries, races, eftc). Ifit is not possible to set-off the loss (fully or partly). it can be carried
forward to the next year for being set-off against the incume undder the head ncome from house property
your knowledge
Test Explain term
L dearly the annual value under section 23(1) of the Income-tax Act. Give examples
2. n computing the taxable income from house property, what deductions are allowed from anmual value
3. X maintains books of account on the basis of mercantile system. Can he claim deductiom of expenses under the
head Income from house property on due basis ? lf not, state the aorrect basis of deducticon
Owner of a house property (imcluding deemed owner under section 27) is chargrable to tax tunder the head
fncome from house property
Is there any provision under the Income-tax Act under which a persorn is chargeable to tax under the head
income irom house property even if he is not owneror deemed owner of a house property during the
previous year r EapPLatn the prozsson (t any) with a sutabe exatmpk
INCOME FROM HOUSE PROPERTY AND TS cOMPUTATION

5.(513) Mrs. X (age :2 years) has occupied two houses for her residential purposes. particulars of which are as
follows:
Hous Housc
Rs.
Municipal valuation (MV) 11,00,000
al ent (PR) 900000 1000,000
Stamdard rent under the Kent Comtrol Act (SR) 10.50000
Municipal taxes paid 75000 75,000
Interest on borrowed capital (amount borrowed during December 2016,
construction completed within 2 years) 6,00,000 80,000
Repairs Na
Besiness incorme of Mrs X is Rs. 25.6000 Besicdes Mrs. Xis empioyed by a private limited company on anual
5alary ot
s00he ontrbutess rd pubc provient hund dur
pertaining to alternaive tax regime. [Ans. 2750,00o, Rs. 6,63,00 ae e
preis
gore section 115BAC
e
6. (P'S.14) x (age: 64 years), a salaried employee (drawing Rs. 8,38,R3 as annual salary) has occupied three houses
for his residential purposes, particulars of which are as folows

Standard rent under the Poona Rent Control Act (SR) 63000 1185000 3,000
Municipal valuation (MV) 70.000 11,90,000 69,000
Fair rent (FR 53,000 11,78000 71,000
Municipal taxes patd 000 42000
Repairs Nil Nal
Ground rent due but outstanding 600
insurance premium due but outstanding 900 2,000 1,200
Xborrows from a relative Rs. 40,000009 peroentper anmum for construction of House Il (date of borrowingJune
1, 2017, date of repayment of loan May 31, 2120)
Construction ot all the houses is oompleted in August 29.Delermine the taxable income and tax liabiity of x
for the assessment year 2121-22 on the assumption that X contributes Rs 46,000 towards statutory provident
fund and Rs8.000 towards National Reief Bonds. lgnore section 115BAC pertaining to albermative tax regime

7 (P5.15) X (age:31 years) owns four houses (outside the jurisdiction of the Remt Comtrol Act) particulars of which

ouse i House 1V

Municipal valuation (M 2,00/000 86,000 5,00,000

Fair rent (PR) 250000 2000 20005,55/000
Rent (if property is let out throughout the year) - 5,72000
Unrealised rent - 90,000
Municipal tax paid by X 17000 3,00045,000
Date of completion of construction June June 14, March 31,
1974 1998
Kepairs 2000
Collection chargs
Land revemue 230 00
Interest on apital bornowed for repairs of house property 32,000 810 10,000
Interest on capital borrowed for oonstructionof house
property
Interest on capital borrowed for payment of municipal
100
Nature of occupation elt Let out
o ocuPied for occupied for for
residence business esidenoe f residence
House V remains vacant for the month of January 2121. Business income of X for the previous year 2120A Rs
een computed as per theprovisions ot incomeax Ac Determine he tatabie income and tx
s
26/0has
sabsiity otX tor the assessment year 2121-22on the assumption that hecould not occupy House il for 2 manths
during the previous year and X pays insurance premium of Rs 85,000 an his insurance policy of Rs. 900,00. He
afso deposits Rs. S0,000 in his public provident fund account. Ignore section 115BAC pertaining to altemative tax
egime. [Ans. Rs. 14,35420, Rs. 252850)
"Number govn in the bracket is soved Problem No. of Student Gride to Incometax, Probiems and Sokatio
 Income under the head
6
CHAPTER
"Profits and gains of
business or profession
and its computation
WHAT IS THE BASTS OF CHARGE [SEC. 28]
77. section 28, the following income is chargeable to tax under the head "Profits and gais of busines or
Profession":
a. profits and gains of any business or profession;
h. any compensation or other payments due to or received by any person specified in section 28(i);
. income derived by a trade, professional or similar asociation from specific services pertormed lor its
members ;
i. the value of any benefit or perquisite, whether convertible into money or not, arising from business or the
exercise of a profession;
any profit on trarsfer of the Duty Entitlement Pass Book Scherme:
f.any profit on the transfer of the duty free replenishment certificate;
& eport incentive available to exporters;

h. any interest, salary, bonus, commission or remuneration received by a partner from firy
any sum received for not carrying out any activity in relation to any business or profession or not to share
ny nowoW pann, copyngn, tndkna,
fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset
defermined in the prescribed manner;
any sum received under a Keyman insuranoe policy incuding bonus
any sum 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 expendi
ture on such capital asset has been allowed as a deduction under section 35AD ; and
m. income from speculative transaction.
Income from the aforesaid activities is computed in accordance with the provisions laid down in sections 29 to
44DB.
77.1 Meaning of business- In view of section 2(13), business includes any (o) trade, ) commerce (9
manufacture, or (4) any adventure or concern in the nature of trade, commeroe or manufacture

157
Para 772 INCOME UNDER PROFTTS & GAINS OF BUSINESS OR PROFESsioN & ITS COMPUTATION

Significance of profit motite - The word "business is one of large and indefinite import and connotes
Somethingwhich occupies attention and labOur ot a person for the purpose ot protit.
Busirness Caot be carmied on with oiescf- Business arises out of commercial transactions between two or more
persons. One cannot enter into a business transaction with oneselt.
77.2 Business income not taxable under the head "Profits and gains of business or profession- In the
following cases, income trom trading or business is not taxable under section 28, under the head Protits and
gains of business or profession
Natureof tcomie Hent under whioh if is duargeabie ko ta
Rental tncome in Rent of house property is taxable under the head "Income from house property", even if
the case ot deaier property constitutes stocK-in-trade of recipient of rent or the recipient of rent is engaged in
In property the Dusineses ot ietting Properties on rent.
Dividend on shares Dividends on shares are taxable under section 56(2)0), under the head Income from other
tn the case of a souroes, even if they are derived from shares held as stock-in-träde or the recipient of
dealer-in-shares dividends is a deaier-in-shares.
Winning om Winnings trom lotteries, races, ete. are taxable under the head Income from other
ot HOuraS even derived asa reglar Dusiness activity)
Interest receved on Such interest is always taable under the head ncome trom other sources (even it it
compensatton or pertains to a regular busines activity). A deductiom of 50 per cent fs allowed and
enhanced compen- effectively only 50 per cent of such interest is taxable under the head "Income from other
sation souroes
Profits derived from the aforesaid business activities are not taxable, under the head "Profits and gains of
business or profession". Profits and gains of any other business are taxable under "Profits and gains of
business or profession,unless such profits are exempt under sections 10 to 13A
77.3 Taxation on certain incomes [Sec. 1458)-Section 1458 provides mode of taxation of the following
incomes
1. Interest received by an assessee on compensation or on enbanced compensation, shall be deemed to be the
ncome ot the year in which it is recerved (however, it is taxable under Section s6 under the head fncome trom
other sources J.
2. The clainm for escalation of price in a contract or export incentives shall be deemed to be the income of the
previous year in which reasonable certainty of its realisation is achieved.
3. Assistance in the form of subsidy (or grant or cash incentive or duty drawback or waiver or concession or
reimbursement) as referred to in section 2(24)(awi) shall be deemed to be the income of the previous year in
which it is received, if not charged to income tax for any earlier previous year

WHAT ARE THE BASIC PRINCIPLES FOR ARRIvING AT BUSINESS INCOME

78.One has to keep in mind the following general principles while computing income taxable under the head
Frotits and gains of business or profession
78.1 Bustness or profession carried on by the assessee Buasiness or profession should be carried on by the
assessee. It is the person carrying on a business or profession who is chargeable to tax.
78.2 Business or profession should be carried on during the previous year -Income from business or
profession is chargeable to tax under this head only if the business or profession is carried on by the asessee at
any time during the previous year (not necessarily throughout the previous year).There area few exceptioms
78.3 Income of previou5 year is taxable during the following assessment year Income of business or
protession carried on by the aesessee during the previous year is chargeable to tax in the next following
assessnent year. There are, however, certain exceptions to this rule.
78.4 Tax incidence arises in respect of all businesses or professions Profits and gains of different
Dusinesses or protessions carried on by the assessee are not separately chargeable to tax. Tax incidence arises
on agE 8ae neome trom an businesses or protessioms cartied on by the assessee. it, therefore, an assessee
earns profit in one business and sustains loss in another business, income chargeable to tax is the net balance
after setting off loss against income. However, profits and losses of a speculative business are kept separately
78.5 Legal ownership vs. Beneficial ownership-Under section 28, it is not only the legal ownership but also
the beneficial ownership that has to be considered. 1 he courts can go into the question of beneficial ownership
159 LOSSES INiDENTAL TO TRADE Para 78.11

and decide who should be held liable for the tax after taking into account the question as to who is, in fact, in
reoeipt of the income which is going to be taxed.
78.6Real profit vs. Anticipated profit -Anticipated ar potential profits or losses, which may oceur in Future,
are not considered fo arriving at taxable income of a previous year. This rule is, however, subject to one
exceptionstock-in-trade may be valued on the basis of cost or market value, whichever is lower.
78.7 Real profit vs. Notional profit-The profits which are taved under section 28 are the real profits and not
notional profits. For instance, no person can make protit by trading with himselt in another capacity.

78.8 Recovery of sum already allowed as deduction Amy sum recovered by the assessee during the
previous year in respect of an amount or expenditure which was earlier allowed as deduction, is taxable as
business income of the year in which it is recovered.
78.9 Mode of book entries not relevant The mode or system of book-keeping cannot override the
substantial character ot a transaction
78.10 legal business-Ihe income-tax law is not concerned with the legality or ilegality of a business or
protession. it can, theretore, be sad that income ot illegal business or profession iS not exempt trom tax.
78.11 Losses incidental to trade Commercial principles for computing business income- Trading losses
of revenue nature incurmed in carrying out the business are deductible, if they are incidental to the operation of
business. This rule is applicable even if it is not specially coded anywhere under the Act.
Instunces of losses detuctible from bustness income:
L Loss of stock-in-trade as a result of enemy action or arising under similar circumstanoes.
2. Loss of stock-in-trade due to destruction by an act of God.
3. Loss arising on account of failure on the part of the assessee to accept delivery of goods.
Deprectation in funds kept in toregn country fur purchase ot stock-in-trade
5. Loss due to exchange rate fluctuations of foreign currency held on revenue account
6. L.oss arising from sale of securities held in the regular course of business
7.Loss of cash and securities in a banking company on account of dacoity (maybe after banking hours)
8. Loss incurred on realisation of amount advanced in connection with business
9.Loss of security deposited for the purposes of acquisition of stock-in-trade
10.Loesdue to forfeiture of a deposit made by the asessee for properly carrying out of contract for supply of
11. Loss on account of embezzlement by an employee.
12. Loss incurred due to theft or burglary in factory premises during or after working hours
13. Loss of precious stones or watches of a dealer while bringing them from business premises to his house.
14. Loss arising from negligence or dishonesty of employees.
15. Loss incurred on account of insolvency of banker with which current acoount is maintained by the assessee
16 Loss incurred due to freezing of the stock-in-trade by enemy action.
7. Loss incurred by a sugar manufacturing company by foregoing advance made to sugarcane growers who
used to sell sugarcane crop exchusively to the company.

Einancing iEs subsicdianes) to its 100 per

v
cent
ve y
supsidiary
the assesseecompany (engaged in the business of
company
19. Loss incurred by a holding company which has guaranteed a loan taken by its subsidiary company.
20. Loss arising as a result of seizure and confiscation of illegal stock-in-trade is allowable as a business loss
against income from ilegal business
21. Loss arising as a result of rejection of goods by the importer (as goods are unfit for human consumption).
fmstances of losses not deductible fromm buasiness income:
1. Loss which is not incidental to trade or profession, carried on by the assessee.
2.Loss incurred due to damage, destruction, etc, of capital assets
5. Loss incurred due to sale ot shares heid as investment.
4. Loss of advances made for setting up ofa new business which ultimately could not be started.
5. Depreciation of funds kept in foreign currency for capital purposes
6. Loss arising from non-recovery of tax paid by an agent on behalf of the non-resident.
Para79 INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSiON &ITS cOMPUTATION

7.Anticipated future losses

8. Provision made by assessee in respect of non-performing assets
9. Loss relating to any business or protession discontinued before the commencement of previous year.

nmm METHOD OF ACCOUNTING HOW FAR RELEVANT FOR COMPUTING BUSINESS

INCOME
79. Income under the heads "Profits and gains of business or profession" and "Income from other sources
shall be computed in accordance with method ot accounting regulary employed by the assesseef.
79.1 Tax accounting standards [Sec. 145) Central Board of Direct Taxes has notified the Income
The
Disclosure and Tax Accounting Standards (tCDS) ride Notification No. 87/2016, dated September 29, 2016.
These standards are applicable for computation of income chargeable under the head Profits and gains of
business or profession or Income from other souroes and not for the purpose of maintenance of books of
acrount. These standards are applicable from the assessment year 2017-18.
79.2 Methodofaccountingin certain cases/Sec. 145A-For purpoe ofdetermining the income chargeable
the
under the head "Profits and gains of business or profession, the following valuation rules are applicable-
1.The valuation of inventory shall be made at lower ofactual cost.or net realizable value computed in the manner
provided in ICDS
2. The valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the
amount ot any tax, duty, cess or fee actualy paid or incurmed by the assessee to bring the goods or services to
the place ot ts location and condition as on the date ot valuation.
3.Inventory (being securities not listed, or listed but notquoted, on arecognised stock exchange) shall be valued
at actual cost initially recognised in the manner provided in ICD5.
4 Inventory (being securities held by a scheduled bank or financial institution) shall be valued in accordance
with ICDs atter taking into account extant guidelines issued by the RB1.
5. Inventory (being listed securities) shall be valued at lower of actual cost or net realisable value in the manner
provided m icDS and tor this purpose the comparison of actual cost and net realisable value shall be done
category-wISe
6.Any tax, duty. cess or fee, by whatever name called, under any law for the time being in force, shall include
all such payment notwithstanding any right arising as a consequence of such payment for the purposes of the
said section

WHAT IS THE SCHEME OF BUSINESS DEDUCTIONS/ALLOWANCES

80. Section 28 defines various income which are chargeable to tax under the head "Profits and gains e

business or protession. ection permits deductians and alowances laid down by sections 0 to 451D while
computinE protts or gais ot a business or protession. Loss ot revenue nature, which is incidental to business
is allowable as deductions while computing taxable business income, even thoughit is not codiified specificaly
under any of these sections. Sections 40, 40A and 43B give a list of expenses which are not deductible.
Before studying the nature and amount of permissible and non-pernmissible deductions under sectiors 30 to
45D,it will be usetul it one keeps tn view the following prinapies governing admissibility of these deductions:
Os of proof-It is the responsibility of the assessee to prove that a particular deduction is admissibie in his
case.
Allounmces are cumaulatoe - The alkowances laid down under sections 30 to 37 are cumulative and not
alternative.
Expenditure should relate to the previous year-It is necessary to claim deduction that the expenditure should
relate to the previous year. In order to ascertain whether the expenditure relates to the relevant previous year
or not, one has to examine method of accounting generally adopted by the assessee. If the assessee keeps his
books of account on the basis of mercantile system, expenses of the previous year would be deductible
irrespective of the fact whether they are actually paid during the previous year or not. If the assessee, on the
other hand, keeps his books of account on the basis of cash system, expenses actually paid during the previous
year are deductible, whether or not they are in respect ot previous year.

r the head ncome from other soures 0per cemt of such interest
is deductible and etfectively 50 per cent is chargeable to tax).
16 RENT, RATES, TAXES, REPAIRS AND INSURANCE FOR BUILDING Para 81.1

Busines shouid he carried on during the precious yenar- In order to avail deduction of expenditure, it is necessary
that the business in respect of which expenses are incurmed, should be carried on by the assessee during the
previous year.
Expenditure should harce heen incured in comnectiom seith assesser's bustness- An expenditure is allowable as
deduction in computation of taxable income only if it is incurred for the purpose of assessees own business
For instance parent company cannot be allowed a deduction in respect of an enpenditure incurred for the
benett ot s subsidiary company (even t it isa wholy-ownied subsidiary company)
Benefit of expenditure maay extend to somebady ese- IF the expenditure is incurred primarily in connection with
assessee's own business, it would still be allowed as deduction even if it enures to the benefit of someune else.
Benefit of expenditure may extend heyond the relerant prerinus year -t is not necessary that benefit of the
expenditure should be limited to the previous year in which the expenditure is incurred. A revenue expendi-
ture incurred during the previous year is deductible even if benefit of expenditure sextended beyond the year
of expenditure.
No allounce in respect of exhaustion of tasting assets- No deduction is admissible in respect of diminution or
exhaustion of the capital asset from which income is derived. Wasting assets such as mines and quarries,
timber-bearing land, leasehold interest are capital assets and their diminution or exhaustion in value repre
sents capital loss which is not allowable as deduction, as the Act permits deduction of revenue loss.
Noallowance in respect of eapenditure incurred before the setting p ofa brusiness-In the case of a new business the
first prevaous year commences on the date when the business or professiorn is set-up. Expenditure ncurred
prior to setting up of a business talls outside the previos year. Section 28 aPplies only in respect ot business
carried on during the previous year. As a oonsequence, expenditure incurred betore setting up ofa business
s
would not be deductibie, while computing ncome ot the previous year. However, there sometimes a time
lag between setting tup a business and actual commencement Expendiure incurred after setting up ot a
ts
business may be allowed as deduction under sections 30 to 37, even if it is incurTed before the actual
commencement ot business. To the aforesaid general rule that expenditure incurred before setting up ot a
business iS not permssibie as deduction, some exceptons are provIded.
in respect of om-aseaie huszness- It an assessee carries on a non-taxable business (such as
No ailoce
agricultural income in India), no deduction on account of expenditure relating to such non-taxable business
can be claimed.
Experditure relating to illegul bustiness- Profits of even illegal business is chargeable to tax. In arriving at
chargeable profits, ordinary business expernditure incurred in carrying on an illegal business is allowable as
deductian However, tntringements ot law tnciuding oreaches ot obigations are not ordinary tncidene ot
businessand penalty or damages paid in connection with such infringement do not constitute ependiture and
not deductible.
No allouace in respet ef anticuted losses- Anticipated loss carnnot be deducted, though the loss is certain.
The only exCeption to this rule is that stock-in-trade may be valued at cost or market vaue, whichever is lower
No dedtuction in respect of depreciation of inrestment- A deduction in respect of depreciation of investment in
shares and securities is not allowable.
Relerance of distinction hetueen cupital amd revenue ependiture The question whether the expenditure is
capital expenditure or revenue expenditure is relevat only in the case of expenditure failing under sections
30,31and57(1) whuchepresslyexclude the items ot the nature ot Capital experndiure trom bengallowed as
permissible defuctiorns. However, expenditure falling under other sections may fall either under the category
of capital expenditure or revenue expenditure

BEHEWHAT ARE SPECIFIC DEDUCTIONS UNDER THE ACT

81. Sections 30 to 37 cover expenses which are expressly allowed as deduction while computing business
ncome secthons 40. 4A and 4s5 cover eperses which are not deductibe Ihe tolowing expenses are
expressly allowed as deductions against protits and gains ot bustness or protession
81.1 Rent, rates, taxes, repairs and insurance for building [Sec. 30)- Under section 30, the following are
deductible-
Rent and rgins Kent and nepair expenditure ot premises, used for the purpose ot carrying on buasiness or
profession, are deductible. However, this deduction is available only if the assessee has occupied the property
as a tenant and the expenditure on account ot rent and repair is not capital in nature.
Municipai taxes - Municipal taxes (land revenue or any other local taves) of premises used for the purpose of
carrying on business or profession, are deductible. However, one has to satisfy the requirement of section 438
Para81.2 INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION 162

(i.e., payment should be actually made during the previous year or till the due date of submission of returm of
income).
Insurance Any premium in respect of insurance against risk of damage or destruction of the aforesaid
premises, is deductible.
81.2 Repairs and insurance of machinery, plant ond furniture (5ec. 31 The expenditure incurred on
current repairs (not eing apital ependitre) andinsurnce in respet ot plant, machinery' and furniture used
for busines86 purposes 1s allowable as deduction under section 31.
81.3 Depreciation ollowance [Sec. 32) - Depreciation shall be determined acording to the provisions of
section 32
81.3-1 cONDITIONS FOR CLAIMING DEPRECIATION In order to avail depreciation, one should satisty the
followingconditions
1. Asset must be owned by the assessee

2. It must be used for the purpose of business or profession.

3. It should be used during the relevant previous ye
4. Depreciation is available on tangible as well as intangible assets.
Asset should be ouncd by the assessee-The asset should be owned by the assessee or the assessee should be the
co-ownerof the asset. The following points should be noted-
1. It is not necessary that the assessee should be the registered owner of the asset. If a person acquires a
building by satisfying conditions of section 53A of the Transfer of lProperty Act [ie, under a Power of Attorney
Transaction], depreciation is available even if he is not the registered owner of the building
Where an assessee carries on a business or professionin a building not owned by him but in respect of which
ne holds a lease or right of occupancy, he is entitled to depreciation", in respect of capital expenditure incurred
by him on construction of any structure or any work in relation to the building by way of improvement,
renovation or extension.
3. If an assessee acquires an asset under financial lease, he can claim depreciation.
4.Generally, in the case of a hire purchase agreement, the hirer has an uninterrupted right over the asset for all
practical purposes, if he discharges his obligation (ie, payment of all instalments). In such a case, the hirer (and
not seller) can claim depreciation from the year in which the asset is taken on hire
must be used for thie purpose of busines6 or professom - The aset, in respect of which depreciation is
Aset
claimed, must have been used for the purpose of business or profession. Even if an asset is put to use for trial
production, depreciation can be claimed. The user of the asset should be understood in a wide sense so as to
embrace passive as well as active user. lfa machine is kept ready for use at any moment in a particular factory,
the machinery can be said to be "used for the purpose of the business and depreciation is available Any
forced idleness of the machinery cannot disentitle the assessee from getting the benetit of depreciation
allowance. an asset is used party for business purposes and partly for other purposes, proportionate
f
depreciation is available.
liser of the asset in the prenious year- The asset, in respect of which depreciation is claimed, must have been
Used tor the purpose ot business during the nelevant previous year. ven if an aset is used for a few days (or
even for a few hours) during the previous year, depreciation for the entire year is available. However, in the
first year, in which an asset is acquired, the asset should be used at least for 180 days to claim fully year's
depreciation (if it is used for less than 180 days, half years depreciation is available in the finst year in which
the asset is acquired)
Depreciation is atvuilable on tangible as uvell as intangible assets - Under the Income-tax Act, one can claim
depreciation in respect of the following assets-
Tangible assets Buildingmachinery, plant or fumiture
Intangible assets acquired Know-how, patents, copynights ae chise other
atter March 31, 198
mat om the
clect
assessment year 2021-22) goodwill of a business or professionj.

Building means the superstructure only and does not include site. "TPlant includes ships, vehicke, books
including technical know-how report), scientific apparatus and surgical equipments used for the purpose of
business or profession It does not include tea bushes or livestock or buildings or furniture and fittings.

Expenditure on conitruction of road/beridge by an asessoe on leased land provided by a Stabe Covernment is qualificd for
pratom
163 DEPRECIATION ALLOWANCE Para 81.3

Consequences twhen aboe conditions are satisfied-If the above conditions are satisfied, depreciation is available
(it is a must, it is not at the option of the assessee to claim, or not to claim, depreciation in such cases). In other
words, depreciation is available whether (or not) the assessee has claimed the deduction for depreciation in
computing his total income
81.3-2 RASIC CONCEPTS FOR COMPUTATION OFE DEPRECIATrON ALLOWANCE IN RESPECT OF UNTES OTHER THAN
POWER UNITS-Depreciation is admissible for block of assets. Method of computation of depreciation is written
down vafue nmethod. 1o understand method of computation of depreciation, one must know the meanung ot
the following terms
. Block of assets.
2.Written down value.
3. Actual cost.
Depreciation is available (at the option of the assessee) in the case of tangible assets according to straight-
line method in the case of an undertaking engaged in generation or generation and distribution of power in
somecases
81.3-3 BLOCK OF ASSETS ISEC. 2011- The term "blockof assets" means a group of assets falling within a elass of
assets comprising
a. tangible assets, being buildings, machinery, plant or furniture;
intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature (and from the assessnment year 2021-22) not being 8oodwill
of a business or protession,
in respect of which the same peroentage of depreciation is preseribed.
There are 10 different blocks* of assets as given below
Number Natuire of ase Rate of depreciata
Block 1 Buidings-Residential buildings other than hotels and boarding houses
Block2 Butldings-Otfice, factory, godowns or builkdings which are not mainly 10%%

Used for residential purpose it covers hotels and boarding houses but does not
cover those which ane covered under Blocks 1 and 3]
Block 3 Buildings- The following building8 40%
abuildings acquired on or after September 1, 2002 for installing machinery
and plant torming part ot water supply projeet or water treatment system
o Duness ot providing inirastruc-
. temporary erections such as wooden structures
Block4 Furniture-Any fumiture/fittings including electrical fittings 10%
Block 5 Plant and macitinery- Any plant or machinery lnot covered by Block 6, 7,8 15%
or 9, motor cars (other than those used in a business of rnunning them on hire)
acquired or put to use on or after April 1, 1990, oil well (not covered under any
other bloc
Blook 6 20%%
Plart and macliery-Ocean-going ships, vessels ordinarily operating on
inland waters including speed boats
Block 7 Plant and machinery- Block includes the following- 30%
Buses, lorries and taxies used in the business of running them on hire"
Motor cars (other than those used in a business of running them on hire)
acquired on or after August 23, 2019 but before the April 1, 2020 and is put to use
before April 1, 2020
Moulds used in rubber and plastic goods factories
Machinery and plant, used in semi-conductor industry

.
For computation ot depreciation tn the case of power units, ser para 81S9
Tt may be noted that "block of assets" means assets of all units of the assessee having the same rate of depreciation and not assets
o oniy one una.
This bfock isapplicable only when the asee is in the businesof hiring out its/his buses, lorres or taxies. 1/ orries are used by
a timber merchant lor delivery of goods to his custoners, this block is not applicabe even if transportation inoone is included in
Dusessincome.
Para81.3 INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION &ms cOMPUTATION 164

Number Nature of aset Raieof depreciation

Block8 Plant amd achinery- Block incdudes the following- 0

Aeroplanes. It also includes commercial vehicle acquired after September 30,
metical eupment and plant and machinery whicth satsty conditions ot ruie

Containers made of glass or plastic used as refills and the following

a. new commencial vehicle acquired during 2001-02 and put to use before
March S1, 2002 tor the purpose of business or profession
b. machinery/plant used in weaving pricessing and garment sector ot
textile industry which ispurchased under Technology Upgradation Fund
Scheme during April 1,2001l and March 31, 2004 and put to use up to March
31, 304, and
newcommercial vehicle which is acquired during January 1, 2009 and
September 30,2009 andis putto use befoneOctober 1, 2009tor the purp0ses
ot businesS or profesSIOn.
Computers inciuding computer software and new commercial vehicle
acquired in replacement of condemned vehicle of 15 years of age which is put
touse betaore April 1, 1 acquired during October 19 and March t
vlinders; plant used in field operations by mineral oil concerns; direct tire
glass meiting furnaces.
Energy renewal energy devices; rollers in flour mils, sugar
Y saving devices;wever.
it does not include windmills or an ial
d
device, which run on windmills installed after March 31, 2012 but before April
1, 2014)
pollution control equipments water pollution control equipments; solid
eAir onol eauipments, recvcling and resourcerecovery system machinery
acquired and installed on or after September 1, 2002 in a water supply project
orwater treatment systemor for the purpose of providing intrastructure lacility
wooden parts used in artificial silk manufacturing machinery cinematograph
films, bulbs of studio fights wooden match frames; some plants used in mines,
quarries and salt works; and books (betng annual publications) owned by
assessees carrying on a profeseion or books (may or may not be annual
publications) owned by a person carrying on business in runnin8 lending
libraries.
Block 9 Plant and macheinery- Motor buses motor lorries and motor taxis fused in a 45%
business of running them on hire) acquirnd on or after August 23, 219 but
beforethe April 1, 20120 and is put to use before April 1, 220
1995)Know-how, patents, copy 25%
Block 10 Intangibie aets (acguirnl ather Marck 31.
or
rights, trademarks, licences, franchises and any other bsiness commercial
rights of similar nature (and from the asessment year 2021-2) ot being
goodwill of a busíness or profession
Note : In
Note: In section 2(11), it is not necessary that the asset should be used for purpose of busines during the year under
section ortant for the purpose of actual allowability of depreciation, Dut no
determining whether the asset falls within the block of assets or not
81.3-4 WRrTEN DOWN VALUE ISEC. 436 Written down value for the assessment year 2021-2 will be
determined as under:

"Printers, scanner NT erver, UTS, router, are part of computer and eligible for depresiatken at the rats of 0per oent. Iowever,
EPAB and mobk phones are
StoCk exchange eth
t
comput
ntto ollect toll website, non-compoerights acquired
ataU far operating hotels, rte, are qualified for depreciation
wer this provision P
165 DEPRECIATiON ALLOWANCE Para 81.3

Step1 Find out the "depreciated value of the bock on April 1, 2020
Step 2 To this value, add "actual cost" of the asset (falling in the block) acquired during the previous year
2020-21.
Slep 3 From the resultant figure, deduct money received/receivable (together with scrap value) in respect
of that asset (falling within the block of assets) which is sold, discarded, demolished or destroyed
dunng the previotts year 2121-41:
Other potnts- The following points should be noted-
1. The resulting amount is the written down value of the block of assets on March 31, 2021 relevant for the
assessmet year 2021-
2. The amount of reduction under Step 3 cannot exceed the value of assets computed under Step 1 and Step 2
3. One may determine Written down value for any other assessnent years on similar basis.
4. Under Strp 3, oniy actual money (received or receivable in cashor by choque or draft) is deductible. In other
words, any other things or benefit (which can be converted in terms of money) cannot be deducted under
Sep 3.

Problem
81.3-4P1 Comgpule Bhe writen dotem vatue from tihe follouing information for the asessment yoar 2021-22-
Blocks of asset Rale of Depreciated value
depreciatio on April 1, 2020

1. Plant A, B and
cent
C t0,40,000
2 Plant D and E 2,60,000
3. Plent F T0.00
4 BuildingA,
5. Balading E, Famd G
B,

6. Building H, LJ and K
Cand D

XMANI
AfterApril 1. 2020, the computy purchases the folieuvimg asets
10 a 0
10,90,600
7,10,200
16,90,000

Assets Date of purchase Rate of depreciation Actual cost

percento
Plant G April 62020 6,000
Plant H y 11, 2020 15 18,000
Furniture June 6, 2020
Car fiiy 7,2020 56.
Building L. September 26, 2020 ,28,A
Copter pieier 2, 2020 40 90,0A
Copynyn
eter 30, 2020 1750,000

Thefolkeetng assets are traiserrnd

Assets Date of sale Sale consideration
Rs
Plant B December 20, 2020 25,10,S00
Plant D fanuary 31, 2021 12000
Building . March 6, 2021 6,00,000

Solution: Bleck 1- Plant md machinery (rute of deprnciationt 15%)

Depreciated value of the block consisting of Plants A, B and C 10,40,000
Add: Actual cost of Plant H and car )274,000
Total 13,14,.000
les: Sale proceeds of Plant B [although sale proceeds of Plant B is more than Rs. 13,14,/000
amount to be deducted is restricted to Rs. 13,14OO0O] )13.14,000
Written down value of the block consisting of Plants A, C and H on March 31, 2021 Nil
Para81.3 INCOME UNDER PROFITS &GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION 166

Block 2-Plant and macitnery (rale of deyreciation :40%)

Depreciated value of the block consisting of Plants D and E on April1, 2020 2,60,000
Add: Cost ot computer purchased during 2020-2
Less: Sale proceeds of Plant D sold during 2020-21 12,000
Written down value of the block consisting Plant E on March 31, 2021 3,38,0000
Block 3-Plant and maciinery (rate of depreciation:304)
Depreciated value of the block consisting of Plant F on April1, 2020 70,000
Add: Cost of Plant G purchased during 2020-21 6,000
Written down value of the block consisting of Plants F and G on March 31, 2021 76,000
Block 4- Building (rate of depreciation: 10%)
Depreciated value of the block on April 1, 2020 consisting of Buildings A, B, C and D 10,90,600
Written down value on March 31, 2021 0,0.00
Block 5- Buildings (nate of depreciation : 5%)
of uhe block consisting of Buildings E, F and G 7,10,200
value
eprexated
Add: Cost of Building8 L purchased auringav
Less: Sale proceeds of Building Lsold during 2020-21 -6.00
b,00.000
Written down value of the block consisting of Buildings E, F and G on March 31, 2021
Block 6- Building (rate of depreciation : 40%)
Depreciated value of the block consisting of Buildings H LJ and Kon April 1, 20/20 16,90.000
Written down value 16,90,000
Bkock 7- Furniture (rate of depreciation: 10%)
Depreciated value on April 1, 2020 Nil
Add: Cost of furniture purchased during 2020-21 S6,000
Written down value on March 31, 2021
Block 9-Copyright (rate of depreciation 25% )
Depreciated value on April 1, 2020
Add: Cost of copyright purchased during 2020-21
Written down value on March 31, 2021
ANN 560
Ni
17.50,000
17.50,00o

81.3-5 cOMPLTATION OF NORMAL DEPRECIATION ALLOWANCE Depreciation allowance is of two types

normal and additional. The rule for normal depreciation is given in this para. Additional depreciation is
covered in para 81.3-6.
Normal depreciation is calculated as follows -
Written down value of the block of asset on the last day of the previous year * Rate of depreciation
Where an assessee incurs any expenditure for acquisition of a depreciable asset in respectof whicha payment
(or aggregate of payments made to a personina day), otherwise than by an account payee cheque/draft or use
a
of electronic ciearing system through bank account (or through prescribed electronic mode?), exceeds
Rs. 10,000, such payment shall not be eligible for depreciation.
The aforesaid rule is applicable to all cases, except a few which are given below -
1. If written down value of the block of asset is reduced to zero, though the block is not empty.

