Chapter 6 - Profits and Gains From Business or Profession - Notes

Chapter 6 – Profits and Gains from
Business or Profession
Meaning of Business
• The term “business” has been defined in section 2(13) to “include any trade, commerce or
manufacture or any adventure or concern in the nature of trade, commerce or manufacture”.
• Business necessarily means a continuous exercise of an activity; nevertheless, profit from a
single venture in the nature of trade may also be treated as business.
Meaning of Profession
• The term “profession” has not been defined in the Act. It means an occupation requiring some
degree of learning. The term ‘profession’ includes vocation as well [Section 2(36)]
• Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect and even an
astrologer are persons who can be said to be carrying on a profession but not business.
• However, it is not material whether a person is carrying on a ‘business’ or ‘profession’ or
‘vocation’ since for purposes of assessment, profits from all these sources are treated and
taxed alike.
Section 28: Charging Section

Following incomes are chargeable under the head PGBP
• Any income (profit) due to business or profession carried on by assessee at any time during
the previous year.
• Any gift/benefit/perquisite received due to business or profession.
• Any amount received by employer from Keyman insurance policy (KIP).
• Any salary, commission, bonus, interest received by Partner from Partnership Firm.
• Non-compete fees
• Any compensation received for termination or modification of business contract.
• Duty Drawback (Refund of Duty) or Cash Compensatory Support against export
• Conversion of Stock in Trade into Capital Asset: FMV of such stock is taxable under PGBP.
Section29: Computation of Profits and Gains from Business or

Profession
• The profits and gains of any business or profession are to be computed in accordance with the
provisions contained in sections 30 to 43D.
• In addition to the specific allowances and deductions stated in sections 30 to 36, the Act
further permits allowance of items of expenses under the residuary section 37(1), which
extends the allowance to items of business expenditure not covered by sections 30 to 36,
where these are allowable according to accepted commercial practices.
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Computation of Profits and Gains from Business or
Profession (section 29)
Sections Section Other

Section 40 Section 41
30 to 37 40A Provisions
Expenses or
Admissible Inadmissible payments not Profits chargeable to
Deductions Deductions deductible in certain Tax
circumstances
Section 30: Rent, Rates, Taxes, Repairs and Insurance for Buildings
Particulars Rent Rates, Taxes Insurance Revenue Repairs Capital Repairs
Owner Not Applicable Allowed Allowed Allowed Not Allowed*
Tenant Allowed Allowed Allowed Allowed Not Allowed*
*It is added to the cost, and depreciation is allowed thereon.
Section 31: Repairs and Insurance of Machinery, Plant and Furniture

Particulars Rent Insurance Revenue Repairs Capital Repairs
Owner Not Applicable Allowed Allowed Not Allowed*
Tenant Allowed u/s 37 Allowed Allowed Not Allowed*
*It is added to the cost, and depreciation is allowed thereon.
Note: Expenses u/s 30 and 31 are allowed only if the assets are used for the purposes of Business or
Profession.
Section 32: Depreciation

• Depreciation is calculated in a different way in Taxation as compared to Accounts.
• The more depreciation an assessee claims, the less becomes his profit, thereby reducing the
tax liability.
• In order to curb the fraudulent practices in relation to Depreciation, Section 32 lays down
elaborate rules for calculating and claiming depreciation for the purposes of calculating Profits
and Gains from Business or Profession.
Conditions to Claim Depreciation

• Assessee must be the owner of the asset, wholly or partly (beneficial owner is also acceptable)
• Asset should be used for the purpose of business or profession
• Notes:
o In case of hire purchase, assessee becomes the owner only after payment of last
instalment, but he can claim depreciation from beginning.
o In case of lease, depreciation is always claimed by lessor.
o Depreciation is allowed from the day on which asset is actually put to use, but in case
of stand-by assets, or emergency spares, depreciation is allowed from the day the
asset is ready to use.
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Classes of Assets
There are various classes of assets for the purposes of claiming depreciation.
Classes of Assets
Intangible
Tangible Assets
Assets
Furniture and Plant &

Buildings Ships
Fittings Machinery
Methods of Depreciation
There are various methods of depreciation depending on the kind of assessee.
Assessee Engaged in the Business of

Power Unit (Generation or Generation and
Others
Distribution of Electricity)
SLM or WDV Always WDV
Rates of Depreciation
S. No. Asset Rate
1. Building
a. Residential Building 5%
b. General Building 10%
c. Temporary Building 40%
2. Furniture 10%
3. Intangible Asset 25%
4. Plant and Machinery
a. Motor Vehicles
i. Used for Hiring Business 30%
i. (If acquired and put to use between 23-08-2019 to 31-03-2020) 45%
ii. Other use 15%
ii. (If acquired and put to use between 23-08-2019 to 31-03-2020) 30%
b. Ship 20%
c. Aircraft 40%
d. Computer and Computer Software 40%
e. Books 40%
(Used in profession or used in library business or Annual publication)
f. Pollution control equipment 40%
g. Windmills and its equipment
i. Installed before 01-04-2014 15%
ii. Installed on or after 01-04-2014 40%
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h. Oil Wells 15%
i. Other Plant and Machinery 15%
System of Depreciation
System of Depreciation
Individual Asset System Block of Asset System
Same as Accounts WDV Method
SLM Method
Block of Assets means group of assets having same rate of depreciation within the same class of assets.
Calculation of Depreciation
Steps for Calculation of Depreciation:
1. Calculate WDV for Depreciation

Particulars ₹
Opening WDV of Block xxx
Add: Actual Cost of Asset acquired during P.Y.
Add: Put to use for 180 days or more xxx
Add: Put to use for less than 180 days xxx
Add: Acquired but not put to use xxx
xxx
Less: Money Received (Selling Price of Asset) xxx
WDV for Depreciation xxx
2. Depreciation is calculated on this WDV as follows:
a. This WDV is divided into 3 parts – Assets Not Put to Use, Assets Put to Use for Less
than 180 Days, and Balance
b. No Depreciation is charged on the assets which were not put to use.
c. Depreciation is allowed to the extent of 50% on assets which were acquired during the
previous year and were put to use for less than 180 days in that previous year.
d. Depreciation is allowed to the extent of 100% on assets which were acquired during
the previous year and were put to use for 180 days or more.
WDV for Depreciation

Put to Use for Less than 180
Asset Not Put to Use Balance (Upto 3rd October)
Days (4th October onwards)
No Depreciation Half Rate Full Rate
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Question 1
Opening WDV of Block = ₹10,00,000
Asset acquired and put to use on 30-12-2022 = ₹4,00,000
Asset sold on 15-11-2022 = ₹3,00,000
Rate of Depreciation is 15%. Calculation depreciation to be allowed.
Solution
Particulars ₹
Opening WDV of Block 10,00,000
Add: Asset Acquired during P.Y.
Add: Put to use for less than 180 days 4,00,000
14,00,000
Less: Sale Value (Money Received) 3,00,000
WDV for Depreciation 11,00,000
Less: Depreciation Actually allowed 1,35,000
Less: (₹4,00,000 × 7.5%) + (₹7,00,000 × 15%)
Closing WDV 9,65,000
Question 2
Opening WDV of Block = ₹10,00,000
Asset acquired and put to use on 30-12-2022 = ₹4,00,000
Asset sold on 15-11-2022 = ₹12,50,000
Rate of Depreciation is 15%. Calculation depreciation to be allowed.
Solution
Particulars ₹
Add: Asset Acquired during P.Y.
Add: Put to use for less than 180 days 4,00,000
14,00,000
Less: Sale Value (Money Received) 12,50,000
Less: Depreciation Actually allowed 11,250
Less: (₹1,50,000 × 7.5%)
Question 3
An asset (Rate of depreciation 15%) is acquired on 19-07-2022 for ₹4,00,000 and put to use on 10-02-
2023. Calculate depreciation for P.Y. 2022-23.
Solution
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Since the asset is purchased and put to use for less than 180 days in that P.Y., depreciation will be
charged @ 7.5%. Amount of depreciation = 7.5% × ₹4,00,000 = ₹30,000
Question 4
An asset (Rate of depreciation 15%) is acquired on 19-07-2022 for ₹4,00,000 and put to use on 10-02-
2024. Calculate depreciation for P.Y. 2021-22.
Solution
Since the asset was not put to use in the P.Y. 22-23, no depreciation benefit shall be available. In the
P.Y. 2023-24, even though the asset is put to use for less than 180 days, the assessee will be able to
claim depreciation @ 15%. This is because depreciation at half rate is available if the asset is put to use
for less than 180 days in the year of purchase. In this case, the asset was purchased in the P.Y. 22-23,
and put to use in the P.Y. 2023-24. Therefore, full depreciation shall be available.
Question 5 – ICAI SM – Illustration 3
A newly qualified Chartered Accountant Mr. Dhaval commenced practice and has acquired the
following assets in his office during F.Y. 2022-23 at the cost shown against each item. Calculate the
amount of depreciation that can be claimed from his professional income for A.Y.2023-24. Assume
that all the assets were purchased by way of account payee cheque.
S. Description Date of Date when Put Amount

No. Acquisition to Use
1. Computer including computer Software 27 Sept., 22 1 Oct., 22 35,000
2. Computer UPS 2 Oct., 22 8 Oct., 22 8,500
3. Computer printer 1 Oct., 22 1 Oct., 22 12,500
4. Books (other than annual publications 1 Apr., 22 1 Apr., 22 13,000
are of ₹12,000)
5. Office furniture 1 Apr., 22 1 Apr., 22 3,00,000
(Acquired from a practicing C.A.)
6. Laptop 26 Sep., 22 8 Oct., 22 43,000
Solution
Computation of Depreciation
Particulars ₹
Block 1: Furniture (10%)
Put to use for more than 180 Days 30,000
(₹3,00,000 × 10%)
Block 2: Plant (40%)
Computer including computer Software 14,000
(Put to use for more than 180 days) (40% × ₹35,000)
Computer UPS 1,700
(Put to use for less than 180 days) (20% × ₹8,500)
Computer printer 5,000
Books (Annual Publications or Otherwise) 5,200
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Laptop 8,600
(Put to use for less than 180 days) (20% × ₹43,000) 34,500
Total Depreciation Allowable 64,500
Additional Depreciation [Section 32(1)(iia)]

• Additional depreciation is allowed only to an assessee engaged in business of manufacturing,
power generation, power transmission, power distribution.
• Additional depreciation @ 20% is allowed on plant and machinery except:
o Second hand plant and machinery
o Machinery installed in office premises or residential accommodation
o Ships, Aircrafts, Vehicles
o Plant and Machinery on which 100% deduction is allowed in a P.Y. in PGBP.
• Additional depreciation is allowed only in the first year in which it is first put to use. If the asset
is put to use for less than 180 days, then additional depreciation is allowed @ 10% in the
current P.Y., and remaining 10% in the next P.Y.
• Additional depreciation is allowed only in case of WDV method.
• Printing or Printing and Publishing business is treated as manufacturing business.
• Forklift truck used in factory is not a vehicle, so it is eligible for additional depreciation.
Mr. X, a proprietor engaged in manufacturing business, furnishes the following particulars:
Particulars ₹
(1) Opening balance of plant and machinery as on 1.4.2022 (i.e., WDV as on 31.3.2022 30,00,000
after reducing depreciation for P.Y. 2021-22)
(2) New plant and machinery purchased and put to use on 08.06.2022 20,00,000
(3) New plant and machinery acquired and put to use on 15.12.2022 8,00,000
(4) Computer acquired and installed in the office premises on 2.1.2023 3,00,000
Compute the amount of depreciation and additional depreciation as per the Income-tax Act, 1961 for
the A.Y. 2023-24. Assume that all the assets were purchased by way of account payee cheque.
Solution
Computation of Normal Depreciation and Additional Depreciation

Particulars Plant and Machinery (15%) Computer (40%)
Normal Depreciation
@ 15% on ₹50,00,000 (Notes 1 and 2) 7,50,000
@ 7.5% on ₹8,00,000 (Notes 1 and 2) 60,000
@ 20% on ₹3,00,000 (Notes 1 and 2) 60,000
Additional Depreciation
@ 20% on ₹20,00,000 (Notes 1 and 2) 4,00,000
@ 10% on ₹8,00,000 (Notes 1 and 2) 80,000
Total Depreciation 12,90,000 60,000
Note 1 - Computation of WDV for Depreciation

Add: Actual Cost of Assets Acquired
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Add: Put to Use for 180 days or more 20,00,000
Add: Put to Use for less than 180 days 8,00,000 3,00,000
58,00,000 3,00,000
Less: Money Received (Sale Proceeds) - -
WDV for Depreciation 58,00,000 3,00,000
Note 2 - Composition of Plant and Machinery in WDV

Plant and Computer
Particulars
Machinery (15%) (40%)
Plant and machinery put to use for less than 180 days 8,00,000
Plant and machinery put to use for 180 days or more (Balance) 50,00,000
Computers put to use for less than 180 days 3,00,000
50,00,000 3,00,000
Question 7
M/s NISH10 Ltd., a manufacturing concern, furnishes the following particulars:
Particulars ₹
1. Opening WDV under Income Tax Act of Block of Plant and Machinery 5,00,000
2. Purchase of Plant and Machinery (Put to use before 01-10-2022) 2,00,000
3. Sale proceeds of plant and machinery which became obsolete – the plant and 5,000
machinery was purchased on 01-04-2019 for ₹5,00,000
Further, out of purchase of plant and machinery:
1. Plant and machinery of ₹20,000 has been installed in office.