2.If the block of assets is empty or ceases to exist on the last day of the previous year (though the writen down
value is not zero).
.
In the case of imported cars.
In the case of succession or amalgamation or business re-organisation or demerger
5.If in the first year in which an asset is acquired, it is put to use for less than 180 days.
Wuen the teritten doun tralue of a block of aset is reduced to zero-No depreciation is admissible where written
down value has been reduced to zero on the last day of the previous year, though the block ot assets does not
cease to exist.

Asper rule 6ABBA, prseribed modes of electronic paymemt ane: o) redit card, ) debit card, (e net barnking (IMIS(mmediahe
Paymemt Servicel, (e)rE (Cnified Payment Interface), ()
RIS (Real Time Gross Suttlement), (g) NEPT (National Electronic Funds
Tranufer) and () BIIM (Bharat Interface for Money) Aadhaar Pay.
167 DEPRECIATION ALLOWANCE Para 81.3

Provisions illustrated
On April 1, 2020, depreciated value of a block of assets (rate of depreciation: 15 per cent) is Rs. 80,000. It consists of
ansAad he a
Purchaesa rate ot o atn
1per urnge prev year
B andPlant Cin the block of the assets, though the written down value of the block is zero. No depreciation will be
admissible for the previous year 2020-21 (4, the assessment year 2021-22) as is evident trom the computations
given below:

Depreciated value of the block consisting of Plants A and B 0,00X0

Add: Actual cost of Plant C 30,000
Total 1,10,000

10,000 the difference of Rs.r70000 1s short-tem capital

esleacti cosiderationot ant, though the plant is solt s 0,
;
the amount
gain under section 50(1)t
Written down value of the block consisting of Plants B and CC Nil
Les: Depreciation lor the previóus year 2020-21
Depreciated value of the block consisting of Plants B and Con April 1, 2021

If block of assets cnases to exist

1f a block of assets ceases to exist or if all assets of the block have been
transterred and the block of assets is empty
on year, no
the last day of the previous depreciation is admissible
n such case.

Provisions illustrated
X Ltd. owns two plants-Plant A and Plant B-on April 1, 2020 (rate of depreciation: per cent, depreciated value
15

on April 1, 2020 Rs. 2.37,000). The company purchases Plant Con May 31, 2020 for Rs 20,000 and sells Plant A (on
April 10, 2020), Plant B (on December 12, 2020) and Plant C (on March 1, 2021) for Rs. 10000, Rs. 15,000 and
Rs. 24,000, respectivet
Written down value of the block of assets will be idetermined as under
Ks.
Depreciated value of the block consisting of Plants A and B 237,000
Add: Cost of Plant C 20,000
Total 2,57,000
Less : Sale proceeds of Plants A, B and C 49,000
Written down value of the block (which is empty) 20,000
In the aforesaid case, no depreciation is admissible, as the block of assets ceases t exist on the last day ot the

he bl
(i.e., written down value on March 31, 2021: Rs. 2.08000 minue short-term oRe08
canital
conei
8ven ab
2,57,000 (say, Rs. 3.57
oo
nC
and
A B and C are transferred for a
a will
w be available 1,00.00 shal
Rs. 1,00,000
De available and Rs.
er than
shall be taken as shor-erm
P gatn on sale of Plants A, B

Imported cars-If an imported car was acquired during March 1, 1975 and March 31,2001, deprociation is not
adnm
protesslon side s
used n the business ot running it on hire tor tourist or for the purpose of bustness or
outside India).
India).
Depreciation in case of succession, aalgamation, business ne-organisation or demergr Fith proviso to sec. 32(1) and
sec 44D These provisins are applicable while determining depreciation it there is a change of ownership
of assets because ot the folowing-
.conversion of firm or sole proprietary concern into company;
b. succession to business other than on death- business of HUF taken over by a member, business of a firm
taken over by a partner, conversion of HuF concerm into company
Camalgamation of a company;
d. demerger of a company;

For section 50, one may refer to para 101.3

Para 81.3 INCOME UNDER PROFITS &GAINS OF BUSINESS OR PROFESSION&ITS COMPUTATION 68

conversion of private company/unlisted public company into limited liability partnership; and
amalgamation or demerger of co-operative banks.
In the year in which change of ownership takes place because of the aforesaid reason, depreciation shall be
calculated as under-
1. Find out the amount of depreciation of the previous year in which ownership of assets changes (because of
the aforesaid reasors) on the assumption that the succession, amalgamation or demerger, etc. has not taken
place.
2. The amount of depreciation so determined shall be apportioned between the predecessor and successor, in
the ratio of number of days for which the assets are used by them during the previous year in which ownership
changes.

Provisions illustrated
A firm owns Plants A and B on April1, 2020 (rate of depreciation: 15 per cent: depreciated value: Rs 30,000). It

are sased- anount of

depreciation available to the firm and
company will
e deermt " 1he

Depreciated value of April 1, 2020 30,000

Add: Cost of Plant C purchased by the firm during 272)-21 20,000

Written down value on March 31, 2021 S0000

Depreciation @ 15% 7500
Depreciation available to the firm (ie.86/365 of Ra. 7,500)
Depreciation available to the company (e, 279/365 of s. 7500) 3,733

When an asset is put to use for less thn 180 days in the yoer of acuisition- If any asset falling withina block of
during the previous year and it is put to use for the purpoes of business or
by assessee
assets is acquired the
professionfor a period of less than 180 days in that previous year, the deduction in respect of such asset shall
be restricted to 50 per oent of the amount calculated at the percentage prescribed in the case of block of asset
comprising such asse
Thefollowing table highlights these provisions-
Whetier he asset ts putFor huu many days the æsset Deprociation fof tihe first your tm Deprectam (of any
ut to
s No depreciation Nodepreciation
Less than 1S0 days Half of usual depreciation sual depreciation
es 180 days or more Usual depreciation Usual depreciation

Provisions illustrated
The above provisions anre eplained in the folowing examples
LX Ltd. purchases an old plant (rate of depreciation: 15 per cent) om May 10, 2020. It is put to use on January 10,
2021. In this case, the plant is acquired during 202-21 and in 2120-21 it is put to use for less than 180 days. It is,
therefore, qualified for half of the usual deprecíation (i, 7.5 per cent).
2.Y Lad purchases a plant (being an office appliance) (rate of depreciation: 15 per cent) on May 10, 2020 it is put to
use on January 10, 2022. In this case, the plant is acquired during 2020-21 and in 2020-21 it is not put to use at al.
heretore, tor the previous year 2, no depreciaton will be availabie
t
put to use n the previous year
l De avatlaDie tas thee asset is not acquired during
2021.22 alo to use for less than 180 day
put ,00
ns wo uldng
which Re 31omois naid bw an arount
A an B on Apr
ave
rate depreciaton per
chooe and Re 100.000 paid ins
et epredalue
ch. llk buildine A durine
lt
the previous year 2020-21 (say on January 10, 2021) for Rs. 870.000. In this case, depreciation for the previous year
2020-21 shall be determined as under-

t includes active use as well as passive use. It inchudes an asset which is kept ready for ue, even if it is not actually used due top
dy re
169 DEPRECIATION ALLOWANCE Para 813

Depreciated value of the block (ie, buildings A and B) on April 1, 2020 14,15,700
Add: Cost of building C(purchased on December 1, 2020) (amount paid exceeding Rs. 10.00 by
bearer cheque or in cash, is not considered) 3,10,000
Total 17.25,700
Less: Sale proceeds of building A 8,70.000
Written down value ot the block 8,55,700
Depreciation [as buildingCis purchased in the year 2020-21 and it is put to use for less than 180 days,
depreciation on Rs. 3,10.000 will be 50 per cent ot 10 per cent of Rs. 3,10.000 and on the remaining
amount depreciation will be 10 per cent of (Rs. 8,55,700- Rs. 3,10,000)] 70,070
Depreciated value of the block on April 1, 2021 785,650
IE, in the aforesaid case, building
A is sold for Rs. 1587,000, depreciation will be determined as under:
Depreciated value on April 1, 2020 14,15,700
Add: Cost of building C 3,10,000
Total 17,25,700
Less: Sale proceeds of building A 15,87,000
Written down value 1,38,700
Depreciation [as the written dowm value is lower than cost of building Cwhich is put to use for less
than 180 days, depreciation shall be 50 per oent of 10 per cent of Rs. 1,38,7001 6935
Depreciated value of the block on April 1, 2021 1,31,765

Problems
813-5P1 X LAd. owns the follewing assets ot April 1, 2020:
Asets ACHal COHE Wrifen dawn value Rate of depreciatioe
on Apr 2020 percent)
Bulang
30,00,000 13,5000

8,00,000
anf
1,70,000 45,100

50.000 31.000

Lhe conpany ncguires the follownng assets after Apral 1, 2020

Date of acquisition
Cot Dut when the asetKate ot deprexiathion
Buildimg ,0,000 May 28, 2020 020
u hae
2020 1, 2020
pas 10 00
S
Plant G 1.50,000 2020 Ododr 30 2020
Building F 2.00.000p May 2020
hu5 2020
ant H 1,30.500

Ihe comipary sells the follouwing assets afler April 1, 2020:

Asset Date ofsaie SakE COSerttiont
Building A ay , 020 13 O00
0
Deo 15000
De
P 2020 32,000
Deeir8,
Para 81.3 INCOME UNDER PROFITS &GAINS OF BUSINESS OR PROFESSION & TS COMPUTATION 170

Detemine the amount of depreciatiom for the assessment year 2021-22 om the assamption thut alditkonal depreciation is not
available. Out of purchase price of Plant E of Rs. 5,90,000, Rs. 1.00,000 is paid in orsh All other transactions are ade by
Account-payer cheues
Solution: 1The written down value and amount of depreciation for the assessment year 2021-22 will be as
follows:
o First biock : Building (rale of depreciation: 10%)
Asgregate amount of writen down value of buildings A and B on April 1, 2020 (e, Rs. 13,50,000
15,75,.000
Add: Cost of Burildings D and F acquired during the previous year 2020-21 () 8m000
Les: Sale oonsideration of buildingA sold during the previous year 202-21 (this amount cannot
however, exceed Rs. 15,75000+ Rs. 8M.000) 13,00.00
Written down value for the previous year 2020-21 10.75.000
Depreciation for the previous year 2020-21 (assessment year 2021-22) (e. 10% of Rs. 10.75.000) 1.07/500
Secomd hiock: Building (rate of depreciation :5%)
Written down value of Building C 40,000
Add: Cost ot building E acquired during the previous year 20/20-21 400.000
Written down value for the previous year 2120-21
Depreciation for the previous year 2020-21 (assessnent year 2021-22) (5% of Rs 4A0,000)
Third block: Plant [rate of depreciation : 15%]
Assregate amount of written down value of Plants A and B on April 1, 2020 (ie. Rs. 45,100+
s, 68000) 1,13,100
Add: Cost of Plants E,Fand H acquired during the previous year 2020-21 (ie Re 490,000
Rs. 2,10,00 +Rs. 1.30500, cash payment exceeding Rs. 10,000 is not considered) 8.30.500
Less: Sale oonsideration of Plant B sold during the previous year 2020-21
Written down value for the previous year 2020-21
2000
9,23,600
Depreciation for the previous year 2020-21 (assessment year 2021-22) (ie. 15% of Rs. 9,23600) 1,38,540
oFourth Nok: Plant Frate of depreciation :40N1
Aggregate amount of written down value of Plants Cand D on April 1, 2020 (ie, Rs. 7,000+
R 38,000
Add: Cost of Plant G acquired during the previous year 2120-21 91.50.000
les: Sale consideration of Plants Cand D sold during the previous year 2020-21 (though the
Ceed Rs 38.000+1.50,000) A0 Rs. 215,000 + Rs. S2/000), the amount of recduction cannot
(Le,
1,86,00
Written down value for the previous year 20a-21 Ni
Depreciation for the previous year 2020-21 (assessment year 2021-22)
Depreciation admisible
Fint block 1,07500
Secondblock 22000
Third block 1.38,540
Fourth block
Total 268,0040
81.3-5P2 X ouns tie filloeing assets on April 1, 2020:
Assets Written down value on April 1, 2020 Rate of depreciation (per cent)

Fumiture M,170
Butlding 9,00,50 20
Plant and machinery 2,10,000 20
Plant and machisnery 64,00,00
Plant and muachinery 2,05,000 40
171 DEPRECIATION ALLOWANCE Para 81.3

During the previous year 2020-21, the foliourting assets are purhuasel by X:
Date of purchase Date when the Asset Cot ale of depreciation
asset spuO Rs
E
October 1, 2020 Oetober 9, 2020 Trale es 15,000
June 20, 2020 June 22, 2020 Plani (second-hsaud) ,50,000
Novemfer 30, 2020 December 1, 2020 oreign made car 1,400,000
December 6, 2020 December 10, 2020 Bools r pnyjessiori sse
Determine the amouont of depreciaticm for the assesment yeoar 2021-22
Solution: Depreciation determined as
wil be under
First Sevns and Fourtit Fitis SixtR
Mock Nock CfocR biock iock
t
FurnEture Butldng Plant P

Rate of depreciation 207 155|

Rs
Rs Rs. Rs Rs
Depreciated value on April 1, 2120 20,1709,00,500 210,00064,00,0002,05,000
Cost of assets acquired during the
previous year L,40,000"| 1,92,700 15.000
Written down value 20,.170 9,00.500210,000 65,40.003,97700 15.000
Depreciation 2.017 90.050 42.0009.70500 1,58,540 1875
Aubmisible depreciatiom for the asesmuent yeur 2021-22 KS.
First block 2,017
Second block 0,050
Third block
Fourth block
Fifth block
th h block
TAXMANN 42,000
9,70.500
1,58,540

Total 12.64,952

81.3-6 cONMPUTATION OF ADDTIONAL DEPRECIATION-The provisions ot additional depreciation are given

below
Comditions-The following conditions should be satisfied to claim additional depreciation
1. Mamufacturo/pduction of amy articie-The assessee should be engaged in the manufacture or production of
any article or thing or generation, transnission or distribution of power".
2. New plant and mactinery installed amd acquired after March 31, 2005- Additional depreciation is available only
in respect of new plant and machinery acquired and installed after March 31, 2005. However, the following
assets are not eligible for additional depreciation-
a.ships arnd aircrafts; or
k.any machinmery or plant which, before its installation by the assesoee, was used either within or outside India
Dy any oue Pn
any machinery or plant which is installed in any office premises, any residential accommodation, or in a
unouse; or
d. any office appliances or road transport vehicles; or
.any machinery or plant, which is eligible for 100 per cent deduction in the first year.
Rate of adlditiomal deprnciation-Additional deprciation shall be available at the rate of 20 per cent of the actual
costot new plant and machinery acquired and instaled after March 31.205.1f. however, the asset is putto use
for less than 180 days in the year in which it is acquired, the rate of additional depreciation will be 10 per cent
(the remaining 10 per cent shall be allowed as deduction in the next year).

As trade mark. car and books are purchasod during the previous year 2020-21 and put to use for less than 180 days during the yoar
220-21, onily 05 of neormal deprecation is admissible.
A power generatingg unit wrich dlaims depreciation on straighi-line basis under section 32(1 M) cannot daim any additional
depreciation in respect of investment in new plant and machinery
Para 81.3 INCOME UNDER PROFITS&GAINS OF BUSINESS OR PROFESSION &ITS COMPUTATION 172

Where an assessee incurs any expenditure for acquisition of a depreciable asset in respect of which a payment
(or aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft or
use of electronicclearing system through a bank account (or through prescribed electronic modef), exceeds
Rs. 10,000, such payment shall not be eligible for additional depreciation.
Additiona depreciation at the rate of 35 per cent in Andira Pradesk, Bihar, Telangana and West Bengal-Ifnew plant
in a notified iaskward area in Andhra Pradesh, Biha, Telangana and West Bengal, the above scheme of
additional depreciation has been modified. Investment in new plant and machinery (on or after April 1, 2015)
will be qualified for additional depreciation at the rate of 35 per cent (instead of 20per cent). If, however, the new
plant and machinery is put to use for less than 180 days in the year of acquisition, then additional depreciation
will be limited to 17.5 per cent of actual cost in that year. The balance 17.5 per cent will be allowed in the
immediately succeeding previous year.

Problem-
s
81.3-6P1XLhd. engegnd in the business of manufacture ef computer hartarare in Rajasthn stnce 1985. During the precvioss
yoar 2020-21, #he follouing assets are acpuired amad prut to use

Block1 Block 2Block 3

Rate of depreciation 40%
Number of assets in lhe ock
Dgrecated uhe of the block om April 1, 2020 18.00 2,00
Additioms of plants (neuw) during the previos yeur 2020-21
Plant A 57.50
Plamt B

ANNL
Plant C 17,00
Sale of od plants (orne plant in ench btock) 28,70 42,00

Plants A. Band Careacquirnd dhuring May 2020 andput to se during September 2020. Hosoeoer, Platt B s put to uae in tie
ouf e amnt oy dgrecatho, authmat derecaafio ani
Solution : Comgutaton of addtthornal deprecathon
cgti gus

Plant A
Plant B Plant C
Whether additional depreciation is available Yes Tes
Rate of additional depreciation 10
Rs Rs Rs
Actualcost (Plant A: Rs. 57,50,000-cash payment of Rs. 50,000) 57.00,000 00,000 17.00.000
ADO0O
Additional depreciation (total Rs. 15,20.000) 1140,000
4000 340,000
Computatho of mOral deyreciation
Blck1 Bleck 2 Blook 3
Rate of deprecsation 30 U
Rs Rs
Depreciated value of the block on April 1, 2020 18,00,000 25,00,000 5,00.000
Add: Actual cost of Plants A, B and C anquired during the previous year 1700,000
Total (a)
5700400000
7500,000 2900.000 2200.00
Less:Sale proceeds of old plants 8,00028,70,000942.00,000
Written down value of the block on March 31, 2021 74.92000 30,000 N
Less: Normal depreciation 11,23,800 4500 Nä
Less: Additional depreciation as computed earlier 11,40,000 40,000 340,000
Depreciatecd value of the block on April 1, 2021 52.28,200 N

tAsper rule 6ABBA, prerbed modes of electronic payment ane:e) credit card, ) debit card, (anet hanking (TS (Immediate
Payment Servioel, (e) LrEUnified Payment Intrface), () RTSReal Tame Grosa Setilement), (g) NEFT (National Electronic Funds
Trarsfer) and () BiIM (Bharat interface for Money) Aadhaar Pay.
173 DEPRECIATION ALLOWANCE Para 81.3

Compulation of capital gains

Sale proceecds of old plants 8,000 28,70,.000 4200,000
Whether capital gain is taxable [°the block does not cease to exist, sale
proceeds do not exceed the opening balance ptus new addition, ie. (a)] No No" es
Less: Cost of acquisition [ie, )
2200.000
Short-term capital gain Nu NH200,
Note-X Ltd. can claim normal depreciation of Rs. 11,28,300 [ie, Rs. 11,23,800 +Rs. 4,500]. Besides, it is also eligible
for additional depreciation of Rs. 15,20.000 as computed above

81.3-7 MEANING OF ACTUAL COSr (SEC. 431 -"Actual cost is considered for calculating the written down
value ot a block of asset to find out normal depreciation.Actual cost of a new plant and machinery 1s taken
mto cornsideration to find out the quantum ot additional depreciation. Meaning ot the expressionactual cost
as given in section 43() and other related issues are summarized below-
The acoepted accounting rule tor determining cost of the fied asset is to include all expenses directly
nelatable to acquisition of the asset (viz, cost price of the asset, interest on money borrowed for purchase of the
asset, bank charges), expenses necessary to bring the asset to site, install it and make it tit tor use (vE, carriage
inwards, loading and unloadin8 charges, installation charges, etc.), and expenses incurred to facilitate the use
o0t the assct (, cost otuse t
repains and modiication prior to use ot the asset to make workabie, training expenses
ot the plant, expenses on esntial construc tion work such as, cOla storage roos,
the statt petore the

actalot actual eost

part claimine deneiai
cost" of building for claiming aepraa
s n cortstruction of a building

fan assessee incurs any expenditure for acquisition of any asset in respect of which a payment (or
aEregate paynents Prson ina aay, otnetwe tnan
de ta akcoun pay ch ya arat oue

under section 32AD will not be available pertaining to a payment (exceeding Rs. 10,000) which is made
otherwise than by an account payee cheque/draft oruse of electronic clearing system througha bank account
(or through prescribed electronic mode).

nterest pertaining to the period till the asset is put to use should be added to the "actual cost" of the asset.
However, interest relatable to any period after the asset is first put to use cannot be included in actual cost.
Expendture on traveling incured tor acquiring depreciable assets is part of actual cost.
Actual cost of an asset for he purpose of depreciation is zero if it is used in business after it ceases to be
used for scientific research related to that business.
If inventory is converted into capital asset, "actual cost of such asset shall be the fair market value of such
asset on the date of conversion.
If an asset is acquired by gitft of inheritance, writem down value in the hands of previous owner will be
considered as cost acqusiton.
lIf an asset is acquired from 100 per cent subsidiary company, or from 100 per oent holding company, written
down value in the hands of transferor will be considered as cost acquisition.
If an asset is acquired in a scheme of amalgamation or demerger by an lndian company, written down value
in the hands of transteror will be considered as cost acquisition.
Where any portion of cost is met by Government (or any other person) in the form of subsicdy, grant or
reimbursement, the amount met by the Government (or any other person) shall be deducted from the cost.
If deduction is claimed under section 35AD, actual cost is zerot.
81.3-8 UNABSORBED DEPRECIATION-While dealing with unabsorbed depreciation, one should keep in mind
the following points

Where any capital asset in respect of which deductkon allowed under setion 35AD is deenied to be the income of the assessee in
1cordancWwith the provisions ot sub-ection (8) ot the said Mehon, the actual cot to thee anse shall be the actial cost to the
asscsse, as reduced by an amount equal to the amount of deprociation calkulated at the rate in force that weuld have beon allowable
hadd the aiset been used for the purpoics of business since the date of its acquisition
Para81.3 INCOME UNDER PROFITS&GAINS OF BUSINESS OR PROFESSION &TS COMPUTATION 74

Stepoe Depreation allowance ot the previos year 1s tirst deductibie trom the income chargeablie under
thehead Protits and gains of business o protession
Step
turoIf depreciation allowance is not fully deductible under the head "Profits and gains of business or
profession' because of absence or inadequacy of protits it is deductible from income chargeable
under other heads of incomme fexcept income under the head Salaries) for the same assessment
year
Step tiere If depreciation allowance is still unabsorbed, it can be carried forward to the subsequent assess-
ment yearis} by the sme assessee [see also the porints given below
Notes:
1.No time-limit is fixed for the purpose of carrying forward of unabsorbed depreciation it can be carried
torward for indefinite period, if necessary.
2. In the subsequent year(s), unabsorbed depreciation can be set off against any income whether chargeable
any
under the head Profits and gains of business or profession" or under other head fexcept income under the
head "Salaries") In the matter of set off, the following order of priority is followed in the subeequent year(s)
a. Current depreciation.
b. Brought forward business loss.
.Unabsorbed depreciation.
it may be said that if in the subsequent year(s), there is no brought forward business los, unabsorbed
depreciation can be added to current depreciation for the pupose of claiming deduction.
3. Continuity of business is not relevant for the purpose of above set off and carry forward.
4. Deprectation can be carry forward by the same assessee. This rule is, however, not applicabke in some cases

Problems
81.3-8P1 Xsubmits the

Carrent deprciatiot
Imcome frot otiner keuras
MANN
ncome frot salary (after stamdard deductionm)
Busuness profits thhire dgnchatiot)
Previous yeirs
2020-212021-22

1,00,000
Te,0XR
1,34,000
10,000
2.00,000
5,000
132,00
80,000
Delentine tiae lzxatble incoe of X for the assessment years 2021-22 and 2022-23.
Solution :ASSESSMENT YEAR N1-2 (PREVIOUS YEAR 2020- 21)
Protits and gains of business or protesn
usinesproits
Less: Depreciation 1,34000
Depreciation not deductible against business profits 1,18000
Income from salary 1,00,000
Income from other sources 10,000
Les Depreciation 10,000
Net income 1,03.000
Note: Unabsorbed depreciation of Rs. 1,05,000 will be carried forward
ASSSSMENT YEAR 2122-B (PREVIOS YEAR N21-29
Profits and gains of business or profession
Business income 18000
Less:Depreciation (ie, current depreciation: Rs. 1,32.000
unabsorbed depreciation of the previous year 2120-1:Rs. 1,08,000) 240.000
Depreciation not deductible against business income 222000
Income from salary 200.000
m other sources 80000
Les: Depreciation 2,22.000 Nil
Net income 200.000
175 INVESTMENTALLOWANCE IN NOTTFIED BACKWARD AREAS Para 81.5

Note: As per section 71(2A), an assessee shall not be entitled to set-off of any loss under the head "Profits and gains
of business or profession" against income under the head "Salaries". Consequently, unabsorbed depreciation of Rs.
80,000 is set off against income from other sources and remaining unabsorbed depreciation of Rs. 1,42,000 will be
carried torward.
81.3-8P2 X submits the folloreing purticulars:
Previous years
2020-21 2021-22
Rs.
Business profits (heore degreciation) (50.00 45,000
Crrent depreciation 18,000 20,000
moome from other souraes 20,.000 70,000
Deletine ihe net income of X for tihe assessment years 2021-22 and 2022-23.
Solution: ASSESSMENT YEAR 2021-22 (PREVIOUS YEAR 200-21)
ncome from other sources 20,000
Less: Business loss
Net income
Amount to be carried forward :

Business le 30,0XK
Unabiorbed depreciation 1800
ASSESSMENT YEAR 2022 23 (PREVIOUS YEAR 2021-22)
Profits and gains of business or profession:
Business profits 45,000
Less:Current depreciation 20,000
Profit after depreciation 25,000
Les: Brought forward business loss of the previous year 2020-21 30,000
Business loss of previous year 2120-21 to be carried forward to the pext year 5,000
Income from other sources
Income 70,000
less: Unabsorbed depreciation of the previous year 2020-21 52,000
Net income 52.000
Brought forward business loss can be set off only against business profits and not against any other income.

81.3-9 DEPRECIATION ON STRAIGHTLINE BASIS IN THE CASE OF POWER UNITS - An undertaking engaged in
generation or generation and distribution of power can claim depreciation (in respect of assets acquired after
March 31, 1997) according to any one of the following methods-
Straight be claimed according to straight-line basis in the case of tangible assets at the
Depreciation can
line basis percentage specified in Appendix lA to the Income-tax Rules on the actual cost of individual asset.
Theaggregate depreciation cannot exceed the actual cost
Written Alternately, such undertaking can claim depreciation, at its option, according to written down
down value method like any other assessee. The option for this purpose shall be exercised before the due
paluebasisdate of furnishing return of income. Once the option is exercised, it shall be final and shall apply lto
all the subequent yeaTs.

81.4 Investment allowance for acquisition and installation of new plont and machinery (Sec. 32AC]-
Section 32AC provides investment allowance in order to encourage substantial investnent in new plant and
machinery. Investment allowance is in addition to depreciation. However, deduction under section 32AC is
available only for assessment years 2014-15 to 2017-18.
81.5 Investment allowance in notified bockward areas in Andhra Pradesh, Bihar, Telangana and West
Bengal Sec. 32ADAdditional investment allowance is available from the assessment year 2016-17 under
section 2AD. This decduction is over and above the deduction available under section32AC. Accordingly, it an
undertaking is set up in the notified backward areas in Andhra P'radesh, Bihar, Telangana and West engal by
a company, it shall be eligible to claim deduction under the provisions of section 32AC as well as under section
32ADifitfulfils the conditions (suchas investment above a specified threshold) specified in the said section 32AC
and conditions specified under section 32ALD.
Para 81.6 INCOME UNDER PROFITS&GAINS OF BUSINESS OR PROFESSION&ITS COMPUTATION 76

Comditions for claiming deduction under sectionm 32AD- The following oconditions should be satisfied in order to
avail tax incentive of additional investment allowance under section 32AD-
1. The assessee may be a company or any other person

2. He/itsetsup an undertaking/ enterptise for manufacture or production of any article or thing on or after April
1,2
cAWara area (notitied by the Central Governnment) in Andhra
Pradesh BiharTenen W
4. He/it acquires and installs (tor the purpoes ot said unertaing Ne for
residentialaccormmodation/ guest house, vehicle, ship or aircraft or any plant and machinery, the whole af the
actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing
business ncome ot any previous year.
5. The new assetshould be acquired and instaled after March 31, 2015but before April1, 2020. Both'acquisition
and installation of the new asset (i.e, new plant and machinery) are required to be made after March 31, 2015
but betore Aprl l, 20aU.
Quatum of ircestmment aloomce-If the above conditions are satisfied, investment allowance under section
32AD Is 15 per cent ot actual costof new
asset.It is available in the year in which the new asset is installed.
81.6 Tea/coffee/rubber development account [Sec. 33AB] -An assessee can claim deduction under section
33AB as tollows
Conditiots- The assessee must satisfy the following conditions-
1. Engaged in te/cofee/ruhher plantatiom -It must be engaged in the business of growing and manufacturing tea
or coffee or rubber in India.
2. Deposit-The assessee must make a deposit in a "special account (ie, deposit with NABARD) or deposit
under a scheme approved by the Tea Board or Coffee Board or Rubber Board. Deposit should be made withina
6months from the end of the previous year or before the due date of furmishing return of income, whichever is
earlier.
3. Audit-1he accountsof the taxpayer should be auditod by a chartered accountant and audit report shoukd be
subnitted one month prior to the due date of submission of return of income
Amount of deduction - Amount of deduction is -
a. a sum equal to amount deposited in the "special acount"; or
gains of business or
PrOtession" before Pr ne dection computed under 33AB and before adjusting brought forward
business loss under section 72,
whichever is less.
Other points- The following points should be noted-
1. Where any deduction is claimed under this section, no deduction shall be allowed in respect of such amount
n any other previous year.
2Theamount standing to the credit ot the special account may be withdrawn only for the purpos specified in
as tavable
accordinel ed, the amount not so utilized will be treated
profits of that year and taxed
o nount is withdrawn because
a of closure of business or because of
taable profit and taxed accordingly on the basis asdissoution
of firm the amount
if the businesst
or the firm had not been dissolved. In all other cases, tiz. death of the tapayer, partition of the Hindu
undivided family and liquidation of the company, the amountwithdrawn on closune of account because of the
Occurrence of any of these events will not be included in the taxable income even though the amount has not
been utilized tor any ot the purposes specitied in the scheme.