2. Plant and machinery of ₹20,000 was used previously for the purpose of business by the seller.
Compute the depreciation and additional depreciation as per Income Tax Act, 1961 for the Assessment
Year 2023-24.
Solution

Particulars Plant and Machinery (15%)
Normal Depreciation
@ 15% on ₹6,95,000 (Note 1) 1,04,250
@ 20% on (₹2,00,000 – ₹20,000 – ₹20,000) 32,000
Total Depreciation 1,36,250
Note 1 - Computation of WDV for Depreciation

Add: Put to Use for less than 180 days -
7,00,000
Less: Money Received (Sale Proceeds) 5,000
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Question 8 – ICAI SM – Question 2
Mr. Abhimanyu is engaged in the business of generation and distribution of electric power. He opts to
claim depreciation on written down value for income-tax purposes. From the following details,
compute the depreciation allowable as per the provisions of the Income-tax Act, 1961 for the
assessment year 2023-24, assuming that he does not opt for section 115BAC:
(₹ in
lacs)
(i) WDV of block as on 31.3.2022 (15% rate) 50.00
(ii) Depreciation for P.Y. 2021-22 7.50
(iii) New machinery purchased on 12-10-2022 10.00
(iv) Machinery imported from Colombo on 12-4-2022 9.00
This machine had been used only in Colombo earlier and the assessee is the first
user in India
(v) New computer installed in generation wing unit on 15-7-2022 2.00
All assets were purchased by A/c payee cheque.
Solution

Normal Depreciation
@ 15% on ₹51,50,000 (Notes 1 and 2) 7,72,500
@ 7.5% on ₹10,00,000 (Notes 1 and 2) 75,000
@ 40% on ₹3,00,000 (Notes 1 and 2) 80,000
@ 20% on ₹9,00,000 (Notes 1, 2, and 3) -
@ 10% on ₹10,00,000 (Notes 1 and 2) 1,00,000
@ 20% on ₹2,00,000 (Notes 1 and 2) 40,000
Total Depreciation 9,47,500 1,20,000
Notes:
1. Computation of WDV for Depreciation

Opening WDV of Block 42,50,000 -
Add: Put to Use for 180 days or more 9,00,000 2,00,000
Add: Put to Use for less than 180 days 10,00,000
61,50,000 2,00,000
2. Composition of Plant and Machinery in WDV
Plant and
Computer
Particulars Machinery
(40%)
(15%)
Computers put to use for 180 days or more 2,00,000
51,50,000 2,00,000
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3. Since this machine was previously used by some other person, additional depreciation will not
be available on it.
Mr. Venus., engaged in manufacture of pesticides, furnishes the following particulars relating to its
manufacturing unit at Chennai, for the year ending 31-3-2022:
(₹ in lacs)
WDV of Plant and Machinery on 31.3.2022 30
Depreciation including additional depreciation for P.Y. 2021-22 4.75
New machinery purchased on 1-9-2022 10
New machinery purchased on 1-12-2022 8
Computer purchased on 3-1-2023 4
Additional information:
• All assets were purchased by A/c payee cheque.

• All assets were put to use immediately.
• New machinery purchased on 1-12-2022 and computer have been installed in the office.
• During the year ended 31-3-2022, a new machinery had been purchased on 31-10-2021, for
₹10 lacs. Additional depreciation, besides normal depreciation, had been claimed thereon.
• Depreciation rate for machinery may be taken as 15%.
Compute the depreciation available to the assessee as per the provisions of the Income-tax Act, 1961
and the WDV of different blocks of assets as on 31-3-2023. Assume that he does not opt for section
115BAC.
Solution

Normal Depreciation
@ 15% on ₹35,25,000 (Notes 1 and 2) 5,28,750
@ 7.5% on ₹8,00,000 (Notes 1 and 2) 60,000
@ 20% on ₹4,00,000 (Notes 1 and 2) 80,000
@ 20% on ₹10,00,000 (Notes 1 and 2) 2,00,000
@ 10% on ₹8,00,000 (Note 3) -
@ 10% on ₹4,00,000 (Note 4) -
@ 10% on ₹10,00,000 (Note 5) 1,00,000
Total Depreciation 8,88,750 80,000
Notes:
1. Computation of WDV for Depreciation

Opening WDV of Block 25,25,000 -
Add: Put to Use for less than 180 days 8,00,000 4,00,000
43,25,000 4,00,000
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Plant and
Computer
Particulars Machinery
(40%)
(15%)
Plant and machinery put to use for less than 180 days 8,00,000 4,00,000
Computers put to use for 180 days or more
35,25,000 -
3. Since the machine purchased on 01-12-2022 was installed in office, additional depreciation
shall not be available.
4. Since the computer was installed in office, additional depreciation shall not be available.
5. If an asset is purchased and put to use for less than 180 days in a P.Y., additional depreciation
is available only to the extent of 50% of 20%, i.e., 10% in that P.Y. The remaining 10% is
available in the next P.Y. Therefore, additional depreciation to the extent of 10% shall be
available to the machine that was purchased on 31-10-2021.
Depreciation in Case of Amalgamation/Demerger/Succession

• In this case, depreciation is calculated normally, and after that it shall be distributed between
Amalgamating Company/ Demerged Company/ Predecessor and Amalgamated Company/
Resultant Company/ Successor Company in the ratio of number of days for which assets were
used by them.
• Succession means
o Partnership Firm → Company
o Proprietary Concern → Company
o Company → LLP
Question 10
Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose written down value on 01-04-
2022 was ₹40,00,000. It purchased another asset (second hand plant and machinery) of the same block
on 01-11-2022 for ₹14,40,000 and put to use on the same day. Sai Ltd. was amalgamated with Shirdi
Ltd. with effect from 01-01-2023.
You are required to compute the depreciation allowable to Sai Ltd. and Shirdi Ltd. for the previous year
ended on 31-03-2023 assuming that the assets were transferred to Shirdi Ltd. at ₹60,00,000. Also,
assume that the plant and machinery were purchased by way of account payee cheque.
Solution
Normal Depreciation
@ 15% on ₹40,00,000 (Note 1) 6,00,000
@ 7.5% on ₹14,40,000 (Note 1) 1,08,000
Apportionment of Depreciation Between Two Companies

Particulars ₹
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Amalgamating Company (Sai Ltd.)
₹6,00,000 × 275/365 4,52,055
₹1,08,000 × 61/151 43,629
4,95,684
Amalgamated Company (Shirdi Ltd.)
₹6,00,000 × 90/365 1,47,945
₹1,08,000 × 90/151 64,371
2,12,316
Notes:
1. Computation of WDV for Depreciation:

Add: Put to Use for less than 180 days 14,40,000
Add: Put to Use for more than 180 days -
54,40,000
Less: Money Received (Sale Proceeds) -
Plant and Machinery

Particulars
(15%)
40,00,000
Question 11
Mr. Gopi, carrying on business as proprietor converted the same into a limited company by name Gopi
Pipes (P) Ltd. from 01-07-2022. The details of the assets are given below:
₹
Block 1 – WDV of Plant & Machinery (Rate of Depreciation @ 15%) on 01-04-2022 12,00,000
Block 2 – WDV of Building (Rate of Depreciation @ 10%) on 01-04-2022 25,00,000
The company Gopi Pipes (P) Ltd. acquired plant and machinery in December, 2022 for ₹10,00,000. It
has been doing the business from 01-07-2022.
Compute the quantum of depreciation to be claimed by Mr. Gopi and successor Gopi Pipes (P) Ltd. for
the assessment year 2023-24. Assume that plant and machinery were purchased by way of account
payee cheque.
Note: Ignore additional depreciation.
Solution
Particulars Plant and Machinery (15%) Building (10%)
Normal Depreciation
@ 15% on ₹12,00,000 (Note 1) 1,80,000
@ 10% on ₹25,00,000 (Note 1) - 2,50,000
Total Depreciation 1,80,000 2,50,000
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Apportionment of Depreciation Between Two Companies
Particulars ₹
Predecessor (Mr. Gopi)
(₹1,80,000 + ₹2,50,000) × 91/365 1,07,205
1,07,205
Successor (Gopi Pipes (P) Ltd.)
(₹1,80,000 + ₹2,50,000) × 274/365 3,22,795
Add: 7.5% × ₹10,00,000 75,000
3,97,795
Note – Computation of WDV for Depreciation

Particulars Plant and Machinery (15%) Building (10%)
Opening WDV of Block 12,00,000 25,00,000
Add: Put to Use for less than 180 days - -
Add: Put to Use for more than 180 days - -
12,00,000 25,00,000
Section 43(1): Actual Cost

Particulars ₹
Cost of Asset (Purchase Price) xxx
Add: Installation Charges xxx
Add: Transportation Charges xxx
Add: Trial Run Expenses (Test Run) xxx
Add: Taxes and Duties (If ITC is not available) xxx
Add: Interest on Loan (upto the date the asset is put to use) xxx
xxx
Less: Sale of Trial Run Product xxx
Less: Government Grant for Acquisition of Asset xxx
Actual Cost xxx
Notes:
1. If any payment > ₹10,000 is made in relation to acquisition of asset by any mode other than
A/c Payee Cheque, A/c Payee Demand Draft, Electronic Clearing System to a single person in a
single day, then it is not included in Actual Cost.
2. If any building which was used for any other purpose is now brought into business, actual cost:
Particulars ₹
Cost of Building xxx
Less: Notional Depreciation at Current Rate xxx
Actual Cost xxx
Note: This provision is applicable only for Building, and not for any other asset. So, if any other
asset is brought to the business, actual cost shall be cost at which such asset was acquired.
Question 12
Mr. NISH10 purchased a building on 16-02-2019 for ₹10,00,000. On 15-07-2022, he brought such
building into business use. Calculate Actual Cost.
CA NISHANT KUMAR 13
Solution
Calculation of Actual Cost

Particulars ₹
Cost of Building 10,00,000
Less: Notional Depreciation
Less: P.Y. 2018-19 (5% × ₹10,00,000) 50,000
Less: P.Y. 2019-20 (10% × ₹9,50,000) 95,000
Less: P.Y. 2020-21 (10% × ₹8,55,000) 85,500
Less: P.Y. 2021-22 (10% × ₹7,69,500) 76,950 3,07,450
Actual Cost 6,92,550
A car purchased by Dr. Soman on 10.08.2019 for ₹5,25,000 for personal use is brought into professional
use on 1.07.2022 by him, when its market value was ₹2,50,000.
Compute the actual cost of the car and the amount of depreciation for the assessment year 2023-24
assuming the rate of depreciation to be 15%.
Solution
As per section 43(1), the expression “actual cost” would mean the actual cost of asset to the assessee.
The purchase price of ₹5,25,000 is, therefore, the actual cost of the car to Dr. Soman. Market value
(i.e., ₹2,50,000) on the date when the asset is brought into professional use is not relevant.
Therefore, amount of depreciation on car as per section 32 for the A.Y.2023-24 would be ₹78,750,
being ₹5,25,000 × 15%.
Note: Explanation 5 to section 43(1) providing for reduction of notional depreciation from the date of
acquisition of asset for personal use to determine actual cost of the asset is applicable only in case of
building which is initially acquired for personal use and later brought into professional use. It is not
applicable in respect of other assets.
Section 43(1): Actual Cost (Contd.)

1. If any asset is acquired by way of gift/will, Actual Cost = Cost to Previous Owner – Depreciation
actually allowed to Previous Owner
2. If any stock in trade is converted into capital asset, and capital asset is used in business, then
actual cost shall be FMV as on date of conversion.
For example, if a building held as stock in trade is converted into capital asset, and the FMV as
on the date of conversion is ₹10,00,000, then:
a. This ₹10,00,000 shall be chargeable to tax under the head PGBP
b. This ₹10,00,000 shall be added to the block of assets to claim depreciation.
3. If any asset is acquired at higher value to claim depreciation on such higher value, then actual
cost of such asset shall be determined by the Assessing Officer with the prior approval of Joint
Commissioner.
For example, suppose Khushal has a machine the WDV of which is ₹1,00,000. Khushal transfers
it to Aman for ₹1,01,00,000. In such case, cost of the machine for Aman shall be determined
by the Joint Commissioner, which is usually the FMV on the date of transfer.
CA NISHANT KUMAR 14
4. If any asset is transferred by assessee and after sometime reacquired by same assessee, then
actual cost that shall be lower of the following:
a. WDV at the time of original transfer
b. Reacquisition cost
For example, suppose Amy had an asset the WDV of which was ₹1,00,000. Amy sold it to Janvi
for ₹5,00,000. Janvi further sold it to Ankita for ₹7,00,000. Ankita sold it to Vaishnavi for
₹9,00,000, and Vaishnavi sold it back to Amy for ₹15,00,000. Now, the cost of this asset to Amy
would be ₹15,00,000, or ₹1,00,000, whichever is lower, i.e., ₹1,00,000.
5. If any asset is acquired from any person and leased back to the same person, then actual cost
shall be the WDV of seller.
For example, suppose Khushal has a machine the WDV of which is ₹1,00,000. Khushal transfers
it to Aman for ₹1,01,00,000. Aman leases it back to Khushal. In such case, cost of the machine
for Aman shall be ₹1,00,000 only, i.e., the WDV which was in the books of Khushal.
6. If any asset is acquired by Non-Resident outside India, and that asset was brought by him into
India and used for the purposes of business or profession, then actual cost:
Actual Cost – Depreciation calculated as if the asset was used in India from the date of
acquisition.
Section 50: Sale of Assets When it is a Part of Block of Assets

Question 14
Opening WDV of a block of assets is ₹6,00,000. The block consists of 5 assets. During the year, 2 more
assets were purchased for ₹2,00,000 and were put to use on 01-07-2022. All these 7 assets were sold
on 01-03-2023 for ₹9,20,000. Discuss the tax implications of Depreciation and Capital Gains.
Solution
Calculation of WDV for Depreciation

Particulars ₹ No.
Opening WDV 6,00,000 5
Add: Purchases 2,00,000 2
8,00,000 7
Less: Sales 8,00,000 7
WDV for Depreciation - -
.
Asset No
WDV No
Depreciation No
Capital Gains Yes
Calculation of Capital Gains

Particulars ₹
FVOC 9,20,000
Less: COA (WDV + Purchases) 8,00,000
Short Term Capital Gains 1,20,000
Question 15
CA NISHANT KUMAR 15
assets were purchased for ₹2,00,000 and were put to use on 01-07-2022. All these 7 assets were sold
on 01-03-2023 for ₹6,50,000. Discuss the tax implications of Depreciation and Capital Gains.
Solution

Particulars ₹ No.
8,00,000 7
WDV for Depreciation 1,50,000 -
.
Asset No
WDV Yes
Depreciation No
Capital Gains Yes

Particulars ₹
FVOC 6,50,000
Short Term Capital Gains (1,50,000)
Question 16
assets were purchased for ₹2,00,000 and were put to use on 01-07-2022. 4 assets were sold on 01-03-
2023 for ₹8,90,000. Discuss the tax implications of Depreciation and Capital Gains.
Solution

Particulars ₹ No.
8,00,000 7
WDV for Depreciation - 3
.
Asset Yes
WDV No
Depreciation No
Capital Gains Yes

Particulars ₹
FVOC 8,90,000
CA NISHANT KUMAR 16
Short Term Capital Gains 90,000
Question 17
assets were purchased for ₹2,00,000 and were put to use on 01-07-2022. 4 assets were sold on 01-03-
2023 for ₹6,20,000. Discuss the tax implications of Depreciation and Capital Gains.
Solution

Particulars ₹ No.
8,00,000 7
WDV for Depreciation 1,80,000 3
.
Asset Yes
WDV Yes
Depreciation Yes
Capital Gains No
Summary
Full Block Transfer Part Block Transfer
Particulars
Case 1 Case 2 Case 3 Case 4
₹ No. ₹ No. ₹ No. ₹ No.
Sale Details 9,20,000 7 6,50,000 7 8,90,000 4 6,20,000 4
Opening WDV 6,00,000 5 6,00,000 5 6,00,000 5 6,00,000 5
Add: Actual Cost 2,00,000 2 2,00,000 2 2,00,000 2 2,00,000 2
8,00,000 7 8,00,000 7 8,00,000 7 8,00,000 7
Less: Sale 8,00,000 7 6,50,000 7 8,00,000 4 6,20,000 4
WDV for Depreciation - - 1,50,000 - - 3 1,80,000 3
.
Asset No No Yes Yes
WDV No Yes No Yes
Depreciation No No No Yes
Capital Gains Yes Yes Yes No
.
Particulars Case 1 Case 2 Case 3 Case 4
₹ ₹ ₹ ₹
FVOC 9,20,000 6,50,000 8,90,000 -
Less: COA (WDV + Purchase) 8,00,000 8,00,000 8,00,000 -
STCG 1,20,000 (1,50,000) 90,000 -
CA NISHANT KUMAR 17
Sale of Assets Under Individual Asset System (SLM Method of
Depreciation)
Question 18
An asset is purchased on 01-04-2020 for ₹1,00,000. Depreciation is charged @ 10% on Straight Line
Method. On 01-04-2022, the asset is sold for ₹72,000. Discuss the implications of Depreciation and
Capital Gains.
Solution
Calculation of WDV as on 01-04-2022

Particulars ₹
Cost of Asset 1,00,000
Less: Depreciation @ 10% (P.Y. 2020-21) 10,000
WDV as on 01-04-2020 90,000
WDV as on 01-04-2021 80,000
Calculation of Terminal Depreciation

Particulars ₹
Full Value of Consideration 72,000
Less: WDV as on 01-04-2022 80,000
Terminal Depreciation (8,000)
This would be debited to the Profit & Loss A/c. This is allowed as deduction. No capital gains shall arise.
Question 19
Method. On 01-04-2022, the asset is sold for ₹89,000. Discuss the implications of Depreciation and
Capital Gains.
Solution

Particulars ₹
WDV as on 01-04-2021 90,000
WDV as on 01-04-2022 80,000
Calculation of Balancing Charge

Particulars ₹
Full Value of Consideration 89,000
Less: WDV as on 01-04-2022 80,000
Balancing Charge 9,000
This would be credited to the Profit & Loss A/c. This is taxable u/s 41(2). No capital gains shall arise.
CA NISHANT KUMAR 18
Question 20
Method. On 01-04-2022, the asset is sold for ₹1,17,000. Discuss the implications of Depreciation and
Capital Gains.
Solution

Particulars ₹
WDV as on 01-04-2021 90,000
WDV as on 01-04-2022 80,000
Calculation of Balancing Charge

Particulars ₹
Full Value of Consideration 1,17,000
Less: WDV as on 01-04-2022 80,000
37,000
.
Capital Gains (₹1,17,000 – ₹1,00,000) (Short Term Capital Gains Taxable u/s 50A) 17,000
Balancing Charge (₹1,00,000 – ₹80,000) (Credited to P&L A/c → Taxable u/s 41(2)) 20,000
Asset is Partly used for Business Purposes and Partly for Personal
Purposes
If asset is not used exclusively for business purposes, then only proportionate expenditure towards
business is allowed.
Question 21
Suppose a car is used 60% for business purposes, and 40% for personal purposes. The opening WDV
of the block is ₹4,00,000. Depreciation is applicable @ 15%. Calculate the closing WDV of the block.
Solution
The total depreciation will be 15% of ₹4,00,000 = ₹60,000. This depreciation will be segregated into
two parts → 60%, i.e., ₹36,000, and 40%, i.e., ₹24,000. While calculating closing WDV, the amount of
depreciation that will be subtracted would be ₹36,000; and hence, the closing WDV of the block will
be ₹4,00,000 – ₹36,000 = ₹3,64,000
CA NISHANT KUMAR 19
Section 35: Scientific Research
Part A: In-House Research [Research for Assessee’s Own Business]
Research for Assessee's Own Business

Research During (Note 1) the Research Before Commencement of Business
Course of Business (Maximum 3 Years Before the Commencement of Business)
Revenue
Capital Expenses Revenue Expenses Capital Expenditure
Expenses
Other Salary Other

100%
Land Capital Material (excluding Other Land Capital
Deduction
Expenditure perquisites) Expenditure
No 100% No No 100%
Allowed Allowed
Deduction Deduction Deduction Deduction Deduction
Note 1 – Section 35(2AB) – If the following conditions are satisfied, and research is carried on during
the course of business, then deduction @ 100% is allowed on all capital and revenue expenses, except
Land and Building. (Till P.Y. 2019-20, it was 150%)
1. Assessee should be a company

2. Assessee should be engaged in manufacturing business or biotechnology business
3. Research is approved
Part B: Donation/Contribution to Outsiders
Notes:
1. Depreciation is not allowed if deduction u/s 35 is claimed.
CA NISHANT KUMAR 20
2. If land and building is purchased through composite agreement, then cost of land and building
shall be bifurcated on the basis of FMV because deduction is not allowed in case of cost of
land.
3. The deduction shall not be denied if approval of institution is withdrawn after payment by
assessee.
Question 22
Mr. Praveen Kumar has furnished the following particulars related to payments made towards
scientific research for the year ended 31-03-2023:
Particulars ₹ (in lacs)

1. Payments made to K Research Ltd. 20
2. Payments made to LMN College 15
3. Payments made to OPQ College 10
Note: K Research and LMN College are approved research institutions, and these
payments are to be used for the purpose of scientific research.
4. Payments made to National Laboratory 8
5. Machinery purchased for in-house scientific research 25
6. Salaries to research staff engaged in in-house scientific research 12
Compute the amount of deduction available under section 35 of the Income Tax Act, 1961 while
arriving at the business income of the assessee.
Solution
Computation of deduction under section 35 for the A.Y. 2023-24

Particulars ₹ % of Deduction ₹
Payment for Scientific Research
K Research Ltd. 20,00,000 100% 20,00,000
LMN College 15,00,000 100% 15,00,000
OPQ College (Note) 10,00,000 0% -
National Laboratory 8,00,000 100% 8,00,000
Expenditure Incurred on In-House Research and
Development Facility
Machinery 25,00,000 100% 25,00,000
Salaries to Research Staff 12,00,000 100% 12,00,000
Deduction Allowable u/s 35 80,00,000
Note - Since OPQ College is not approved, donation made to it shall not be allowable as deduction.
Mr. A, furnishes the following particulars for the P.Y.2022-23. Compute the deduction allowable under
section 35 for A.Y. 2023-24, while computing his income under the head “Profits and gains of business
or profession”.
Particulars ₹
1. Amount paid to notified approved Indian Institute of Science, Bangalore, for 1,00,000
scientific research
2. Amount paid to IIT, Delhi for an approved scientific research programme 2,50,000
3. Amount paid to X Ltd., a company registered in India which has as its main object 4,00,000
scientific research and development, as is approved by the prescribed authority
CA NISHANT KUMAR 21
4. Expenditure incurred on in-house research and development facility as approved by
the prescribed authority
(a) Revenue expenditure on scientific research 3,00,000
(a) Capital expenditure (including cost of acquisition of land ₹5,00,000) on 7,50,000
scientific research
Solution
Computation of deduction under section 35 for the A.Y. 2023-24

Particulars ₹ % of Deduction ₹
Payment for Scientific Research
Indian Institute of Science 1,00,000 100% 1,00,000
IIT Delhi 2,50,000 100% 2,50,000
X Ltd. 4,00,000 100% 4,00,000
Expenditure Incurred on In-House Research and
Development Facility
Revenue Expenditure 3,00,000 100% 3,00,000
Capital Expenditure (excluding Land) 2,50,000 100% 2,50,000
Deduction Allowable u/s 35 13,00,000
Mr. Gamma, a proprietor started a business of manufacture of tyres and tubes for motor vehicles on
1.1.2022. The manufacturing unit was set up on 1.5.2022. He commenced his manufacturing
operations on 1.6.2022. The total cost of the plant and machinery installed in the unit is ₹120 crore.
The said plant and machinery included second hand plant and machinery bought for ₹20 crore and
new plant and machinery for scientific research relating to the business of the assessee acquired at a
cost of ₹15 crore.
Compute the amount of depreciation allowable under section 32 of the Income-tax Act, 1961 in
respect of the assessment year 2023-24. Assume that all the assets were purchased by way of account
payee cheque and Mr. Gamma has not opted for the provisions of section 115BAC.
Solution
Computation of Depreciation Allowable u/s 32 to Mr. Gamma for A.Y. 2023-24

Particulars ₹ (in crores)
Normal Depreciation
Total Cost of Plant and Machinery 120.00
Less: Used for Scientific Research (Note 1) 15.00
Eligible for Normal Depreciation 105.00
Normal Depreciation @ 15% on ₹105 crores 15.75
Additional Depreciation:
Cost of Plant and Machinery 120.00
Less: Used for Scientific Research 15.00
Less: (100% Deduction Allowed u/s 35)
Less: Second Hand Plant and Machinery (Note 2) 20.00 35.00
Eligible for Additional Depreciation 85.00
Additional Depreciation @ 20% on ₹85 crores 17.00
Depreciation allowable for A.Y. 2022-23 32.75
Notes:
CA NISHANT KUMAR 22
1. Depreciation is not allowed on plant and machinery purchased for Scientific Research, as
deduction is allowed on it u/s 35.
2. When an assessee engaged in the business of manufacturing an article or thing purchases any
new plant and machinery, additional depreciation is allowed @ 20%. However, additional
depreciation is not allowed, inter alia, in case of second hand Plant and Machinery.
Section 35D: Amortization of Preliminary Expenses

1. “Preliminary Expenses” means:
a. the preparation of feasibility report
b. the preparation of project report;
c. conducting market survey or any other survey necessary for the business of the
assessee;
d. engineering services relating to the assessee’s business;
e. legal charges for drafting any agreement between the assessee and any other person
for any purpose relating to the setting up to conduct the business of assessee.
2. These expenses are allowed as deduction only to resident assessees who incur such
expenditure before commencement of business or after commencement for extension or for
setting up a new unit.
3. Limit
a. Indian Company – Lower of the following is allowed:
i. Actual Preliminary Expenses
ii. 5% of Cost of Project/Capital Employed
b. Other Resident Person – Lower of the following is allowed:
i. Actual Preliminary Expenses
ii. 5% of Cost of Project
Cost of Project means amount invested in fixed asset of new project or extension or new unit
as per books of accounts as on last day of P.Y.
Capital Employed = Share Capital + Debentures + Long Term Borrowings for New Project or
Extension or Set up of new unit.
Note: Reserves & Surplus is not included in Capital Employed.
4. The deduction is allowed in 5 equal annual instalments.
5. Audit is mandatory in the year in which expenses are incurred (other than company and
cooperative society).
6. If there is an amalgamation or demerger, then remaining deduction is allowed to amalgamated
company/resulting company.
Question 25
First Flight Ltd. is an existing Indian Company, which sets up a new industrial unit. It incurs the following
expenditure in connection with the new unit:
Particulars ₹
Preparation of project report 4,00,000
Market survey 3,00,000
Legal and other charges for issue of additional capital required for the new unit 2,00,000
9,00,000
The following further data is given:
Particulars ₹
Cost of project 30,00,000
CA NISHANT KUMAR 23
Capital employed in the new unit 35,00,000
What is the deduction admissible to the company under section 35D for Assessment Year 2023-24?
Solution
Calculation of Allowable Expenditure u/s 35D

Particulars ₹
Lower of the following is allowed:
(i) Actual Preliminary Expenses 9,00,000
(ii) Higher of the following:
(ii) 5% of Cost of Project 1,50,000
(ii) 5% of Capital Employed 1,75,000 1,75,000
Total Deduction Allowable 1,75,000
Deduction Allowed for A.Y. 2023-24 (1/5 × ₹1,75,000) 35,000
Section 35DDA: Amortisation of Expenditure Incurred Under Voluntary

Retirement Scheme
1. This deduction is allowed to all assessees.
2. This deduction is allowed in 5 equal annual instalments.
3. If there is an amalgamation or demerger, then remaining deduction is allowed to amalgamated
company/resulting company.
Section 35AD: Investment Linked Tax Deduction to Specified Businesses

At the option of the assessee, 100% deduction of Capital Expenditure is allowed in case of the following
businesses:
1. setting-up and operating ‘cold chain’ facilities for specified products