The amount withdrawn irom the specal account cannot be utilised for acquiring plant and machinery
which is to be instaled in any office premises or residential accommodatiom or guest houses. Barring
computers office appliances cannot be purchased. Even any machinery which is to be installed in an
undertaking producing low priority items (Specified in the Eleventh Schedue) or is an item of plant or
machinery entitied to 100 per cent deduction im any one year, cannot be axquired. Machinery so akquired

here
a peron
made to
nn
aei ina day),any
an pndiue o ACuon ot any at t o wc pamn or
othenwise than by an account paye chieguedratt or ue ot eietronic elesring system threughabank
Acnt (o throgh preribed electronic model, esceeds Ra. 100) ach payment shal nee be elgbie foe invetnent alowance
Asper nule 6iABBA. prescnbed modesof electronicpayment ane :()credit card, ) debit card. (d nethariking (d DMTs(immediate
Payment Srvi.olinitied Payment intertacel. TSKeal 7ime Srose Setlement), (c) NEPT (National Eletronic Funds
0
Transfer) and 0) BEEIM (Bharat Interface for Money) Aadhaar Pay.
177 SITE RESTORATION FUND Para 81.7

shouldnot be transferred within 8 years from the end of the year in which it is acquired (this rule of 8 year is
not applicable in the case ot transter to the Central Covemment, state Covermment, statutory corporation,
Government company or transfer ina scheme of conversion of firm into company)

Problem
81.6-6P1 Find out the tax comseguences m the folleunng aes
70 laid for the assessment yoar 2020-21. it
1. Business prafit of X Lt, a toa grouring arnd mamufacturing compny. is
depsits Rs. lakit in accoat
R 33AB. I# 1nunts to clažm set-of f rought
25 thepeal for claiming deductom umler sectiom

2021fr

021
3. The asset tohich is purchased for Rs. 18 lakt is soid to Yfor Rs. 31 lakt on Decemher 3. 2023.
Solution:
1. Amount deductible for the assessment year 220-21 is
40% of Rs. 70
lakh)
. Rs. 25 lakh (e,
1akh (being the deposit with the "special acount),
whichevers lower.
Rs. 25 lakh is, therefore, deductible under section 33AB Taxabile income of X LId shall be determined as under
im iakk
Business income
Less: Deduction under section 33AB
Net income
As per rule 8, 40% of Rs. 45 lakh is taken as non-agricultural income which is chargeable to tax and
the balance 60% is treated as agricultural income which is not taxable
Non-agricultural income [ie. 40% of Rs. 45 lakh
Les : Brought forward loss
Net income
lakh, being the amount not utilfised up to March 31, 2t21 will be business income (40% of which will be
2R2
taxable as non-agricultural income) for the assessment year 2021-22
3. The new asset is transferred within eight years from March 31, 2021. Consequently, the taxable income fo
the assessment year 2024-25 (ie,previous year 2023-24 in which the asset is transferred) will be determined as
folows-

Basiness income |40% of which is taxable as non-agricultural income 8,0

Short-termn capital gain (t.4, Ks. 51 lakh - Rs. 18 lakh) 1500000
81.7 Site restoration fund [Sec. 33ABA] An assessee can claim deduction under section 33ABA as
follow
Cmditions-The assessee must satisfy the following conditions-
1. Priiction petrlmstrl taxpayer is enged in the business of the prosperting for,o
extraction or prouf sThe
2. Agrement-The Central Government has enteredintoberd
into an
an agreement taxpayer for such business
agreement with the taxpayer business
.Depostttmustmakea depositwith s5i ina spectal account tn accordance wtha scheme appruved by the
framed by the Ministry of Petroleum and Natural as. The deposit should be made before the end of the
previous year.
4.Audit-Books of account of the taxpayer should be audited and audit report should be submitted one month
prior to the due date of submission of retum ot income
Amount of detuction- Amount of deduction is-
a. a sum equal to amounts deposited as given aboves or
d under the head "Profits
and ge ness
profession" before making any deduction under section 33ABA and before adjusting brought forward
forward t
business loss under section 72
whichever is less.
For Rule , see para 187
Para 81.8 INCOME UNDER PROFITS &GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION 178

81.8 Reserves for shipping business (Sec. 33AC)- No deduction under section 33AC is available from the

81.9 Expendlture on scientific research [Sec. 35)- The term scientific research mearns "any activity for the

succesful secientific research. With a view to accelerating scientific research, section 35 provides tax incentives
Under this section amount deductible in respect of scientific research may be clas6ified as under:
Ependiture o research
seesee
orried an Contributiom to outsider
Ye
1. Revenue expenditure under section 35(1)09 Contribution to an approved research
1. association
e 2.
para 81
Capital expenditure under section 35(2)
under secfiom 350)a2/ (t) see para 81.92
2. Payment to National Laboratory under section 35(2AA)
e para 8193 Bee para 894
3.Expenditure on an approved inhouse research Contribution to an Indian scientific research company
S.ee para 81.56)
under section 35(2AB) ee para 8193

81.9-1 REVENUE EXPENDITURE INCURRED BY THL ASSESSEE FMSELF (SEC 35(U40)-Where the assessee himself
carries on scientific research and incurs revenue expenditure, deduction is allowed for such expenditure only
if such research relates to the business.
Provisions illustrated
Suppoe x Lad is engaged in the business ot anutacture ot paper and neurs evene epenses tor conducting
t
business
ch tor improving the quality ot steel, such expenditure s not deductible, as it is not related to the
business ot the taxpayer

Pr-coeicent perid Kevenuce expenses (other than ependiture on providing perguisites to

ated
which the business is commenced. However, the deduction is limited to the extent it is certified by the
prescribed authority

Provisions ilustrated
XLad. starts a business on May 21, 20120. Revenue expenditure (for conducting scientific research related to the
business) incurred by it from May 21, 22) to March 31, 2021 is allowed as deduction for the assessment year
2021-22. Besides, the following expenses on scientific reseanch related to the business incurred by X Ltd during May
21, 2017 and May 20, 2020 (and approved by the prescribed authority) will be allowed as deduction for the
assessment year au
aexpenses on purchase of material used in scientifie research ; and
Bsalary paid to employees (not espenses om perquisites).
81.9-2 coNTRIBLITION MADE TO ouTSIDERS (SEC. 35(1)(aD) - Where the assessee does not himself carry onn
research but makes contributions to other institutions lor this purpose, a deducthon is allowed, as tolows-

To uhom aortribution Oar he girven Quantum of detuction

An approved research association which has, as its object, undertaking of 100% of actual expendituref
scientific research related or unrelated to the business of assessee [sec. 350)(1
An approved university, college or other institution for the use of scientific100% of actual expenditue
research related or unrelated to the business of assessee sec. 35(1)6)
An approved association which has as its object the undertaking of research 100% of actual expenditure
in social science or statistical science or an approved university, colege or
other institution for the use of research in social sciences or statisticalresearch
related or unrelated to the bustmess of the assessee sec. 3501}6m)

APproval is given by the Central Government. Contribution to these institutions are qualified for deduction
even if after the date ot making contribuion, the aPProval granted to these inshtuhons have been withdrawn.

100% of actual expenditure (for the assesment years 2018-19 to 2020-2) and 100% of actual expenditure (from the assessment year
2021-2 onwands).
 EXPENDITURE ON SCIENTIFIC RESEARCH Para 81.9

81.9-3CAPrTAL EXPENDITURE INCURRED BY AN ASSESSEE HIMSELF ISEC. 352- Where the assessee incurs any
ependiture ot a capital nature on scientific research related to his business, the whole of such expenditure
mcurted tn any previous year is allowable as deduction for that previous year.
One should note the tollowin8 POints
apitalependiture on conductins scientific research (relating to thebusiness of assessee) is deductible at
the rate ot 00pertocent in the year in which expenditure is incurred. Deduction is available even if the relevant
aset1not put use tor research and development purposes during the previous year in which the
encuure s incurred.
eabove expenses may be an plant or equipment for research er constructing building (excluding cost of
transport research personnel. pss on purchase of buses to

Where any capital expenditure has been incurred on scientific research related to business before the commence-
ent ot bsiness, thie amount of such expenditure, incurred within three years immediately preceding the com
mencement ot the bustmess, ts deductible n the previous year in which the business is commenced.
The
land.
aforesaid deduction is not available in respect of capital expenditure incurred on the acquisiti on of any

Nothededuction by way of depreciation is admissible in respect of an asset used in scientific research

asset is sold eithout hating been used for other purposes, the following amount shall be chargeable to
l under section 41(6)
tax
a.surplus (i.e, sale price): or
b. deduction already allowed under section 35,
whichever is less.
It is chargeable to tax as business income of the previous year in which the sale took place. The excess of sale
price over cost of acguisition (or indexed cost of acquisition) is chargeable to tax under section 45 under the
head"Capital gains
8194 CONTRIBLITION TO NATIONAL LARORATORY /SEC. 352AA]- The provisions of section 35(2AA) are given
below-
Conditons-The following conditions should be satisfied
1. The payment is made to National Laboratory, university. 11, or a specified person as approved by the
prescribed authority.
2. The above payment is made under a specific direction that it should be used by the aforesaid person for
undertaking cientinc Tesearch programme apProved by the prescribed authorty
conriuton hich is for dedctionhe noteliile fot an oh dedcti butionthe eutibie.Such
contribunon wnien eile
s eaginie tor deaucton s not engDie for any otner aeatuchon under the Act.
81.9.5 EXPENDITURE ON TN4IOUSE RESEARCH AND DEVELOPMENT EXPENSES SEC 35(248)-Section 35(2AB)
provides for a deduction in respectot expenditure on in-house researh and development expenses subjet to
Conditions-One has to satisfy the following Conditions
.The taxPHyer is aconpany.
the company or ay
e
should emgaged in the business ot bo-tehnologyor in any business ot manutacture or
int
3. It
incurs d ech emenditure is of capital nature or revenue nature
(not being expenditure in the nature of cost of any land and building)". The expenditure on scientific research
in relation to drugs and pharmaceuticals shall includc expenditure incurred on clinical drug trial, regulatoryy
approval and tilingg an application tor a patent.
The research and development facility is approved by the prescribed authority.
5. The taxpayer has entered into an agreement withthe prescribed authority for co-operation in such research
and development faciity and for audit of the accounts maintained for that facility or fulfils such conditions
with regard to maintenance ot accounts and audit thereot and furmishing ot reports in such manner as may b
prescribed.
Amount of deduction-If all the above conditions are satisted, then a sum equal to 100f per oent of the
deduction av
heclaimed as r th
uos are ot Ststed, hen
81.9-6 cONTRIBLITION' TO A COMPANY TO BE UIStD FOR SCTENTIFIC RESEARCH (SEC. 33(Mia-Section 35(1)in) is
a
h naent dehionof io0 ner ent ailakReseah s en
mav or ma ol he olate tohe hssiness of
ay or may hot e neted to the busineSS
the person making the contribution
There is no need to ind s
out whether the expnditure capital expenditure or reveue epediture bocause undeT has secaon both
of land is eligible for 100 per cent deduction under section 352) (e para 8193}
150% (for the assessment yean 218-19 to 2021-21) and 100 (from the assessment year 20221-2 onwands)
Para 81.9INCOME UNDER PROFITS&GAINS OF BUSINESS OR PROFESSION &ITS COMPUTATION 80

Restrictiom on payer-company The payee-company cannot claim deduction of 100 per cent under section
352AB). However, the payee-company can claim a deduction to the extent of 100 per cent of the sum spent as
revenue expenditure or capital expenditure on scientiic rescarch, under section 350)
81.9-7 CARRY FORWARID AND SET-0F OF DEFRCENCY IN SUSENIENT YEARS-f on account of inadequacy or
allowed, fully or partly, the deficiency so arising is to be carried forward as if it is unabsorbed depreciation.
pursuance of an agreement of amalgamation, if the
81.9-8 coNSEQUENCES IN CASEOF AMALGAMATION In s
amalgamating company transters to the amalgamated copuy, which an indian company, any asset

atedcompany as they would have applied to the amalgamating company if the latter had not transferred the

81.9-9 PROCEDURE FOR APPROVAL, STATEMENT AND CERTIICATE- The following amendments have been
made with ettect trom April 1,2U21-
Existing research asseciationycompary-Anentity which has taken approval for the purpose of section 35(1)#
Cta) (
betore Aprill,2021 1s required to apply atresh (approval granted up to March 1,2021 shallbedeemed
ncomeax authority on or beor september 30, 2021. 5ubet to this intmation, the notification hall be valid
epenmber Su, 2.ujattto tnis httmatdon, tne noatkaton snau be vana
for a period of 5 assessment years
Nee entities-Any new notification issued by the Central Covemment under section 35()097 (aa)/ () (arter
March 26, 2020) shalleapp
oined to furmish to the prescribed ncoi the rine
year. Form No. 108D is required to be uploaded on or before May 31 immediately following the financial year
in which such donations/contributions are received.
Moreover, the above entities are required to givea certificate of donation to the donors [ie, the taxpayers who
want to claim deduction under section 350m)/ (iia)/ (tm)] in Form No. 10BE on or before May 31 immediately
following the financial year in whuich such dornations/contributions are received.

Problems
81.9-P1 X Ld. commenced productiom of paper o December 1, 2020. The comupamy huzs muade the folkouing eapenditure on
scientifie research up to the yoar ending om March 31, 2021
1On Decmber 13, 2020, the compay peys Rs 80.000 to the indien Agricultara! Rescrdh institate. New Dethi berRg a
prod rearc tstittio under sectiom 35(. pr the prse of arryng out scktiic reseroh in rtuna saence
2.O Deamber 21. 2020 the consyprys Ks. 70.00 fo the ndtsas Instifute of Managenenl, Ahmedabas, betng an approce
3.On ory 10. 2021, the compuany pays Rs 40,250 to am appruei Nathonal Labonalory for arrying eut pnigranes of

4.On Decemhr 23, 2020, the cmpamy purchuases a plot ef iand Rs. 6.00.000. Later on a latoratory buildimg is cnnstricted
fr
(cost of comsiruction: Rs. 4,70,000, date of ampletion of comstruction: March 1, 2021) to start an in-iose research.
5.Before the commencemeut of the prodsctiom, the cmpauny ud made the foiloruing reveme epenhure for its resesrdt lako-
rilory
Expenditure on salaryand perguisite to research personnef and research material during thie 12 mceths ending on Noreember
S0000
0K
o Expenditure om salary of reserch professonal from December 1, 2017 to November 30,2020: Rs. 91,000 fout of toinch amosunt
certified by the prescribed authority ts Rs. 32,000).
oEpenditsre on proeiding renl-fre flat and ctub facility to resesrdi personuael from December 1, 2017 to Nonember 30,
2020: Rs. 18,000
Expendiune on research material frot December 1, 2017 o Nocember 30, 2020: Rs. 76,800 (out of uhich amount certjfied
by the prescribel mutherity ts Rs. 4,300).
o Capital expenuditure o scientiýfie researca (not certijfied by the prrscrihod authority)
Expenditure incurred Expenditure incurred
up to November S0,betiween Dxember 1,
2U17 and Nveme
Rs s
Pure
Cost
ef iud
r ing herbals
of cultivation herhals
of
for resear 50.0

22,000
740000
181 EXPENDITURE ON SCIENTIFRC RESEARCHPara 81.9

to La. under secthon 35() for the assesoment yoar 2021-22, if the scientific
ut ection labe X

soutioon:
The amount of deduction under section 35 for the assessment year 20720-21 will be determined as under -

Payment of Rs. 80,000 to an approved research institution for carrying on research in natural science
deductible under section 35(1)( S0,000

under section 35/1 m

for ciarrying8 on researchin social sckence is deductible
70,000
3. Payment of Rs. 40,250 to an approved Nationat Latoa 40,250
4. Cost of laboratory building (excluding cost of land) [deductible under section 35(2)1 ,70,0000
. Ependiture on salary excuding peryuisite) to research peTonnel and expenciture on material tor
cenihe research incurred within 3years betore commencement of business ts deductibie under secthion
Rs. 30,000 being expenditure on salary and perquisites is not deductible as it is not incurred within
years etore commencement of business Nil
Rs.32000 being expenditure on salary to research personnel as certified by the preseribed authority
within 3 years before commencement of business is deductible 32,000
Rs. 18,000 being expenditure on providing perquisites to research personnel before commencement
of business is not deductible Nil
Rs. 44,800 being expenditure as certified by the prescribed authority on purchasing research material
within 3 years before commencement of busines is deductible 44/800
Cost of land purchased for growing herbals (not deductible)
Rs. 140,000 (being the cost of equipment) is deductible 1,40,000
Rs. 44.600 being cost of growing herbuls is deductible 44,600
Amount deductible under seection 35 tor the assessment year 2021-2 ,21, ,650

81.9-P2 XYZ LM, a pager matufacturing concen,purdhases a achine om Mardh 1, 2018 for Rs. 6,20,000for its labortiory

1. Whal will be he amount of deduction under sectionm 35 on incount of aprital erpenditure of Rs. 6,10,0 for the assessmeunt
yeur 2016-

for iohich the aforesaid machine ispurchased, cnes in 2019 anil the machinery is brought tnto business
2. If the reseurcdh actioity
deereciaied
lue of dhe relerant bleck o sels on ADril 1, 2019 Re 1407 6 te scientic resor ahie iold for
Re.1,90,000on April4, 2020, twhat ueill be the amount of depreciation for the assessment yetr 2021-22 and amount of cdhargeable
roht unader section 4i(3) ?
3.
fthe research activity for ehich the machine us purchased oeases on Norvember 1, 2019 (rmarket zulue of the machine :
Rs. 2,30,000) and the mactine fs solid on April 4, 2020 urithout using it for atother purpow, sale prior being Ra 1,90,000 or
s. 15,00,00
ution
1. As the scientific research fs related to the business of assessee, the whole of capital expenditure of Rs. 6,10,M0 is

prr
Tax treatment of as under
on November 1, 201
depreciation will be

Depreciated value of the block of assets on April 1, 2019 14,07/860

od P o ratory on November 1, 2019 ie, Rs. 6,10,00-deduction
ea under section
3
Nil
*
Written down value 14,07,860
Les: Depreciation for the previous year 2019-20 [15%% of Rs. 14,407,860]
Depreciated value of the block on April 1, 2020 11,96,681
Les: Sale prooreds of machine sold on April 4, 2020 1,90,000
Written down value 10,06,681
lLes: Depreciation for the previous year 2020-21 (15% of Rs. 10,06,681) 1,51,002
Depreciated vaue of the block on April 1, 2021 8,55,679
There will be no capital gain or loss in this case
Para 81.9A INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION &ms cOMPUTATION 182

Tax treatment should be as under:

the sale pre
Rs 1.90 lakl Rs 15 lakhh

Amount chargeable under section 413) (ie. sale proceeds but subject to maximum
of deduction claimed under section 35 for the assessment year 2018-19) 1,900 6,10,000
Capital gain under section 45
Sale proceeds 1,90000 15,00,000
Less:Cost of acquisition 6,10,000 6,10,000
Short-term capital gain 4,20000 8,90,000

Note- It can be seen from the above computation that when the capital asset is transferred for Rs. 1.90 lakh without
putting it to some other use, the taxpayer can claim short-term capital lossof Rs. 4.20 lakh, apurt trom claiming
deduction under section 35-Phanmson Plarmaceuticals Lad. v. CIT (2003] 87 ITD 668 (Ahd.). To avoid double
deduction, it is suggested to the Govemment that a suitable amendment should be made in section 35 incorporating
the following
Where deduction is allowed in respect of a capital ependiture under section 3501o), no deduction shall be
allowed in respect of the said expenditure under any other provision of the Act in any year.

81.9A Expenditure for obtaining right to use spectrum for telecommunication services (Sec. 35ABA)
eton 3ABA provides tax treatment ot pectrum tees on the tolowing lnes-
1. Any captal expenditure incurred and actually paid Tby an assessee on the acquisition of any rght to use
Paving p
ihe
starting from the
vear in which payment made (or commencement
actual is the year of of business, whichever
is later) and ending with the year whenspectrumcomes to an end, irrespective of the previous year in which the
liability for the expenditure was incurred according to the method of accounting regulariy employed by the
assessee or payable in such manner as may be prescribed.
. Where the spectrum is transferred and proceeds of the transfer are less than the expenditure remaining
unallowed, a deduction equal to the expenditure remaining unallowed as reduced by the proceeds of transfer,
shall be allowed in the previous year in which the spectrum has been transterred.
3. If the spectrum is transferred and proceeds of the transfer exceed the amount of expenditure remaining
unallowed, the excess amount shall bechargeabie to tax as protits and gains of business in theprevious year in
which the spectrum has been transferred.
Unallowed expenses in a case where a part of the spectrum is transferred would be amortised.
81.10 Amortisation of telecom licence fees (Sec. 35ABB-The provisions of section 35ABB are given
Delow
Conditions-Deduction under section 35ABB is available if the following conditions are satisfied -
1. The expenditure is capital in nature

2. It is incurred for acquiring any right to operate telecommunication services.

. The
expenditure is incurred either before the commencement of business or thereafter at any time during
Any previous year.
4. The payment for the above has been actually made to otbtain licence
If all the above conditions are satisfied, then one can claim deduction under section 35ABB. If, however, these
conditions are not satisfied, then deduction under section 35ABB is not available [one may claim deduction
under section 37(0)
Amount of deduction-The payment will be allowed as deduction in cqual instalments over the period starting
from the year in which such payment has been made" and ending in the year in which the licence comes to an
end. it may be noted that the deduction starts trom the year in which actual payment of expenditunre is made
irrespective of the previous year in which the liability for the expenditure is incurred according to the method
ot accounting regularly employed by the assessee.

hwndeet
with the previous yeur in which the licence comes to an end.

has t
For this purpose, rule6A been inseried. provides that wherean asessee has opted for and has boen allowed by the Department
of Telecomnunicationa, Governnment ot India (DO) to make deferred payment, the amount which wouid have been payable by
the assessee had he opted for full upfront payment of spectrum fee, will be conaidered as amount "actualy pakd"
183 AMORTISATION OF TELECOM LICENCE FEES Para 81.10

Where deduction is claimed and allowed under section 35AB8, no deduction will be available in respect of the
same expendifure under section 32
Profit or less on sale of telecom liceno-Any profit or loss on sale of telecom licence is taken into consideration
while computing business income. The relevant rules are discused with the helpof Problem 81.10-P2
Cosequences in case amalgamation or demerger- Where under a scheme of amalgamation/ demerger, a
f
telecom licence is transferred to an Indian company, then the provisions of section 35ABB shall continue to
apply to the transferee-company.

Problems
81.10-P1 X Lad, a company proeiding telecommunicatiom sermin, obtains a telecom licmor on Apri 20, 20720 for aperind of 10
yeurs tefch emds em Mlarc 31, 2050 tence jer beng KS. 15 la). Fad owt the anant f descEsom ter setiom 3sABB
a.he extre amount ts pand on Nryo, 2020; or
b. the entre amount ts ptid on April 1, 2021 ; or
cthe cntire amount is paid in three cqpual inshalments on April 30, 2020. April 30, 2021 and April 30, 2022.
Solution:
Sitation (a)-The payment of Rs.18 lakh is deductible in 10 instalments over a period of 10 years during the previous
years 2020-21 to 2029-30 (the amount deductible each year being Rs. 1.8 lakh)
Situation )-The payment is deductible in 9 years starting from the year of payment. ie, the previous year 2021-22
and ending with the previous year 2029-30 (the amount deductible each year being Rs. 2 lakh).
Staatios ()-The entine payment is made in three instalments. Deduction under section 35ABB is availabie as under
Firstintstaiment Second iestementhird steim.emt Tote
Date of payment April 30 2020 April 30, 2021 April 3 2022
Period during which deductiom is available 10year (2021year 2121-2 toyears (2122-23
Amount of payment Rs6
lakh Rs. 6 lakh
Amut olhactibde tm preos y
0.000
6667
222-23 onwards 60,000 667 75,000 o1 667

81.10-P2 X Ld, a compry idt prehdes teleon serions, acpuires a trleam lioenor on Aprl5, 2020 forapertod ef 15 years
uich ends on March 31, 2035 (licemcefees being Rs. 15 tak poid on May6, 2020). The lioencr is trznsfered by XLd.on Deamber
20, 2022 for (a) Rs. 6,92.000, (b) R. 13,70,000 or (c) Rs. 15.60,000. Compute the amount chargeable to tax
Solution:
Cost of lioence which is paid on May 6, 2020 15,00,00
Les: Amount written off during the previous years 2X020-21 and 2021-22 2.00.000
Written down value on April 1, 2022 13,00.000
Tax treatment when telecom licence is transferred on December 20, 2022
Sale comsideration
Rs. 6.92 lath Rs. 13.70 lakinRs 15 60 iaidt

Sale proceeds 6,92,000 13,70,00 15,60,000

Less: Written down value on April 1, 2022 13,00,000 13,00,00 13,00,.000
Surplus 608,000 2,60,0000

Amount deductible during the previous year 222-23 under

sextion 35/ABB(2) 6,08,000
Amount chargeable to tax during the previous year 2022-23 as
notional business income, it cannot exceed the amount of
deduction claimed in earlier years under section 35ABB 70,0D 20000
Slhort-term capital guins
Sale proceeds 6,92.000 13,70,00 15,60.000
Les: Cost of acquisition 15,00.000 1500%00 15,00,000
Short-term capital gain/loss P808,000|913000 60,00
Para 81.11 INCOME UNDER PROFITS&GAINS OF BUSINESS OR PROFESSION & Ts cOMPUTATION 184

Note- It can be seen from the above data that when the telecom licence is transferred for Rs. 692 lakh, the taxpayer
can claim short-termcapital loss of Rs. 8.08 lakh, apart fromclaiming deduction under section 35ABB. Toavoid double
deduction, it is suggested to the Government that a suitabke amendment should be made in section 35ABB
incorporating the toliowing

Where a deduction is allowed in respect of a capital expenditure under section 35ABB, no deduction shall be allowed
in respect ot the said ependiture under any other provison of the Act im any year
81.11 Expenditure on eligible projects or scheme [Sec. 35AC]- Deduction is available under section 35AC
(up to the assessment year 2017-18)f for promoting social and economic welfare or uplift of the public.
81.12 Deduction in respect of expenditure on specified business [Sec. 35AD) Section 35AD provides
investment-linked tax incentive. FrOm the assessment year 2020-21, the benefit under section 35AD is available
at the option of the assessee.
81.12-1 coNDITIONS- 1The following conditions should be satistied to avail of the benefit of deduction under
ection 139AD
Comdition7- Specified business- Deduction under section 35AD is available only in the case of a "specified
business given below
pNcthed business Wao should ocem the Vrotu (if any) Date of co nceient

1. Setting up and operatingAny personn Not requtred On or after April 1, 2009

a cold chain tacility see
Note 11
2. Setting up and operating Any person TNJuATed On or after April 1,
a warehousing tacility for 2009
storage Otagncuitural

. Laying and operatingaAn

prokatce
lndian company or hould be approved by On or atter Apal
CTOSB-COuntry natural gas
or crude or petroleum oil
a comsortum
ot indian etroleumana Natura
companies or an autho-Gas Regulatory Baard
ne
laying and
case o
operatirng
Pipeline network for rity/ Board corpora- and notified by the
/ CrosS-country na
ment WOk for
strae facitiesheine or State Noe 21 distri
on or
integral part of such Act oIn other cases,
2009.
network tCr April1,
4.Building and operating Any person No approval required:On or after April 1, 2010
anywhere in India however, hotel should
hotel of 2 star or above be classified by the
category 1See Note 3] Central overnment as
2 star hotel or abOve
calegoy
.Building and operating Any personn Oapproval required On or after April 1, 2010
hospital anywnc n india, any
hospital with at east
100 beds lor patients

6. Developing and builkding

a housing project
Any person Developing and build-
ing housing proje
On or after April 1, 2010

should be under
sheme to v
tation framed by the
Central Covernment/
State CGovernmeent and
notified by the Board im
ccordance with Pre
sCribed guidelines
7. Developing and bui Any person Developar and On or after April 1,
ding a housing project building a housing pro 2011
ject should be under a
Scheme for alfordable

No deduction under soction 35AC will be available from the asecsoment year 2018-19 onwardá.
 EXPENDITURE ON SPECIFIED BUSINESSPara 81.12

Specified brusines Wio should om the Approcal( amy) Daleof couenomm

of bustnes
housing frarmed by the
Central venment
or a State Cowernment
and notified by the
Board
8. Production of fertilizer Any person Not requiredd On or after April 1, 2011
inindia
etting
or a
up and operatngAny peron
container freight
ove On or after April L, 2012

station
10. Bee-keeping and produc-Any person No approval On or after April 1, 2012

1. Setting up and operating Any person No approva On or after April 1, 2012

warenousing laciity for
storage o Sugar
person No appoval On or after April 1, 2014
2 yLaying and operating aAny
ppeline lor the trans-
portation of iron ore
13. Setting up and operating Any person As notified by the Board On or after April 1, W14
aSem-conductor water macordance with sch
fabrication manufacturing Suideline as may b
unit prescied
14.Developing or maintain- An Indian company or The eligible entity has On or after April 1, 2017
ing and operating or devea consortium of indian entered into an agree
loping, maintaining and comparnies or an autho- ment with Central/State
operating a new infrastrucrity/board/corpora- Government/local
re facility tion/any other body authority/any other
established or constitu-statutory body for deve
ted under any Central loping maintatning, ec
Or State w
trastrucfure
taciny

Note 1-Cold chain facility means achain of facilties for storage or transportation of agriculfural and forest produoe
meat and meat prodtacts. poultry, marine and dairy products.prodtcts ot harticulfure.tkoriculitureand apicuiture and
processed food tems under scientificaly controlled conditions inclading refrigeration and other tacilities neessury
for the preservation of such produce
Note 2-This business should make not less than one-third (for a natural gas pipeline network) or one-fourth (for
petroleum product pipeline nefwork) of its total pipeline capacity availabie ior use on common carrtier basis by any
Person other than the assessee or an associated person, Asociated peTon is a peron who participates in the
management of the asoessee; holds at least 26 per cent voting power in the assessee: appoints more than half of the
board of directors or who guarantees not less than 10 per cent of the total borrowing of the assessee.
Note 3-Where an assessee builds a two-star (or above categor) hotel and, subsequently, while contiuing to own the
hotel, tranefers the operation thereof to another person the asseseeshall be deemed to be carying on the specified
business of building and operating hotel for the purpose of section 35AD.
Note Infrastructure facility means aroad including toll road, a bridge or a rail system (e) a highway project
incuding housing or other activities being an integral part ot the highway project (a water suppiy propect, waler
treatmentsystem, irrigation projt, sanitation and sewerage syte or solid waste management system and (4) a
Por apo mana waway, tnana pot or gaonal
neuw
cnanna in
t S
Conditiom 2- Specifind business should be business- The specified business should not be set up by splitting
up, or the reconstruction, ot a business already in existence. Moreover, it should not be set up by the transter ot
old plant and machinery. However, 20 per cent old plant and machinery 1s permited. Second-hand imported
machinery is treated as new machinery provided it was not used in Indáa earlier.
Codition 3- Audit of books of acoount- Books of account of the assessee should be audited.
Para 81.12 INCOME UNDER PROFITS &GAINS OF BUSINESS OR PROFESSION & TS cOMPUTATION 86

81.12-2 AAMOUNT OF DEDUCTION-100 per cent of capital expenditure incurred wholly and exclusively for the
purpose of specified business carried on by an assessee is deductible in the previous year in which the
expenditure is incurred. However, this is subject to the following two propositions-
1. Expenditure incurred on the acquisition of any land or goodwill or financial instrument is not eligible for
any deduction under section 35AD
2. Deduction under section 35AD is not available pertaining to any expenditure in respect of which payment

of electrornic clearing system through a bank account (or through prescribed electronic modet)] exceeds Rs.
3.Expenditure incurred prior to the commencement of operation, wholly and exclusivedy, tor the purpose ot
any specitied business, shall be allowed as deduction during the previous year in which the assessee
commences the operation of his specified business, if the amount is capitaliZed in the books ot acoount of the
assessee on the date ot commencement ot operation.
81.12-3 cONSEQUENCES OF CLAMING DEDUCTION UNDER SECTION 35AD- The tollowing consequences shoukd be
noted-
L. If
deduction is claimed and allowed under section 35AD, the assessee shall not be allowed any deduction in
respect of the specified business under the provisions of Chapter VIA under sections 80HH to 80RRB for the
same or any other assessment year
. No deduction in respect of the expenditure in respect of whidh deduction has been claimed shall be allowed
to the assessee under any other provisions ot the Income-tax Act.
3. Any sum received or receivable on account of any capital asset, in respect of which deduction has beenn
allowed under section 35AD, being demolished, destroyed, discarded or transferred shall be treated as income
of the assessee and chargeable to income-tax under the head Profits and gains ot business or protession
4. Any loss computed in respectof the specified business shall not be set off exoept against profits and gains, if
any, of any other specified business. To the extent the loss is unabsorbed, the same will be carried forward for
set off against profits and gains from any specified business in the following assessment year and so on (no
time-limit for carry forward of such loss).
. If the assessee owns two units one of them qualifies for deduction under section 35AD and the other one is
not eligible for the sanme and there is inter-unit transfer of goods or services between the two units, then for the
purpose of section 35AD calculation will be made as if such transactions are made at the market value.
6. An asset in respect of which a deduction is claimed and allowed under section 35AD) shall be used only for
in whichs

deduction so claimed and allowed in any previous year in respect of such asset (as reduced by the amount of
depreciation allowable in accordance with the provisions of section 32 as if no deduction had been allo
under section 35AD) shall be deemed to be business income of the assessee of the previous year in which the
asset is so used. However, this provision will not apply to a company which has become a sick industrial
company under section 17(1) of the Sick Industrial Companies (Special Provisions) Act within the time period
of 8 years as stated above

Problem
81.12-P1 On April 1, 2020 X Lad. commenoes the openation of a trehousing fcility in Andhra Pradkesh fer storge of
gTicaitunt proxtuce. he fotiot8 jormiatiot i5 #aiare from ie ecuris of cunpary
Expenses incurred prior to April 1, 2020
RS
Purchase of land for uarehouse S0L00,000
Constructiom cest of teuretouse 8,00,000
Purchase of know-hoso for warehou 10,00,000
Salary to staff 78,000
These exyenes are capitalized on March 31, 2020.
Expenses incurred during 2020-21
Construction cost of teurehouse 60,00,000

per rule 6ABBA preseribed modes of electronic payment ane:(o) credit cand, debit carnd. (a net banking
As
Payment Service), (e)
) ( IMPS (lmmediate
Settlement), NEFT (National Electronic
UPUnified Payment
Interface), RTCS(Real Time Gress (o Funds
Transfer) and 04) BEIM (Bharat Interace for Money) Aadhaar Pay.
 EXPENDITURE ON SPECIFIED BUSINESS Para 81.12

KS.
Purchase of old plant and mnciinery (from domestic waarket) 2,00,000
Purchase of dd plait arnd mncinery Grom oermany 4,00,000
Purdhase of new plant aná madinery 9,00,000
Purdhase of gotusll 3,50,000
Profit and loss account for the year 220-21
KS.
Degreciationof building ( 5%) 3,4000 Amont onlected from persos seing8 78.00,000
precuhom of machinery ( 23.333%)
Cost of kep- atounl turiien o)
Other operng
Aaram a pothot party
Net prut
78,00,000 78,00,.000
Out of other ogerating capemses, a paymaent of Rs. 40,000 is made in caah. Otiher operating expess are deductible snder sectior
37. Find out the tazable income ef X Ltd.for the assessment yoar 2021-22 om the assumptim that X LM. the follouring income
is
from other sources-income from tie business of commission agency:Rs.20,15.00(omputed sunder the yroeisions of the lnaw
:
taxAct) and dicidend frot am Indiam aompaney Rs. 50,000. X LAd.inas not dectared any diridenud so fir.
Solution : Amount dedectihle wnder sectiom 35AD
Expenahiture incurned prikor to the cmencememt ef operutiout (lo tihe exdent thee are aupilalzod)
Purchase of land (not qualified for deduction) Nil
Construction cost of warehouse 8,00,000
Purchase of know-how 10,00,000
Salary to staif 78,000
Expemditure incurred diurng the preo

N
yoir
Construction cost of warehouse 60,00,000
Purchase of machinery (Rs. 2.00,000+ Rs. 4,00.000+Rs 9.00000) 1500,000
Total 93,78.000
Amount deductible under setion 35AD (deduction &100s of Rs 93,78000) 93,78.000
Comgpulatio of tncome freom urehouse
et prolit as per protil and loss account 53,49,000
Adl: Depreciation of building (not deductible as cost of bailding is eligible for dedtction umder
section 35AD) 3,40,000
Add: Depreciation of machinery (not deductible as cost ot machinery s qualitied for deduction under
ection 36AD) 3.50.000
Add: Cost of know-how (not deductible as deduction is available under section 35AD) 10,00,000
Add: Amount paid in cash (operating xpenses) 40,000
Ad:Denation to politkcal party 10,00
Less: Deduction under section 35AD
O93780
Loss from warehouse 9289000
Compulatiom of tncomse

Commission agency business 20,15,000

Warehouse 228900
Business income (loss from operating warehouse, being a spcified business under
section 5AD cannot be set off against any other income except income troma
pecified business) 20,15,00
income from other sources (dividend) S0.000
Gross total income 20,65,000
Les: Deduction under section 80GCGB (donation to a political party) 10,000
Net income 20,55.000
Notes-
1.Second hand imported machinery is taken as new machinery. The business of operating warehouse is formed by
using new amachinery of Rs. 13,00,00 and old machinery of Rs. 200,000. Value of old plant and machinery does not
Para 81.13 NCOME UNDER PROFTS & GAINS OF BUSINESS OR PROFESSION & Is cOMPUTATION 88

exceed 20 per oent of the total value of plant and machinery.Other cunditions of section 35AD are satisfied. X Ltd. is,
therefore, eligible for deduction under section 35AD.
2.Loss from operating warehouse (by virtue of section 73A) can be set off only against profit and gains, if any, of any
other business specified under section 35AD. In this case, X Lid. does not have any other specified business. Loss
will be carried torward (without any time-limut) for being set oft against income trom operating warehouse or any
other specified business under section 35AD.

81.13 Payment to ossociations and institutions for carying out rural development programmes Sec.
35CCA]- Any sum paid to the following is eligible for deduction under section 35CCA-
aany association or institution to be used for carrying out any progranme of rural development approved
before March 1, 1983;
b.an association or institution which has its object the training of pensons for implementation of a rural
development programme approved before March 1, 1983;
cthe National Fund for Rural Development; and
d. notified National Urban Poverty Eradication Fund.
81.13A Expenditure on agricutural extension preject {Sec. 3sccC]Where an assessee incurs any
expenditure on notified agricultural extension project, then he can claim 100 per cent of such expenditure as
deduction under section 35CCC
Other points- The following points should be noted-
1. Project shall be undertaken by an assessee for training education and guidance of farmers.
2. Project shall have prior approval of the Ministry of Agriculture.
3. Ependiture (not being cost of land/ building) exceeding Rs. 25 lakh is expected to be incurred for the
proect
4. For getting approval for the purpose of claiming deduction under section 35CCC, an application in Form
No. 3C-Oshould be submitted to the Commissioner of Income-ta
.
Application shall be accompanied by-
aa detailed note on the agricultural extension project
b. details of the expenditure expected to be incurred and expected date of completion and
Capproving letter of Ministry of Agriculture
81138 Expenditure for skill development (Sec. 35CCD Where a company incurs any expenditure (not
Deng expenditure
Such company
nthe nature ot cost ot any landt or ulng) on any notuied sk developnent proect, then
can claim 100 per cent ot such expenditure as deducticon under section 35cCD
Other points-The following points should be noted-
1.
A company engaged in manufacture/production of any artice/thing (not being alcoholic spirits and
tobacco products) or a company engaged in providing specified services (31 servioes have beennotified for this
purpose) can claim the benefit of deduction under section 35CCD.
2. Expenditure should be incurred on notified skill development project.
3. The project should be undertaken in separate facilities in a training institute set up by Coverniment local
uthority or in an institute affiliated to National Council for Vocational Training or State Council for Voca-
tional Training
For the purpose of claiming deduction, an application should be submitted in Form No. 3cQ to National
Skill Development Agency (NSDA),.
5. A copy of Form No. 3CQ should be sent to the Commissioner of Income-tax.
6.Form No.3cO should be acrompanied by detailed note on skill development projoct, experted expenditure
and expected completion date, letter of concurrence from the training institute.
81.14 Amortisation of Preliminary expenses [Sec. 35D)- ndian company or a resident non-corporate
An
assessee can claim deduction under section 35D in respect of preliminary expenses, Suach ependiture may be

Where a deduction under this section is claimed and allowed for any assessment year in respoct of amy expenditure referred to
above, deduction shall not be allowed in rspoct of such expenditure under any other provisions of the Act for the same or any other
asessment year.
189 AMORTISATION OF EXPENDITURE IN CASE OF AMALGAMATION Para 8115

incurred before commencement of the business or after commencement of the business in connection with
xtersion ot an undertaking or in connection with setting up a new uut,
Qualifying expendihure-The heads of qualifying expenditure are the following
The urvrk shonld be carriodl on by the The uvek c be carried on by thee asessee itseif or by
asesee itself or by a concen any comcers (yyoned er not sproenl)
Pproved by the Botnd
nditure in conneton with p
pendie in
ion of prot rerrt
8a chargs r rartinggany agreemnt wen
to e up o
setug es
the business of

market survey (or any other survey Legal charges for drafting the memorandum and articles of
essary the business of theassciation it the taxpayer is a company
assessee). orengineering services Printing expenses of the memorandum and articles of associa
relating to the bustness ot the assessee thon if the tanpayer 1s a company.
provided the work fs carried on by the Regtstration fee of a company under the provistons of the
assessee himself or by a concernCompanies Ac
which is for the time being apPrOveu Expenses in connection with the public issue of shares or
in this behalf by the Board. debentures of a company, underwriting commission, brokerage
and charges for drafting typing printing and advertisement of the
prospectus.
Maximum ceiling on qualifying expenditure- The aforesaid expenditure cannot exceed 5 per cent of cost of
project or 5 per cent of Capital employed by a company, whichever is more.
oCast of project Cost of project for this purpose is the actual cost (or additional cost incurred after
commencement of business in connection with extension or settingup an undertaking) ot fixed assets, namely,
land, buildings, leaseholds. plant, machinery, furmiture, tittings and railway sidings (induding expenditure on
development of land and buildings), which are shown in the books of the assessee as on the last day of the
previous year in which the business of the assessee commences
a
oCapital employed in the business of compay It is the aggregate of the issued share capital, amount
outstanding as share premium account, debentures and long-term borrowings, as on the last day of the
previous year in which the business of the company commences (in the case of an existing company only
capital, debentures and long-term borrowing issued or obtained in connection with the extension of the
undertaking or the setting up of the new unit of the company, shail be considered).
unt of doductiom-One-fifth of the qualitying
vears es
allowable as deduction in each of the five
case may be, the previous
ucdertaking Is completed or the new unit commences production or operation.
te
Atreport rort-n thece otapeTon (other than a compamy/co-oPetamveoty), deucton avalabke oniy s
ta t s
audit o6auned trom achartered antart Form No. AE, electronac uploading B required
one month prior to the due dateot submission ot retum ot income).
o Consequences in the case of amalgamation or demerger-The benefit of deduction under section 35D is not lost in
a case where the undertaking of an Indian company which is entitled to the amortisation is transferred to
another Indian company in a scheme of amalgamation or demerger within the 5-year period of amortisation.
In that event, the transteree-company can claim the deduction tor unexpired period.
Dtferemt epenses-The tabie given below highlights whether different epenses are deductible under wiction
35D or 37()
Ditferent epenses Incurnd hya new comces mcurrod by at existing
befoee comnenomen omorrn sler cmmenoe
easness
Epenitue on esue ot bonus sthares Sec.50 Sec.S
. 35D
Expenditure on issue of shares (not being bonus shares)
Expenditure on issue of debentures . 35D

81.15 Amortisation of expenditure in the case of amolgamation/demerger Sec. 35DD)- If an Indian

sec. 37(1)

company tncurs any e

five successive years in tive equal instalments. 1the firt
Te instaiment is deductible
first instaliment is deductible in
in the previous year
the previous yearin which
in whuich
Para 81.16 INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION &TS COMPUTATION 190

amalgamation or demerger takes place. A similar provision is applicable in the case of amalgamation or
demerger of co-operative banks.
81.16 Amortisation of expenditure under voluntary retirement scheme [Sec. 35DDA] Expenditure by
way of payment of any sum to an employee in carnection with his voluntary retirement (under any scheme of
voluntary retirement), is deductible in 5 successive years in 5 equal instalments. The fint instalment is
deductible in the year in which such amount is actually paid (deduction is available on payment basis and not
on accrual basis). Each part of the payment in connection with voluntary retirement is deductible in 5 years in
5 equal instalments.

e tolowing poinis should be noted-

1. above rule is applicable even if the scheme of voluntary retirement has not been framed in accordanoe
The
with guidelines prescribed under section 10(IOC).
2. Where voluntary retirement payment is made by predecessor and before completion of 5 years it is
succeeded in a scheme of business reorganization (like amalgamation/ merger of Indian companies or co-
operative banks, conversion of firm/proprietary concern/private or unlisted company into company/1LL),
the deduction for the remaining years will be available to the successor from the year in which the conversion
takes place

Provisions illustrated
According to voluntary retirement scheme of X Lad., each employee will get voluntary retirement compensation in
threeinstalments (35 per oent at the time of voluntary retiremernt, 10 per cent on November 1of the frst financia
yearimmediateiy atter retirement and remaining 33per centon berotesondtanye eey
Ouhtary retirement (total compensation of Rs 80 lakh payable by way of 3 instalments as stated abovej
Solution
Prectous yeurs instalmont of Rs, 28 Total
wtich the puyment
inFirst
akh (etng 35 pay
Secomd instalment
Rs8 lakit (being 20
Zhtrd mstatiment of
Rs 44 iakh (being
s deductible able iduring tihe
fan payable onm Nereipc pya on
cnl year 2020-21) 1,2024) Decemter 1, 2022)
Rs
2020-21 5,60,000 5,60,000
2021-22 5,60,0 1,60.000 7.,20,0
2022-23 5,60,000 18000 880,000 1600,.000
2023-24 5,60,000 1,600 880,000 16,00,000
24 5,60,000 S,NO,00 1600000
160,000 8,80000 10,40,000
U26-2 8,80,000 8,80,000

81.17 Amortisation of expenditure on prospecting, etc. for development of certain minerals fSec. 35E] -
Section 35E provides for the amortisation of expenditure incurred wholly and exciusively on any operation
relating to prospecting for the minerals or group of associated minerals or on the development ot a mine or
other natural deposit of any such minerals or group of associatecd minerals specified in the Seventh Schiedule
Wiho cm claim deduction -Deduction under section 35E is allowed only in the case of Indian compunies and
resident assessees other than companies.
Qualifying espenditure - wohen it should be incurmed-The qualifying espenditure should be incurred during the
year of conmercial production and tour yeas uneaey preegye
Qalifying expenditure-ehat does it inchude- Expenditure incurred wholly and exclusively on any operations
relating to prospecting for any mineral (or group of associated minerals) specified in the Severnthheue
on the development of a mine or other natural depositof any such mineral or group ot associale uneas
qualitying expenditure,Howevera few pensese Pn
acquisition of site, capital expenses on acquiing building Plant, machinery anc rurniture) aire ec
Amount and period of deduction-The amortisation of qualifying expenditure is allowed in equal nstalments
over a perTIod ot 10 years. The amount deductible for each year is
one-tenth of qualiying expenditure or
;

income (before section 35E deduction) of the previous year arising from commercial exploitation of any
mine (ie, not only the mine in respect of which commercial exploitation restilted from the ogperation ot
191 INTEREST ON BORROWED CAPITAL Para 8120

development in question but also where commercial production has been established as a result of
operations undertaken earfier) or deposit of minerals of any other nature,
whichever is less.
The following points should be noted-
1. Income in () supra includes only income from mine operations. lt does not include any other income of the
taxpayer.
2. Deduction is available for a period of 10 years beginning with the year of commercial production.
3. The amortisation of qualifying expenditure is allowed over a period of 10 years against the profits arising
trom commercial eplottation ot any mine or natural deposat
4. Where the instalmernt of amortisable ependiture relating to a given year cannot be wholly absorbed by the
profits against which the amortisation is to be allowed, the unabsorbed amount is to be carried fonward to the
subsequent year and added to that years instalment and so on for succeeding previous years. Such carry
forward is allowed onily up to and including the lenth previous year as reckoned from the year of commercial
production. if there is any unabsorbed amount at the end af the tenth year, it will lapse.
Audit report- If the assessee is a person, other than a company/co-operative society, then books of account of
the relevant year(s) in which the expenditure is incurred should be audited. Audit report shall be submitted
electronically one month prior to the due date of submission ot returm of income
Comsequemoes in the ctse of amalgamation or demerger
In the case of amalgamation/demerger of Indian
companies, the above benefit for the unexpired period will be available to the transferee.
81.18 insurance premium (Sec. 36(1)- Insuranoe premium is deductible in the following cases-
1Any premium paid in respect of insurance against risk of damage or destruction of stocks or stores, used for
the purposes of business or profession.
2. Insurance premium paid by a federal milk co-operative society on the lives of cattle, owned by the members
of a primary milk co-operative society affiliated to it.
3. Health insurance premium of employees paid by employer by any mode other than cash.

81.19 Bonus or commission to employees [Sec. 36(1)()] Bomus or commision paid to an enployee is
allowable as deduction subject to certain conditions:
Admissihle only if not payahle as profit or diovidend - One of the conditions is that the amount payable to
employees as bonus or commiseion should not otherwise have been payable to them as protit or dividend. This
is provided to check an employer from avoiding tax by distributing his/its profits by way of bonus among the
member-employees of his/its concern, instead of distributing the sum as dividend or profits.
Deductihle on payment basis - Bonus or commission is allowed as deduction only where payment is made
during theprevious year or on or betorne the due date ot furmishing retum of income under section 159.
81.20 Interest on borrowed capital [Sec. 36(1)(i) - Interest on capital borrowed is allowed as deduction if
the following conditions are satisfied-
. The assc
st
2. The money so borrowed must have have been the purpoe
been used for the purposeot
of busnes
business.
3. Interest is paid or payabie on such borrowing
Assesee must hrtve borroued oapital- Interest in respect of capital borrowed for the purpose of business/
profession is a permissible deduction. Interest on own capital is not deductible. In other words, interest shall be
paid to another person. Interest paid by one unit of the aseessee to another unit is not deductible
oThe following propositions should also be kept in view-
1. Deduction of interest on borrowed capital cannot be denied only because the borrOwed capital produces
non-taxable income.
2. Guaranteed interest paid to shareholder on paid-up capital is not deductible.
3. Interest paid to wife and daughters on money allotted to them on partition, is deductible.
4.Interest paid by a firm to partners is deductible according to the provisions of section 40() [ie, ®12per cent
per annum simple interest). However, interest paid by an association of persons to its members is not
deductible
Capital must be usedfor the purpose of business-Capital should have been borrowed for the purpose of business
or proren
ohnterest onm cagital borrouel for acguiring a ouprital aset - Interest liability pertaining to the period beginning
trom the date on which capital is borrowed for the acquisition of an asset till the date, when such asset is fint
Para 81.21 INCOME UNDER PROFITS & GAINS OF BUSINESs OR PROFESsiON &TS COMPUTATION 192

put to use, should be capitalised and it cannot be elaimed as deduction under section 36. Only interest on
capital borrowed to purchase a capital asset for business purposes pertaining to the period after the asset is put
to use, is deductible on year to year basis under section 36.
Other points- The following proposition taken from differentjudicial pronouncements should also be kept in
1. 1f borrowed money is utilised in earning non-assessable income, no deduction is allowed for interest paid on
such borrowing
2. It is not for the income-tax department to examine whether there was no need to borrow money because the
assessee had ample fund of his own.
3. A taxpayer who is engaged in the business of trading in paper can claim deduction in respect of interest on
capital borowed for the setting of a garment business (even if the new business generates negative income).
. It is
not open to the Assessing Officer to reject the claim of the assesee in respect of the interest paid on that
capital merely because the use ot the capital is unremunerative
5. Interest on money originally borrowed for business purposes would be disallowable in a subsequent year in
which the money 1s used tor non-business purposes
. Interest paid by the assessee on money borrowed for paynent of dividends is an allowable deduction.

Where the assessee-partner borrows money for investing as capital in partnership, interest paid by the
assessee on borrowed money is allowable as deduction.
. Interest on money borrowed to pay income-tax is not allowable as deduction. Interest for late paynent/ non-
payment of income-tax/advance tax/tax deducted or collected at source or for late filing of return, is not
allowable as deduction. Similarly, where interest is paid for meeting tax liability of partners, such interest is
not deductible.

81.21 Discount on zero coupon bonds [Sec. 36(2)(ia))-Discount on notified zero coupon bonds (being the
difterencebetween amount received and the amount payable on redemption/maturity by the issuing com
pany) is allowed as deduction on pro rata basis. The pro nata deduction is available having regard to the period
of life of such bond. Period of life of the bond means the period commencing from the date of issue of the
bond and ending on the date of the maturity or redemption of such bond.
What are zero coupon bonds- According to section 2(48), zero coupon bond is a notified bond issued by any
infrastructure capital company (or infrastructure capital fund or public sector company or scheduled bank) on
or after June 1, 2005. From the assessment year 2022-23, it also includes a bond issued by infrastructure debt fund.
In respect of such bond, no payment/ benefit is received (or receivable) by a bondholder before maturity/
redemption.

Problem
81.21-P1Zero coupon bomds are issued hy X Lhd. (infrasiructure cpital oompany) on October 4, 2020 (issue price: Ra 85. fjace
alue as well as amount payable at the time of redemption:Rs. 100, redemption date: July 20, 2031, mumber ef bonds subscribed
by prublie: 1,00,000), These bonds are notificd by the Gorernment as zero coupom bonds.
Solution: Pro nata deduction arvailahle to X Ltd.
Date of issue: Oetober 4, 2020
Date of issue (rounded of): October 1, 2020 (f fraction is 15 days or more, it is taken as one month)
Date of redemption: July 10, 2031
Date of redemption (rounded off): June 30, 2031 (if fraction is les than 15 days, it shall be ignored)
Amount of discount offered by X Ltd. IRs. 100- Rs. 85) x 1,00,000 Rs. 15.00.000
Period of life of the bond Qune 30, 2131 minus October 1, 2120; 129 months ()
Pro rata deduction for 1 month: Rs. 11,628 [a)+ (6 (9
Amount deductible for the previous year 2020-21: Rs. 69,767 ie. () *6]
Amount deductible for the previous years 2021-22 to 2030-31: Rs. 1,39.535 [Le, (o) * 12 per year
Amount deductible for the previous year 2031-32: Rs. 34,584 [ie. (e) * 31

81.22 Employer's contribution to recognised provident fund and approved superannuation fund [Sec.
36(1)(iv) Employer's contribution towards a recognised provident fund or an approved superannuation
fund is allowable as deduction subjoct to the limits laid down for the purpoe of recognising the provident
fund or approving superannuation fund
193 AD DEBTS Para 81.27

81.23 Employer's contribution to notified pension scheme (NPS) (Sec. 36(1)iva)]- Employer's contribu-
tion towards NPS is deductible (in the instant of 10 per cent of salary of employees). Meaning of salary for
this purpose and for the purpose of calculating house rent allowance exemnption is the same.
81.24 Contribution towards approved gratuity fund [Sec. 36a)]- Employer's contribution towards an
approved gratuily fund created by him exclusively for the benefit of his employees under an imevocable trust
is allowable as deduction.
81.25 Employees contribution towards staff wetfare schemes [Sec. 36(1)va)] Section 224) defines
income. ause () of section 224) provides that any sum received by an emplayer rom his employees as
contribution to provident fund (or any fund for the welfare of such employees) shall be included in the
employers income.

Moreover, section 36(1)(0n) provides that any sum received by the employer as contribution from his
mployees towards provident fund (or any weltare fund of such employees) shall be allowed as deduction
only if such sum is credited by the employer to the employees account in the relevant fund on or before the
due date. For this purpose "due date means the date by which the employer is required to credit such
contribution to the employee's account in the relevant fund under the provisions of any law or term of contract
of service or otherwise. The cumulative impact of these provisions is ilustrated in the problem given below-
Explanation has been inserted by the Finance Act, 2021 in section 36(1)(a) to clarify that the provisions of
An
Section 438 does not apply and deemed to never have been applied tor the purposes ot determining the "due
date under section 36O(0a).
Thecumulative impact of these provisions is illustrated in the problem given below-

ss Problem-
81.25-P1 The profit anul loss acount for the year endäimg March 31, 2021 i us flious

A
2.30,000
COst of gds sold
3,000Saieprocents gonts
Salary to enpioyees

d pro 00
2.30,0020 2,30,00

The salary of Ks.

900 comprises KS. 9,000 aS enployee s contrnbuton toearas recogsed provndent fomd. Out of RS. 9,000,
Rs. 6,000 t8 eredited in the enployes' provident find teittin "dne date" aná Rs. 3,00 45 creadited after "átue diate". Comyute tihe
iet tmcome AJor ihe aSessmierit year 2021-22.

olution
Net prof o,000
Add: Employees' contribution towards provident fund [it is first included in income by virtue of
section 2(24}0)| 9,000
Total 55,000
:Employees contribution towards provident fund if credited on a date before the due date
Sec. 6,000
Net incoe 49,000

81.26 Write off of useless or dead animals (Sec. 36(1)(vi)) - In respect of animalsf which are used for the
purposes of business or profession (not as stock-in-trade) and have died or become useless, the difference
Derween the actual cost or the arumais to the assessee and the amount realised (u any) n respect ot carcasses
or sale of animals, is allowable as deduction
81.27 Bad debts (Sec. 36(1)(vii)] Amount of any debt or part is allowable as deduction subject to the
followingconditions
or of an
a.the debt has been taken into account in computing the income of the assessee of that previous yearmoney
earlier previous year, or represents money lent in the ordinary course of business of banking or
lending which is carried on by the assessee ; and
b. it has been written off as irrecoverable in the accounts of the assessee for that previous year
Inorder to claim deduction under section 36(1)(pi), one must keep in view the following points:
fWord 'animal"' used in section 36(1X0) inchudes birds and chicken alo
Para 81.27 INCOME UNDER PROFITS&GAINS OF BUSINESS OR PROFESSION &Ts cOMPUTATION 194

There must be a debt - Before claiming an amount as a debt, it must be shown that it is a proper debt. Unless,
therefore, there is an admitted debt it cannot be allowed as bad debt when it becomes irrecoverable.
Debt must be incidental to the business or profession of the assesse-Debt must be incidental to the business or
profession carried on by the assessee, whose income is chargeable to tax.
Debt must have been taken nto account in comyputing assessatie irncome- No deduction on account of bad debt is
Cod deot represernts noney lent in
rdinary course of monev-lendine or
or hankine ****va
eng banking business.
D must hane heem writen off in the books ofacoumtttofofthe
fihe asse
Debt aee-Decbt should be writen off as irrecoverable
n the boks o the assessee n the previous year in wich ciam for detction is made
foorhad and
tis pot neessry
p anster to provsion
for and dohfldb
doubtful debts account shall not be taken as bud eoes wa*

Provisions illustrated
To illustrate the aforesaid provisions the following examples are given-
1.Xa trader, sells goods on credit. Out of the credit sales made in the current year (or in the earfier years), Re. 50,000
is written off as bad debt. As sales turnover is considered in calculating income, bad debts so written off is allowable
as deduction.
Yowns an industrial undertaking One of the plants in the factory is replaced by him. The old plant is sold for Rs
60,000 on credit to A. A, however, becomes insolvent before making payment of sale consideration. This is capital
loss and it cannot be debited to profit and loss acount. It is, therefore, not deductible. In other words, "debt" should
De revenue in narure
3. Z, a money-lender, gives a loan to A. Before repaying loan along with interest, A becomes insolvent. In this case if
nferest is inciuded in income onaccrual basis, it can be written otf as bad debt and the same is allowable as
deductson. Loss on aceount ot nan-recoverY of lean is also deductible t it 1s writen oft im the books at account (the
condition that the debt is deductiblie only if it was taken into account in computing the total income of the taspayer,
is not appicable in the case of non-recovery ot loan where it represents money lent in the ordinary course ot money-
lending bustness

Audjustment at the time ofrecoery-A deduction on account of bad debt is based upon a mere estimate and it is
alowed as deduction on the basis of anount written ott in the books of account ot the taxpayer. 1heretore, in
a case where debt ultimately recovered is less (or more) than the amount of debt left after writing off bad debt,
some adjustment is required. The mode of adjustment is discussed in the problem given below-

Problem
8127-P1X.atrader. sells gds on credit to Y (outstanding halnce on Aril 1, 2020: Rs 40.000 ad ttal bils iesucd during
32 ht. HH
000 as bad debt. o
Deer 19 202X
fYas d f t a e5
000, er d
Rs.55,000, or ()Rs. 70,000. Find out tbhe tax conseuences for diferent assessment yezr
Solution : Asessment ear 2021-2- During the previos year 2120-21, X writes off Rs. 32.000 as bad debt. It s,
therefore, deductible for the assessment year 2021-22
Asessent year 2022-253-Tax treatment, when recovery is made during the previous year 221-2 wil e as
follows
Amont of debt as on April 1, 2021 (Le, Rs 1
1akit-Ks. 10,009 Amount reaeened as full Detucthowincoe
(9

Rs
58,000 15,000 43000
58,000 55,000 3.000
58,000 70,000 12000
In situation (o) Rs. 43,00) is deductible as bad debt if he writes off Rs. 43.000 in his books of account as bad debt
aurngoo foe the vear endine March 31, 2022 12.000 the ev
fant In situation (), however, Ks. ng

a debtbecomes irecerabeon the bases ot incomecomputain and

oe standards withut rerordingihe eme in the
acceunts, it shall be allowed as deduction in the previous year in which such debt becomes irecoverable and it shal be deemed that
MDCth debt has been written oft as irrcoverable in the acrounts for the purpones of setion s6(0)NG)
195 FAMILY PLANNING EXPENDITURE Para 81.30

recovery, is taxable as business income by virtue of section 41(4) for the previous year 2021-2 [irrespective of the
wi
twhether the business is in existence during the previous year 2121-2 or not)
fact

Debts of a discontinued business not deductible No allowance can be claimed in respect of bad debts of a
business which has been discontinued betore the commencement of the prevlous year. Such bad debt cannot
be deducted even trom profits of a separate existing business.
Allowable in the hands of successor-In some cases (es one of thee partners taking over business of the firm with
all assets and liabilities or conversion of firm into company by taking over all assets and liabilities), the
successor can claim the benefit of deduction of bad debt, if the successor carries on the business of the
predecessor and bad debt is written off in the books of account of the successor
81.28 Provision for bad and doubtful debts relating to rural branches of scheduled commercial banks
(Sec. 36(1)(via)]- A deduction is allowed while computing the taxable profits in respect of any provision for

bad and doubtful debts made by a bank and financial ínstitutions. The amount of deduction is given below:
Amountdedactibde in respeci of protision for bad anmd doubifal detets
Scheduled huank Public firancinl institutioE, Fonign hank or
foier thana jonetg State finauC cororalion, m-mktng
hunk], a State ndustral iestnent anchal compnany
scheduled bank md orratio

Total income (computed before this 8.5 per cent of such 5 per oent of such per cent of
deduction and amount deductible under income tncome such income
bections 80C to 800)
AggTegate average advances made by 10 per cent of
rural Daenas
Cn advances
Rural brunch-"Rural branch means a branch of a bank situated ina place which has a population of not
more tharn 10,000 according to the last preceding census ot whicth the relevant figures have been pubished
before the first day ot the previous year.
Deduction in the case of an assesse toho is eligible for deiductiom under iection 36(1)(ei) and (via) - In the case of
above taxpayers, no deduction is allowed under section 36(1)(ori) in respect of bad debts unless the amount of
bad and doubtful debt is debited to the provision for bad and doubtful debts account and the deduction
admissible under section 36(1)(0in) is limited to the amount by which such debt or part thereof exceeds the
credit balance in the provision for bad and doubtful debts account.
Non-banking finanoe compunies (NBFCS)-NBFCs are not covered by section 36Mcio) and, therefore, are not
entitked to deduction of any provision ereated for bad and doubtful debts even if such provision is created and
based on the guidelines issued by RBI.
81.29 Transfer to special reserve [Sec. 36(1J(vii)) -A financial corporation, banking company,co-operative
bank and a housing finance company can claim deduction under section 36(ri) as follows, if a few
conditions are satistied
a. the amount transterred during the previOus year to the specal reserve account created for the purposc o
section 36(1J(o1n) : o
20 per cemt of the protits
derived from the business of provicding long-term finance before claiming
deduction under section 36(1)(0ii) :or
20 per cent of (paid-up share capital and general reserve as on the last day of the previous year) minus the
balance of the special reserve account on the first day ot the previous year,
wnichever is lower.
Aount rn rom reseroe accoun any amount witndrawn trom the aroresaid reserve account in
whether the busin
year or not n (4A), regardless of the fact
existence in that
81.30 Family planning expenditure [Sec. 36(1)(i))- Any bona fide expenditure incurred by a company for
the purpose of promoting family planning among its employees, is allowable as deduction. Ii, however, such
expenditure is of capital nature, one-fifth of such expenditure is allowable as deduction for the previous year in
which it was incurred and the balance is deductible in equal instalments in the next four yeans
Para 81.31 INCOME UNDER PROFITS&GAINS OF BUSINESS OR PROFESSION&TS COMPUTATION 196

The following points should be considered

1. No deduction is available under section 36(1)) in the case of a non-corporate assessee. A non-corporate
assessee may claim deduction under sections 32 and 37(1) if the relevant comditions are satistied.
2.Any family planning ependiture which not allowed as deduction due to inadequacy of profit, shall be set
is
off and carry forward as if it is unabsorbed depreciation.
81.31 Revenue expenditure incurred by entities established under any Central, Stote or Provincial Act
Sec. 36(1)(xii))- Any revenue expenditure incurred by a notified corporation or a body corporate (by
whatever name called) constituted (or established) by a Central, State or Provincial Act for the objects and
purposes authorised by the Act shall be allowed as a deduction.
81.32 Banking cash transaction tax, securities transaction tax and commodities transaction tax- These
taxes are deductible. Howeve, securities transaction tax and commodities transacted tax are deductible only if
the assessee is a dealer in seecurities or commodity derivatives.
81.33 Contribution to credit guarantee trust fund [Sec. 36(1) (xiv))-A public financial institution can claim
deduction in respect of its contribution to the Credit CGuarantee Fund Trust for Micro and Small Enterprises.
81.34 Expenditure by co-operative society for purchase of sugarcane (Sec. 36(1)(xvi)] Deduction is
allowed in respect of expendifure incurred by a co-operative society (engaged in the business of manufacture
of sugar) for purchase of sugarcane at a price which is equal to (or less than) the prioe fixed or approved by the
Covernment.