2. setting-up and operating warehousing facilities for storing agricultural produce
3. laying and operating a cross-country natural gas or crude or petroleum oil pipeline network
for distribution, including storage facilities being an integral part of such network
4. building and operating a hotel of two-star or above category, anywhere in India
5. building and operating a hospital, anywhere in India, with at least 100 beds for patients
6. developing and building a housing project under a notified scheme for slum redevelopment or
rehabilitation framed by the Central Government or a State Government
7. developing and building a housing project under a notified scheme for affordable housing
framed by the Central Government or State Government
8. production of fertilizer in India
9. setting up and operating an inland container depot or a container freight station notified or
approved under the Customs Act, 1962
10. bee-keeping and production of honey and beeswax
11. setting up and operating a warehousing facility for storage of sugar
12. laying and operating a slurry pipeline for transportation of iron-ore
13. setting up and operating a semiconductor wafer fabrication manufacturing unit, if such unit is
notified by the Board in accordance with the prescribed guidelines
14. developing or maintaining and operating or developing, maintaining and operating a new
infrastructure facility.
New Infrastructure Facility Means:
a. A road including toll road, a bridge or a rail system.
CA NISHANT KUMAR 24
b. A highway project including housing or other activities being an integral part of the
highway project.
c. A water supply project, water treatment system, irrigation project, sanitation and
sewerage system or solid waste management system.
d. A port, airport, inland waterway, inland port or navigational channel in the sea.
Notes/Conditions:
1. Above businesses should be new. They should not be a split up or reconstruction of existing
business.
2. Plant & Machinery required should be new. However, there are two exceptions:
a. 20% of total Plant and Machinery can be second hand
b. Imported second had Plant and Machinery as new only for this section.
3. Under this section, deduction is allowed for all capital expenditures except:
a. Land
b. Goodwill
c. Financial Instruments
4. Deduction of expenses is allowed only if more than ₹10,000 expenditure in a single day to
single person is paid by A/c Payee Cheque, A/c Payee Demand Draft, or other mode of
Electronic Clearing System.
5. Depreciation is not allowed if deduction is claimed under this section.
6. Expenditure incurred before commencement of business is allowed as deduction in the year
in which business is commenced.
7. Losses of specified businesses can be set off only against profits of specified businesses, and
remaining losses can be carried forward for unlimited years.
8. If any asset is sold (on which deduction u/s 35AD is claimed), then selling price of such asset is
taxable under the head PGBP.
9. In case of hotels, if operations are transferred to any other person, then also deduction is
allowed u/s 35.
10. Petroleum/Natural Gas Pipeline Business and New Infrastructure Business should be owned
by Indian Company or consortium (group) of Indian Companies, and approved from prescribed
authority.
Mr. A commenced operations of the businesses of setting up a warehousing facility for storage of food
grains, sugar and edible oil on 1.4.2022. He incurred capital expenditure of ₹80 lakh, ₹60 lakh and ₹50
lakh, respectively, on purchase of land and building during the period January, 2022 to March, 2022
exclusively for the above businesses, and capitalized the same in its books of account as on 1st April,
2022. The cost of land included in the above figures is ₹50 lakh, ₹40 lakh and ₹30 lakh, respectively.
During the P.Y. 2022-23, he incurred capital expenditure of ₹20 lakh, ₹15 lakh & ₹10 lakh, respectively,
for extension/reconstruction of the building purchased and used exclusively for the above businesses.
Compute the income under the head “Profits and gains of business or profession” for the A.Y.2023-24
and the loss to be carried forward, assuming that Mr. A has fulfilled all the conditions specified under
section 35AD and wants to claim deduction under section 35AD and has not claimed any deduction
under Chapter VI-A under the heading “C – Deductions in respect of certain incomes”.
The profits from the business of setting up a warehousing facility for storage of food grains, sugar and
edible oil (before claiming deduction under section 35AD and section 32) for the A.Y. 2023-24 is ₹16
CA NISHANT KUMAR 25
lakhs, ₹14 lakhs and ₹31 lakhs, respectively. Also, assume in respect of expenditure incurred, the
payments are made by account payee cheque or use of ECS through bank account.
Solution
Computation of Profits and Gains from Business or Profession for A.Y. 2023-24
Particulars ₹
Profit from business of setting up of warehouse for storage of edible oil (before 31,00,000
providing for depreciation under section 32)
Less: Depreciation u/s 32 3,00,000
Less: 10% of (₹50,00,000 – ₹30,00,000 + ₹10,00,000)
Profits and Gains from Business or Profession 28,00,000
Calculation of Income/Loss from Specified Business u/s 35AD

Food
Particulars Sugar Total
Grains
Profits from Specified Business 16,00,000 14,00,000 30,00,000
Less: Deduction u/s35AD
Capital Expenditure (other than Land) incurred 30,00,000 20,00,000 50,00,000
prior to commencement of business
Capital Expenditure incurred during the P.Y.2022- 20,00,000 15,00,000 35,00,000
23
Total Capital Expenditure 50,00,000 35,00,000 85,00,000
Deduction Allowed (100%) 50,00,000 35,00,000 85,00,000
Loss from Specified Business (34,00,000) (21,00,000) (55,00,000)
Notes:
1. Additional Depreciation is available only when the assessee is engaged the business of
manufacturing of an article or thing. In this case, since the business is of setting up a warehouse
for storage of edible oil, additional depreciation shall not be allowed.
2. Deduction of 100% of the capital expenditure is available under section 35AD for A.Y.2023-24
in respect of specified business of setting up and operating a warehousing facility for storage
of sugar and setting up and operating a warehousing facility for storage of agricultural produce
where operations are commenced on or after 01.04.2012 or on or after 01.04.2009,
respectively.
3. However, since setting up and operating a warehousing facility for storage of edible oils is not
a specified business, Mr. A is not eligible for deduction under section 35AD in respect of capital
expenditure incurred in respect of such business.
4. Mr. A can, however, claim depreciation@10% under section 32 in respect of the capital
expenditure incurred on buildings. It is presumed that the buildings were put to use for more
than 180 days during the P.Y. 2022-23.
5. Loss from a specified business can be set-off only against profits from another specified
business. Therefore, the loss of ₹55 lakh from the specified businesses of setting up and
operating a warehousing facility for storage of food grains and sugar cannot be set-off against
the profits of ₹28 lakh from the business of setting and operating a warehousing facility for
storage of edible oils, since the same is not a specified business. Such loss can, however, be
carried forward indefinitely for set-off against profits of the same or any other specified
business.
CA NISHANT KUMAR 26
Mr. Suraj, a proprietor, commenced operations of the business of a new three-star hotel in Madurai,
Tamil Nadu on 1.4.2022. He incurred capital expenditure of ₹50 lakh during the period January, 2022
to March, 2022 exclusively for the above business, and capitalized the same in his books of account as
on 1st April, 2022. Further, during the P.Y. 2022-23, he incurred capital expenditure of ₹2 crore (out of
which ₹1.50 crore was for acquisition of land) exclusively for the above business.
Compute the income under the head “Profits and gains of business or profession” for the A.Y. 2023-
24, assuming that he has fulfilled all the conditions specified under section 35AD and opted for claiming
deduction under section 35AD; and he has not claimed any deduction under Chapter VI-A under the
heading “C – Deductions in respect of certain incomes”.
The profits from the business of running this hotel (before claiming deduction under section 35AD) for
the A.Y. 2023-24 is ₹25 lakhs. Assume that he also has another existing business of running a four-star
hotel in Coimbatore, which commenced operations fifteen years back, the profits from which are ₹120
lakhs for the A.Y. 2023-24. Also, assume that payments for capital expenditure were made by net
banking.
Solution
Computation of Profits and Gains from Business or Profession

Particulars New Hotel Existing Hotel
Profit before deduction u/s 35AD 25,00,000 1,20,00,000
Less: Deductions u/s 35AD
Less: Capital Expenditure incurred prior commencement 50,00,000
Less: Capital Expenditure incurred during P.Y. 2022-23 (except Land) 50,00,000
Profits from Specified Business (75,00,000) 1,20,00,000
.
Net Profit from Specified Business after Set Off 45,00,000
Lock in on Asset Purchased for Specified Business

Asset acquired for Specified business should not be transferred to non-specified business within 8
years from the year of acquisition. If it is transferred within 8 years, then following shall be taxable
under the head PGBP:
Particulars ₹
Amount of deduction claimed u/s 35AD earlier xxx
Less: Depreciation allowable if section 35 AD was not claimed xxx
PGBP xxx
For non-specified business, following shall be added to block of asset (Actual Cost)
Particulars ₹
Cost of Asset xxx
Less: Depreciation allowable if the asset was used for Non-specified business from acquisition xxx
Actual Cost xxx
Note: If asset is transferred to non-specified business after 8 years or asset is acquired under
amalgamation/demerger/gift and previous owner has already claimed deduction u/s 35AD, then
actual cost is NIL.
CA NISHANT KUMAR 27
Mr. Arnav is a proprietor having two units – Unit A carries on specified business of setting up and
operating a warehousing facility for storage of sugar; Unit B carries on non-specified business of
operating a warehousing facility for storage of edible oil.
Unit A commenced operations on 1.4.2021 and it claimed deduction of ₹100 lacs incurred on purchase
of two buildings for ₹50 lacs each (for operating a warehousing facility for storage of sugar) under
section 35AD for A.Y.2022-23. However, in February, 2023, Unit A transferred one of its buildings to
Unit B.
Examine the tax implications of such transfer in the hands of Mr. Arnav.
Solution
Calculation of Deemed Income from PGBP

Particulars ₹
Deduction allowed u/s 35AD 50,00,000
Less: Depreciation allowable u/s 32 (for P.Y. 2021-22) (10% × ₹50,00,000) 5,00,000
Deemed Income 45,00,000
Calculation of Actual Cost to be added to the Block of Assets

Particulars ₹
Actual Cost to the Assessee 50,00,000
Less: Depreciation allowable u/s 32 (for P.Y. 2021-22) (10% × ₹50,00,000) 5,00,000
Actual Cost to be Added to the Block of Assets 45,00,000
Section 36: Other Deductions

• Insurance Premium of Stock in Trade – Allowed
• Health Insurance Premium for Employees – It is allowed only if it is paid by any mode other
than cash
• Bonus and Commission to Employees – As per Section 43B, it is allowed only if it is paid upto
the due date of return filing.
• Employer Contribution
Employer Contribution
Allowed Not Allowed

Statutory Recognised Approved Approved Unrecognised Unapproved Unapproved
Any other fund as
Provident Fund Provident Fund Gratuity Fund Superannuation Provident Fund Gratuity Fund Superannuation
per Law
(SPF) (RPF) (AGF) Fund (ASF) (URPF) (UAGF) Fund (UASF)
As per Section 43B, it is allowed only if it is paid upto the due date of return filing.
• Employer Contribution to Pension Scheme u/s 80CCD (New Pension Scheme/National Pension
Scheme/Central Government Pension Scheme) – Deduction Allowed: Lower of the following is
exempt:
o Actual Contribution
o 10% of Salary (Basic + DA (in terms))
As per Section 43B, it is allowed only if it is actually paid up to the date of return filing.
CA NISHANT KUMAR 28
• Any sum received by Employer from Employee as contribution to PF, Superannuation,
Employee State Insurance has to be deposited by the Employer upto due date of such fund,
otherwise it will be treated as PGBP income of employer.
Note: PF due date is next month’s 15th.
• Animals used in the business (other than Stock in Trade)
Deduction is allowed in the year in which such animal dies or becomes permanently useless.
Amount of Deduction = Cost of Animal – Scrap Value
• Bad Debts
Bad Debts
Actual Bad Debts Provision for Bad Debts
Related to Sales Related to Loan Not Allowed
Allowed Not Allowed
Exception: Money Lending

Business
Notes:
a. There’s no need to prove that debt has become bad.
b. For claiming bad debts, assessee should write off debtors.
c. Section 41(4): Bad Debts Recovery – If deduction of bad debts is already allowed, then
recovery of bad debts will be taxable in the year in which it is recovered, even if
assessee is not doing the same business.
Note: Recovery is taxable only if assessee who claimed bad debts and recovered is the
same.
o Taxable Amount = Recovery Amount – Disallowed Earlier
Question 29
In P.Y. 2017-18, Bad Debts were ₹2,00,000. The AO allowed deduction of ₹1,20,000, and disallowed
₹80,000. ₹1,50,000 were recovered in P.Y. 2022-23. How much amount shall be taxable in P.Y. 2022-
23?
Solution
Taxable Amount = Recovery Amount – Disallowed Earlier
Taxable Amount = ₹1,50,000 – ₹80,000 = ₹70,000
Section 36: Other Deductions (Contd.)

• Interest on Loan
CA NISHANT KUMAR 29
Interest on Loan
Loan for Personal
Laon for Business/Professional Purposes
Purposes
Loan from Scheduled Bank (including Co-op.
Bank), Public Financial Institution, State
Loan from Others Not Allowed
Financial Corporation, State Industrial
Investment Corporation
Allowed (As per Section 43B, it is allowed

only if it is paid upto the due date of return Allowed, even it is paid or outstanding
filing)
• Discount on Zero Coupon Bonds (ZCB) – It is allowed as deduction on pro-rata basis over the
life of bond (calendar months).
Note: If, in any calendar month, part is 15 days or more, then that calendar month shall be
considered and if such part is less than 15 days, it shall be ignored.
Question 30
RIL issued 1,00,000 Zero Coupon Bonds @ ₹80 per bond on 07-11-2022. Face Value of Bond is ₹100.
ZCB is redeemable after 12 months. Calculate discount for P.Y. 2022-23.
Solution
Total Discount = (₹100 – ₹80) × 1,00,000 = ₹20,00,000
Total No. of Months – Nov, 22 (as the number of days outstanding is more than 15) + Dec., 22 + Jan.,
23 + Feb., 23 + March., 23 + Apr., 23 + May, 23 + Jun., 23 + Jul., 23 + Aug., 23 + Sep., 23 + Oct., 23
(November 23 will be ignored as the maturity is to happen on 6th November, so the number of days in
November is 6, which is less than 15)
Therefore, monthly discount = ₹20,00,000 ÷ 12 = ₹1,66,667
Discount Allowed in P.Y. 2022-23 = ₹1,66,667 × 5 = ₹8,33,333
Question 31
Suppose in above example, the company had issued bonds on 16-11-2022?
Solution
Total Discount = (₹100 – ₹80) × 1,00,000 = ₹20,00,000
Total No. of Months – Nov, 21 (as the number of days outstanding is more than 15) + Dec., 22 + Jan.,
23 + Feb., 23 + March., 23 + Apr., 23 + May, 23 + Jun., 23 + Jul., 23 + Aug., 23 + Sep., 23 + Oct., 23 +
Nov., 23 (as the number of days is 15)
Therefore, monthly discount = ₹20,00,000 ÷ 13 = ₹1,53,846
Discount Allowed in P.Y. 2022-23 = ₹1,53,846 × 5 = ₹7,69,231
CA NISHANT KUMAR 30
Section 36: Other Deductions (Contd.)
• Family Planning Expenditure: Deduction is allowed only to company.
o Revenue Expenditure = 100% Deduction
o Capital Expenditure = 5 Equal Instalments
• Security Transaction Tax (STT) and Commodity Transaction Tax (CTT): It is allowed if assessee
is engaged in shares, commodity trading business.
Section 37: Residuary Expenses

Any expense not covered under sections 30 to 36 shall be allowed as deduction u/s 37 if following
conditions are satisfied:
• The expenditure should not be of the nature described in sections 30 to 36.