Problem
8134-P1 XYZ Co-openatire Sugtr Lid. is argisiered oopenatite sodiety under the Tamil Nadu Cop Sosietics Act. tistin
Saniers d engeged in cultiation of sgarone). The olionotig dala is rioted from thie axoounls af uhe co-oyperate sociey
Rs
Gros turmocer of sale of sugar amd by protucts 2.87,86,000

Rs 3200 per io d e r yurto anufacture sugar: 8,700 tonnex

2,78,40,00
Olher expenmses (including depreciation) 10,000
Net profit as per pmofit and loss account 36,000
Other information - Sugarcane praunement price fixed by Tamil Nadu Copernment is Rs 2800 per kute fe, Fair
Reomunerutine Prce (FRP) fred by the Centrul Goerment Rs. 2,400 per tonne + Stute Astetsory price: Rs. 400 per tone).
Houeer, ngher amet ts paid (as gTem abooe) ty thie assesscr co-opruttv tyur procuring sugurcane frovt its members

Solution : By paying higher amount for prourement of sugarcane, the acounting profit of the society has been
However, tax liabilily of its members will not increase as income in the handsof members is agricultural income which
is not chargeable to tax. To check this practice, clause (rvi) was inserted in section 36(). Under the amended
provisions, co-operative societies (engaged in manufacture of sugar) will get deduction pertaining to punchase ot
Sugarcane ata price which is equal to (or less than) the prioe fixed or approved by the CovernmentTheexcessamount
if any) will not be deductible under section 36 ar under section 37 (or under any provisions of the Act).
Taxable income of XYZ Co-operative Sugar Ltd. will be calculated as follows

Net profit as per profit and loss account 36,000

Add: Cost of sugarcane debited to profit and loss account 2,7840,0
Les: Cost of sugarcane as per section 36(1)(1vii) (ie, 8,700 tonne * Rs. 2800 per tonne) 243,60,000
Taxable income 35,16,000

81.35 Marked to market loss [Sec. 36(1) (xvii)]- Deduction in respect of any marked to market loss (or other
expected loss) shall be allowed only if much loss is computed in accordance with notified Income Computation
and Disclosure Standards (ICDS).
81.36 Advertisement expenses [Sec. 37(28))- Deduction is not available in respect of expenditure incurred
by an assessee on advertisement in any souvenir, brochure, tract pamphlet or the like published by a political
party.
197 GENERAL DEDUCTION Para 81-38

to appolitical party is deductible

Contributiontoa
Contribution under section 80KGKGB (if a contribution is made by an Indian
CC.G a contribution is made by a er than dian
Expenditure by way of advertisement in a magazine owned by a political party is treated as "contribution to
olitical party for the purpose of section 80KGB, but not for the purpose of section 8CCC. In other words,
advertisement expenditure (in a magazine owned by a political party) is deductible undet section 80GGB (if
the taxpayer is an Indian company) but the same is not deductible under section 80KAC (f the taspayer is a
person other than an Indian company).
Provisions illustrated-
Net profit as per profit and loss account of an assessee for the year ending March 31. 2021, is Rs. 14.35000
Advertisement expenditure debited to profit and loss accoumt is Rs 800.000 (out of which Rs. 1,40.000 is in respect
of advertisement which appeared ina magazine owned by a political party). In this case, income of the a ssessee shall
be calculated as followws-

the aseethr asesee is

Ra
Net profit as per profit and loss account 14,35,000 14,35000
Add: Advertisement expenditure not deductible by virtue of section 37(28)
being advertisement ependiture in a magazine owned by a political party] 0,00 140,000
Business ncome 15,75,000 15,75000
Any other income
Caross total mcome
Ni
15,75,000
N15,75,000
Less: Deducton
Under section SCGB (in the case of an Indian company. advertisement epend
ture paid to a political party is treated as"contribution to the political party and
deductible under section 8UCGB) 1,40,00
Under section 80GGC (in the case of a person other than an Indian company,
advertisement expenditure paid to a political party fs not treated as contribu-
tion" to the political party and not deductible under section 80CCC)
Nef income 14.35,00 15,75.00

81.37 Expenses deductible from commission earned by life insurance agents, UTI agents, post office
Government securities agent and agents of notified mutual funds-Ir the agsTegate commission of these
agents does not exceed Rs. 60,000, they can claim an ad hoc deductiorn as follows
LIC agents-50 per cent of finst year's commision, 15 per cent of renewal commission (if separate figures of
first year commission and renewal commission are not available:33 per cent of the commission), subjoct to a
maximum of Rs. 20,000. No deduction is available out of bonus commission.
uTT apents, agents of specified Governmet securities arnd agents of notified mutual fund- 50 per cent of
commissiOn.

81.38 General deduction [Sec. 37(1)]-Section 37(1) is a resíduary section. In order to claim deduction under
this section, the following conditions should be satisfied
1. The expenditure should not be of the nature described under sections 30 to 36.
2.lt should not be in the nature of capital expenditure
3. It should not be personal expenditure of the assessee.
4lt should have been incurred in the previous year
5. It should be in respect of business carried on by the assessee
6. It should have been expended wholly and excusively for the purpose of such busiess
7.It should not have been incurred for any purpose which is an ofence or is prohibited by any law.
Expenditure shoruld not be covered by sections 30 to 36-For claiming deduction of an ependiture under section
37(),it should be ensured that the expenditure is not in the nature described by soctions 30 to 36. The rule is
that if an item of expenditure is covered under any of the aforesaid sections, the same cannot be claimecd under
the residuary section.
Para 81.38 INCOME UNDER PROFTTS & GAINS OF BUSINESS OR PROFESSION& TS cOMPUTATION 198

Expenditure should not be in the nature of cupital erpeniditere - Capital expenditures are not deductible under
section 37(0). As the Act does not define the terms "capital expenditure and "revenue expenditure", one has
to depend upon its natural meaning as well as decided cases
1. Acquisition of fixed assets v. Routine expenditure - Capital expenditure is incurred in acquiring, extending or
improvinga fixedd asset, whereas revenue expenditure is incurred in the normal course of business as a routine
business expenditure
Several previous yearsv. Oie previOus yeur- Capital expenditure produces benefits for several previous years,
whereas revenue expenditure 1s consumed within a previous year.
Improcement v. Maintenance-Capital expenditure makes improvements in earning capacity of a business.

.
Revenue expenditure, on the other hand, maintains the profit-making capacity of a business.
Nort-recuring v. RecumngUsually capital expenditure is a non-recurting outiay, whereas revenue experndi-
ture is normally a recurring item.
Lunp sum payment v. Periodic payment- In order to determine whether expenditure is capital or revenue in
nature, the tact that it is a fump sum payment or periodic payment 1s not important.
1hough the dividing line between a capital and revenueexpenditure is real, yet sometimes it becomes difticult
to draw. heretore, the distinction depends on facts and surrounding circumstances ot each case.
Expenditure should not be personal expenditure of the ussesee -Section 37(1) expressly prohibits deduction on
account of personal expenses. Prsonal expernses meanexpenses satistying personal needs such as food, cloth,
shelter, etc, which are not related to the business. In other words, money expended for domestic or private
purpose, as distinct irom the purpose ot the trade or protession, are not deductuble.
Expenditure should hatve been incurred tn the prectous ear- In order to claim deduction, the amount should
have been laid out or expended in the previous year. If a business liability has detinitely arisen in the previous
year, the deduction should be allowed although the liability may have to be quantified and discharged at a
future date. What should be certain is the incurring of the liability. It should also be capable of being estimated
with reasonable certainty though the actual quantification may not be possible.
Expenditure should have been laid out uholly and excfusiely for the purpose of busines or grofession- Expenditure
should have beern latd out wholy and exclusively for the purpose of the business. The nexus between the
expenditure and the business in connection with which expenditure has been incurred has to be established
betore the asessee gets entitledto deduction under section 7.hen an assessee 1s carrying on bustness in
various ventures and some ot them eld taxable income and the others do not the question ot allowability or
the expenditure under section 7 will depend on the provisions of seetion 14A.
o Interest on delayed payments to micro, small and medium enterprise is not deductible.
o Any expenditure incurred by an assessee on the activities relating to corporate social responsibility (CsR)
referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose
of business and hence shall not be alowed as deduction under section 37.

Epenses siould he in respect of the business carried on by the assessee-For the purpose of claiming deduction
under section 37(0), expenditure shouid be incurred for the purpose ot the business whuch is carried on by the
assessee in the previous year and profits of which are to be computed and assessed and expenditure should be
ncrre arter tne Dusne P

l eehdifuAny penditure tnaurred by an assessee for any purpose which 1s an ofence or which is
ADdno allowance or deuction shal be made in respect of ach ependit Unlawful errendiure is not
allowable as deduction. The above provisions applies only to "business expenditure' and not to "business lose'
nd, hence, loss arising as a result ot seizure and confiscation ot illegal stock-in-trade ts allowable as a business
oss against income from illegal business
Instances of expenses deductible under section 37()-A complete list of instances where expenses are allowable
under section 37(1) cannot be drawn. However, to have better understanding of section 37(), a few instances
are given where expenditures are allowable under section 37(0)
. Litgation expenses in proteeting the trade or business.
2. Expenditure incurred for the preservation or protection of the asset ar for saving such asset from destruction,
dissipation or wastage in the interest of and for the benefit of assessee's business.

Pharma cmpanies incur expentiture tor proding gi, trave facilty, hospitality, cash or monetar 8rant or smilar ireebies ta
Condc Eioete and Eibi keeationsp Ssin e ditrne 6 ohibied Lw i e o dedaide in coenbine
income of pharma companies The same is, howiever, taxable in the handa of recipient medical practitioners Cicular No. 5/2012,
dated August 1, 23012 t may be noted that the expenitune incurred by a phara or heaitheae cornpany throagh distribution of
free samples to doctons, is not covered by the aforesaid circular and is deductiblk
199 GENERAL DEDUCTION Para 81.38

.
Litigation expenses incurred in order to defend or maintain an existing title to the business asset.
. Litigation
expenses for the purposes of protecting capital assets of a business.
. Expenses on litigation (whether civil or criminal) if incurred wholly and exclusively for the purpose of the
business
6. Litigation expenses of a company in connection with a petition for its winding up.
. Legal charges for obtaining a loan from a financial institution
Litigation expenses for making agreements, various deeds, etc
. Litigation expenses
incurred in restraining another company from using assessee's trade mark
OCation so as to bring it in conformity with the
changes brought about in the CommanA
12. Damages for breach of contract for export of goods before declaration of export policy of the Government.
12. Damages paid to a worker in order to dismiss him in the fnterest of business.
13. Damages for failure to fulfil a contract in time.
14. Brokerage paid for raistng loan to finance business.
15. Stamp and registration charges for the purpose of entering into agreement for obtaining overdraft facilities.
16. Amount spent towards stamps, registration fees, lawyer's fees, etc., for obtaining loan or raising money by
issue of debentures (not shares).
17. Guarantee commission paid to brokers and shareholders for giving personal guarantee to obtain credit
lity.
18. Commission paid at a percentage of profits to general manager.
19. Commission paid to selling agents
20. Contribution to a trade syndicate with a view to prevernting uneconomic competition.
21. Contribution to a union formed for opposing nationalisation of assessee's business.
22. Salary and perquisite to employees.
23. Salary, bonus and travelling expenses paid by a partner-assessee to his staff to look after his interest and to
cam income for parthership.
24. Expenditure incurred in obtaining use of trademark, technical information, training of apprentices and
technician
25, Recurring expenses incurred on imparting of the basic training to apprentices under the Apprentices Act,
961
26. Expenses incurred on the occasion of Diuti and mahunt subject to the Assessing Officer being satisfied that
the expenses are admissible as a deduction under the law and are not expernses of a personal, sOcial or religious

27. Initial expenditure on the first installation of fluorescent lights is treated as capital expenditure and all
Subvequent expenditure for replacement of tubes is treated as revenue expenditure and are allowed n toto.
28. Expenditure in respect of commitment charges paid by the borrower with regard to the amount of loan not
drawn by him but kept in readiness by the lender for disbursement.
29. Revenue expenses incurred by an industrial undertaking in connection wth the maintenance of the
industrial home guard units.
30. Premia paid on loss of profit policies.
31. Professional tax paid by a person carrying on business or trade.
32. All expenditure on maintenance of a tea garden including expenditure on the maintenance of an area that
has not reached maturity.
33. Deposit made under "own your telephone scheme [is allowable as deduction in the year of payment and
in case the telephone is not installed and money is returmed, it is chargeable to tax under section 410))
34. Forteiture of security deposit for breach of contract.
35. Expenses on registration of trademarks.
36. Amount paid to third parties in order to use his quota rights.
37. Penalty levied for supply of foodgrains not conforming to the contract quality.
38. Expenditure incurred by a surgeon to keep himself up-to-date about the latest fechnique in surgery.
Para 81.38 INCOME UNDER PROFTTS & GAINS OF BUSINESS OR PROFESSION& TS COMPUTATION 200

39, Substantial repair charges on plant and machinery being necessary owing to long neglect of assets.
40. Entertainment expenses incurred on opening of new branches at diteren places.
41. Expenditure incurred to protet capital aset income af which is assessable to tax.
42. Cash shortage found in business at the end of day.
43. Periodical payment for the use of goodwill.
4. Expenditure incurred on renovation of the living room, bathroom, back verandah, study, etc, of branch
office.
45. Road and Public Works Cess under the Bengal Cess Act and Education Cess under the Bengal (Rural)
Primary Education Act.
46. Municipal property tax chargeable under local tax law of Japan.
47. Settlement amount paid by the sub-lessee of a mine as a result of compromise decree in a suit filed by it
against lesser on latters refusal to renew the lease for the option period.
48. Share of profit given by debtor to creditor besides interest.
49. Expenditure incurred to secure overdraft facilities for the business purposes.
50. Expenditure incurred on renovation of a colliery on its derequisition.
51. Expenditure incurred by an assessee for ily air ash collection system.
52. Royalty paid by an assessee to a company for using its logo.
53. Consultancy charges paid for maintenance of software.
54. Environment monitaring expenses and community development experses.
53. Provision for foreseeable losses under As
.
56. Amount spent by a turf cdub on a school for training of jockeys.
57. Annual listing fees paid to stock exchanges.
58. Expenditure on management of temple in factory premises for recreation of employees.
59. Contribution given under a development scheme for construction of roads around factory building for
facilitating the transport of sugarcane to the factory and the flow of manufactured sugar out of the factory.
60. Expenditure incurred for purchase of loom hours
61. Royalty payable on goods manufactured as a consideration to acquire monopoly rights to manufacture the
product.
62. Expenditure on licence fees for the import of capital goods and registration fees of trade mark.
63. Expenditure on valuation of shares.
64. Amount paid in compromising a hona fide dispute and as part of an arrangement for enabling the assessee
to continue Dusiness
65. Expenditure incurred by the assessee on replacement of damaged moulds.
66. Expenditure in regard to contribution made by the assessee-company to State Electricity Board towards
laying of additional circuit line in order to meet increased demand of company.
67. Expenditure on re-routing of pipeline in order to obtain saline free water for factory
68, Donation/contribution made by an assessee to any relief fund, such as Chief Minister's Drought Relief
Fundor a District Welfare Fund estabished by District Collector for benefit of public with a view to securing
benefit to assessee's business (it cannot be regarded as payment oPposed to public policy irrespective of lact
that contribution is voluntary or at instance of authorities concerned).
69. Amount paid by the assessee-company for Flag Day Fund on Government's appeal
70. Contribution made by the assessee, running a refinery, to railway department for construction ot railway
track and siding which are necessary for the purpose of smooth running of business in a profitable and
dvantageous manner (only expenditure incurred in relevant year of assessment alone is to be allowed).
71. Contribution made by the assessee-company to State Housing Board for construction of tenements for its
workers, ownership of which tenements remained with Housing Board.
72. Expenditure incurred by the assessee-company on foreign visit of director and his wife in connection with
medical treatment of the director.
73. Expenditure incurred by the assessee on plantations in factory premises and residential quarters of
company, with a view to making atmosphere pollution free.
74. Royalty paid by the assessee for user of trademark of another company.
201 GENERAL DEDUCTION Para 8138

75. The expenditure and modernizing the hotel and replacing the eisting compo
building, furniture and fittines wi ew ae a cOnucttve and beautiful atmosphere for
he e
the ourpose of running of the business of a hotel.
pnsatoy ahre and which
n natureand deductible.
which is paid for breach of a contract or statute is dedcue
lf sonnething hore
s
payaDie, ten
Suppose, sales tax is charged at the regular rate of Spercent It, hovwever, goods are purchased for manufactur

tax3 per cent and iater on it is discovered that these goods are used for other purposes, then for such default
penal sales tax is payable at the rate of 9 per cent. In this case, penalty of 9 per cent comprises both the element
of compensation (f.e., the difference between regular rate and concessional rate of 5 per cent) and penalty (i.e.
per cent. The penalty by way of compensation 1s deductible but the extra payment of per cent 1s not
deductib
The following should also be noted-
Penalty, interest and fine paid/payable under direct taxes is not deductible.
Act. Factories ActPro P OT
0PEMA, Cetral Excise Act, usomsCustoms
ottences) are not deductible
deve nce developed by the assess a id to bes
incurred in are allowable as revenue expenditure-Bsites ffurmuttot
v.
Services CT (2000] 106 Taxman 116 dp).
Processing Serep
nus
78. Expenditure on issue of bonus sh shares.
.Harvesting and transportation expenses incurred by the C0-0perative 5ugar Mills for procuring Sugarcane
WnO Are bound under an agreement to
supply the sugarcane exclusively to the conred
80. Expenditure for improving the performance of existing products is deductible.
1. Expenditure incurred for purpose of sub-division of shares for easy trading of shares in market, is
deductible.
82. Expenses incurred by an assesee for preliminary work fora projoct (which project has been abandoned for
some unavoidable reasons) is deductible.
83. Advertisement expenditure incurred by an assessee for building up its brand is deductible
84. Expenses on replacement of mother board/UPS and expenditure incurred on ERP software/customizing
sottware are deductible.
85. Expenditure incurred on garden to control pollution is deductible.
Instances of expenses not dedductihle under section 37(1)- Few instances are given below:
1. Damages and penalty paid for transgressing the terms of agreement with the State.
2. Penalty and damages paid in connection with infringgement ot law.
. Litigation expenditure incurred for curing any defect in titie of assets or completing that tite.

. Litigation expenses for registration of shares.

Fees pad for increase of authorised capital
Expenditure on raising equity share capital and preference share capital (may be redeemable). However,
expenditure on issue of bonus shares is deductible
. Amount paid for acquiring technical know-how which is to be utilised for the purpose of manutacturing any
new article and such know-how is to become the property of the assessee at the end of the stipulated period"
Amountepended for acquiring a business or a right ot a permanent character or an asset which generates
income or tor avoiding compensation in business,
. P'ayments made for
acquisition of goodwill.
10. Expenditure incurred for acquiring right over or in land to win minerals (where, however, minerals are
already on surface, expenditure incurred for obtaining right to acquire raw material is deductible).
11. Fees paid to obtain licence to investigate and search minerals,
12.Payment made in consideration of acquiring a monopoly right to manufacture aproduct (royalty payable
on the basis of goods produced under the same arrangement is, however, deductible).
13. Tax paid by the assessee (who is defaulter by not deducting tax at souroe under section 195) on behalf of
non-resident.

Depreciation is available.
Para82 INCOME UNDER PROFITS&GAINS OF BUSINESS OR PROFESSION &ITS COMPUTATION 202

14.Compensation paid to contracting party with the object of avoiding an unnecesary investment in capital
asset.
3. Expenditure on shifting of registered office.
16. Insurance premia paid by a firm on life insurance policies of its partners.
17. Amount paid by liquor contractor to police staff and other officer to enable it to make unauthorised
purchases and sales ot hquor.
18. Amount paid by a company to the Registrar of Companies as filing fee for enhancement of capital base of
he company.
19. Payment made by the assessee-company which was partner in a firm, to outgoing partners of firm on
account of their agreeing to restrain from carrying on similar business for a period of 15 years.

WHAT ARE THE SPECIFIC DISALLOWANCES UNDER THE ACT

82. The following expenses given by sections 40, 40A and 438 are expressly disallowed by the Act while
computing income chargeable under the head"Profits and gains of busines6 or profession.
These disallowances are narrated briefly in the table given below -
Natiure of expniliture Disallouane
oTDS default when payment/ credit (other than Such payment or credit is not deductible in a few
salary) is gven to a non-resident cases see para 82.1
TDSdefault when payment/credit of interest Such payment or credit s not deductible in a few
commissicn, rent, technical/professional fees, TOyalty cases see para 82:2
andcontract payments are given to a resident
TDS default when salary is paid to a non-residernt Such payment is not deductible ina tew cases e
pira 823
oDefault pertaining to non-deduction/non-deposit of penditure pertaining to equalisation levy is not
equalisation levy deductible[ser para 82.2A]
o Fringe benefit tax, income-tax, dividend tax, wealth- These are not deductible
tax (including penalty, fine, interest)
o Tax on non-monetary perquisite paid by employer not deductible (see para 824
tissome
Salary/htete cases are not dedutible [|koe para 216
m
beT inNot deductiblethese
9 y/mterest aid by an AOP to its members
Excesstve or unreasonable payment to relatives/ Not deductible in some cases s" para B2.5
tnter-connected concerts

Expenditureexceeding Rs. 10,00 paid by aa mode Not deductibie ser para 8261
other than account payee cheque/ draft
Contribution towards unapproved gratuity fund Not deductible |see pra 82.71
Employer'scontribution towards non-statutory funds Not deductible (ser para 828]
Marked to market oss Not deductible [except as allowable under section
36(1)(rvii) -se para 8159
o Certain unpaid liabilities Not deductible |see para 829

821Interest. royalty. fees fo technical services poyable outside India or payable to a nonresident Sec.
40ra0-ithe following thre conditions are satistied, the assessee (ie, the payer) is supposed to deduct tax
1. The amount paid is interest, royalty, fees for technical services or any other sum (not being salary).
The aforesatd amount is chargeable to tax in India in the hands ot the recipkent.
3. The aforesaid amount is paid/payable to a non-residert
f the above three conditions are satisfied, the assessee (the payer) is supposed to deduct tax at souroe and
deposit the same with the Ciovermnment.
Disallowamoe of expenditure under section 40a)(i) -If TDS default is committed in respect of payment/credit
given to a foreign company/non-resident, the expenditure is disallowed in the handds of payer under section
40(0)0). These provisions are given below -
203 INTEREST, ROYALTY, FEES FOR TECHNICAL SERVICES Para 82.1

TDS default Is such ependiture is suctpenuthre encthie ut any

tie current
deiductible in subsequent prewious year
precious y
Caese1-Thx is deductible but not 100 per cent of such ex tax is dedacted in any subsequent year
deducted penditure s disallowed the expenditure (which is disallowed in the
in the eurrent year current year) will be deducted in the year in
which 115 will be deposited by the assessee
with the Governmet
Case 2-Tax is deductible (and is so 100 per cent of such ex If tax is deposited with the Cowemment after
deducted) during the current finan penditure is disallowed the due date of subnission of return of
cial year but it is not deposited on in the current year income, the expenditure (which is disallowed
or before the due date of submis- in the current year) will be deductible in that
19aar come under year in which tax will be deposited
io
section 1S90)

ote-it rercpent s a non-resident or toretgn company and

of payer, as
1 detauit 1s committed py the paver, Per ent or
the expenditure ts disallowed the hands
in 8iven above Similar rule is applicabie i reipient is a
resident and TDS delault is committed (however, not 100 per cent but 30 per cent expenditure is disallowed). 1he
rule pertaining to TDS default (in case recipient is resident) is given by section 400)fia) and explained in para 82.2.

Problem
82.1-P1 XLAd. is am Inatiam oompany, Profit and los acount of X Ld. for bhe yoar endting Mardi: 31, 2021 is givn belew-

Comimisston 4,u,000 urss pru 1,05,50,000

Kertt
Licensefees of soytunure
Saiary
Offier expemses
Net prufit
TAG ANN 1750,000
18,00.00
27,00.000
30,00,000
1,05,50,000 1.05,50000
The due date of filing of retum of income of the assessment yenr 2021-22 for X Ltd. is October 31, 2021. Recipkents of
commássion,interest, rent, license fos aud salary (gioen in the profit and loss aoout) are mon-residents or foreign coparies
In the hands of reciprienis, these psaymentscredits are dhargeable to lax in badia. Censequentiy, tax is desduchbie by X Ld. Tax
deduction (1DS) detats of hese payiemts ane grre t the kate beiote-

Nature of expenditure Date on which tax 8 Actual date of tax Date of deposit of TDS
euro eucte deduction byX Ltd. by

Conimissiom: Rs. 2,00,000 Juiy 13, 2020 uly 13,2020 Jaly 30, 2021
nlerest: Rs. 3,00,000 December 24, 2020 December 24, 2020 November 8, 2021
Rent Rs. 8,00,000
: une 6,2020 Not deducted
Licemse of softuoare
fes : October 20, 2020 May 10, 2021 June ,2021
Rs. 17,50,000
Salary: Rs. 18,00,000 aary 1, 2021 Jamaary 1, 2021
Deber 17, 2021
In the case of rent, lax is not deducted during the financial yoar 2020-21 (and Hil daie it is not deducied). In the cnse of itcense
fors of noftvare, tox is ot detuctedl during the financhal year 2020-21 (but it is defucted ant depostet in the rnext finAncial year,
i.e, 2021-22 as given above). Find out the net income of X Lhnd. for the assessmert year 2021-22.
Solution:
Payment/eredit of commission, interest, rent and fees to a non-resident/foreign company are covered by section
40(0). Salary to a non-resident is, however, covered by section 400(ii) and discussed in para 823. These
payments are deductible as follows-
Para 82.1 INCOME UNDER PROFITS&GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION

Nature of expeniditureWhich DS deauit Ixwodeich yoar expeuditure is deductiöle in tie harndis of X LM

Tax is deducted m the curent previous year (te, 202-21), is

sumst
omiisn None
00,J00 deposited wth ovenmmto ar betore the due date ot 21).
Consequently, commission of Rs. 200.000 is deductible in the
previous year 2020-21
Interest: Rs. 3,00,000Case 2 Tax is deducted in the current previous year (iLe, 2020-21). However,
tax is not deposited with the Government till the due date of
submission of return of income for the previous year 2020-21 (ie.
etober l, 2121). Consequenty, mterest ot Rs. 3400J 1s not
deductible tor computing income ot the previous year 22D21. |
However, it is deductible in the year of deposit of TDS. If TDS is
deposited on November 8, 2021, the interest of Rs. 3,00,000 will be
deducthhie m the previos year 2121-2
Rent: Rs. 800.000 Case Taxis deductible but not deducted Consequerntly, the entire rent of
R&.
80100s notdeductible for computing income ot the previous
wed as deduction in uhe year in wnch ibs
deposited by X Ltd.
Tav ie
License fees of soft
ware : Ks. 17S000
Case1 ax5 deductie during the prevous ra Dt 5 no
entire license fers of Re 175000 omes non-deductinle busine
expenditure of X Ld. for the p rious year 2020-21. However,
cense lee wil be aliowed as detuction in the previus vear m
deposited. If 1DS is deposited on June 3, 2024, license
which 1DSis
fees ofR 1750000 will berome dedtactible in the previous year
2021-22
Salary: Rs 18.00,000 Salary to nen-ressdent 1s covered by secthim 0ke) which ts
eplained in para 23 Under section 404)() disallowance is
applicable only if tax is neither deposited nor deducted Date of
deduction and deposit of tax is not relevant if reeipient of salary is
and the entie salary is deductible fr the previous vear 2020-21.
pevous ye

Cogutatiom ef tncome ofX LM.-

Net profit as per profit and loss account 30,00,000

Ad
Add: Interest 3,00,00
Rent
Add:1 8,00,000
Add:FFees 17.50,000
Net income 5550.000

82.1-1 WHEN RECTPIENT HAS PAID TAX The above provisions have been amended. Under the amended
provisions, a relief is given in Case 1 (and not in Case 2) of para 821. This relief is available if the following
conditions are satistied -
1. Tax is deductible on the aforesaid payments but it is not deducted (wholly or partly) by the payer (ie,
Cae 1).
2. The payer is not deemed to be an assessee-in-default under the first proviso to section 201(1) Under the first
proviso to section 201(1), the payer is not deemed to be an assessee-in-default if-
athe recipient has furnished his returm of income under section 139,
b.the recipient has taken into account the above income in such return of income;
the recipient has paid the tax due on the income declared in such retum of income, and
d. the payer uploads a certificate to this effect from a chartered accountant in Form No. 26A.
<05 ANY SUM PAYABLE TO A RESIDENT Para 82.2

40(40) it shall be deemed that the payer has

If the above conditions are satisfied, then for the purpose of section
deducted and paid the tax on such amount on the date of the furmishing of returmof income by the recipient [se
para 82.2-1 for illustrations
a
82.2 Any sum payable to resident Sec. 40(a)ia))- In respect of the following payments/credit to a
resident, tax is deductible under Chapter XVI-B of the Income-tax Act (i.e, sections 192 to 206AA)-

1. Salary 8. Payment in respext of life insurance policy

interest 9. Payment in respect of deposits under NSS
3. Dividends 0. Paymet on account of ertain units
4. Winnings from lottery or crossword puzzles 11. Rent
5. Winnings from horse raes 12 Payment on purchase of immovable property
6. Payrhents to contractors 13.Technical/professional fees, royalty, fees to a part
7. Commisston or brokerage (imcduding insurance tie diretor
commissicon 4 Paymernt of compensation on acquisifion ot immovabie
property
.Disalloamoe of above expenditure under section 40hafia) - If TDS default is committed in respect of the above
payment/credit given to a resident, 30 per cent of such expenditure is disallowed in the hands of payer under
section 40@(in). These provisions are given below
TDS defoul s sudt exenditure
deductibie tn ihe
sad ependiture detuctible in any suhseguent
precius ye

CurTent previkous yoe

Case I-Tax is dedactible but not 30 per cent of such ex F tax is deducted in any subsequent year, the
deducted penditure is disalowed ependiture (which is disallowed in the current
in the current year year) will be deducted in the year in which TDS
will be deposited by the assessee with the
Covemment
CRe 2- 1ax
is deductible (and 530 ent per ot such ex tax s deposited with the Govermment affer
so deducted) during the current penditure is disallowed the due date of subrmission of netum of income,
s
nancial year but it not depost inthe current year he epen
at year in
the

submission of return of income which tax wall beden

under section 139(1)

Problem
82.2-P1 Calcwiate the income of X Ltd. in Probiem 821-Pl om the assumption dhat recipients of comissim, inkenest, reut,
arnul salary are persons resident in Inudia. Dates of dedactien of tax and deposit of TDS are the same as
ginen fes fsftusre
ficense
in the problem.
Solution:
Payment/credit of commission, interest, rent, lees and salary to a resident are covered by section 40@Na). These
payments are deductible as followS
Nature of ezpenditure Whrich TDS default Tn weich year cxpenditure is ideductile in tie lands ofX Lid.
cbie
Ce or Cae2
Commission None Tax is deducted in the current previous year (ie, 2020-). It is
Rs 200,000 deposited with Goverrment on or before the due date of submission
of return of income for the current year (ie, October 31, 2021
Consequently, commission of Rs. 200.000 is deductible in the
Prwous year 2120-21
Interest: Rs. 3,00,000 Case 2 Tax is deducted in the cament previous year (ie, 220-21). However,
tax is not deposited with the Coverniment till the due date of
submission ot refum t imcume for the previous year 2021 (e.
October 31, 2021). Consequently, 30% of interest of Rs. 3,00.00
Para 82.2 INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION &aITs COMPUTATION

Nature of erpeniditure Which TDS defau In sohicih year epeniditure is deitactile in the hamds of X Lti.
154ppkicabie -
Case 1 or CaSe 2

ie, Rs. DOU) is not deductible for computing income of the

previous year 2120-2 thowever, balance of Rs. 2.10.000Uis deductible
torthe previous year 202, Rs. A will be deductible the
year of depeosit of TUS. If TDS is deposited on November 8, 2021,
n
Rs. 90,000 (being the amount disallowed earlier) will be deductible
m the previous year 23021-2
Rent: Rs B,00,000 Case 1
Tax is deductible but not dediicted, Consequently, 30% of rent of
Ks. 5,0000 Le, KS 2,40,000) 15 not deductible tor compuling
income of the previous year 2120-21 (however, the balance of
Rs. 5,60,000 is deductible for the previous year 2120-21), IF X Ltd.
deducts and deposts TDs in ay subsequent year, Rs. 240,0O0
(being the amount disalowed earler) willbe allowed as deduction
in the year in which TDS is deposited by X LId.

Case1 Tax is deduactible during the previous yesar 220-21 but it is not
software deducted dunng the prevtous year 2120-21. Consequentty, a ot
Rs. 17,50,000 icense fees of Rs. 17,50,000 (ie, Rs. 5,25,00) becomes a non-
deductibie business expenditure ofX Ld. lor the previous year
vear 2020-21
TDSdeosited ne on
3, 2021,R525.000
being the amount disallowed earlier) will become deductible in
the previous year 2021-22
Salary: Rs. 18,00,000 Case 2 TDS default pertaining to salary payments to
redent ePes
Sine TDS is not deposited till the due date of sibmission of netur
of income, 30% of salary (t.e., Rs. 5,40,000) is not deductible for
computing income of the previous year 2020-21 (however, the
balance of Rs. 12.60,000 is deductible for the previous year
2120-21).TDS pertaining to this payment is deposiled on Dember
17, 2021. Rs. 540,000 (being the amount disallowed earlier) will be
deductible in the previous year 2021-22
Compulationm of income of X Lld. -
RS.
et prontas per profit and loss account 30,00,000
Adjustments-
Add: 30% of interest (ie., 30% of Rs. 3,00,000) 90,000
Add: 30% of rent (ie., 30% of Rs. 8.00,000) Z0,000
Ad: 30% of fees (ie., 30% of Rs. 17,50,000) S,25,000
Add: 30% of salary (ie, 3% of Rs. 18,00.000) 5,40,000
Net income 43,95,000

82.2-1 WHEN RECIPIENT HAS PAID TAX - In respect of TDS defaults pertaining to payment/credit given to
residents, a relief is given by the Finance Act, 2012 with effect from the assessment year 2013-14. Under the
amended provisions, the relief is given in Ciase 1 (and not in Case 2). This relief is available if the tollowing
conditions are satisfied-
1. Tax is deductible on the aforesaid payments but it is not deducted by the payer (ie, Case 1).
2. The payer is not deemed to be an assessee-in-default under the first proviso to section 201(1). Under the first
proviso to soction 201(1), the payer is not decmed to be an assessee-in-default if-
a. the recipient has furnished his returm of income under section 139;
b. the recipient has taken into account the above income in such return of income;
207 DISALLOWANCE OF ROYALTY, ICENCE FEES. ETC.Para 82.28

the recipient has paid the tax due on the income declared in such retum of income, and
d. the payer furnishes electronically a certificate fin Form No. 26A] to this effect from a chartered accountant
If the abave conditions are satisfied, then for the purpose of section 40(e) fia) it shall be deemed that the payer
has deducted and paid the tax on such amount on the dateof the furnishing of returm of income by the resident
recipient

Provisions illustrated-
XLd pays by passing a book entry) a sum of Rs. 45.000 as commission to Y 1Lad. (an Indian company) on April 2
20/20 without deducting tax at source. Y Ltd. pays advance tax on the dae dates on its income (including Rs. 45,).

Entire ta liability is paid by YLtd. by advance payment of tax during the financial year 202-21 and/or by payment
ofself-assessment tax at the time of10,submission of return of income. Returm of income of Y Ltd. for the assessment
2021. X Ltd. has submitted eiectronicaly certificate in Form No. 26A to thiss
year 2121-2is submitted on July
etfect troma chartered accountant.
Tax treatment of non-deduction of tax by X Lad. and subsequent payment by the recipient is as follows-
Assessment yoar 2021-22-Tax is not deducted by X Lad. during the financial year 220-21. Consequently, 30 per cent
of commission of Rs. 45,000 (, Rs. 13,500) will be disallowed in the hands of X Lid. for the assessment year

Assessment year 2022-23- After payment of tax by Y Ltd., the recipient of commission, X Ltd. cannot be treated as an
assessee-indefault under the provisions of first proviso to section 2i10), as the following oonditions are satisfied-
. Y Ltd., the recipient of commission, has furnished its returm of income under section 139 (late sabemission does
not affect on this point
.YLd. has taken into account the above income in such retum of income
e YLad. has paid the tax due on the income declared in such return of incone; and
d. XLtd. has submitied electronicaly certificate to this effect írom a chartered accountant in Form No. 26A
Under the provisions as amended by the Finance Act 2012 it will be assumed that X Ltd. has detucted and
deposited tax on July 10, 2021. Asa consequence, Ra. 13,00 will be alowed as deduction in the hands of X Lid. for
theprevious year 2121-2
82.2A Default pertaining to non-deduction/non-deposit of equalisation levy (Sec. 40(a)(ib)) - Any
consideration paid or payable (toa non-resident for a specified service on which equalisation levy is appli-
cable) is disallowed in the folowing cases
1. Equalisation levy is deductible and such levy has not been deducted.

evy 1s deductible (and it is so deducted) but it is not deposited fon or before the due date of
tion
,
smssom ot retum o income uner extion 1
however, equalisation levy is deducted/ depostted in a subsequent year, the atoressid consideration shall be
allowed as a deduction in computing the income ot the previous year in whuch such ievy has been patc.

82.28 Disallowance of royalty, licence fees, etc, in cose of State Government Undertakings [Sec.
40(a/ab)The tolowing shall not be allowed as deduction
LAny amount paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or
charge (by whatever name called), which is levied exclusively on a State Government undertaking by the State
Government
2. Any amount which is appropriated (directly or indirectiy) from a State Covemment Undertaking by the
State Govermment.
What is State Gocermment LIndertaking-For the above purpose, a State Government undertaking includes the
following
a.acorporation established by (or under) any Act of the State Ccovernment;
b. a company in which more than 50 per cent of the paid-up equity share capital is held by the State
Goverhaent
ca company in which more than 50 per cent of the paid-up equity share capital is held by the above two
entities (whether singy or taken together)
d. a company or corporation in which the State Govenment has the right to appoint the majority of the
directors or to control the management or policy decisions, directly or indirectily, including by virtue of its
shareholding or management rights or shareholders agreements or voting agreements or in any other
manner
Para 82.3 INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION 08

anGovernment
authority, a board or an institution or a body established or constituted by or under any Act of the State
or owned or controlled by the State CGovemment.
82.3 Salary payable outside India without tax deduction [Sec. 40()(ii)J -Section 400 i) is applicable if
salary is paid outside India or paid to a non-resident and tax has not been paid to the Govemment nor
deducted at source under the Income-tax Act

Provisions illustrated
The following illustrations given in nespect of salary payable for the previous year 2120-21 by a comparny to (a) any
person outside India or () a non-resident in india
Date om saoich lax is Actaual date of ax should IeActaal date of Precioss oar
Amounl
e dathuctnd defuction
W
depoitedl ander depsit in anich salery
(Le, ine ale of stlary sectiot 200) parymenl is
deductiMe
40,000 July 31, 2120 July 31, 202D August 7, 2120 November 10, 2020-21
202
90,000 March 31, 2121 March 31, 2021 April 30, 2021 April 30, 2021 2020-21
1,60.000 March 31. 2021 March 31, 2021 April 30, 2021 May 12, 2021 2020-21
70,000 March 31, 2121 Not deducted pril 30, 2021 May 12, 2021 2020-21
75.000 March 31, 221 March 31, 2021 April 30, 2021 Not deposited 2020-21
95,000 March 31, 2021 Not deducted April 30, 2021 Not deposited Not deductible
1,28000 July 31, 21420 July 31, 2020 August 7, 2/20 December 15, 2020-21
2021

82.4 Tax on non-monetary perquisite paid by the employer [SeC. 40(@)9)-The provisions of section
40@(o) are given below-
L. The employer provides non-monetary perquisites to employees

2. Tax on non-monetary perquisites is paid by the employer.

3. The tax so paid by the employer is not taxable in the hands of employees by virtue of section 10(10Cc).
4. While caleulating income of the employer, the tax paid by the employer on non-monetary perquisites is not
deductible under section 400(0).
Provisions iustrated
Dhuring the preous year 2020 LR.paysR per monthas slary toX(age1 yers) and prviesa ren
ree unturmished house (iease rert being Ks. 10,000 per month. ihe tax on perquisite is paid by A LRd. as tollows

Salary 30.000
Value of pequisite (15 per cent of salary)
Gross salary 5,52000
Les: Standard deduction S0000
et income 5,02,000
Tax on net income (including health and education cess) 13416
Average rate of tax (Rs. 13416/Rs. 5,02.000 100):267%
Tax on perquisite (2.67% of Rs. 72/000) 1,924

Total expenditure incurred by A Ltd. in respect of employeeXis as follows

Salary to X LS0.000
Rent-free house to X (Rs. 1o00 12) 20 000
Tax on perquisite borne by A Lad.
Total 601,924
82.5 Amounts not deductible in respect of payment to relatives (Sec. 40A(2-Section 40A2) is applicable
if expenditure is incurred for goods, services or facilities, payment is made to the persons given below and
such payment is considered as excessive or unreasonable having regard to-
209 AMOUNTS NOT DEDUCTIBLE OF EXPENDITURE EXCEEDING RS. 10,000 Para 82.6

a. the fair market value" of the commodity or service or facility;or

b. legitimate business needs of the assesee or
benefit derived by or accruing to assessee as a result of the expenditure.
To the extent payment is considered as excessive ar unreasonable, it will be disallowed.
To whom the payment is made - Section 40A(2) is applicable in the following cases (list is not complete, only
important cases are given
. Payment made by an individual to his or her relative.
. Payment made by a company to a director of the company or any relative of the director.
3. Payment made by a firm/AOP/HUF to a partner/member or a relative of partner/ member.

4.Payment made to an individual who has a substantial interest in the business of the payer or a relative of
such individual.
5. Payment made to a company who has a substantial interest in the business of the payer, any director of such
company or relative of such director.
. Payment made to a firm/AOP/HUE who has a substantial interest in the business of the payer or partner/
member of such person or relative of partner/member.
.
Payment made to a person in whose business the payer/any relative of payer has a substantial interest.
Relative-"Relative in relation to an individual, means the husband, wife, brother or sister or any lineal
ascendant or descendant of that individual
Substantialinterest- A person is deemed to have substantial interest in the business or profession, if such
person is the beneficial owner of at least 20 per cent of equity capital (in the case of a company) or if such person
is entitled to 20 per cent profits of a concern (in any other case) at any time during the previous year.

Provisions illustrated
Consider the following cases-
1.Xis a trader. He purehases goods from his brother. Market value is Rs. 130.000, whereas amount charged by his
brother is Rs. 1,40,000. The excess payment will be disallowed
2. A. B and Care three directors of X Ltd. XLtd. pays Rs 4,00,000 for takingtechnical advice from MrsA.Similar
advice can be obtained from any competent person for Rs. 70.000. The access payment of Rs. 330,000 will be
disallowed for computing income of X Ltd.
3.Xholds 20 per cent equity share capital in X Ltd. X Ltd. takes on hire trucks owned by the brother of X and pays
rent. Any excess payent of rent can be disallowed.
4. Mrs X holds 20 per cent equity share capital in Y Ltd. X purchases goods from Y Lad. Any excess payment by X
will be disallowed.
5. Xis a trader. He sells his goods to his brother. Amount of bill
is Rs. 1,00,000 whereas market value is Rs 1,40,00.
In this case, X has not incurred any expenditure. Section 40A[2) would not be attracted. Business income of X will be
calculated by taking into consideration the amount of bill of Rs. 1,00,M0.

82.6 Amounts not deductible in respect of expenditure exceeding RS. 10,000 [Sec. 40A(5)] -The provisions
ot section 40AS) are given below
Rule of disallouvance Disallowance is attracted under section 40A(3) if the following conditions are
satisfied-
L
The assessee incurs any expenditure which is otherwise deductible under the other provisions of the Act for
computing business/ protession income (e8, expenditure tor purchase ot raw material, tracding goods, expen
diture on salary, etc:). The amount of expenditure exceeds Rs. 10,000f.
Apayment (or aggregate of payments made to aperson in a day) in respect of the above expenditure exceeds
s. 10,000.
3. The above payment is made otherwise than by an account payee cheque or an account payee demand draft
or use of electronic clearing system through a bank account (or through prescribed electronic modet)
fall the above conditions are satisfied, then 100 per cent of such payment will be disallowed.
owed

Tor the assessment years 2014-15 to 2017-18, the aforesaid disallowance shall not be made if such transaction is at arm's length pricw
s detined in sectiom 2F()J
KS0 an asoessee maks payent tor plying hiring or leasing goods carages
Asper rule 6ABBA, prescribed modes of electronic payment ane: (e) credit card, ) debit card, (c) net banking (MIS(Immediate
Payment Servine), (e) UP(Unified Payment Interface). (0 RTCS (Real Tinne CGross Settlement), (e NEFT (National Eletronic Funds
ranster) and 0) BtUM (Bharat Intertace tor Money) Aacthaar 1'ay.
Para 82.6 INCOME UNDER PROFITS&GAINs OF BUSINESS OR PROFESSION &ITS COMPUTATION 210

Exceptions-The above rule is not applicable to a few cases given below-

1. Payment made to a bank (including private sector banks, co-operative bank, credit societies), LIC, etc.
2. Payment made to Government.
3. Payment through banking system.
4. Payment made by bookadjustment by an assessee in the account of the payee against money due to the
assessee for any goods supplied or services rendered by him to the payee.
5. Payment made to a cultivator, grower or producer in respect of the purchase of agricultural or forest
produce or product of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry
farming or fish or fish products or proucts of horticulture or apiculture (even if these products have been
subjected to some processing provided the processing has been done by the cultivator, grower or the
producer of the product).
6. Payment made to a producer in respect of the purchase of the products manufactured or processed
without the aid of power in a cottage industry.
7. Payment made to a person who ordinarily resides or carries on business in a village not served by any
bank
8. Payment of terminal benefits, such as gratuity, retrenchment compensation, etc., not exceeding

9.Payment made by an assessee by way of salary to his employee after deducting tax and when such
employee is temporarily posted foracontinuous period of 15 days or more in a place other than his normal
place of duty or on a ship and does not maintain any account in any bank at such place or ship
10. Payment required to be made on a day on whiech the banks were closed either on account of holiday or
strike.
11. Payment made by any persontohis agentwho is required to make payment incash for goods or services
on behalf of such person.
12. Payment made by an authorised dealer or a money changer against purchase of foreign currency or
travellers cheques in the normal course of his business.

Problems
82.6-P1 Delermtine the amount of disaliouHce in the caes given below
,
1. Genenuly Xpays salary to his employees byaccountpayee ckegues. Salaryof Deuenber 2020 houeer, prid to threr employees
A. B and C by bearer cheques (payment beting Rs. 6,000, Rs. T0,000 amd Rs 10.500, repectively).
2. X Lad. purchases goods on credit from Y Ld. om May 6, 2020 for Rs 86,00 which ks paid as folloses
a. Rs. 5,000 in cash on May 11, 2020;
b.Rs. 30,000 by a bearer ciueque on May 31, 2020
c.Rs. 51,000 by an account payee chegue on May 16, 2020.
3. Z Ltd. purdeses goods on credit from A Ld. on May 10, 2020 for Rs. 6,000 and on May 30, 2020 for Rs 5,000. Tie total
payment of Rs. 11,000 is made by a crossed cheque on June 1, 2020
4.A Ld. purchases goods on credit fromt a relalioe ofa director on June 20, 2020 for Rs. 50,000 (market vsalue : Rs. 42,000). Tihe
amount ts purid in cash om June 25, 2020.
B LAd purchases rue mterial on credit from A teho holids 20 per cent euity siare caprital in B Lhd. (the amount of till being
5.
Rs. 36,00, market price being Rs. 9,0x0). It ts paid tn cash on July 26, 2020.
Solution:
1. Rs. 10,300, being 100 of salary paid by bearer cheque to C, will be disallowed.
e
2 Nothing wl disallowed outot the payment ot Rs. U00 incash on May 11, 2020, as the payment does not exCeed
KT0010ot Rs. 00 will be disallowed Nothing will be disallowed outot Rs 1
3hough the armorntot paymentexceedss 10 rothingshabe dsalewed. Toatrat disallowance, the amount
tto a relative) shall be disallowed under section
40A(2). As the payment is made in cash and the remaining amount exceeds Rs. 10,00, 100% of the balance (lie. Ra
42,000) shall be disallowed under section 40A(3).
5. Out of the payment of Rs. 36,000, Rs. 27,000 (being the excess paynent to a person holding a substantial interest)
shall be disallowed under section 40A(2). The remarning amount (6., Ks. 9X0) does not exced Rs. 10000, Nothing
shall be disallowed under section 40A(3) even if the payment is muade in cash.
 AMOUNT NOT DEDUCTIBLE IN RESPECT OF CONTRIBUTIONS TO FUNDS Para 82.8

82.6-1 WIEN OUTSTANDING LIABILTY OF EARLIER YEARS 1S PAID IN TIT CURRENT YEAR ISEC 404(3A))- Section
40A(3A) is applicable if an outstanding liability was allowed as deduction in any of the earlier years and
during the current year payment in respect of such liability is made otherwise than by an account payee
af 1 h ament toanerson ina day exceeds Rs. 10.0001, the payment so made shali be
chargeable to tax as business income in the year of payment. This rule will, however, be not applicable in
the exceptions given above.

Provisionsillustrated-
X Ltd. claimed a deduction of Rs. 70,000 inthe previous year 2017-18 pertaining to an otstanding bill of purchase of
raw material (payable to BLid.). Out of Rs. 70,000, Rs. 15000 is paid to B Ltd. in cash on April 20, 202) and Rs. 55,000
is paid by an account payee
cheque on April 28,2020. In this case, Rs. 15,0O0 (being payment in cash) will be treated
as business income of X Ltd. for the previous year 2020-21

82.7 Amount not deductible in respect of provision for unapproved gratuity fund [Sec. 40A(7))- Provision
for gratuity fund (for meeting future liability) is deductible only if such gratuity fund is an approved gratuity
fund. In other words, any provision for unapproved gratuity fund (for meeting future hability) is not
deductible.
The following points should be noted--
1. An employee retires during the current year. Ihe employer does not maintain any gratuity fund. Gratuity is
paid to him during the current year. It is deductible during the current year
2. An employee retires during the current year. Gratuity is payable to him. A part of the amount is paid during
the current year and the balance will be paid in the next year. A provision is made towards gratuity in the
books of account ot the current year tor making payment in the next year. Tthe entire amount is deductible
during the current year (if no deduction was claimed earlier). In this case, deduction is available during the
current year even if provision is made for gratuity fund, which is unapproved.
3. A company has 50 employees. To meet future liability to pay them gratuity at the time of retirement, a
gratuity tund iscreated the employer makes conirbution every year Employers contribution to this fund
and
is deductible only if the fund is an approved gratuity fund.
82.8 Amount not deductible in respect of contributions to non-statutory funds (Sec. 40A9)- Any sum
paid by the assessee as an employer by way of contribution towards recognised provident fund, or approved
superannuation fund or an approved gratuity fund, is deductible to the extent it is required by any law.
What is not deiuctible -If the following conditions are satisfied, then contribution or payment is not
deductible by section 40A()-
1. The contribution/payment is made by an assessee as an employer.

2. It is paid towards setting up (or formation of) any trust, company, association of persons, body of
individuals, society or it is paid by way of contribution to any fund.
3. The contribution or payment is not required by any law.

Provisions iustrated
To ciarity the above provsions, one may examine the lolowing illustrations
1.X Lad. incurs an expenditure of Rs. 30000 for maintenanoe of street lights in workers' colony. The expenditure is
mcurred wthout any legal or contractual requirement. n this case, nothingwill be disallowed under sextion 40A(9,
as it ts not towards setting up or tormation ot, or as contribution to, any fund, sosiety. etc.
2.Y LAd. has a tea club in its office. Tea chub provides tea, coffee, snacks, soft drinks to the employees during tea
breaks. The dub has been set up by employees (and or by Y Ltd.) for the benefit of employees without any legal
requirement. Y Ltd contributes Rs. 50,000 annually towards tea club. It will be disallowed under section 40A() in
the hands of YLId. The position will remain the same even if tea club was set up by the employer under the terms of
employment but without any legal obligation.
3.2Lhd. provides fne tea, coffe. snacks, soft drinks to the employees during tea breaks The actual expenditure for
Prvdng ts Taclty 5 0*0 durng the preious year 2 Noting will be disallowed under section
40A(9, as its not towarcds setting up or tormation ot, or as contrn bution ta, any fund, society, etc

tRa. 35,000 if an asensee makes payment for plying. hiring or lkasing goods cariages.
Para 82.9 INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION &ITS COMPUTATION 212

4. Employers contribution towards unrecognized provident fund or any other staff welfare fund (without any
statutoryrequirement wil be disalowed undeT section 0A
82.9 Amount not deductible in respect of certain unpaid liabilities [Sec. 438)- Section 438 is applicable
only if the taxpayer maintains books of account on the basis of mercantile system of accounting. The provisions
of section 435 are given below-

General rule- Certuin exgenses are dehuctible on paymenit basis -The following expenses (which are otherwise
deductible under the other provisions ot the Income-tax Act) are deductibie an payment basis
a.any sum payable by way of tax, duty, cess or fee (by whatever nanme called undet any law for the time being
n force
.any sum payable by an employertt by way of contribution to provident furnd or superannuation fund or
any other tund for the welare ot etmployees
any sum payable as bonus or commission to employees for service rendered
d. any sum payable as interest on any loan or borrowing from a public financial institution (i.e, lCIaI, IFCI,
1DBL, LIC and U11) or a state financial corporation or a state industrial investment corporation;

eany sum payable as interest on any loan or borrowing fromadeposit-taking non-banking finance company
(NBEC) and systematically important non-deposit taking NBFC;
interest on any loan or advance takern from a scheduled bank or a co-operative bank other than a primary
agricultural credit society or a primary co-operative agricultural and rural development bank;
8any sum payable by an employer in lieu of leave at the eredit of his employee; and
i. any sum payable to the Indian Railways for the use of railway assets.
The above expenses are deductible in the year in which payment is actually madet. There is, however, one
exception given below.
Exception -When deductible on accrual btsis - If the aforesaid payment is actually made on or before the due
date of submission of return of income, deduction can be claimed on accrual basis. Due date of submission ot
return of income in the case of a company (or in the case of a taxpayer whose books of account are required to
e audited under any law) 1s October 31 ot the assessment year. In the case ot a prson (having international
transactions with associated enterprises) due date of subunission of return of income is November 30 of the
assessment year, In all other cases, the due date of submission of returm of income is July 31 of the assessment
eiar.
Provisions illustrated
X Ltd. (not having any international or specified domestic transaction) maintains books of account on mercantile
basis. For the previous year 2020-21 (1.e, the assessment year 2021-22), interest on term loan taken from Punjab
National Bank (or any other sum given above) is Rs. 1,95,000. The anmount is paid as follows
Date of payment Amount

May 2 2020 25,000

November 20, 2020 20,000
August 16, 2021 25,000
December 5, 2021 30,000
June 12, 2022 35,000
November 2, 2022 40,000
Not paid so far 20,000

As the expenditure is covered by section 438, it is deductible on payment basis in the year in which payment is
made. However, the payment is made on or before the due date of submission of return of income for the
f
assessment year 2021-22((, on or before October 31, 2021), then such payment is deductible on acerual basis for
the previous year 2020-21. Consequently, these payments are deductible as follows:

Arrean of 5llary ant other benetit: payabte to employees are not cOvered by section 4s6.
her eifan and.
planations haas beent inserted by the Firance Act, 2021 (n sestion 438 (with effect from the assessment vear 2021-22) to clarify this
proposition
Even advance depoit ot oentral excise in pernonal ledger account is deductbke in the year at payment- CIE V. Motgn LM [17]
7 taxmann.com 275 (SC).
3 AMOUNT NOT DEDUCTBLE OF CERTAIN UNPAID IABILITIES Para 82.9

Date o AmoTE Kersons

P

May 2. 2020 25.000 2020-21 Payment made during the relevant year is deductible in that year
November 20,20,0O02020-21 Payment made during the relevant year is deductible in that year
2020
August 16 25,000 2020-21 Payment made after the end of the relevant year but on or before the
2021 fue date of submission of return of income (ie, October 31, 2021) is
deductibiein the year in which the liability is incurred
December 5, 30,000 2021-22 Payment made after the due date of submission of return of income
(., made after ctober 31, 2021) s deductible in the year in which
tne payrment 1s macde
June 12, 2022 35,000 2022-23 Payment made after the due date of submission of return of income
ie, made after October 31, 2021) is deductible in the year in which
the payment is made
November 2, 40,000 2022-23 Payment made after the due date of submission of neturn of income
2022 i, made after October 31, 2021) is deductibe in the year in which
ne payTnent is made
Not paid 20,000 Not Not deductible as the payment is not made.
deductible

is the status of coversion of unpaid sales tax into loan bya State Goxermment-Conversian of unpaid sales tax
Wat
into loan by a State Covernment is treated as payment of sales tax in the year of conversion.
What is status of conversion of umpaid interest on loan as a fresh loan by a bankfinancial institution If any sum
payable by an assessee as interest on any loan (or borrowing or advance) is converted by the bank or financial
institution into a fresh loan, the interest so converted (and not 'actually paid') shall not be deemed as 'actual
payment' and not allowed as deduction in the computation of income under section 43B. The converted
interest (by whatever name called) will be eligible for deduction in the computation of income of the previous
year in which the converted interest will be ctually paid'.
Provisions illustrated -
Ihe tollowing illustrations are given to have better understanding
1. Loan taken from bank on March 31, 2017 is Rs. 20,00,000. Interest unpaid up to March 31, 2020 is Rs. 2,00,000. In
the restructuring arrargement entered into n this case, the unpaid interest has been converted into a Funded

being Ks. 50.000), In this case, deduction to the extent of the amount actualiy paid aainst the pavment of instalment
actually p
of FITL of Rs. 2,00,000 under tinsection 43B shall be allowed in the relevant assessment year when it is actually paid.
Interest on the original principal of Rs. 20,00.000, if any, actually paid will be independently allowable under section
SB.
2.Suppose in the above case, interest is payable on FITL In such a situation, the following shall be deductible on
ctual payment basis according to the provisions of section 438
4interest on original loan of Rs. 20,00.000:
b. repayment of FITL; and
Cintereston FlTL
3. Loan taken by the assessee ironma term lending instituion in May 2018 is Rs. 14croe. Interest not paid up to Apri
2U 18 rore in a restructuring artangenent unpaid interest ot Ks crore s erged witn te
princapa
amount ot RS. 14 crore. Ater mergeT the amont ot loan becomes Rs 16 crore which 1s payable by the tapayer in
equal annual instalments from April 1, 2020. In the previous year 2020-21, the first instalment of Rs. 3.2 erore is paid
by the laxpayer. The amount of deduction in the computation of income on acount of actual payment of interest
will be worked out in the following manner:
Rs. 3.2 crore x Rs. 2 crore Rs. 16 crore- Rs. 40 lakh.

Out of the repayment of Rs. 3.2 crore in the first year, deduction of Rs. 40 lakh will be admissible in terms of the

Balance Rs. 2.80 crore representing repayment of the principal shall not be admissible as deduction in
the computation of income.
Para 82.9 INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION &ITS COMPUTATION 214

Problems
82.9-P1 X Ld. is a mamufacturing cmpurny. Profit and loss accunt of the cumpny for the year enaing March 31, 2021 is

Rs.
Cost of goods sold 13,90,000 Sales 58,00,000
Depreciation 2,80,000
Municipal tax of office building 60,000
Outstmding GST 6,70.000
Salary to eployers 8,70,00
Bank interest 6,90,00
Other experts 6,00,000
Adane income-tax 3,002000

interest on loant taken to pay income-tit 30,000

Net profit 9,10,000
58,00,000 58,00,000
Notes -The following additional information is given-
.Deprecittion debited in profit amd loss account is oalculaled acxording to the income-tax.
Municipal tax of oftice building incdudes an outstanding payrent of Rs. 60,000 tehich is not pakd so fur (comgpany irtends to
pay it in the financial yesr 2022-23).
3. Outslamding GST is paid as follones-Rs. 1,00,.000 on August 1, 2021 and Rs. 5,70.000 on December 6, 2022.

Salary lo employees tncudes outstanding bonus of Rs. 60,000 which is paid on April 30, 2021. It also incdudes comtston os
ubhie employees of Rs. 30,000 which paid on December 5, 2021
purchases payabileto emaployees
of
KS. is
no interest of Rs.
Ra. 2,00,0o0, Ra
fRs 6,90,
1.70.000 is naid on e 1 3o21 200,0 pne dto SBI os terni loan. Out of
pek ofDecember 204 2021.
Rank interest aiso inctudes an outstanding intenest of Rs. 50,000 pyable to Purjab Nutional Bank. It is comverted isto fresh
locans by Paunjab Nationai Bunk on March 31, 2021.

6. Other expenses inctude an outstanding amount of Rs. 40,000 payolNe on account of gods purceasel fronn Delhi Government
it ueill be psažd in January 2022. It also includes ant outstamding telephone bill of Rs. 6,000 puyable to MTNL. It will be paid on
Nocember 10, 2021.
. Adtace income-tax is paid up to Mardh 31, 2021.
3. Interest ont loam laken to pay income-lax is paid on May 6, 2021.

Find out the net income of X Lti. for the assessment yenr 2021-22. Due date of submissiom of returm of income is October 31,

Solution: In the given problem municipal tax, excise duty, bonus and commission to employees, sales tax and bank
interest are covered by section 438. These are deductible for computing the income of the previous year 2020-21 only
if these are paicd during the previous year 2020-21 or up to the due date of submission of return of income (ie
October 31, 2021). Income of X Lad. shall be calculated as follows

Net profit as per profit and loss account 9,10,000

Akt: Municipal tax of office building (not paid up to October 31, 2021) 60,000
Adl CST (R 10.0 is paid on August 1, 2021, it is deductible. Rs. 5,70,00 is not paid up
5,70,000
Add: Outstanding bonus (Rs. 60,0 is paid on April 30, 2021, it is deductible) Nil
Add. Commiseion on purchases (it is payable to employees and Rs. 30.000 is not paid up to October
2021) 30,000
Add: Outstanding bank interest payable to SBI (Rs. 30,000 is not paid up to October 31, 2021)
Adá: Outstanding bank interest converted into loan [see Notel 50,000
Adá: Outstanding amount payable to Delhi Government (not covered by section 438 and
deductible on accrual basis) NI
Add: Outstanding telephone bill (not covered by section 43B and deduetible orn accrual basis) Nil
Add: Advance tax (income-tax is never deductible, date of payment is irrelevant) 3,00,000
Add: Interest on loan taken to pay income-tax (never detuctible) 30,000
Net income 19,80.000
215 AMOUNT NOT DEDUCTIBLE OF CERTAIN UNPAID UIABILITIES Para 82.9

Note-Conversion of outstanding interest by a bank into a loan is not treated as payment of tnterest to bank on the
date ot conversson. Consequently, it is not deductible.

82.9-P2 XLti. isa manufacturing comyaty (not having any internathonal or specified domestic tramsction). Iihe profit and loss
account of X LHd. for the year eniling March 31, 2021 16 gtoen elott
Ks.
Rs
GST 50,000 Sales 20,10,000
Otler expemses 14,15,000
Net profit 5,45,000
20,10,000 20,10.000
Other information
1.Out of GST of Rs. 50000, omly Rs. 47,000 is paisd. The prayment is made as folous-
a. Rs. 40,000 on September 2, 2020;
b. Rs. 4,00 on October 5, 2021; and
c.Rs. 3,000 on November 1. 2021.
Retunt of tncome is submitfed on Nooember 10, 2021.
3. Dhuring the preeonas yeur 2020-21, the following pryments are ne in respect of ex7etses pertatning to eartier years-
a. bonus lo enpioyecs perlaining fo ihe previous yetr 2018-19 pid on April 30, 2020 Rs. 15,000;
b. customs duty perlatining to the previous year 2018-19 pait or Decemier 1, 2020: Rs. 25,000
C clectrictty bill payable ko BSES perlaining to precious year 2018-19 psuid on May 3, 2020: Rs. 35,00
d. GST pertaining to the prvious year 2019-20 paid onm May 20, 2020: Ra. 40,000; and
e.leutve salary payahle to enployers pertaining to the prenious yoar 2019-20 paid on Mardh 2, 2021: Rs. 45,000
Dhese payments do not pertain to the preious year 2020-21. Consoguently, tiese ane not rmoordnd tihe profil and loss account
it
gioen abooe. Find out the net income of X La. for the assessment yeur 2021-22. Asume hat bhe dae dale of furnisitng etiurm
of income for the assessment yeur 2021-22 is October 31, 2021.
Solution:
Net profit as per profit and loss account
Adjustments
CST
Less: GST
ANIN
paid during 2020-21 (deductible on payment basis)
Less: GST paid during April 1, 2021 and October 31, 2021 ]ser Note 1)
5,45,000

50,000
-40,000

Lese: Bonus to employees see Note 2 15,000

Less: Customs duty [ser Note
Less: Leave salary |se Note 3
2 25,000
45000
Net income
Notes
1.GSTdebited to the profitand account given in the problem is covered by section 43B. The due date of submission
los
of retum ot income is October 31, 2021.1t the payment is made up to CXtober 31,2021, then it is deductible on accrual
basis for the previous year 2020-21. The payment of Csot Rs 4,000 on October 5, 2021 ts, therelore, deductibie on
acerual bass. The payment made on November 1, 2041 15 not deductibke tor the prevtos year 314-21.
Bonus to employees pertaining to the previous year 2018-19 is paid on April 30, 2020. Similarly, customs duty
pertaining to the previous year 2018-19 is paid on December 1, 2020. 1he due date of submission of retuurn of income
for theprevious year 2018-19(or the assessmentyear 2019-20)1sSeptember 30, 2019.As thesepayments were not made
up to September 30, 2019, these were not allowed as deduction for the previous year 2018-19.Payment made after this
date is allowable as deduction on payment basis in the year in which the payment is made. Iherefore, payments made
on April , 2020 and Decermber l, 2020 are deductible for the previous year 202021.
3. For the previous year 2019-20 (i.e, the assessment year 2020-21), the due date of subrmission of retum of income is
Oetober 31, 212001. CSt and leave salary are covered by section 43B. l payment an respect of these expenses are made
up to October 31, 20201, then these paymentsare deductible an acerual basis for theprevious year 2019-20.G5Tispaid

not oeucible tor the previous year

on pavment basis for the
2019-20. It is deductible on paynment basis for the previous year 20404.

tExtended to February 15, 2021

Para 83 INCOME UNDER PROFITS & GAINS OF BUSINESs OR PROFESSION &TS cOMPUTATION

4.Electricity bill payable to BSES is not covered by section 43HB Any expenditure, which is not covered by sectionn 438
is deductible on accrual basis if the taxpayer maintains books of account on accrual basis. Consequently, it was
dedactible for the previous year 2018-19.