• It should have been incurred by the assessee in the accounting year.
• It should be in respect of a business carried on by the assessee the profits of which are being
computed and assessed.
• It must have been incurred after the business was set up.
• It should not be in the nature of any personal expenses of the assessee.
• It should have been laid out or expended wholly and exclusively for the purposes of such
business.
• It should not be in the nature of capital expenditure.
• The expenditure should not have been incurred by the assessee for any purpose which is an
offence or is prohibited by law.
Examples:
1. Salary
a. Salary to employees: Allowed
b. Salary to working partner: Allowed
c. Salary to sleeping partner: Not Allowed
d. Salary to directors: Allowed
e. Leave salary: Allowed. As per section 43B, it is allowed only if it is actually paid upto
the due date of return filing.
2. Advertisement: Allowed
Note: If advertisement is done in newspaper, pamphlet, brochure of any political party, then
it is not allowed.
3. Taxes
Particulars Taxes Interest Fees Penalty
Direct Tax Not Allowed Not Allowed Not Not
Allowed Allowed
Indirect Allowed (As per Section Allowed (As per Section Allowed Not
Tax 43B, it is allowed only if is 43B, it is allowed only if is Allowed
paid upto the due date of paid upto the due date of
return filing) return filing)
Note:
Penalty for breach of law: Not Allowed
Penalty for breach of contract: Allowed
4. Diwali Puja Expenditure/New Office Opening Expenditure: Allowed
5. Corporate Social Responsibility Expenditure: Not Allowed
CA NISHANT KUMAR 31
6. Premium for Keyman Insurance Policy: Allowed
7. Gift to Employees or Customers: Allowed
8. Free Samples or Freebies provided by Pharma Companies to Doctors: Not Allowed
9. Other Expenses such as:
a. Telephone Expenses
b. Printing and Stationery Expenses
c. Electricity Expenses
d. Audit Fees
e. Sundry Expenses
are allowed if they are paid for the purposes of business or profession.
Section 40: Inadmissible Deductions
Section 40(a)(i): Payment made to Non-Resident/Foreign Company

Amount paid/credited to non-resident/foreign company shall be disallowed (100%), if:
1. TDS is not deducted in Previous Year, or

2. TDS is deducted but not paid to Government upto due date of return filing
Note: If TDS is deducted in any subsequent year or deducted in Previous Year but paid to Government
after due date of return filing, then such sum shall be allowed in the Previous Year in which such TDS
has been paid to government.
Section 40(a)(ia): Payment made to Resident

Amount paid/credited to resident shall be disallowed (30%), if:
1. TDS is not deducted in Previous Year, or

2. TDS is deducted but not paid to Government upto due date of return filing
Note: If TDS is deducted in any subsequent year or deducted in Previous Year but paid to Government
after due date of return filing, then such sum shall be allowed in the Previous Year in which such TDS
has been paid to government.
Exceptions to above sections: If any amount is paid/credited and TDS is not deducted, but payee
1. furnishes his return of income and

2. he takes into account such amount in total income and
3. has paid the taxes on total income, and
4. payer furnishes report from CA (Form 26A)
then, whatever amount (30%/100%) was disallowed earlier, shall be allowed in P.Y. in which payee
furnishes his return of income.
Example
NISH10 Ltd. paid ₹10,00,000 to Mr. Anshul as professional fees on 26-07-2022 without deducting TDS.
Mr. Anshul considered professional fees in his total income and he paid taxes on such total income. He
filed his return of income on 15-11-2023. NISH10 Ltd. obtained a certificate from CA to the above
effect.
In this case, ₹3,00,000 shall be disallowed in P.Y. 2022-23; and ₹3,00,000 shall be allowed in the P.Y.
2023-24 (i.e., the year in which the payee filed his return of income).
CA NISHANT KUMAR 32
Section 40(a)(iib): Royalty, Fees Charged by State Government
If any royalty, fees, service charge, etc. is exclusively collected by State Government from State
Government undertaking, then such expenditure is not allowed to State Government Undertaking.
Section 40(a)(iii): TDS on Salary payable outside India or to a Non-

Resident
If any salary is paid outside India or to a Non-Resident in India and:
1. TDS is not deducted, or

2. TDS is deducted but not paid to Government upto due date of TDS payment, then
such salary expenditure shall be disallowed.
Note: If TDS is deposited late by even one day, then also, salary is not allowed.
Section 40(a)(v): Tax on Non-Monetary Perquisites

If any tax on Non-Monetary Perquisites of employee is paid by employer from his own pocket, then
such tax is not allowed to employer.
Section 40A(2): Payment to Relative

If any payment is made to relative, then Assessing Officer can disallow excessive or unreasonable
amount.
Relatives for different types of persons are given below:
1. For Individual
a. Relatives are Spouse, Mother, Father, Brother, Sister, Lineal Ascendents, Lineal
Descendants
2. For HUF
a. Relatives are members, and their relatives
3. For a Firm/LLP
a. Relatives are partners and their relatives
4. For an AOP/BOI
a. Relatives are members and their relatives
5. For a company
a. Relatives are directors and their relatives
6.
CA NISHANT KUMAR 33
7. Holding-Subsidiary: If a holding company has two or more subsidiaries, those subsidiaries are
relatives to each other.
Section 40A(3): Cash Payment more than ₹10,000 Disallowed

If assessee makes payment for any expenditure to single person in a single day for more than ₹10,000,
by any mode other than A/c Payee Cheque/A/c Payee Demand Draft/Electronic Clearing System, then
such expenditure shall be disallowed.
Notes:
1. If payment is made to transporter, then limit is ₹35,000

2. If the expenses are claimed as deduction in an earlier P.Y. on accrual basis and if such expense
is subsequently paid in cash or bearer cheque, then deduction claimed earlier shall be
withdrawn, and it’ll be taxable as PGBP in the year in which such payment is made.
Exceptions of Section 40A(3) [Rule 6DD]:
1. Payment made to RBI/LIC/Banks/Government

2. Payment made through NEFT/RTGS/Debit Card/ECS/Credit Card/UPI/BHIM
3. Payments by book entry (adjustment)
4. Payment of producers of agricultural products, forest products, poultry products, fish
products, livestock, etc.
5. Payment of Retirement benefits, provided such payment is upto ₹50,000
6. Payment of salary to an employee who is posted to any other place or ship for 15 days or more
other than his normal place of duty
7. Payment made where banking facility is not available
8. Payment is made by any person to his agent who is required to make payment in cash for
goods or services on behalf of such person
9. Payment is made by an authorised dealer or a money changer against purchase of foreign
currency or travellers’ cheques in the normal course of his business
10. Payment of purchase of product manufactured or processed without aid of power in a cottage
industry, to the producer of such product.
Section 40A(7): Provision for Gratuity – Disallowed

Note: Only payment of gratuity or contribution to approved gratuity fund is allowed as deduction.
Section 43B: Expenses allowed on Payment Basis

Following expenses are allowed only if they are paid upto the due date of return filing as per section
139(1):
1. Any tax, duties, cess, fees (IDT)

2. Bonus and commission to employees
3. Employer contribution towards SPF, RPF, AGF, ASF, New Pension Scheme, any fund as per Law
4. Leave Salary
5. Interest on loan taken from Scheduled Banks, Public Financial Institutions, State Financial
Corporation, State Industrial Investment Corporation, NBFC
6. Any sum payable to Indian Railways for use of Railway Assets
Notes:
CA NISHANT KUMAR 34
1. If above payment is made after the due date, then expenditure is allowed in the year in which
actual payment is made.
2. If interest payable is converted into loan, then it is not treated as actual payment. Interest shall
only be allowed as deduction in the year in which such instalments are paid.
Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss Account for the year
ended 31st March, 2023:
Trading and Profit and Loss Account for the year ended 31-03-2023
Particulars ₹ Particulars ₹
To Opening Stock 90,000 By Sales 1,12,11,500
To Purchases 1,10,04,000 By Closing Stock 1,86,100
To Gross Profit 3,03,600
1,13,97,600 1,13,97,600
To Salary 60,000 By Gross Profit b/d 3,03,600
To Rent and rates 36,000 By Income from UTI 2,400
To Interest on Loan 15,000
To Depreciation 1,05,000
To Printing & Stationery 23,200
To Postage & Telegram 1,640
To Loss on Sale of Shares (Short Term) 8,100
To Other General Expenses 7,060
To Net Profit 50,000
3,06,000 3,06,000
Additional Information:
1. It was found that some stocks were omitted to be included in both the Opening and Closing
Stock, the values of which were:
Opening stock ₹9,000
Closing stock ₹18,000
2. Salary includes ₹10,000 paid to his brother, which is unreasonable to the extent of ₹2,000.
3. The whole amount of printing and stationery was paid in cash by way of one time payment to
Mr. Ramesh.
4. The depreciation provided in the Profit and Loss Account ₹1,05,000 was based on the following
information:
The opening balance of plant and machinery (i.e., the written down value as on 31.3.2022
minus depreciation for P.Y. 2021-22) is ₹4,20,000. A new plant falling under the same block of
depreciation was bought on 01.7.2022 for ₹70,000. Two old plants were sold on 1.10.2022 for
₹50,000.
5. Rent and rates includes GST liability of ₹3,400 paid on 7.4.2023.
6. Other general expenses include ₹2,000 paid as donation to a Public Charitable Trust.
You are required to compute the profits and gains of Mr. Sivam under presumptive taxation under
section 44AD and profits and gains as per normal provisions of the Act assuming he has not opted for
the provisions of section 115BAC. Assume that the whole of the amount of turnover received by
account payee cheque or use of electronic clearing system through bank account during the previous
year.
Solution
CA NISHANT KUMAR 35
Computation of Business Income of Mr. Sivam for A.Y. 2023-24
Particulars ₹
Net Profit as per Profit & Loss A/c 50,000
Add: Inadmissible Deductions
Add: Depreciation (Considered Separately) 1,05,000
Add: Loss on Sale of Shares (Short Term) 8,100
Add: Undervaluation of Closing Stock 18,000
Add: Unreasonable Salary to Relative 2,000
Add: Cash Payment in Excess of ₹10,000 (Note 1) 23,200
Add: GST Liability included in Rent and Rates (Note 2) -
Add: Donation to Public Charitable Trust 2,000 1,58,300
2,08,300
Less: Items to be deducted
Less: Undervaluation of Opening Stock 9,000
Less: Income from UTI (Chargeable under IFOS) 2,400 11,400
Business Income Before Depreciation 1,96,900
Less: Depreciation (Note 3) 66,000
Business Income 1,30,900
Notes:
1. As per Section 40A(3), if any payment is made to a person in a single day in a mode other than
A/c Payee Cheque/A/c Payee DD/any mode of Electronic Clearing System, in excess of ₹10,000,
the entire payment is disallowed.
2. Since GST Liability has been paid before the due date of return filing, it shall be allowed.
3. Calculation of Depreciation
Particulars ₹
Opening WDV 4,20,000
Add: Cost of New Plant and Machinery 70,000
4,90,000
Less: Sale Proceeds and Assets Sold 50,000
WDV For Depreciation 4,40,000
.
Depreciation @ 15% 66,000
Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit & Loss
Account for the year ended 31.03.2023:
Particulars ₹ Particulars ₹
To Opening Stock 71,000 By Sales 2,32,00,000
To Purchases of Raw Materials 2,16,99,000 By Closing Stock 2,00,000
To Manufacturing Wages & 5,70,000
Expenses
To Gross Profit 10,60,000
2,34,00,000 2,34,00,000
To Administrative Charges 3,26,000 By Gross Profit 10,60,000
To SGST Penalty 5,000 By Dividend from Domestic 15,000
Companies
To GST Paid 1,10,000 By Income from Agriculture (Net) 1,80,000
CA NISHANT KUMAR 36
To General Expenses 54,000
To Interest to Bank (On Machinery 60,000
Term Loan)
To Depreciation 2,00,000
To Net Profit 5,00,000
12,55,000 12,55,000
Following are the further information relating to the financial year 2022-23:
1. Administrative charges include ₹46,000 paid as commission to brother of the assessee. The
commission amount at the market rate is ₹36,000.
2. The assessee paid ₹33,000 in cash to a transport carrier on 29.12.2022. This amount is included
in manufacturing expenses. (Assume that the provisions relating to TDS are not applicable to
this payment)
3. A sum of ₹4,000 per month was paid as salary to a staff throughout the year and this has not
been recorded in the books of account.
4. Bank term loan interest actually paid upto 31.03.2023 was ₹20,000 and the balance was paid
in November 2023.
5. Housing loan principal repaid during the year was ₹50,000 and it relates to residential property
acquired by him in P.Y. 2021-22 for self-occupation. Interest on housing loan was ₹23,000.
Housing loan was taken from Canara Bank. These amounts were not dealt with in the profit
and loss account given above.
6. Depreciation allowable under the Act is to be computed on the basis of following information:
Plant and Machinery (Depreciation rate @ 15%) ₹

WDV as on 31.03.2022 minus Depreciation for P.Y. 2021-22 11,90,000
Additions during the year (used for more than 180 days) 2,00,000
Total additions during the year 4,00,000
Note: Ignore additional depreciation under section 32(1)(iia)
Compute the total income of Mr. Raju for the assessment year 2023-24 assuming he has not opted for
the provisions of section 115BAC.
Note: Ignore application of section 14A for disallowance of expenditures in respect of any exempt
income.
Solution
Computation of Total Income of Mr. Raju for A.Y. 2023-24

Particulars ₹
Income from House Property
Net Annual Value -
Less: Deduction u/s 24(b) 23,000 (23,000)
Income from House Property (A) (23,000)
.
Profits and Gains from Business or Profession
Net Profit as per Profit & Loss A/c 5,00,000
Add: Inadmissible Deductions
Add: SGST Penalty (Note 1) 5,000
Add: GST Paid (Note 2) -
Add: Depreciation (Considered Separately) 2,00,000
Add: Unreasonable Commission to Relative 10,000
Add: Cash Payment in excess of ₹10,000 (Note 3) -
Add: Bank Term Loan Interest (Note 5) 40,000 2,55,000
CA NISHANT KUMAR 37
7,55,000
Less: Items to be Deducted
Less: Dividend from Domestic Companies (Charged as IFOS) 15,000
Less: Agricultural Income (Exempt) 1,80,000
Less: Salary to Staff (Note 4) 48,000
Less: Depreciation (Note 6) 2,23,500 4,66,500
Profits and Gains from Business or Profession (B) 2,88,500
.
Income from Other Sources
Dividend from Domestic Companies 15,000
Income from Other Sources (C) 15,000
.
Gross Total Income (A) + (B) + (C) 2,80,500
Less: Principal Repayment of Housing Loan 50,000
Total Income 2,30,500
Notes:
1. Penalty on Indirect Taxes is not allowed.