WHAT
ARE THE DEEMED PROFITS AND HOW THEY ARE CHARGED TO TAX
83.The following receipts are chargeable to tax as business income
83.1 Recovery against any deduction [Sec. 41(1-Section 410) is applicable as follows
Inany of the earlier yearsa deduction was allowed to the taxpayer in respect of loss, expenditure (revenue or
capital expenditure) or trading liabulity incurred by the assessee
During the current previous year, the taxpayer-
a. has obtained a refund of such loss or expenditure (it may be in cash or any other manner);or

.has obtained some benefit in respect of such trading liability by way ot res
r this purpose includes unilateral act ot the assessee by way of writing-off of
h liability in his books of accou
f the above two conditions are satistied, the amount obtained by such person (or the value of beneit accruing
of recovery. If there is amalgamation/demerger of companies or business is succeeded under any other mode,
the amout obtained by successor shall be taxable in his hands
Provisions illustrated
To clariy the above provisions, one can go through the folkowing examples
1. Rs150,000 is paid as sales tax by X during the previous year 2019-20 and the same is allowed as deduction. The
tapayer claims refund of Rs.10.00 on June 16, 2020 from the sakes tax department after getting a favourable
a
verdict from the Delhi Hagh Court Rs.10000 is taxable for the previous year 232-21, even it the bustness ts not in
existence during 3/20-21. It will be taxable, even if after giving refund, the Government files an appeal before the
Supreme Court.
2 Suppose in 1 supa before the verdict of the Delhi High Court. X dies and the business is continued by his son Y
who gets a refund of Rs.10,00 from the sales tax department, then Rs.10,000 is tacable as business income of Y.
3.XLtd. purchases goods on credit from different parties and dlaims deduction on "acrual basis. Cenerally, these
bills are paid within 6 months of submission ot delivery documents. As some of these documents are nisplaced by
A, one of the suppliers, he could not claim payment of a bill of Rs. 2)O0 pertaining to 2016-17, although X Ltd. has
caimeddedtug tha the
r on penod
thar urn
the company. In this case, Rs. 20,000 is chargeable to tax by virtue of section 41(3) as business income of the
assessment year 2021-22.
4.An assessee is allowed deduction for the assessment year 2018-19 in respect of Rs 42.000 misappropriated by his
cashier, and later on in the prevous year relevant for the asessment year 2121-2 Rs. 8D (out of the sum so
misappropriated) is recovered by the assessee. Ks. 8,000 ts chargeabie to tax as bustness profits tor the ssessment
2021-22

83.2 Sale of assets used for scientific research [Sec. 41(3-Where any capital asset used in scientific
research is sold swithout lacng bem used for other purposes and the sale proceeds (minus expenses on transfer),
is chargeable to tax as business income in the year in which the sale took place.
83.3 Recovery of bad debt [Sec. 41(4)]- Excess recovery of bad debt is chargeable to tax. Ser para 81.27 and
Problem 8127-1.
83.4 Recovery ofter discontinuance of business or profession Sec. 176[3A), (-Section 176(4) is
applicable where any profession is discontinued in any year on account of oessation of the profession by, ar the
retirement or death of, the person carrying on the profession. Section 1763A) is applicable where any business
is discontinued in any year. By virtue of these sub-sections of section 176, any sum received after the
discontinuance of the business or profession is deemed to be the income of the recipient and charged to tax in
the year of receipt
 MAINTENANCE OF BOOKS OF ACCOUNT BECOMES COMPULSORY Para 85
217

wu WHAT ARE SPECIAL PROVISIONS FOR COMPUTATION OF BUSINESS INCOME

84. A few special provisions for computation of business income are gven below
84.1 Special provisions for determining sale consideration in the case of transfer of immovabie property
[Sec. 43CA)-Section 43CA is applicable if an asset (other than capital asset), being land or butiding or both, 1s
transferred. f, however, the asset which is transferred is a capital asset, section 50C (not section 43CA) is
applicable
When section 43CA is applicable -By virtue of secticon 43CA, on transfer of land and/or building (other than
capital asset), stamp duty value adopted (or assessed/assesable) by stamp duty authority shall be deemed to
be full value of consideration for the purpose of computation of business income if the following condition is
satisfied-
For assessment years 2014-15 to 2018-19 If stamp duty value exceeds 100 per cent of sale cmeideration
For the assessment years 2019-20 and 2120-21 stamp duty value eoends 105per oent of sale consideration
From the assessment year 2021-22 If stamp duty value exceeds 110 per cent of salee consideration

Note-110 per cent has been increased to 120 per cent if the following conditions are satisfied
The transfer of residential unit takes place during November 12, 2020 and June 30, 2021.
Such transfer is by way of first time allotrment of the residential unit to any person.
The consideration received or acruing as a result of such transfer does not exceed Rs. 2 crore.
FOr this purpose, esidential unit means an independent housing unit with separate facilities for living,
coOKing aa sau h h an interior door ina shared hallway and not by walking
the living space of another household.
through te
througn
ement date and negistrutiom date is not same-Where the date of agreement (fixing
fotranafer of the asset) and the date of registration (of such transfer of asset) are no
the same stamp duty value on the
date of the agreement shall be considered for section 43CA. However, this
rule is applicable oniy if the amount of consideration (ora part thereof) has ben received by seller by wayof
an account payee cheque/draft or by use of electronic clearing system through a bank account (or through
prescribed electronic mode)f on or before the date of agreement for transfer of the asset
Can an asseseee challenge stamp duty caluation -The assessee can claim that the value adopted (or assessed or
assessable) for stamp duty purposes exceeds the fair market value of the property as on the dale of transter. l
this claim is made before the Assessing Officer and the assessee has not disputed the value so adopted (or
assessed or assessable) in any appeal or revision or reference before any authority or Court, the Assesstng
Officer shall refer the valuation ot the relevant asset toa Valuation Otticer in accordance with secthon 35A.
the fair market value determined by the Valuation Officer is less than the value adopted tor stamp duty
purposes, the Assessing Officer may take such tair market value to be the full vafue of consideration. FHowever,
if the fair market value determined by the Valuation Officer is more than the value adopted or assessed for
stamp duty purposes, the Assessing Officer shall not adopt such fair market value and shall take the full value
of consideration to be the value adopted or assessed for stamp duty purposes
84.2 Computation of income from construction and service controcts (Sec. 43CB] -Section 43CB provides
as follows
Percentage of comgpletiom method- Profits and gains arising from oonstruction contracts/service contracts shall
bedetermined on the basis of peroentage of completion method. Conputation will be done on the basis of
notified Income Computation and Disclosure Standards (CDS).
Service conmtracts- Income from service contracts with duration of not more than 90 days shall be determined
on the basis of project completion method. Moreover, service contracts involving indeterminate number of acts
over a specific period of time shal be delermined on the basis of straght ine method.
Retention money- For making above computations, contract revenue shall include retention money
Cost-Contract costs shall not be reduced by any incidental income in the nature of interest, dividends or
capital gains.

mum WHEN MAINTENANCE OF Bo0KS OF ACCcoUNT BECOMES COMPULSORY [SEC. 44AA]

85. The provisions regulating compulsory maintenance of books of account are given below
1Aspr rale 6ABBA prescrbed modes of electronle paynent ane:(ocredit ard debit card. 6 net banking (TMTS ionmediate
)
Payment Servioe), () UPI(Unifiod Payment Interface). () RTCS (Real Time Grou Settlement, NEFT National Dlectronic Funds
Transfer) and h) Bi IIM (Eharat Intherface for Money) Aadhaar Pay.
Para86INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION &ITS COMPUTATION 218

Persons carrying on specified professions""Specified professions are legal, medical, engineering, architec
tural, accountancy, technical consultancy, interior decoration, authorised representative, film artist, company
secretary and information technology. In these cases, if annual gross receipts (of any of proceding 3 years) do
not exceed Rs. 1,50,000, the tapayer is required to maintain such books of account as may enable the
Assessing Otticer to compute his taxable income under the income-tax Act. It, however, gross reoeipts are
more than Rs. 1.50,000, the taxpayer will have to maintain books of account prescribed by rule 6F |[ie, cash
book Journmal, ledger, oopies ot bils tssued by the taxpayer, etc.
Persons carrying on "non-specified professions" or any business- If annual income does not exceed Rs. 1,20,000
and annual gross receipts/ tumover do not exceed Rs. 100,000g (ot all preceding S yeas), the taxpayer is not
required to maintain any bookS ot account. conversely, ir the annual ncome and/ or annual receipts/tumover
exceed these tigures, the taxpayer is required to maintain such books of account as may enable the Assessing
Officer to compute his taxable income under the lncome-tax Act (books are not prescribed by Board).
Persons cooerel by secthons 44AD(4), 44ADA, 14AE, 4BB, BBB- H it is claimed that business income is lower
than the income computed under sections 4ADA, HAE, HBB, and 4BBB, on estimated basis, or the assessee
s covered by section 4HAD4), the taxpayer will have to maintain such books of account as may enable the
Assessing Officer to compute his taxable income (books are not prescribed by Board). This rule is applicable
irrespective of turnover or income. However, in the case of section 44AD or 44ADA this rule is not applicable,
if income is not more than exemption limit.

mu WHEN AUDIT OF ACCOUNTS BY CERTAIN PERSONS IS COMPULSORY [SEC. 44AB]

86. The provisions of section 44AB are given below
Compuisory audit The following persons are required to get their accounts conpulsorily audited by a
chartered accountant-
1.A person carrying om business, it the total sales, turnover or gross receipt in business exceed Ks. 2 crore
2. If the following 2 conditions are satisfied, compulsory audit is required only if total sales, turmover or gross
receipts in business exceeds Rs. 5crore (or the assessment year 0-21) or Rs: 10crore (from the assessment year
2021-22 onwards)-
ABgregate of all receipts in cash during the previous yeur does not exceed 5 per cent ot such receipt
Aggregate of all payments in cash during the previous year does not exceed 5 per cent of such payment.
For this purposes, payment/ receipt by a cheque/ draft, which is not acoount payee, shall be deemed to be
payment/Teceipt in cash.
3. A person carrying on profession, if his gross receipts in profession exceeds Rs. 50 lakh.
. A person covered under section 44AE, 44BB or 44BBB, if such person claims that the profits and gains from
the business are lower than the profits and gains computed under these sections (irespective ot his turnover)
5. A person covered under section44ADA, if such person claims that the profits and gains from the business or

profession are lower than the profits and gains computed in accordance with the provisions of section 44ADA
and it his income exceeds the exemption limit.
6. A person covered under section 44AD(4), if his income exceeds the maximum amount which is not
chargeable to income-tax in any previous year
Due date for audit report- Audit report should be uploaded one month prior to the due date of furnishing
return of income under section 1391).

HOW TO COMPUTE INCOME ON ESTIMATED BASTS IN THE CASE OF TAXPAYERS

ENGAGED IN A BUSINESS [SEC. 44AD]
87. Section 44AD is applicable if the taxpayer is a resident individual, resident Hindu undivided family or a
resident partnership firm (not being a limited liability partnershup). The taxpayer should be engaged in any
business (but not in the negative list given below). The annual turnover should not exceed Rs. 2crore. In such
a case, income is computed on estimated basis at the rate of B per cent# of tunover. The rate of 8 per cent# is

Rs. 250.000 (from the assessment year 2018-19) in the case of an individual/HUP
Rs. 25,00000 (fron the asscssnent yoar 2018-19) in the caie of an individual/11UE
6 per cent in respect of lotal turnover or gros eoerpts reerved by an account payee cheque/dralt or use ot dectroc crng
submisslon of retunm of incomeunder section 139(1).
As per rule 6ABBA. premcribed modes of electronic payment are:(@) creditcand, 6) debit cand, (a net banking, (IMS (mmediate
Payment servioel. tej PUnitied Payment lnferface). ) RTCS(Keal Tinme Gros6 Seftlement), (8) NEFr (National Electronic unds
Transfer) and () BHIM (Bharat Interface for Money) Aadhaar Pay.
219 OW TO COMPUTE INCOME ON ESTIMATED BASIs Para 87

comprehensive (i.e., no further deduction is allowed under any other section, even the deductionof remunera-
tion and interest to partners is not available from the assessment year 2017-18). An asessee (who opts for the
above scherme) is eligible for the following benefits-
1. He can submit his return of income in ITR-4 (UTR4 is a simplified form as compared to other forms).
2. He is exempted from maintenance of books of account.
. He can pay advance tax pertaining to his business income in one instalment (i.e, on or before March 15 of
the financial year immediately prior to the assessment year). Other assessees are required to pay advance tax
in four instalments (i.e, on or before June 15, September 15, December 15 and March 15 of the financial year
mmediitely prior to the assessment year).
Negative list- The following persons are not eligible to avail any benefit under section 44AD-
4aperson carrying on profession as referred to in section 44AA();
B. a person earning income in the nature of commission or brokerag

C. aperson carrying on any agency business; or

d. a person who is in the business of plying hiring or leasing goods carriages;
e.the assessee who has claimed any deduction under sections 10A, 10AA, 108, 10BA, 80HH to 80RRB in the
relevantassessment year
is it possible to declare iigher incomie-Ataxpayer who is covered by section 44AD can declare higher income
1s it possible to declare louer tncome-ll an assessee deciares profit for any previous year under the scheme of
section 44AD, he cannot dectare lower prott for the tnext consecutive sutbsequent assessment yvears. it he
declares lower profit, then he shall not be eligible to claim the benefit of the provisions of section 44AD for 5
subsequent assessment years ie, Subsequent to the assessment year relevant to the previous year in which the
Prot has not been declared at the rate of 8 per cent For exampie, an engibie assessee ciaims to tbe tawed on
presumptive basis of 8 per cent" of turnover under section 44AD for assessmernt year 2017-18. He otfers income
of Rs. 8 lakhon the turnoverof Rs. l crore. For assessment year 2018-19 ardd assessment year 2019-20 also he offers
income in accordance with the provisions of section 44AD. However, for assessment year 2020-21, he offers
income of Rs. 4 lakh on turmover of Rs. 1 crore. In this case, since he has not offered income in accordance with
the provisions of section 44AD for 5 consecutive assessment years, after assessment year 2017-18, he will not be*
elbie to clain the benett ot sextion aAD tor next tive asessment years (t&, 10r asbesstnent yeuns 2ULI=LZ o
4 he will have to maintain the books of account as per section44AA (irTespective of incomeor turmover), if his
total incomne exceeds the exemption iiit; and
he will have to get his books of account audited under section 44AB (irrespective of turnover), if his total
income exceeds the exemption limit.
If the taxpayer wants to declare lower income, he cannot submit his returm of income in ITR4 (return can be
submitted in TR-3 or 1TR-5).

B Problem
87.1-P1 X & Co. (a firm of X amd Y unlimited liahility) is eugaged in tihe busines of uvhole sale irading (turnorer of
ith
2020-21 out
eingRs 87,80000, of uhich 64.50,000 ts recetirved by acoount
Rs. ayr
dheques up to October 31, 2021). It eants

to urters as permited by sectiom 40(b) 000

alar
t
Deprec 70 000
Ct of mater
usel (a bill of Rs. 70,000 is peid in cush
ther f material 75,90,000
3,45,000
Totai 87,35,000
Net prufit (Rs. 87,80,000 minus Rs. 87.55,000) 25,000
Delentine the net income ofX &Co.for the assessmenl year 2021-22 assuming ihat long-term oapiial gain is Rs. 40,00, the firm
1s eligilie Jor a deuctton of Rs. 5,00 unider section 806 anut tie frm oants to opt for seutionm HAD.
Solution:
Income from the wholesale business (6% of Rs. 64,50K008% of Rs. 23,30,000) 5,73/400
Les:Expenses
Salary/ interest paid to partners as permitted by section 400)
Other expenses
Add : Disallowance under section 40A(3) for payment of Rs 70000 in cash (not applicable when income
1s computed on estimated basis under section 44AD or 44AE or under any other section) Nil
5,73400
Soe page 2
Para 87A INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION 20

Capital gains 40,000

Gross total income 400
Les:Deductions under sections 8C to 80U
Net income

uHOw TO COMPUTE INCOME ON ESTIMATED BASIS IN CASE OF TAXPAYERS

ENGAGED IN PROFESsION [SEC. 44ADA]
87A. The provisions of section 44ADA are given below
e ofession
The assessee is engaged in a proteron refered
2.architectu teeeoto in section 44AA() ie, such as legal, medical, engn
a rirdeoationoAn S

other profession as is notified by the Board).

3.Gross receipts of the assessee from the profesion does not exceed Rs. 50 lakh.
If the above two conditions are satisfied, income of the assessee shaill be calculated on estimated hasis at a
4.
sum
eua eoallte 50
toper e cent of tt
cent or the togross tepis
e ecan vountarily declare a higher income in his return. abs
6.All deductions under sections 30 to 36,incuding depreciation and unabsorbed depreciation, are deemed to
havebeenaiready allowed and no further deduction is allowed under these sections (not even salary/ interest
n down value is calculated,
Moreover, it will be disallowanceif anv, under sections 40, 40A and 43B has been considered
while calculating the estimateu heome
s An than the deemed profits and gains as stated above. The
oi
a9

gains as
n ae anlicable if theJOwer
stated above.
tapaver declares his income which ts
ncome which is lower than the
lower than deemed
the deemed
protits and
The assessee will have to maintain the books of account as per section 44AA, if his total income exceeds the
exemption limit.
The a ssee will have to get his books of account audited under section 44AB (irrespective of turnover), it
his total income exceeds the exemption limit Return of income will be submitted with digital signature.
Audit report should be uploaded one month prior to the due dale of submission of return of income

HOW TO COMPUTE INcOME ON ESTIMATED BASIS IN THE CASE OF TAXPAYERS

ENGAGED IN THE BUSsINESS OF PLYING, LEASING OR HIRING TRUCKS [SEC. 44AE]
88. Section 4HAE is applicable, if the taxpayer is engaged in the business of plying, hiring and leasing goods
carriages and he/it does not own more than 10 goods carriages at any time during the previous year.
Hotw to oiculate income- In such a case income will be calkculated on estimated basis as follows-
Hery gonds vehicle- For a heavy goods vehicle, the profits and gains shall be an amount equal to Rs 1,000 per
ton of gross vehicle weight (or unladen weight) for every month (or part of a 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 vehice, whichever is higher.
0ther bhan heary gonds zelicle-In the case of a goods carriage other than heavy vehicle. the profits and gains shall
be an amount equal to Rs. 7500 for every month (or part of a month) during which the goods cariage is owned
by the assessee in the previous year or an amountclaimed to have been actually earned from.suchgoods carriage
whichever B hgher
Other points-One should note the following8 points-
Heuy oods telicle:For this purpose, heavy goods wehicle means any goods carriage the gross vehicke
weight of which exoeeds 12,000 kilograms
2. Nofurther deatsction- Nofurther deduction is allowed under any other section exceptremuneration and interest
to partners.
3.isitpossihle to declare lozver income-If the taxpayerwants todeclare lower income, hewill have to maintain books
ofaccount and getsignature,
his account audited on compulsory basis. Retum of income will have to be uploaded in
Audit report should be uploaded one month prior to the due date of submission
R4with digital
ot retum O

He may be rosident and ordinarily resident or resident but not ordinatrily resident
221 PROBLEMS ON COMPUTATION OF INcOME FROM BUSINESS 90-P1

Problem
88-P1 X Ltd. is engeged in the business of aurriage goods. On April 1, 2020, it oums 10 trucks as foliaur-
f
7 leaming goxads vehticles (aveight of oach one of them s 14 tom).
3 igit goods vehicies (uveiglit of each one of them is 5 tom).
On May 6, 2020, one of the heay gods rehicies is sold by XLui. to purdlase 1 ight goods vwhide on May 10, 2020. The nuly
purchased light goods velbice is put to use only fromm June 17, 2020.
Find out the net income of X Ld. for the assessment yetr 2021-22 takžng imto comsideratiam the folloneing data-
Rs.
Freight collectod 8,90,009
es
Operational epenses (a bill of Rs. 30,000s paid in cad 40,000
Deppaton as per sechom S2
OBier effhce eapenses
Net profit 45,000
Oter bustnesyhtom-usiness incomse 6,70,000
Solution: Income shall be computed under section 44AE as follows-
X
Trucks owned by Ltd.

Type of oama Perisd sduring unich trucks Namber af montias Rate per Amust ft Rs)
are eumnd Cincdinea part (C) )(40
fmo)
23
April 1, 2020 to March 31, 2021
6 heavy goods vehicles Rx 1,000x 14 ton 1018,DJ)
heawy goods vehicieApril 1, 212) to May 6, 212) Rs 1,000 14 ton 2000
light goods vehicie May 10, 2020 to March 31L, 2021 7500 82500
3 ight goods vehicles April 1, 22 to March 31, 2021 12 7,500 270000
Total 138.>00
Computatiom of timcome- RS
Income from cafiage of
gods 500
Other income 670
et ihcome 585
WHAT ARE PERMISSIBLE METHODs OF VALUATION OF CLOSING STOCK
89. The valuation of closing stock or inventory shall be made at lower of actual cost or net realizable value (NRV)
sec. 145A@O1 Cost/NRV shall be computed in the manner provided in Income Computation and Disclosure
Standards (ICDS). The following points should akso be noted-
1.The method of valuation of inventories once adopted by a person in any previous year, shall not be changed
without reasonable cause
2. Inventory (being securities not listed, or listed but not quoted, on a recognised stock exchange) shall be valued
at actual cost
3. Inventory (being listed securities) shall be valued at lower of actual cost or NRV. For this purpose, the
comparison ot actual cost and NRVshall be done category-wise [different categories are :shares, debt secuities,
convertible securities and any other securities).
4Evenin the case of dissolution of a partnership firm or AOP or BOL the inventory on the date of dissolution
shall be valued at cost or NRV, whichever is lower [there is a conflict between para 24 of ICDS-VIl and section
145A(0, section 145A() will supersede para 24].

Problems on computation of income from business/profession

90-P1 From he Profit and Loss Account of X age :31 years resident) for the year ending March 31, 2021, asaertain his totol
the assesnont yoar 2021-22 :
imcwme and tax liaity (Gignore setion 11584C)fr

General expee
,
13,400 Gns prafits 4,15,500
Bad debts 22,000 Covnmssion 8,600
90-P1 INCOME UNDER PROFITS&GAINS OF BUSINESS OR PROFESSION&ITS COMPUTATION 222

Advance tax 5.000 Brskenuge 37,000

Irtsurance 600 Sundry reoet 2500
Salary to 26,000 Rad debt reconered (oarlier alouvid as
Salary to X stf 48,000 deduction) 11,000
Interest on ocerdraft 4.000 Interest on debentares (i.e, net amount
interest on loun to Mrs. X 42,000 Rs. 22.500+ hax destucted at souroe
Interest on cnprilal of X 23,00 Rs 2,500) 25,000
Depreciatiom 48.000 nterest on depsit with a compaaty
Adertisement expenditure 7,000 (no-trade) net interest:Rs. 11,700+
Contributin to empíoyees recognised tax deducted at sourcei K5. 1,300) 13,000
procdent fnd 13,000
Net profil 2,60,600
5,12,600 3,12,600
Other information:
1. The amtoutl of depreciation allonahle is Rs. 37,300 s per the lnooe-lax Rules. it includes depreciation on peranent stgn
art.
2. Adtertisement expenditure inchudes Rs. 3,000, being cost of pemanent sigm board fixed on ofice premises
3. Income of Rs. 2,04.500, accrued during the previous year, is nol recondei in the Profit and Loss Account
4. X pays Rs. 6,000 as premium on oun life insurance policy of Rs. 70,000.
5. Genenl eonses nclaude (a) Rs. s00 gien to Mrs Xfor arramging a party in inoiour ofafriend uwino has reenily come
Canada (b) Rs 1,000 being contributiom to a political party.
fro
6. Loam anas taken from Mrs. X for payment of arrears of inaome-tax.
Solution: R&
Net profit as per Proflit &e Loss Account 2,60,600
Hajustiments
dd: Expenses tor arranging personal party
da: Contribution to a political party
1dd: Advance tax
MAINN 500

Ada: Salary to X 48,000

Add: Interest on capital to X 25,000
Add: Interest on loan taken for payment of income-tax 12,000
Add: Capital expenditure on advertisement 3,000
Add: Excess depreciation (e, Rs. 48,000-Rs. 37,300 10,700
Adá: Income not recorded in the profit and loss account 204,500
Lese: Interest on debentures (-)25,000
Less Interest on company deposit (-13,000
income
Business D,300
COMPUTATION OF NET INCOME OF X
Profits and gains of business or profession 300
Income from other sources (interest on debentures and company deposit9 38,000
Gross total income ,300
lees: Deductions
Under section 80C (payment of insurance premises) 6,000
Deduction under section 80XCC (being contribution to a political party) 1,000
Net income 91,
Income-tax 30,760
Less: Rebate under section 87A (net income exceeds Rs. ,00,000, rebate under section 87A not available) Nil
section 87A
ncome-tax (after rebate under 30
Add: Surcharge (not applicable as taxable income does not exceed Rs. 50 lakh) Nil
Ta
atid education cess
ut 31,990
Pre-paid tax (ie, advanoe tax tax deducted at souroe)
Less: 8,800
Balance (ie, amount refundable) (rounded of) 3,190
Note: Expenditure on sales tax proceeding is deductible.
Z23 PROBLEMS ON COMPUTATION OF INcOME FROM BUSINESS 90-P2

90-P2 X(ge:64 years), a resident inticidual, furnishes the foilswring purticulars rcletmt for the assessmett yair 2021-2:
Profit and Loss Account for the year ending March 31. a21
s.
Salary to statf 34,000 Gnss prafit 16.86.000
General expenses 48.00 Cemmissiom and discoum! 2.17,200
Bad debhts writlen off 15,000 Sunáry reoeipts 43,000
Reserve for lesses 2.000 Sort-tenms pryfit om sale of inpestnenit

ie sune
Adteriisemet
premuum (Omae prese) 4.200
2,400
31,000

Outstunding atoertisement L,600

Interest om X's anpifal 3,500
interest o bansk loan 4500
Ezperditu on
anut
acquisition of a atent right
prut to use os jarne 30, 2020 17.000
cqutet
Lamp sum amsiderstiom for acquiring knte
Jhoue on Marcdh 3, 2021 60,000
Depreciation on plant and mactinery 28,000
Procisiont or outstanding sales tax and excise
uty 13.000
Net profit
19,77,200 977.200
r anformatiom
Autbvertisement espemliture inciaudes Rs. 3,400, being cost 2 diaries faost ef esch heing Rs. 1.700) prsented to custoners
f
21Depreciation om plant and machinery according to income-tax proision aomes to Rs. 29,700.
3. Salary te staff inciudes paymaent of Rs 8000 to a relatize aohich is unrasahe to tihe extent of R 3.00
4. General cxpenses incdude fa) ependiture of Rs 4.800, incurred by X on training of his empioyees b) cummissiom of
Rs. 10.000fr securing a iusiness onider, and (c) ampensationef Rs. 600patil to mu enploye nile terminating his sercrice in
the bwstness mterest.
5.Out ofoutstanding sales tx md excise duty. Rs. 3.000 is pid om July 10, 2021 and Rs. 8,000 is paid orn October 3, 2021. Tie
ulanor is mot pnid as yet, Dae dale of fiing retus o income is iy 31, 2121
6.
Icoe of X Jrom compaty depostl 1s Ks. 12,000, uvnck 1s no shou in the Praftl ant Loss Account.
7.X does not oat to opt for tie altermatine ter regime of sectiovn 7158AC
Detenmine the taxahle income amd tar iehlity of Xfr the assessmest yoar 2021-22, asuning that insunmce pramhm puažid hy
Xon the life insuramce policy of Mrs Xis Rs. 1,03,200 (sum assured: Rs. 11.00,000).
Solution:
Profit as per Profit and Loss Account 17.34,000
Adjustments-
Add: Salary to staff (salary paid to a relative to the extent it is treated as excessive or
unreasonatble)
Add: Reserve for losses 2000
on capital
test
Add: Depreciation on patent right (amount deductible is 25% of Rs. 17,.000, ie, Rs 4,250;
3500

12750
Add: Depreciation on know-how (50% of 25% of Rs. 60,000, as it is put to use for less than
180 days, s deductible which comes to Rs. 7S00; amount not deductible is Rs. 5250) 52.500
Add: Outstanding sales tax and excise duty IRs. 5,000 paid on or before July 31, 2021
deductible. The balance is not deductible for the previous year ending March31, 20211
s 10,00
Lees: Provision for depreciation on plant and machinery (ie Rs. 9700- Rs. 28,000)
Less : Short-term capital gain on sale of investment 31,000
Business income 17,85,050
cOMPUTATION OF NETNCOME
Profits and gains ot business or protession 17/85,050
Capital gas 31,00
Income from other sources 12.000
oross total income 18,28.050
Les: Deduction under section 80C [payment of insurance premium) 1,05,200
Netincome 8S0
90-P3 INCOME UNDER PROFITS & GAINS OF BUSTINESS OR PROFESSION &ITS COMPUTATION 224

faxt ,27 455

Add: Health and education cess 13,098
Tax liability (rounded off 340550
Notes:
1. Expenditure on training of employees is a deductible expenditure. Likewise, commission for securinga business
order is deductible.
2. Advertisement expenditure (being expenditure of reveae nature) is fully deductible under section 370)
3. Compensation payable for terminating service of an empkoyee is deductible

90-P3 X (ge: 29 years) fsumishes the follouting informuation leoant for the assessment year 2021-22:
roit anaLoss ACOunt tor the ear ereing areh si, 2uat
Re
fce expensess 45,000 Gross pres 03,0D00
Sundry expenses 39,000 Sunáry reugnts 11,000
Entertaintmet expenditure 5,000 Rad debts reveered (mot alloued as deduction
Audit fees ,100
chargevexpenses 4000Custots diaties reoerel Jrum the Goreriment
Lel b,000 (rier allouwel s dcductiOn) 32,500
Depreciation on platt and machuinery 23,000 Gft reitvel fromt fotiher 43,000
Salary to staf:
Salary 43.000
Bomus 36,000
Comtributiom toxeirils
pro 15.
ales t 38,000
Prorision for sales tax
Paymuent ho an aqpromed reserct asociation

r arryng om sctentiftc reseurdt

vet proyit
25,000

19,000
5,82,600
8,96,600
INN 8.96,600
Other torrmaiiot
1.As shown in the P'rofit and Loss Acount, Rs. 19.000 is paid to a reserh assaciatiom for the purpe of carrying on ayproced
scienlific research in natural science, not related fo the businessafX. Besides, X pserchases a plant of Rs 30.000 for the purpesek
ofcarrying on scientific research related io his business. Neither ast of plant nor depreciatáout finereot is debled io profit amd loss

f rctam bor
paid om Nocenr 11. 2021., 2021 theing the due date of
fumishine fincome). The blance ofR 6000 he,
3. Depreciation on plant and muachinery and exlension of building as per income-tax procrision is Rs. 19,000.
4.Sales tax ofRs. 38,000 inchuides (a) inlerest for late paymentofsales tax:Rs.1.200:b)penalty for cuding sales tax: Rs. 10,000.
5. Provisiom for sales tax represents an outsáanding sales tax liatility, wiich is, honever, paid on July 10, 2021.
Salary to stuf inciudes a payment of pension of Rs. 5,000 to the aridue of a fomer employne
6.
7.X does not oarnt to opt for the altermative tax regime of sectiom 115BAC
Ascertain the net income amd tax fiakility of X for the assessemt ynar 21021-22, asuming that he deposits Rs. 1,20,000 in pubtic
procident fnd account during the precvtious year 2020-21 amd his income frum other seurces is Rs. 196,500.
Solution:

Net profit as per profit and loss account 2,600

Adjustmemts
Add: Extension of building (capital expenditure, not allowed) (depreciation available, as given below) 6,000
Add: Depreciation on plant and machinery as per books ot account (taken separately) 23,000
Tess: Depreciation (as per income-tax provisions) on plant and machinery and extension of building )1900
Add: Bomus not paid till the due date of furmishing of return of income (ie, Rs. 36,000-Rs. 30,000) 6000
Add: Contribution to unapproved gratuity fund 4,000
Add: Sales tax penalty 10,000
Add: Payment to an aPproved scientilic research association (deductibie, no adjustment required)

Astaxable income is more than Rs. 5,00,000, rebate under section 87A is not available. Surdharge is not applicableas tasable income
does not esceed Rs. S0 lakh.
225 PROBLEMS ON COMPUTATION OF INCOME FROM BUSINESS 90-P4

Ks
Ies: Capital expenditure on scientific research related to the business of the assessee (it, 100% of
Rs. 0,000) (-) 30,000
Less: Recovery of bad debts (not taxable, as earlier it was not deducted) (97A00
Less: Gift received from father (not an income, gift received from a non-relative is taxable in soune
Cases-see para 114)
Business income 5,32500
Income from other sources 1,96,50
Gross total income 7,29,000
Less: Deduction under section 80C [contribution to public provident fund] 1,20.000
Net income 60 9,000
Tax on net income 34300
Adá: Surcharge (surcharge is applicable if net income exceeds Rs. 50 lakh) Na
lax and surcharge 34,300
Add: Health and education cess 1372
Tax liability (rounded off) 35,670
Notes
1. Outstanding bonus and sales tax paid up to July 31, 2021 (ie. the due date of submission of return of income) is
deductible. Amount paid after this date is deductible in the year of payment
2. Pension paid to the widow of a former employee is deductible
3. Interest for non-payment of sales tax is deductible

90-P4 X (age : 24 yoars), a resident indimidual, fumishes the follesuring information, for the asesenent year 2021-22:
Profit and Loss Account for the year ending March 31, 2121
Rs s.
Office expenses
Telephome bills