2. Assuming that GST was deposited in the Government A/c before the due date of filing of return
of income, it'll be allowed.
3. In case of payment to transporter, the limit of cash payment is ₹35,000. Since, the payment
made was below ₹35,000, it'll be fully allowed.
4. In the absence of any information, it is assumed that salary was omitted to be recorded in the
books of the assessee by mistake, and that the assessee has offered satisfactory explanation
to the Assessing Officer regarding the same. Therefore, it shall be allowed as deduction.
5. Since the interest on term loan was paid after the due date of return filing, it is disallowed.
6. Calculation of Depreciation
Particulars ₹
Add: Cost of New Plant and Machinery (More than 180 Days) 2,00,000
Add: Cost of New Plant and Machinery (Less than 180 Days) 2,00,000 4,00,000
WDV For Depreciation 15,90,000
.
7.5% (Being 50%) on ₹2,00,000 15,000
15% on Balance (₹15,90,000 – ₹2,00,000) 2,08,500
.
Hari, an individual, carried on the business of purchase and sale of agricultural commodities like paddy,
wheat, etc. He borrowed loans from Andhra Pradesh State Financial Corporation (APSFC) and Indian
Bank and has not paid interest as detailed hereunder:
₹
1. Andhra Pradesh State Financial Corporation (P.Y. 2021-22 & 2022-23) 15,00,000
2. Indian Bank (P.Y. 2021-22) 30,00,000
45,00,000
CA NISHANT KUMAR 38
Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during the year 2022-23,
converted the above interest payable by Hari to them as a loan repayable in 60 equal installments.
During the year ended 31.3.2023, Hari paid 5 installments to APSFC and 3 installments to Indian Bank.
Hari claimed the entire interest of ₹45,00,000 as an expenditure while computing the income from
business of purchase and sale of agricultural commodities. Examine whether his claim is valid and if
not what is the amount of interest, if any, allowable.
Solution
According to section 43B, any interest payable on the term loans to specified financial institutions and
any interest payable on any loans and advances to, inter alia, scheduled banks shall be allowed only in
the year of payment of such interest irrespective of the method of accounting followed by the
assessee. Where there is default in the payment of interest by the assessee, such unpaid interest may
be converted into loan. Such conversion of unpaid interest into loan shall not be construed as payment
of interest for the purpose of section 43B. The amount of unpaid interest so converted as loan shall be
allowed as deduction only in the year in which the converted loan is actually paid.
In the given case of Hari, the unpaid interest of ₹15,00,000 due to APSFC and of ₹30,00,000 due to
Indian Bank was converted into loan. Such conversion would not amount to payment of interest and
would not, therefore, be eligible for deduction in the year of such conversion. Hence, claim of Hari that
the entire interest of ₹45,00,000 is to be allowed as deduction in the year of conversion is not tenable.
The deduction shall be allowed only to the extent of repayment made during the financial year.
Accordingly, the amount of interest eligible for deduction for the A.Y.2023-24 shall be calculated as
follows:
Interest Number of Amount per Instalments Interest

Outstanding Instalments Instalment Paid Allowable (₹)
APSFC 15 lakh 60 25,000 5 1,25,000
Indian Bank 30 lakh 60 50,000 3 1,50,000
Total amount eligible for deduction 2,75,000
Section 43A: Changes in the Rate of Exchange of Currency

If any asset is acquired from outside India through Foreign Currency Loan or Foreign Supplier Credit,
any loss/gain at the time of actual payment shall be adjusted in Block of Assets.
Question 35
NISH10 Ltd. acquired Plant and Machinery for $1,00,000 on 16-07-2020 on credit. Payment of $50,000
was made on 19-02-2022 and the balance $50,000 was made on 15-07-2022. Calculate depreciation
for P.Y. 2021-22 and P.Y. 2022-23. Exchange Rates are as follows:
Date Rate
16-07-2021 $1 = ₹60
19-02-2022 $1 = ₹72
15-07-2022 $1 = ₹57
Solution
Calculation of Depreciation for P.Y. 2021-22

Particulars ₹
Opening WDV -
CA NISHANT KUMAR 39
Add: Actual Cost of Asset ($1,00,000 × ₹60) 60,00,000
Add: Losses due to Section 43A [(₹72 – ₹60) × $50,000] 6,00,000
66,00,000
Less: Sale Proceeds -
Depreciation @ 15% 9,90,000

Particulars ₹
Less: Gain due to Section 43A [(₹60 – ₹57) × $1,00,000] 3,00,000
Depreciation @ 15% 7,96,500
Section 41: Profits Chargeable to Tax

• This section enumerates certain receipts which are deemed to be income under the head
“business or profession.”
• Such receipts would attract charge even if the business from which they arise had ceased to
exist prior to the year in which the liability under this section arises.
Section 41(1): Remission or Cessation of Trading Liability

If assessee claims any loss, expenses, trading liability and subsequently he gets refund or the trading
liability is remitted or ceased, then such refund or remission shall be taxable under the head PGBP. For
example:
1. GST Refund
2. Waiver of Electricity Bill
3. Stock destroyed by fire and insurance compensation is received
Section 41(2): Balancing Charge

Already done with Depreciation
CA NISHANT KUMAR 40
Section 41(3): Sale of Scientific Research Asset
Sale of Scientific Research Asset

Sale Without Use in the Sale After Use in the
Business Business
If Selling Price > Sale [Section 50
Add to Block of
Lower of the following is taxable Cost, then will apply (Part
Assets by NIL
under PGBP Capital Gains will Block/Full Block
Value
apply Transfer)]
Deduction
Selling Price
claimed u/s 35
Section 41(4): Bad Debts Recovery

Already done with section 36
Section 44AA: Compulsory Maintenance of Accounts
Vinod is a person carrying on profession as film artist. His gross receipts from profession are as under:
CA NISHANT KUMAR 41
Particulars ₹
Financial Year 2019-20 1,15,000
What is his obligation regarding maintenance of books of accounts for Assessment Year 2023-24 under
section 44AA of Income-tax Act, 1961?
Solution
Section 44AA(1) requires every person carrying on any profession, notified by the Board in the Official
Gazette (in addition to the professions already specified therein), to maintain such books of account
and other documents as may enable the Assessing Officer to compute his total income in accordance
with the provisions of the Income-tax Act, 1961. As per Rule 6F, a person carrying on a notified
profession shall be required to maintain specified books of accounts:
1. if his gross receipts in all the three years immediately preceding the relevant previous year
have exceeded ₹1,50,000; or
2. if it is a new profession which is setup in the relevant previous year, it is likely to exceed
₹1,50,000 in that previous year.
In the present case, Vinod is a person carrying on profession as film artist, which is a notified
profession. Since his gross receipts have not exceeded ₹1,50,000 in financial year 2019-20, the
requirement under section 44AA to compulsorily maintain the prescribed books of account is not
applicable to him.
Mr. Vinod, however, required to maintain such books of accounts as would enable the Assessing
Officer to compute his total income.
Section 44AB: Audit of Accounts

Following persons are required to furnish audit report by specified date:
1. Persons engaged in Profession: If the gross receipts are more than ₹50 lakhs.
2. Persons engaged in Business:
a. Case 1 – If the sales, turnover, or gross receipts exceed ₹1 crore
b. Case 2 – If the following conditions are satisfied, the turnover limit is ₹10 crores
i. Cash Receipt is less than 5% of Total Receipts
ii. Cash Payment is less than 5% of Total Payments
3. Special Cases
a. Persons 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 (irrespective of his turnover)
b. Persons covered under section 44AD(4): If his income exceeds the basic exemption
limit
c. Persons covered under section 44ADA: If such person claims that the profits and gains
from the profession are lower than the profits and gains computed in accordance with
the provisions of section 44ADA and if his income exceeds the basic exemption limit.
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Presumptive Taxation Scheme
Section 44AD
• This section is applicable to a Resident Individual, Resident HUF, Resident Partnership Firm
(excluding LLP).
• The taxpayer should be engaged in any business except:
o Specified Profession, as referred to in Section 44AA(1)
o Business in which income is in the nature of commission or brokerage
o Agency business
o Business of Plying, Hiring, or Leasing goods carriages
o Business in which deductions u/s 10A, 10AA, 10B, 10BA, 80HH to 80RRB are claimed
by the assessee.
• If the gross annual turnover is upto ₹2 crore, then 8% of the gross turnover shall be considered
to be the PGBP income of the assessee.
• In case of gross receipts which are received by account payee cheque/draft or use of electronic
clearing system through a bank account, or any other prescribed electronic mode, the PGBP
income shall be considered to be only 6% of such receipts.
• Such an assessee is not required to maintain his books of accounts, or to get them audited.
• If an assessee desires to show higher income than 8%, s/he may do so.
• Of course, no deductions can be claimed against this income of 8%/6%.
• If an assessee desires to show a lower income than 8% or 6%, he’ll have to maintain his books
of accounts and get his accounts audited as well.
• However, in order to curb the hardship of such compliances to small businesses, it is provided
that if such lower income is even lower than the basic exemption limit, then there’s no need
to maintain the books of accounts or to get them audited.
• If an assessee opts for section 44AD, he cannot declare lower profit for the next 5 consecutive
subsequent assessment years. If he declares lower profit, then he shall not be eligible to claim
section 44AD for 5 subsequent assessment years (i.e., after the assessment year relevant to
the previous year in which the profit has not been declared at the rate of 8%).
• For example, an eligible assessee claims to be taxed on presumptive basis of 8% of turnover
under section 44AD for Assessment Year 2021-22. He offers income of ₹8,00,000 on the
turnover of ₹1,00,00,000. For assessment year 22-23 and assessment year 23-24 also he offers
income in accordance with provisions of section 44AD. However, for assessment year 24-25
he offers income of ₹3,00,000 on turnover of ₹1,00,00,000. 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 21-22 he will not be eligible to claim the benefit of
section 44AD for next 5 assessment years (i.e., for assessment year 2025-26 to 2029-30).
Consequently, for the assessment years 2024-25 to 2029-30:
o he will have to maintain the books of accounts as per section 44AA (irrespective of
income or turnover) if his total income exceeds the exemption limit, and
o he will have to get his books of accounts audited under section 44AB (irrespective of
turnover) if its total income exceeds the exemption limit.
Mr. Praveen engaged in retail trade, reports a turnover of ₹1,98,50,000 for the financial year 2022-23.
His income from the said business as per books of account is ₹13,20,000 computed as per the
provisions of Chapter IV-D “Profits and gains from business or Profession” of the Income-tax Act, 1961.
CA NISHANT KUMAR 43
Retail trade is the only source of income for Mr. Praveen. A.Y. 2022-23 was the first year for which he
declared his business income in accordance with the provisions of presumptive taxation u/s 44AD.
1. Is Mr. Praveen also eligible to opt for presumptive determination of his income chargeable to
tax for the assessment year 2023-24?
2. If so, determine his income from retail trade as per the applicable presumptive provision
assuming that whole of the turnover represents cash receipts.
3. In case Mr. Praveen does not opt for presumptive taxation of income from retail trade, what
are his obligations under the Income-tax Act, 1961?
4. What is the due date for filing his return of income under both the options?
Solution
1. Yes. Since his total turnover for the F.Y.2022-23 is below ₹200 lakhs, he is eligible to opt for
presumptive taxation scheme under section 44AD in respect of his retail trade business.
2. His income from retail trade, applying the presumptive tax provisions under section 44AD,
would be ₹15,88,000, being 8% of ₹1,98,50,000.
3. Mr. Praveen had declared profit for the previous year 2021-22 in accordance with the
presumptive provisions and if he does not opt for presumptive provisions for any of the five
consecutive assessment years i.e., A.Y. 2023-24 to A.Y. 2027-28, he would not be eligible to
claim the benefit of presumptive taxation for five assessment years subsequent to the
assessment year relevant to the previous year in which the profit has not been declared in
accordance the presumptive provisions i.e. if he does not opt for presumptive taxation in say
P.Y. 2022-23 relevant to A.Y.2023-24, then he would not be eligible to claim the benefit of
presumptive taxation for A.Y. 2024-25 to A.Y. 2028-29. Consequently, Mr. Praveen is required
to maintain the books of accounts and get them audited under section 44AB, since his income
exceeds the basic exemption limit.
4. In case he opts for the presumptive taxation scheme under section 44AD, the due date would
be 31st July, 2023. In case he does not opt for presumptive taxation scheme, he is required to
get his books of account audited, in which case the due date for filing of return of income
would be 31st October, 2023
Section 44ADA
1. This section is applicable to a Resident Individual, or a Resident Firm (excluding LLP).
2. The assessee is engaged in a profession referred to in section 44AA(1), i.e., legal, medical
engineering or architectural profession or the profession of accountancy or technical
consultancy or interior decoration or any other profession as is notified by the board.
3. If the gross receipts of such assessee from the profession is upto ₹50 lakhs, 50% of gross
receipts shall be deemed to be the PGBP income of the assessee.
4. Of course, the assessee has a choice to declare a higher income.
5. No deductions can be claimed against this income.
6. The written down value of the block is to be calculated as if depreciation has been allowed.
7. If the assessee wants, he can declare a lower income. In such case, the following consequences
are applicable:
a. He’ll have to maintain books of accounts as per Section 44AA, if his total income
exceeds the exemption limit
b. He’ll have to get his books of accounts audited under section 44AB (irrespective of
turnover), if his total income exceeds the exemption limit.
CA NISHANT KUMAR 44
Section 44AE
1. This section is applicable to the assessees who are engaged in the business of plying, leasing,
or hiring goods carriages, and if the assessee does not own more than 10 goods carriages at
any time during the previous year.
2. In such a case, income will be calculated as follows:
a. In case of Heavy Goods Vehicles: Higher of the following:
i. Actual amount earned
ii. ₹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
Note: Heavy Goods Vehicle means any goods carriage, the gross vehicle weight of
which is more than 12,000 kilograms.
b. In case of Other Vehicles: Higher of the following:
i. Actual amount earned
ii. ₹7,500 per month (or part of a month) during which the goods carriage is
owned by the assessee in the previous year
3. Of course, no further deduction is allowed under any other section; however, interest and
remuneration to partners is allowed as deduction against this income.
4. If the taxpayer wants to declare lower income, he will have to maintain books of accounts and
get his account audited on compulsory basis.
Mr. X commenced the business of operating goods vehicles on 1.4.2022. He purchased the following
vehicles during the P.Y.2022-23. Compute his income under section 44AE for A.Y.2023-24.
Gross Vehicle Weight (in kilograms) Number Date of Purchase

(1) 7,000 2 10-04-2022
(2) 6,500 1 15-03-2023
(3) 10,000 3 16-07-2022
(4) 11,000 1 02-01-2023
(5) 15,000 2 29-08-2022
(6) 15,000 1 23-02-2023
Would your answer change if the goods vehicles purchased in April, 2022 were put to use only in July,
2022?
Solution
Since Mr. X does not own more than 10 vehicles at any time during the previous year 2022-23, he is
eligible to opt for presumptive taxation scheme under section 44AE. ₹1,000 per ton of gross vehicle
weight or unladen weight per month or part of the month for each heavy goods vehicle and ₹7,500
per month or part of month for each goods carriage other than heavy goods vehicle, owned by him
would be deemed as his profits and gains from such goods carriage. Heavy goods vehicle means any
goods carriage, the gross vehicle weight of which exceeds 12,000 kg.
Calculation of Presumptive Income u/s 44AE

No. of Months the
Date of Rate per
Type of Carriage vehicle is owned by Ton Amount
Purchase Ton
Mr. X
(6) = (3) ×
(1) (2) (3) (4) (5)
(4) × (5)
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Heavy Goods Vehicle
2 Vehicles 29-08-2022 8 1,000 15 2,40,000
1 Vehicle 23-02-2023 2 1,000 15 30,000
Rate per
Light Goods Vehicle
Month
2 Vehicles 10-04-2022 12 7,500 - 1,80,000
1 Vehicle 15-03-2023 1 7,500 - 7,500
3 Vehicles 16-07-2022 9 7,500 - 2,02,500
1 Vehicle 01-01-2023 3 7,500 - 22,500
Total 6,82,500
Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April, 2022, he owns 10
trucks (out of which 6 are heavy goods vehicles, the gross vehicle weight of such goods vehicle is 15,000
kg each). On 2nd May, 2022, he sold one of the heavy goods vehicles and purchased a light goods
vehicle on 6th May, 2022. This new vehicle could however be put to use only on 15th June, 2022.
Compute the total income of Mr. Sukhvinder for the assessment year 2023-24, taking note of the
following data:
Particulars ₹ ₹
Freight charges collected 12,70,000
Less: Operational expenses 6,25,000
Depreciation as per section 32 1,85,000
Other office expenses 15,000 8,25,000
Net Profit 4,45,000
Other business and non-business income 70,000
Solution
Since Mr. Sukhvinder is engaged in the business of plying goods carriages and owns not more than ten
goods carriages at any time during the previous year, he shall be eligible to opt for presumptive
taxation scheme u/s 44AE.