Siary to sta
TADX 11

000
8,000
42.000
Gns proft
Suniry recnpts
8,78,000
8,000

Depreato 25 00
Trucelling expenses 43,000
Los of cash by an employe thnouglh ertezzlement 5,000
Amount tranesferred io sperial nesere acoDut 500
Expeniditure on the occasion of Dizoali 7,100
nerest ant iegal enyents
8,500
Net proftt 6,81,900
8,86,000 8,86,000
Other informastiom
. Salary to staff incdudes payment of Rs. 12,000 out of India om zovnich tax has not bem deuuctei at source nor prid to tihe
Goxermment
2 Depreciated tnatue of piartt and machinery on April 1, 2020 is Rs 1,10.000 (rate of sdepreciation: 15 per cemt).
Aplat uthose wrtllen doun ralae on April 1 2020 1s Rs. 17,440 ts seid during the prerious yer jor Rs. 11,OD.
Amachineryfcost price Rs. 20,000) whose writtem doen taiue on April 1, 2020 is Rs. 2.350 is sold during the precvious year
Jor Rs. 15,000
During the year, X purchases a neto eguiment for hce for Rs. 2.00,000 (out ef toluich Rs. 1.22.670 is paid by accout paye
dhegue and balanor ts pand in cash) tofnch ts efgibie jor deprectathom at the rute of 5 per cmt. lhe plant ts tRstaiied annd prat
to use on May 15, 2020
3.Trveiling eapemses inchude Rs. 10,000 being hotel expenditure of an employee in npect of am official visit he Bombuy for 5
days.
4.Expenditure on the ocassom of Dtuali includes a gift of Rs. 2,000 to Mrs. X.
5. Interest incdudes a payment of Rs. 3,000 out of Indis ot zwhich tax has not bent detuctnd.
6. Sundry eapemses inchude expenditure of Rs. 1.000 on maintenance of guest huse in Delin for the purpose ofcarrying om tihe
s
husiness amd Rs. 4,000 being enployer's contributiom toueards ESl out af toiaich: Rs. 600 paid after tihe due date of suimisiot

TRebate under section 87A is available only in the case of a residernt individual if his/ her taxable income is Rs. 5,004K0 or less.
90-P5 INCOME UNDER PROFITS& GAINS OF BUSINESS OR PROFESSiON &ITS COMPUTATION

Delenine Bhe taxabie income and lax liability of X for ae aesessment er

2021-22 assuning that sundry meipts inctude
Rs. 5,000, betnng amount of endourment tnsuraioe policy reoered froE the Life Insuranoe Corporation of Frsdáa at the titse of
maturity of the policy (ie, December 5, 2020) jamount ef tmsuzranae preism last paid o une 5, 2020 : KS. H0)
Resides X has FD bank interest of Rs. 2,40,000 (not ginen atve) and he deqesits Rs 1,30,00 in PPF acaout of Mrs Xon
March 31, 2021.
Solution :
Net profit as per Profit and Loss Account 6,81,900
Adjastment-
Adkd: Salary paid outside india [not deductible as tax has not beerm deducted at sourcel 12000
Add : Depreciation (taken separately) 28,000
Aukd: Traveling expenses [fully deductible under section 37(1
Add: Gift to Mrs X on the occasion of Diwali 2000
Aadd: Payment of interest out of lndia not deductible as tax not deducted at soroe 3,000
is
Add: Expenditure on maintenance of guest house (deductiblel
Add: Employer s contribution towards ESI which is paid after due date otf submission of refum
of income
Add: Amount transferred to special reserve account
Less: Depreciation fsee Note 31,000
Les: Amount credited but not taxable (amount of insuranoce policy)
Income under the head Profits and gains of business or profession 6,99.000
Income from any other sources 240,000
Gross total income 9,39,000
Less: Deduction under section 80 1,30,400
Net income 8,08,60
Tax on net incomet 74,220
Add: Health and education cess (4% of income-tax)
Tax liability (rounded off
Note: Cemputatiom ef depreciation
Depreciated value of plant and machinery on the first day of the previous year 1,10,000
Add Cost of plant and machinery acquired during the previous year (payment exceeding
Rs. 10,000 in cash not considered) )1,22670
Les:Saleproowds of plant and machinery sold during the previous year [Rs. 11,000 926.000
Rs 15,000]
Written down value 2.06,670
Amount of depreciation [15% of Rs. 2.06670] 31,000
90-PS Xis 95 per cemt sharecholder in X LId X Ld. etms a marufacturing unit in Cadewari Distriet, Amdirra Pradesh. For tie
year ending March 31, 2021, X Ld. has generuted imoomse of Rs. 2715,000 s per its profit and loss acoumt. Ihe cmupany gies
foliloeringintormathet-
1. For the precionus year 2020-21, tihe compamy has transferred a sum of Rs. 2,70,000 y deliting its profit anut loss account to
proeision for bad amd doubhtful deht acont. A busines dett of Rs. 1,00,000 is uritter offty dehiting it to prorisiom for had and
dosubtfaul decet account.
2On April 15, 2020, the
oy dedauchef tax at souror om rent of Rs. 2,00.000 pertaining to the precious yesr 20i4-15.
tis
amOt s disailouned from he income of the prrvicus year 2014-15 om.accout of uom-defuctim of
tar so dedauctedl is depositnf on OXtober 25, 2020.
DS during 2014-15. The*

3. Rs. 55,000 is paid in cash for purchase naue material. The psnyment is, ihroener, maade om bansk Îhekiday on Augaust 15, 2020.
f
4.Family plamming epemditure of Rs. 60000 is deited lo profit and ioss accoent. The ependitare is incurrol for the bengit of
employes Out of Rs. b0.000, Ks. 20,00 is aptal expenitture
2020-21, a apensatiom of Rs 2/00,00 is paid to a
5. Lnder nolantary retirement scheme of the coany, during the
e
enplcyee Yo has taken oluniary relirement durung 2018-20. Noting ts detitef lo ihe prot amd koss anni of 2020-21.
6.An adtertisement ependiture Re
of 5,0020 8s incurned in reet an
of artisement af comany s
product aikch: 4ppoars
in a neuwspaper oumed by a poiticsl party. Tis amount is detited to profit and ioss acvunt
Determine the amosnt of met income of X LAd fur the aesesment yoar 2021-22

TAs taxable incomeis mone than Rs 550J00A,rebute under section87A isnot available. Surdharge is not applicableas tavabie income
doesnot nced lakh oeo tax iabsility is calkuilatef without consierting the alterrative tax regime of sexton 1155AC
 PROBLEMS ON COMPUTATION OF INCOME FROM BUSINESS 90-P6

Solution: Computation of income of X Lhd. -

Net profit as per profit and loss account 27,15,000

Adjustments-
Add: Amount transferred to provisions for bad and doubtful debt account 2,70,000
Less: Amount written off by debiting it to provision for bad and doubtful debt account (1,00,000
Less: Rent of previous year 2014-15 on which tax is deducted and deposited during the
curent year J2.00,000
Adl: Purchase of raw material in cash (as the cash payment is made on a bank holiday
disallowance provisiorns are not attracted
Adl: Family planning expenditure (1/5th of capital expenditure of Rs. 20.po0 is deductible
during the current year and remaining amount will be deductible in the next 4 years) 16,000
Less: Voluntary retirement expenditure (20% of Rs. 2,00.000 is decductible in 5 years) 40,000
Adi: Advertisement expenditure given to a political party 85,000
Business income 27,46,000
Any other income Nit
Gross total income 27,46,000
less: Deductions under section 80GB [ee Note] 85.000
Net incomee 26,61,000
Note : Expenditure by way of advertisement to a newspaper owned bya political party is not deduetible under
section 37(28).

or under section 80GGC (if a contribution

a
Contribution to a political party is deductible under section 80CKGB (if contribution is made by an Indian company)
made by a person other than an Indian company). Expenditure by way
of advertisemet toa ewpper owne by a ptcal party
is as comtriuton tpotcl party
treted the
T
weanr
but the same
owned h nart
eal edaible ne on
naver
is not deductible under section 80GGC if the taxpayer is
a
cR e aer isanldancomnaw ny
is a person other than an indian conmpany

90-P6 X (age: 40 yeers) furmishes the follouring particulars of his income relervnt for the assesment year 2021-22:
Profit and Loss Account for the year ending March 31, 2021
Rs
Salary to staf 2,31,000 Grss pryfit 10,86,000
Adoeriiseneit 8,000 Rent of house proyerty 2,40,000
Repairs lo house propey 20,000 Diridends from an Indian company 12,500
Municgil tar of hrouse Property 30,000 Profit on sale of iwport licence 63,800
msurunce:
Houseproperty 16,000
Officeand godoum 20,00
Office expenses 4.500
Life insunance premium on oun life policy 3,000
Deprecaton
o House pruperty 60,000
Bustnesassets 13,400
Wealth-tax 6,000
Patent rights hof Rs. 70.00 being cost of such
rigt acquired on April 6, 2020 35,000
Income-far penatty 1,000
Interest on capital borroxrve:
o for busines 3,800
o for reconstruction of house properly 50,000

for inovestment in shares 2,000

Rent praid to X (for using 25 per oent portin
for business purposes) 1,00,000
90-P6INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION&TS COMPUTATION 228

Rs. Rs
Net profit s,600
14,02,300 14,02,300
X owns a house properiy (oulside the jurisdiction of any Rent Comtol Act), enection of which was completed in March 1998.
here are tiree restentii utts n ie house. ut (oSIsing o o
per cent of he arpet areu) ts iet out a tenanit af
Rs. 20.000 per month. tnit 2 (25 per oent of the carpet arna) is wsed by X for auwm residential purposes. LUit 3 (25 per cent) is
utilised by him for his business purposes. Determine the tarable income of X for the assessment year 2021-22. Durin the
previous year 2020-21, X has received a gift of Rs. 3,79,500 by dheque frot his non-resident friend, out of wlich Rs. 1,00,000
is deposiled in prabiie protideni fund.
Solution
BUSINESS INCOME
Net protit as per Profit and Loss Account 7,98,600
Adjustment
Add: Repairs to house property (inadmissible amount is 3/4 of Rs. 20,000) 15,000
Add: Municipal taxes (inadmissible amount is 3/4 of Rs. 30,000) 22,500
Adá : Fire insurance of house property (inadmissible amount is 3/4 of Rs. 16,000) 12,000
Add : Life insurance premium (personal expenses not admissible) 3,000
Add: Depreciation on house property (inadmissible amount is 3/4 of Rs. 60,000) 45,000
Add: Wealth-tax and income-tax penalty (ie. Rs. 6,000 + Rs. 1,000) 7,000
Add: Patent right [ie, amount in excess of 25% of Rs. 70,000) 17,500
Add : Interest on capital borrowed for :
house property /4 of Rs, 50,000) 37,500
investment in shares 2,000
Add: Rent paid to X 1,00,000
Less : Rent of house property (240,000
Les: Dividend
Business profit
INCOME FROM OTHER sOURCES
Dividend (i., Rs. 12.500-Rs. 2.000)
XMANN 12.500
,07

10,500
3,79,500
Income from other sources 3,90,000
INCOME FROM HOUSE PROPERTY
Linit 1
Fair rent (Rs. 20,000 x 12) 240,000
Less : Municipal taxes (50% of Rs. 30,00) 15,000
Annual value of Unit 1 2.25,000
Less: Deductions under section 24
Standard deduction (30% of Rs. 2,25,000) 67,500
Interest (50% of Rs. 50,000) 25,000
Income of Unit 1 () 1,32.500
Unit 2 (self-occupied)
Annua Nil
nal
Lese Municipal taes
taxes Nil
Net annual value Nil
Less: Deductions under section 24
Standard deduction Nil
nterest on borrowed capital (25% of Rs. 50,000) 12,500
Income of Unit 20)
12
Total income from house property ()*()
cOMPUTATION OF NET INCOME
Income from house property 1,20,000
29 PROBLEMSON COMPUTATION OF INcOME FROM BUSINESS 90-P7

Rs.
Profits and gains of business or profession 807,600
income rom other sources 3,90,000
Gross total income 13,17.600
Less: Deduction under section 80c 1,053,00
Netincome 12,14,600

90-P7 X (age: 26 yoars), a loading tax comsultant, uwho maintains books of accunt on oah hasis furnishes the folleneing
particulars ef inoumne and ependiture for thie assessment year 2021-22:
Recveipt and Payment Acount for the year ending March 31, 2021
RS
Balance brought doum 12,400Puraase of a typeuriter b,00
Fesfrot clients Car expense 18,000
o of 2020-21 7.30.500 Ofe esgens 40,000
o of 2019-20 1,11.500 Salary to stuf:

f 2021-22 1,13,000
ofof 2020-2
2021-22
32.000
Preenis from citens 4,K0 11.000
Interest-free loan fret a dient for puncdhase 238,000 Exenes in resect ef let out property
ofa cr TwrOnicipal tax : Rs: 2000, ngti
Winnings from lottery 46,000 R. 1,000, rsurance : KS. 5,000 6,000
Rent of a let out property 60,000 Car purchased on December 10, 2020 240,0
Slhare of tncome from a firm 27,00Kepats of ofhce 12.000
interest omlon 10.000
Incme-tx p 2,000

TAX 13,62,400
ife iesaraor premtie
Balannce crt aav
2,08,000
7.77400
13,62,400

Car is pardiy wsd for officiai purpeses (40%) amd partly for priake purpoes (605).
Delentine lae taxable incoe and tax liability of X.for lhe assessmest year 2022-22.
Solution:
Fees from clients (ie. Rs. 730,500 Rs. 1,11,500+ Rs. 1,13,000) 9,55000
Add: Presents from clients 24,000
Gross ecepts 9,79,000
Adissibie epeses
Less:Depreciation of typewriter (ie, 15% of Ra. 6,00)
iess: Car expenses (ie, 40% of Rs. 18.0) 7200
Les: Otfice expenses 40,000
Les:Salary to staf (ie. Rs. 32000+ Rs 11,00) 43,000
Les:Repairs 12000
Les: Depreciation of car (e, 75% of 40% of Rs. 240,00) 7,200
less: Interest on loan 10,000
Income from profession 8,58700
Property income (ie, Rs. 60,000-R. 2,000-30% of Rs. 58,000) 40,600
Winnings trom lothery 46000
Share of income from frm (exempt)
CGross total income 9,45,300
Les: Deduction under section 80C (payment of life insurance premium) 1,50,000
Netincome 7.95300
Taxt 76,160

TAs taxabie income is more than Ra. S0, rehate inder sections7A isnot avatlabe Surcharge tsnetapplicaeas taabe tme
nara 194 3
xllability
is cakulated wwihout conskdering the allernative lax regime of section 1158AC
90-P8 INCOME UNDER PROFITS & GAINs OF BUSINESS OR PROFESSION & ITS COMPUTATION 230

Add: Health and education cess (4% of income-tax) 3,046

Tax liability (rounded off) 79,210
Note : As books of acconunt are maintained on the basis of cash system, income is taxable on "receipt" basis and
expenditures are deductible on "payment basis

90-P8 X (age : 34 years) is a businessman in Mumlai. Detemine hés net income and tax liabvility on the basis of the foikorwtng
profit and loss account for lthe year ending March 31, 2021:
Rs. Ks.

Opeting stoc 1,04,000 Sales 92,51,000

Purchases 80,08, 750 Ciosing stock 2,10,000
Slartes and uoges 1,75,000
Rent and rat 1,31,000
Commissiom 21500
Houselhold expenses 20.000
tcome-tax for 2020-21 36,100
Advertisement ,000
Postage and telegrum 4,000
Interest on oen ayita! 84,000
Keserce for bad debts 3,400
Depreciation on furniture 18,000
Net profit 8,50,250
94,61,000
Other particulars:
1. Closting stock and opening stock has comsistentiy been sxulued at 10 per cent beloe cost price.
2 Depreciatiom om furniture. as per tar protisions, is R. 17,200.
o
3. Amosnt sales includes a sum of Rs 41,250 rpenting the tlue of genfs urithdraten for ihe wse of X s family memtbers
These goods tuere purchased at ost of Rs. 27,850, MMarlet value of lDhese goods is Rs. 45,240.
4. Purcases include a cotultancy bill of R&. 1,00,000 (out of R&. 1,00,000, tax of Rs. 10,000 uas deducted at souroe but it is
deposited om Jamuary 10, 2022).
5. Household expenses include a contribution of Rs. 6,00 tuvrds pruic preident fund
6. On September 20, 2020, X has recerirvnd a gift of Rs.96,000 from a friend settled in UK. The emtire amosunt is inovested in NSC
I fssue.
7. X purdhaes notifind fonads (for the prurpose of section 80C) of an infrastructue compamy on April 2, 2021 Jor Rs, 7,06,00.
Solution :
R&
Net profit as per profit and loss account 8,50,250
Adjustments -
Add: Household expense 20,000
Add:Income-ta 36,100
Add Interest on capital
:
84,000
3,400
ad Keserve for bad debts
Ad: Consultaney fee (30% of Rs. 1,00,000, as tax deducted at source is deposiled after the
due date ot submission ot return of income) 30,000

on on uruture (1.e, Rs. 15,000-Rs. 17,200)

Less : Notional profit on goods withdrawn by X (i.e, Rs. 41,250-Rs. 27,850) 400
10,11,150
ADJUSTMENT IN RESPECT OF VALUATION OF SToCK SO AS TO BRING THEM AT COST
Add: 1/ o 23,333
Ks. 1,01,D
es/9otincome
Business 10,22,92/
Any other incorme lgift from a friend is income, ser para 114 6,00
Gross total income 11,18,927
Less: Deductions under section 80C 1,02,000
Net income (rounded off) 10,16,930
231 PROBLEMS ON COMPUTATION OF INCOME FROM BUSINESS 90-P9

axo incomet
Adt t
Add: Health and education cess
1,17.379

1ax payabte (rounded oft) 1,2280

Notes:

Coods withdrawn by the owner 1s not treated as sale. Profit element on this notional sale (ie
Rs. 41,250R 280) s, therefore,toexcluded while computing net income. 1his is because of the fact that one
cannot make profit by selling goods onesell.
2. Stock is valued by X at 10% below cost. Therefore, for computing taxable income, amount of closing and opening
stock is worked out at cust (as sthown under) and niecessary adjustment is made according'y :

Closing stock shown in books

Closing stock at cost price (14, Rs. 2,10,000 * 100) 233,333
Amount added to book profit 23,333
Opening stock shown in books 1,04,000
Opening stock at cost price (ie, Rs. 1,04,000 * 100+90) 1,15.556
Amount deducted from book profit
556
90-P9 X30 years) ts a husinesma. For the year ending March 31, 2021, net prefit as per profit and loss acaunt is
Ks. 41,00,00. It is calculated uwithuut taking tnto covEsikenation the fotloutng expenses

Capital expenditue on family plamning for the hengit of empdoyees 6,00,000

Entertaiment expenditure mcurred at the hime sohen afereigm colabourator ositeá Xs factory dhuring
December 2020 2.70,000

Lmp sum aonsieratiom or purciaase of hectunicnl kno-o 1,00,00

Salary pid to an entoye the
r mt e ry 2021 inc
17.000

December 10, 2021 aud the

lee at d
s 6,0A) s peid on

Amount paid to the Cocitin tUniversity for cimdhicting an approead marketing reearch (research is, houvener,
Hot related to the business of X) 25,000
Depreciationt ailabe under section 32 on phant and aachinery se for manufacturing purposes L80,000
Coods of s. 40,000 ere parchasel from Q (a supyier) on credit dfaring 2018-19. it anas daimd as dieductim
2018-19 om accnual hast. Ifouerner, the amnt s ot pnid ts not tnicnsie. On March 31, 2021,
toshe
the itity s rttent off an the amoent of Rs.
00s rarred fo apitai reere scn
Fimd out the net income fXfor ble assessmeni yEr 2021-22 iakimg inio considenaion the folloeing additional inkormaiion-
40,000

1. Although depreciation fR& 1,50,000 is arailakie ander section 32, X does nof tust do claim if in the current yoar.
2. During the prevtoss year 2020-21. X has deposilel Rs. 1.10,000 in pubiie prossient furná,
3. Xtts to claim deductiom in rpect of oupital eapenditure on famity pilanning unier section 36. Alterautitely, the asse
hich 1s purcased ts eligthie or dgpreciation unáer setiom 32 at the rate of 15 pr cent.
. X has received income-tax nefund of Rs. 80,000 on Jamuary 10, 2027. It inciudes Rs. 10,000 being imlerest on nefiand paid by
the departmett.
5. Due date of filing of returm of inome for the assessment yoar 2021-2 is Oclober 31, 2021.
Solution: Computation income of X-
f Rs.
Net profit as per profit and loss account 41,00,000
Adjustments-
Less: Depreciation on family planning asset under section 32 (15% of Rs. 6,00,00) 90.000
Less: Expenditure incurred on entertainment -210,000
Less: Depreciation on purchase of technical know-how (25% of Rs. 1,00,000) 25000
Les: Salary paid in cash (cash payment exceeding Rs. 10,000 not deductible)
Les: Sales tax provision (amount pauid up to October 31. 2021 is qualified for deduction)
Ni
(10.000
Les: Deduction in respect of paymernt to Cochin University 25.000
Less: Depreciation on plant and machinery -1,80000

mone than Rs 5.00.000. rebate under section 87A is not available. Sureharge is not applicable as taable income
tAs taxable incomeis
does not esced Ra. 50 lakh Moreover, ta
tot these provisens, Fefer to para 19431
Lability is caliculated without considering the alterrutive tax regime of section 1158/AC
INCOME UNDER PROFITS &GAINS OF BUSINESS OR PROFESSION &TS COMPUTATION

Add: Liability written off pertaining to goods purchase on credit in a preceding year 40,000
Business income 36,00,000
Income from other sources (interest on income-ax refund is chargeable to tax) 10000
Gross total income 36,10.000
Less: Deduction under section 80C
Net income 34.70,000

your knowledge
EnuTest
1 Set out in detail, specific statutory deduction in computing busines income.
2 Discuss the provision relating to the allowance of the following ependiture whike computing incume under the
head Proits and gains of bustness or profession
.
Interest paid on loans received by a company
h Bad debes.
Salary and perquisites to employees of a company (other than directors ar their relatives)
3. What expenses are disallowed to a businessman in computing profits?
4. What do you mean by the term "depreciation as used in the Income-tax Act? Discuss the different types of
depreciation allowanoes admissible under the Act.
5. How would you treat unabsorbed depreciation while calculating total income?
6. Write notes on
a. Scientiífic research expenditure.
kad debts.
7. Discuss the condition laid down for allowanoe of :
a. Expenditure in respet of salaries and perquisites given to directors and other employees
Traveling epenses ot directos and other emplayees
8. Discuss briefly the provwisions relating toallowanceof the following expenditure while computing incame under
the head rofits and gains of business or profession
a Bonus to employees.
b. Expenditure on scientific research
9. Discuss the admissibility of the following claims for expenses against busines profits:
Loss Dy Durglary ot casth trom the cash sate in the business premses ot a money-iender.
. Loss ot money through embezzlement by an employe
Loss of stock-in-trade in fire.
4. Expenses incurred in contesting the title suit of business premises.
10. What do you understand by methods of accounting? Enumerate them and discuss which of them will you
advise assessee to folow.
11 (P6.29)XLtd. is engaged in the business of manufacture of telecommunicatiorn equipments. During the previous
year 2020-21, it incurs the tollowing expendifure on in-house research and development facility-

purchase of land 26,00.000

construction of builkding 12,90,000
purchase of plant and equipment 790 000
a, research material, etc 2,10,000
Find out the amount of deduction under section 35i1 (a the research and development acility is approved by the
prescribed authority for the purpose of section 352AB), (6) it is not approved by the prescribed authority.
Ans. Rs. 2200, KS.
A
12.(P6.30) x (age: 69 years) furnishes the following information relevant for the assessment year 2121-22
Profit and Loss Account for the year ending March 31, 2021
Rs
Household epenses 23,000 Gross protit of agency business 32,65,150
Bad debts 1,000 Commisiom 18.000

Number given in the bracket is solved Froblem No. of Students Cuide to Income-tax, Froblems and Solutions
233 TEST YOUR KNOWLEDGE

Provision for bad debts receipts 2000

Sundry
Fie insurance ,0 nterest on investment 14,000
rier allowedas
9,00,000 deduction
900,000 deduc 9,750
ie
12.000 Interest on securities sro 11,000
Contribution towards unrecognised
nd 72,000
nte
Overdraft taken for payment of sales tax 8.000

en pital of X
by X's brother
42000
9.000
ation
Adverie
on building and
ding u 11,500
a enenditure 7,000
onma sign board
ndture 8000
protit 22,00,000
33,19,900 33.19.900
Other information
General expenses include medical expenditure of X Rs. 500
2. Income o Rs.35,00, accrued duing the previous year ending March 31, 3121, 1s not rerorded in the Protit and
Loss Account
3.X contributes Rs. 1,10.000 towards publie provident fund.
. Depreciation on building, furniture and sign board comes to Rs. 8000 aocording to tax provision.
the
Determine the tavable income and tax liabslity of X for the asesment year 2121-2 lgnore section 115BAC
pertaining to altemative tax regime. [Ans. Rs 229400, R&. 5,19500
13. (P632) Mrs. X(age: 55 years), a resident individual, furmishes the following particulars for the asoessment year
2021-22
Profit and Loss Account for the year ending March 31, 2021

Otice expenses 82,000 Giross proti 26,66,600

Audit te
1,000Sundry reeps 20000
Legal expenses 500 Customs duties recowered trom the Goverm
Cost of externsion to building 40,000 ment (earlier not allowed as dedaction) 12,000
Dpreathon on machinery and extension Bad debts recovered (earfier allowed as
t building8 31,000 deduction) 1,000
Salary to statt 1,81,000 Gaft from a friend 60,000
Bomusto 45,000
Contribution to an approved gratuity fund 30000
Outstandingliability in respect of interest
Payable to IDBI 38,000
General expenses 71,000
et proit 2.30.100
27,59,600 27.59 600
Other relevant particulars:
Bonus is outstanding on March 31, 2021. Rs. 40000 is, however, paid on October 31, 2021 (being the
ot furnishing return of income
Depreciation on machinery and extension of building shown in the Profit and Loss Account is calculated
according to the income-lax provisions.
. General expenses include payment of Rs. 10,000 to an approved institute for the purpose of carrying on a
sclentifie research in natural science. The research is, however, not related to the business of the assessee

Number given in the bracket is solved Problem No. of Students' Cakde to Income tax, Problems and Solatio
INCOME UNDER PROFTS & GAINS OF BUSINESS OR PROFESSION &ITS cOMPUTATION

i. During the previous year 2020-21, Mrs. X also makes a capital expenditure of Rs. 11.000 for
the purpose of
carrying on a scientific research related to her business. This expenditure is, however, not recorded in the Profit
and Loss Account.
. Outstanding interest payable to IDBl is paid as follows : Rs. 600 on April 10, 2021, Rs. 4,00 on May 10, AU21,
Rs. 6,000 on June 30, 202l and Rs. 1.500 on September 10, 2021. The remaining amount is still outstanding
Salary to statf includes Rs. 40000 being compensation paid for termination to an employee
Determine the net income and tax liability of Mrs. X for the assessment year 2021-2, assuming that she annually
deposits Rs 1,25,000 in the public provident fund. Ignore section 115BAC pertaining to alternative tax egime
TAns. Rs 21,5300, Rs. 476,740)
14. (P6.35 X (age: 32 years), a resident individual, furnishes the lollowing particulars tor the assessnent year
2021-22
Profit and Loss Account for the year ending March 31, 2021

Office expenses 254,000 Gross profit 31,42500

Salary to statf 8,20,.000 Sundry receipts 52000
Depreciation 85,000
Travelling expenses for business 44,000
Loss of cash by an employee through
ement
embezz. L.000
Transter to special reserve account 2,000
Expenditure on lestival
Interest and legal expenses 12/000
Sundry expernses 2.100
Deposit under Tatkal Telephone
Scheme 6,000
Net profit 19,36,000
3194500 31,94500
Other information
to the Cover ot Rs. 6.00 out ot India on which tax has not been deducted at source nor paid

Depreciated value of plant and machinery on April 1, 2020 is Rs 3,20,000 (rate of depreciation: 15 per cent)
Anair-conditioner (cost price: Re. 22000) whose written down value on April 1, 220 is Rs. 600, is disposed
of for Rs. 1500
A typewriter whose writen down value on April 1, 2020 is Rs. 2.000 is sold for Rs. 80.
Xpurchases a telephone set for Rs. 3000 on November 1, 220 which is eligibke for depreciation at the rate of
15 per oer

Traveling expenses include Rs. b,A) being hotel expenditure ol an employee in respect of an ofticial visit to
Madras for 3 days
Amount debited as expenditure on festival is cost of a gift presented to a relative
Sundry expenses include expendifure of Rs. 2,000 on maintenance oft a guest house at Bombay.
Legal expenses include cash payment of Rs. 8,000 to an advocate (who is not an employee of X) for giving
ncome-tax Advkce.

Determine the taxabie income and tax liabality ot Xfor the assessmentyear 2021-22 assuming that sundry receipts
inctude Rs. 40,000, being amount of a loan taken from public provident fund aocount to which X annually
contributes Rs. 1,20,00 lgnore section 1158AC pertaining to alternative tax regime. [Ans. Rs. 18,61.30,
Rs 3,85,7501.
15. (P634) XYZ Lid. an Indian company, submits the following particulars relevant for the assesiment year
2021-22:
Profit and Loss Account for the year ending March 31, 2021

Salary to stalf 16,40,000 Gross protit 63,37,450

Income tax 30,000
Expenseson issue of shares for setting up a new
show roonm at Delhi 18,000
Expernses on raising a long-term loan for setting
p a new shbow room at Bombay 12,000

Number gven in the bracket is sobved Problem No. of Student Gerkde ta Income-tax, Probles and Selutiona
235 TEST YOUR KNOWLEDGE

Rs Rs
Interest on public deposits 82,000

enses e
to promotion of family
for filing income-tax appeals
32,000

e the Delhi High Court

losse
10,000
50,000
Reserve
for payment of fines and penalty 20,000
d and doubtful debts 10,000
eepenses Of
ot car 56,000
3,450
Depreciati
Plant and machinery 81,000

Office exp nses 1.02000

Rent and repai 42000
R6.000
A
Net profit
Pses 40,38,000
63,37,450 63,37,450
Other information
1. Car is partly used tor official purposes and partiy for personal purposes ot a relative ot director. n past, 10 per
cent of car expenditure is disallowed
2. Sundry expenses include payment of an advertisement bill to a person who has substantial interest in the
company. 1Ihe payment is excessive to the extent ot Rs. 2000.
.
Office expenses inchude an expenditure of Rs. 10,100 which is paid in cash.
.
Sundry expenses include an expenditure of Rs. 10,000 which is paid by a bearer cheque.
. Depreciation on machinery as per tax provisions is Rs. B6M00.
6. On March 10, 2021, the company pays Rs. 200,000 to a Natioral Laboratory for carrying an approved scientific
research programme in natural science. The payment is not reconded in the above P & LA/e
7. Sundry expenses include royalty payment of Rs. 30000 to a resident on which tax is deducted at source on

February 10, 2021 and paid to the Government on December 5, 2021.

Determine the taxable income and tax liability of the company for the assessment year 2021-22. Applicable tax rate
is 25 per cent. [Ans. Rs. 40,30,200, Rs. 1047850
16. (P6.35") X (age: 38 years) furnishes the followings particulars of his income for the assessment year 2021-22
Tont and Loss ACCOUnt tor the year ending March i, 20t
Rs.
Salary to staff 8,00,000) Caross pr 40,66,600
property received from tenant
House property 60,000 (Rs 1,00,000 was received in advance durin8
Machiner 12,000 2019-20) 8,00,000
Municipal taxes of house property 18,000 Refund of deposit from a supplier (deposit was
Fireinsurance: made to purchase a machine, the supplier could
House property L,000 not supply the machine) S0,000
Machinery 600 Interest on such refund 3,000
Office expenses 86,000
Depreciation
oue property
Business assets (allowable)
12,0
1,20,000
Interest on capital borrowed for
onstruction of house property 2,00,000
Net protnt 36,40.000
4949.600

Number given in the bracket is solved Problem No. of Students' Guide to Incometax, Problems and Solutions
INCOME UNDER PROFITS &GAINS OF BUSINESS OR PROFESSION &ITS COMPUTATION 36

Kowns a house property, erection of which was completed in May 2010. 50 per cent of the carpet area (Unit 1) is
let out to a tenant at Rs. 751000 per monthy 25 per cent ot the carpet area (Unit 2) is used by X for his own restcdernce
and the renmaining portion (unit s s uSed by nam lor his Dusiress purposes (no rent is charged)
Determine the taxable income and tax liability of X for the assessnent year 2021-22 on the assumption that he
deposits onApril 1, 2021, Ks. 1,40,U0 in the Home Laan Account Scheme of the National Housing Bank. lgnore
section 115BAC pertaining to alternative tax regime. [Ans. Rs. 34,51,950, Rs. 8820101.
17. (P6 36°)X(age: 32 years), a lawyer, who maintains books of account on cash basis, furnishes the following
particulars ot his income for the previous year ernding March 31, 2021
Keceipt and Payment Account for the year ending March 31, 2021

Balance brought down 7,20,000 Purchase of fumiture 56000

Fees from clients: Car expenes A5,000
of 20/20-21
21,20,000Otficeexpenses 82000
o 2019-2
resents from cients
0,0O
40,000
Salary to stat
Interest on loan
S40,000
20000
Loan froma chent 5,00,000 Income-tax penaity ,000
Contribution to public provident fund ,40,000
Purchase of notified bornds of infrastructure
company 12.000
Balance carried down 20.72000
34.70,000 34,70,000
Notes:
1.5 per ent of car expenses are attributable towards use of car for personal purposes.
2. Fees
due but outstanding is Rs. 9,00.000
Depreciation of car is Rs. 2.70.000.
. Income of X from other sources is Rs. 8.32000
X purchased a computer for Rs. 30p00 on March 10, 2120. It is., however, put to use an December 3, 2120 (rate
ot depreciation: 40 per cent).
Determine the taxable income and tax liability of X for the aseessment year 2021-22 lgnore section 115BAC
pertaining to alternative tax regime. [Ans. Rs. 1483,150, Rs. 2,67,740

Number givem in the bracket is solved Problem No. of Students' Guikde to Income-tax, Problems and Solutions