Date of No. of Months the Rate per
Type of Carriage Ton Amount
Purchase vehicle is owned Ton
(6) = (3) × (4)
(1) (2) (3) (4) (5)
× (5)
Heavy Goods Vehicle
5 Vehicles – 12 1,000 15 9,00,000
1 Vehicle – 2 1,000 15 30,000
Rate per
Light Goods Vehicle
Month
4 Vehicles – 12 7,500 - 3,60,000
1 Vehicle 06-05-2022 11 7,500 - 82,500
Total 13,72,500
Therefore, if Mr. Sukhvinder opts for presumptive taxation scheme, his income from the business of
plying goods carriages would be ₹13,72,500. Adding his other income of ₹70,000O to ₹13,72,500, the
total income of Mr. Sukhvinder comes out to be ₹14,42,500.
CA NISHANT KUMAR 46
On the other hand, if Mr. Sukhvinder opts for normal scheme, his total income would be ₹4,45,000 +
₹70,000 = ₹5,15,000.
However, Mr. Sukhvinder can claim lower profits and gains only if he keeps and maintains proper books
of account as per section 44AA and gets the same audited and furnishes a report of such audit as
required under section 44AB. If he does so, then his income for tax purposes from goods carriages
would be ₹4,45,000 instead of ₹13,72,500 and his total income would be ₹5,15,000.
Examine with reasons, the allowability of the following expenses incurred by Mr. Manav, a wholesale
dealer of commodities, under the Income-tax Act, 1961 while computing profit and gains from business
or profession for the Assessment Year 2023-24.
1. Construction of school building in compliance with CSR activities amounting to ₹5,60,000.

2. Purchase of building for the purpose of specified business of setting up and operating a
warehousing facility for storage of food grains amounting to ₹4,50,000.
3. Interest on loan paid to Mr. X (a resident) ₹50,000 on which tax has not been deducted. The
sales for the previous year 2021-22 was ₹202 lakhs. Mr. X has not paid the tax, if any, on such
interest.
4. Commodities transaction tax paid ₹20,000 on sale of bullion.
Solution
1. Construction of school building in compliance with CSR activities

a. Under section 37, only expenditure not being in the nature of capital expenditure or
personal expense and not covered under sections 30 to 36, and incurred wholly and
exclusively for the purposes of the business is allowed as a deduction while computing
business income.
b. However, any expenditure incurred by an assessee on the activities relating to
corporate social responsibility referred to in section 135 of the Companies Act, 2013
shall not be deemed to have been incurred for the purpose of business and hence,
shall not be allowed as deduction under section 37.
c. Accordingly, the amount of ₹5,60,000 incurred by Mr. Manav, towards construction
of school building in compliance with CSR activities shall not be allowed as deduction
under section 37.
2. Purchase of building for setting up and operating a warehousing facility for storage of food
grains
a. Mr. Manav, would be eligible for investment-linked tax deduction under section 35AD
@100% in respect of amount of ₹4,50,000 invested in purchase of building for setting
up and operating a warehousing facility for storage of food grains which commences
operation on or after 1st April, 2009 (P.Y.2022-23, in this case), if Mr. Manav does not
opt for section 115BAC.
b. Therefore, the deduction under section 35AD while computing business income of
such specified business would be ₹4,50,000, if Mr. Manav opts for section 35AD.
3. Interest on loan paid to Mr. X (a resident) ₹50,000 on which tax has not been deducted:
a. As per section 194A, Mr. Manav, being an individual is required to deduct tax at source
on the amount of interest on loan paid to Mr. X, since his turnover during the previous
year 2021-22 exceeds ₹100 lacs.
CA NISHANT KUMAR 47
b. Therefore, ₹15,000, being 30% of ₹50,000, would be disallowed under section
40(a)(ia) while computing the business income of Mr. Manav for non-deduction of tax
at source under section 194A on interest of ₹50,000 paid by it to Mr. X. The balance
₹35,000 would be allowed as deduction under section 36(1)(iii), assuming that the
amount was borrowed for the purposes of business.
4. Commodities transaction tax of ₹20,000 paid on sale of bullion:
a. Commodities transaction tax paid in respect of taxable commodities transactions
entered into in the course of business during the previous year is allowable as
deduction, provided the income arising from such taxable commodities transactions
is included in the income computed under the head “Profits and gains of business or
profession”.
b. Taking that income from this commodities transaction is included while computing the
business income of Mr. Manav, the commodity transaction tax of ₹20,000 paid is
allowable as deduction under section 36(1)(xvi).
Examine with reasons, for the following sub-divisions, whether the following statements are true or
false having regard to the provisions of the Income-tax Act, 1961:
1. For a dealer in shares and securities, securities transaction tax paid in a recognized stock
exchange is permissible business expenditure.
2. Where a person follows mercantile system of accounting, an expenditure of ₹25,000 has been
allowed on accrual basis and in a later year, in respect of the said expenditure, assessee makes
the payment of ₹25,000 through a crossed cheque, ₹25,000 can be the profits and gains of
business under section 40A(3A) in the year of payment.
3. It is mandatory to provide for depreciation under section 32 of the Income-tax Act, 1961, while
computing income under the head “Profits and Gains from Business and Profession”.
4. The mediclaim premium paid to GIC by Mr. Lomesh for his employees, by a draft, on
27.12.2022 is a deductible expenditure under section 36.
5. Under section 35DDA, amortization of expenditure incurred under eligible Voluntary
Retirement Scheme at the time of retirement alone, can be done.
6. An existing assessee engaged in trading activities, can claim additional depreciation under
section 32(1)(iia) in respect of new plant acquired and installed in the trading concern, where
the increase in value of such plant as compared to the approved base year is more than 10%.
Solution
1. True: Section 36(1)(xv) allows a deduction of the amount of securities transaction tax paid by
the assessee in respect of taxable securities transactions entered into in the course of business
during the previous year as deduction from the business income of a dealer in shares and
securities.
2. True: As per section 40A(3A), in the case of an assessee following mercantile system of
accounting, if an expenditure has been allowed as deduction in any previous year on due basis,
and payment exceeding ₹10,000 has been made in the subsequent year otherwise than by an
account payee cheque or an account payee bank draft or use of ECS through a bank account
or through such other prescribed electronic modes such as credit card, debit card, net banking,
IMPS, UPI, RTGS, NEFT, and BHIM Aadhar Pay, then, the payment so made shall be deemed to
be the income of the subsequent year in which such payment has been made.
CA NISHANT KUMAR 48
3. True: According to the Explanation 5 to section 32(1), allowance of depreciation is mandatory.
Therefore, depreciation has to be provided mandatorily while calculating income from
business/ profession whether or not the assessee has claimed the same while computing his
total income.
4. True: Section 36(1)(ib) provides deduction in respect of premium paid by an employer to keep
in force an insurance on the health of his employees under a scheme framed in this behalf by
GIC or any other insurer. The medical insurance premium can be paid by any mode other than
cash, to be eligible for deduction under section 36(1)(ib).
5. False: Expenditure incurred in making payment to the employee in connection with his
voluntary retirement either in the year of retirement or in any subsequent year, will be entitled
to deduction in 5 equal annual installments beginning from the year in which each payment is
made to the employee.
6. False: Additional depreciation can be claimed only in respect of eligible plant and machinery
acquired and installed by an assessee engaged in the business of manufacture or production
of any article or thing or in the business of generation or transmission or distribution of power.
In this case, the assessee is engaged in trading activities and the new plant has been acquired
and installed in a trading concern. Hence, the assessee will not be entitled to claim additional
depreciation under section 32(1)(iia).
Examine, with reasons, the allowability of the following expenses under the Income tax Act, 1961 while
computing income from business or profession for the Assessment Year 2023-24:
1. Provision made on the basis of actuarial valuation for payment of gratuity ₹5,00,000. However,
no payment on account of gratuity was made before due date of filing return.
2. Purchase of oil seeds of ₹50,000 in cash from a farmer on a banking day.
3. Tax on non-monetary perquisite provided to an employee ₹20,000.
4. Payment of ₹50,000 by using credit card for fire insurance.
5. Salary payment of ₹4,00,000 to Mr. X outside India by a company without deduction of tax
assuming Mr. X has not paid tax on such salary income.
6. Payment made in cash ₹30,000 to a transporter in a day for carriage of goods.
Solution
1. Not allowable as deduction: As per section 40A(7), no deduction is allowed in computing

business income in respect of any provision made by the assessee in his books of account for
the payment of gratuity to his employees except in the following two cases:
a. where any provision is made for the purpose of payment of sum by way of contribution
towards an approved gratuity fund; or
b. where any provision is made for the purpose of making any payment on account of
gratuity that has become payable during the previous year.
Therefore, in the present case, the provision made on the basis of actuarial valuation for
payment of gratuity has to be disallowed under section 40A(7), since, no payment has been
actually made on account of gratuity.
Note: It is assumed that such provision is not for the purpose of contribution towards an
approved gratuity fund.
2. Allowable as deduction: As per Rule 6DD, in case the payment is made for purchase of
agricultural produce directly to the cultivator, grower or producer of such agricultural produce,
CA NISHANT KUMAR 49
no disallowance under section 40A(3) is attracted even though the cash payment for the
expense exceeds ₹10,000.
Therefore, in the given case, disallowance under section 40A(3) is not attracted since, cash
payment for purchase of oil seeds is made directly to the farmer.
3. Not allowable as deduction: Income-tax of ₹20,000 paid by the employer in respect of non-
monetary perquisites provided to its employees is exempt in the hands of the employee under
section 10(10CC).
As per section 40(a)(v), such income-tax paid by the employer is not deductible while
computing business income.
4. Allowable as deduction: Payment for fire insurance is allowable as deduction under section
36(1). Since payment is made by credit card, which is a prescribed electronic mode,
disallowance under section 40A(3) is not attracted in this case.
5. Not allowable as deduction: Disallowance under section 40(a)(iii) is attracted in respect of
salary payment of ₹4,00,000 outside India by a company without deduction of tax at source.
6. Allowable as deduction: The limit for attracting disallowance under section 40A(3) for payment
otherwise than by way of account payee cheque or account payee bank draft or use of ECS
through a bank account or through such other prescribed electronic mode is ₹35,000 in case
of payment made for plying, hiring or leasing goods carriage. Therefore, in the present case,
disallowance under section 40A(3) is not attracted for payment of ₹30,000 made in cash to a
transporter for carriage of goods.
Examine with reasons, whether the following statements are true or false, with regard to the
provisions of the Income-tax Act, 1961:
1. Payment made in respect of a business expenditure incurred on 16th February, 2023 for
₹25,000 through a crossed cheque is hit by the provisions of section 40A(3).
2.
a. It is a condition precedent to write off in the books of account, the amount due from
debtor to claim deduction for bad debt.
b. Failure to deduct tax at source in accordance with the provisions of Chapter XVII-B,
inter alia, from the amounts payable to a non-resident as rent or royalty, will result in
disallowance while computing the business income where the non-resident payee has
not paid the tax due on such income.
Solution
1. True: In order to escape the disallowance specified in section 40A(3), payment in respect of
the business expenditure ought to have been made through an account payee cheque.
Payment through a crossed cheque will attract disallowance under section 40A(3).
2.
a. True: It is mandatory to write off the amount due from a debtor as not receivable in
the books of account, in order to claim the same as bad debt under section 36(1)(vii).
However, where the debt has been taken into account in computing the income of the
assessee on the basis of ICDSs notified under section 145(2), without recording the
same in the accounts, then, such debt shall be allowed in the previous year in which
such debt becomes irrecoverable and it shall be deemed that such debt or part thereof
has been written off as irrecoverable in the accounts for the said purpose.
CA NISHANT KUMAR 50
b. True: Section 40(a)(i) provides that failure to deduct tax at source from, inter alia, rent
or royalty payable to a non-resident, in accordance with the provisions of Chapter XVII-
B, will result in disallowance of such expenditure, where the non-resident payee has
not paid the tax due on such income.
Delta Ltd. credited the following amounts to the account of resident payees in the month of March,
2023 without deduction of tax at source. What would be the consequence of non-deduction of tax at
source by Delta Ltd. on these amounts during the financial year 2022-23, assuming that the resident
payees in all the cases mentioned below, have not paid the tax, if any, which was required to be
deducted by Delta Ltd.?
Particulars Amount in ₹
(1) Salary to its employees (credited and paid in March, 2023) 12,00,000
(2) Directors’ remuneration (credited in March, 2023 and paid in April, 2023) 28,000
Would your answer change if Delta Ltd. has deducted tax on directors’ remuneration in April, 2023 at
the time of payment and remitted the same in July, 2023?
Solution
Non-deduction of tax at source on any sum payable to a resident on which tax is deductible at source
as per the provisions of Chapter XVII-B would attract disallowance u/s 40(a)(ia).
Therefore, non-deduction of tax at source on any sum paid by way of salary on which tax is deductible
u/s 192 or any sum credited or paid by way of directors’ remuneration on which tax is deductible under
section 194J, would attract disallowance @ 30% u/s 40(a)(ia). Whereas in case of salary, tax has to be
deducted u/s 192 at the time of payment, in case of directors’ remuneration, tax has to be deducted
at the time of credit of such sum to the account of the payee or at the time of payment, whichever is
earlier. Therefore, in both the cases i.e., salary and directors’ remuneration, tax is deductible in the
P.Y.2022-23, since salary was paid in that year and directors’ remuneration was credited in that year.
Therefore, the amount to be disallowed u/s 40(a)(ia) while computing business income for A.Y.2023-
24 is as follows:
Amount Paid Disallowance u/s 40(a)(ia) @

Particulars
(₹) 30%
Salary
(tax is deductible u/s 192) 12,00,000 3,60,000
Director's Remuneration
(tax is deductible u/s 194J without any threshold
limit) 28,000 8,400
Disallowance u/s 40(a)(ia) 3,68,400
If the tax is deducted on directors’ remuneration in the next year i.e., P.Y.2023-24 at the time of
payment and remitted to the Government, the amount of ₹8,400 would be allowed as deduction while
computing the business income of A.Y. 2024-25.
CA NISHANT KUMAR 51
During the financial year 2022-23, the following payments/expenditure were made/ incurred by Mr.
Yuvan Raja, a resident individual (whose turnover during the year ended 31.3.2021 was ₹99 lacs):
1. Interest of ₹45,000 was paid to Rehman & Co., a resident partnership firm, without deduction
of tax at source;
2. ₹10,00,000 was paid as salary to a resident individual without deduction of tax at source;
3. Commission of ₹16,000 was paid to Mr. Vidyasagar, a resident, on 2.7.2022 without deduction
of tax at source.
Briefly discuss whether any disallowance arises under the provisions of section 40(a)(ia) of the Income-
tax Act, 1961 assuming that the payees in all the cases mentioned above, have not paid the tax, if any,
which was required to be deducted by Mr. Raja?
Solution
Disallowance under section 40(a)(ia) of the Income-tax Act, 1961 is attracted where the assessee fails
to deduct tax at source as is required under the Act, or having deducted tax at source, fails to remit
the same to the credit of the Central Government within the stipulated time limit.
1.
a. The obligation to deduct tax at source from interest paid to a resident arises under
section 194A in the case of an individual, whose total turnover in the immediately
preceding previous year, i.e., P.Y.2021-22 exceeds ₹1 crore.
b. Thus, in present case, since the turnover of the assessee is less than ₹1 crore, he is not
liable to deduct tax at source.
c. Hence, disallowance under section 40(a)(ia) is not attracted in this case.
2.
a. The disallowance of 30% of the sums payable under section 40(a)(ia) would be
attracted in respect of all sums on which tax is deductible under Chapter XVII-B.
b. Section 192, which requires deduction of tax at source from salary paid, is covered
under Chapter XVII-B.
c. The obligation to deduct tax at source under section 192 arises, in the hands all
assessee-employer even if the turnover amount does not exceed ₹1 crore in the
immediately preceding previous year.
d. Therefore, in the present case, the disallowance under section 40(a)(ia) is attracted
for failure to deduct tax at source under section 192 from salary payment.
e. However, only 30% of the amount of salary paid without deduction of tax at source
would be disallowed.
3.
a. The obligation to deduct tax at source under section 194H from commission paid in
excess of ₹15,000 to a resident arises in the case of an individual, whose total turnover
in the immediately preceding previous year, i.e., P.Y.2021-22 exceeds ₹1 crore.
b. Thus, in present case, since the turnover of the assessee is less than ₹1 crore, he is not
liable to deduct tax at source u/s 194H.
c. Mr. Raja is not required to deduct tax at source u/s 194M also since the aggregate of
such commission to Mr. Vidyasagar does not exceed ₹50 lakh during the P.Y. 2022-23.
d. Therefore, disallowance under section 40(a)(ia) is not attracted in this case.
Question 46 – RTP May, 2020
CA NISHANT KUMAR 52
Dr. Arjun runs a clinic in Delhi. As per new rule in the city, private cars can be plied in the city only on
alternate days. He has purchased a car on 25-09-2022, for the purpose of his medical profession, as
per following details:
Particulars ₹
Cost of Car (excluding GST) 15,00,000
Add: Delhi GST at 14% 2,10,000
Add: Central GST at 14% 2,10,000
Total price of car 19,20,000
He put his car to use from 25.9.2022 itself. He estimates the usage of the car for personal purposes
will be 25%. He is advised by his friends that since the car has run only on alternate days, half the
depreciation, which is otherwise allowable, will be actually allowed. He has started using the car
immediately after purchase.
Determine the depreciation allowable on car for the A.Y. 2023-24, if this is the only asset in the block.
If this car would also be used in the subsequent Assessment Year 2024-25 on the same terms and
conditions above, what will be the depreciation allowable? Assume that there is no change in the legal
position under the Income-tax Act, 1961.
Solution

Particulars ₹
Opening WDV of the Block -
Add: Actual Cost of Asset
Add: More than 180 Days 19,20,000
19,20,000
Depreciation (15% × ₹19,20,000 × 75%) 2,16,000
Closing WDV of the Block 17,04,000

Particulars ₹
Opening WDV of the Block 17,04,000
Add: Actual Cost of Asset -
17,04,000
Depreciation @ (15% × 75% × ₹17,04,000) 1,91,700
Closing WDV of the Block 15,12,300
Question 47 – November, 2019 (4 Marks)
Mr. Prakash is in the business of operating goods vehicles. As on 1st April, 2022, he had the following
vehicles:
Vehicle Gross Vehicle Weight Date of Purchase Put to use during F.Y.
(in Kgs.) 2022-23
CA NISHANT KUMAR 53
A 8,500 02-04-2021 Yes
B 13,000 15-05-2021 Yes
C 12,000 04-08-2021 No (as under repairs)
During P.Y. 2022-23, he purchased the following vehicles:
Vehicle Gross Vehicle Weight Date of Purchase Date on which put to

(in Kgs.) use
D 11,000 30-04-2022 10-05-2022
E 15,000 15-05-2022 18-05-2022
Compute his income under section 44AE of the Income Tax Act, 1961 for A.Y. 2023-24.
Solution
Since Mr. Prakash does not own more than 10 vehicles at any time during the previous year 2022-23,
he is eligible to opt for presumptive taxation scheme under section 44AE. ₹1,000 per ton of gross
vehicle weight or unladen wight per month or part of the month for each heavy goods vehicle and
₹7,500 per month or part of month for each goods carriage other than heavy goods vehicle, owned by
him would be deemed as his profits and gains from such goods carriage. Heavy goods vehicle means
any goods carriage, the gross weight of which exceeds 12,000 kg.
No. of Months the

Date of Rate per
Type of Carriage vehicle is owned by Ton Amount
Purchase Ton
Mr. Prakash
(6) = (3) ×
(1) (2) (3) (4) (5)
(4) × (5)
Heavy Goods Vehicle
B 15-05-2021 12 1,000 13 1,56,000
E 15-05-2022 11 1,000 15 1,65,000
Rate per
Light Goods Vehicle
Month
A 02-04-2021 12 7,500 - 90,000
C 04-08-2021 12 7,500 - 90,000
D 30-04-2022 12 7,500 - 90,000
Total 5,91,000
The “put to use” date of the vehicle is not relevant for the purpose of computation of presumptive
income under section 44AE, since the presumptive income has to be calculated per month or part of
the month for which the vehicle is owned by Mr. Prakash.
Section 40(b): Interest/Remuneration by Firm/LLP to Partners

1. Remuneration should be paid only to a working partner.
2. Remuneration must be authorised by the partnership deed, and it should be paid according to
the terms of partnership deed.
3. Remuneration should not relate to a period prior to partnership deed, i.e., partnership deed
cannot be amended only to provide remuneration retrospectively.
4. The limits of allowable remuneration are:
a. On the first ₹3,00,000 of Book Profit – Higher of the following:
i. ₹1,50,000
ii. 90% of book profit
b. On the balance of book profit – 60% of book profit
CA NISHANT KUMAR 54
5. Book Profit is basically profit just before partners’ remuneration.
Calculation of Book Profit:
Particulars ₹
Net profit as per PGBP xxx
Add: Remuneration to Partners (if debited to Profit & Loss A/c) xxx
xxx
Less: Depreciation (Current + Unabsorbed) xxx
Book Profit xxx
6. Interest to a partner, be it on loan, or capital, or for any other thing, should not exceed 12%.
7. If an individual is a partner in a firm in individual capacity, and he receives interest from the
firm in representative capacity, then the limit of 40(b) doesn’t apply. In other words, interest
will be allowed even if it exceeds 12%. Similarly, if an individual is a partner in a firm in
representative capacity, and he receives interest from the firm in individual capacity, then also,
the limit of 40(b) doesn’t apply.
8. The amount of remuneration allowable to the firm is taxable in the hands of partner under the
head PGBP.
9. The amount of remuneration disallowed (or, taxable) to the firm is exempt in the hands of
partner.
A firm has paid ₹7,50,000 as remuneration to its partners for the P.Y.2022-23, in accordance with its
partnership deed, and it has a book profit of ₹10 lakh. What is the remuneration allowable as
deduction?
Solution
Calculation of Allowable Remuneration

Particulars ₹
On first ₹3,00,000 of book profit (₹3,00,000 × 90%) 2,70,000
On balance ₹7,00,000 of book profit (₹7,00,000 × 60%) 4,20,000
Total Allowable Remuneration 6,90,000
The excess amount of ₹60,000 (i.e., ₹7,50,000 – ₹6,90,000) would be disallowed as per section 40(b)(v).
Rao & Jain, a partnership firm consisting of two partners, reports a net profit of ₹7,00,000 before
deduction of the following items:
1. Salary of ₹20,000 each per month payable to two working partners of the firm (as authorized
by the deed of partnership).
2. Depreciation on plant and machinery under section 32 (computed) ₹1,50,000.
3. Interest on capital at 15% per annum (as per the deed of partnership). The amount of capital
eligible for interest is ₹5,00,000.
Compute:
1. Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
2. Allowable working partner salary for the assessment year 2023-24 as per section 40(b).
Solution
CA NISHANT KUMAR 55
1. As per Explanation 3 to section 40(b), “book profit” shall mean the net profit as per the profit
and loss account for the relevant previous year computed in the manner laid down in Chapter
IV-D as increased by the aggregate amount of the remuneration paid or payable to the
partners of the firm if the same has been already deducted while computing the net profit.
In the present case, the net profit given is before deduction of depreciation on plant and
machinery, interest on capital of partners and salary to the working partners. Therefore, the
book profit shall be as follows:
Computation of Book Profit of the firm under section 40(b)

Particulars ₹
Net Profit (before deduction of depreciation, salary and interest) 7,00,000
Less: Depreciation u/s 32 1,50,000
Less: Interest @ 12% p.a. [being the maximum allowable as per 60,000 2,10,000
section 40(b)] (₹5,00,000 × 12%)
Book Profit 4,90,000
2. Salary actually paid to working partners = ₹20,000 × 2 × 12 = ₹4,80,000
As per the provisions of section 40(b)(v), the salary paid to the working partners is allowed
subject to the following limits:
On the first ₹3,00,000 of book profit or in ₹1,50,000, or 90% of book profit, whichever
case of loss is more
On the balance of book profit 60% of the balance of book profit
Therefore, the maximum allowable working partners’ salary for the A.Y. 2023-24 in this case
would be:
Particulars ₹
On the first ₹3,00,000 of book profit [(₹1,50,000 or 90% of ₹3,00,000) whichever 2,70,000
is more]
On the balance of book profit [60% of (₹4,90,000 - ₹3,00,000)] 1,14,000
Maximum allowable partners’ salary 3,84,000
Hence, allowable working partners’ salary for the A.Y. 2023-24 as per the provisions of section
40(b)(v) is ₹3,84,000.
Speculative Business
• If an assessee carries on speculative business, that business of the assessee must be deemed
as distinct and separate from any other business.
• This becomes necessary because losses in speculation business cannot be set-off against the
profits of any business other than a speculation business.
• A loss in speculation business carried forward to a subsequent year can be set-off only against
the profit and gains of any speculative business in the subsequent year.
• Therefore, profits and losses resulting from speculative transaction must be treated as
separate and distinct from profits and gains of business and profession from any other
business.
Meaning of Speculative Transaction

• “Speculative transaction” means a transaction in which a contract for the purchase or sales of
any commodity including stocks and shares is periodically or ultimately settled without the
actual delivery or transfer of the commodity or scrips.
CA NISHANT KUMAR 56
• If any part of the business of a company consists in the purchase and sale of the shares of other
companies, such a company is deemed to be carrying on speculation business to the extent to
which the business consists of the purchase and sale of such shares.
• However, this deeming provision does not apply to the following companies –
o A company whose gross total income consists of mainly income chargeable under the
heads “Interest on securities”, “Income from house property”, “Capital gains” and
“Income from other sources”;
o A company, the principal business of which is –
▪ the business of trading in shares; or
▪ the business of banking; or
▪ the granting of loans and advances.
Accordingly, if these companies carry on the business of purchase and sale of shares of other
companies, they would not be deemed to be carrying on speculation business.
Transactions not deemed to be speculative transactions

• Hedging contract in respect of raw materials or merchandise
• Hedging contract in respect of stocks and shares
• Forward contract
• Trading in derivatives
• Trading in commodity derivatives
Section 145(1): Method of Accounting

For computing PGBP and IFOS, assessee can follow cash or accrual system of accounting.
Conversion of Stock in Trade into Capital Asset

Question 50
NISH10 Ltd. is engaged in the business of share trading. It had bought some shares in the P.Y. 2017-18
costing ₹20,00,000. These shares were kept as stock in trade. In the P.Y. 2021-22, these shares were
converted into Capital Asset. The FMV of these shares on the date of conversion was ₹30,00,000. These
shares were ultimately sold for ₹45,00,000 in the P.Y. 2022-23. What is the amount taxable under the
heads PGBP and Capital Gains?
Solution
PGBP income will arise in the year in which shares are converted from stock in trade to capital assets,
i.e., in P.Y. 2021-22. Taxable PGBP = FMV on the date of conversion – Cost of Purchase = ₹30,00,000 –
₹20,00,000 = ₹10,00,000.
Capital Gains will arise in the year in which the shares are ultimately sold, i.e., in P.Y. 2022-23. Since
the shares were held for a period less than 12 months, there would be Short Term Capital Gains of
₹45,00,000 – ₹30,00,000 = ₹15,00,000.
Miscellaneous Questions
X Ltd. contributes 20% of basic salary to the account of each employee under a pension scheme
referred to in section 80CCD. Dearness Allowance is 40% of basic salary and it forms part of pay of the
employees. Compute the amount of deduction allowable under section 36(1)(iva), if the basic salary
CA NISHANT KUMAR 57
of the employees aggregate to ₹10 lakh. Would disallowance under section 40A(9) be attracted, and if
so, to what extent?
Solution
Computation of deduction u/s 36(1)(iva) and disallowance u/s 40A(9)

Particulars ₹
Basic Salary 10,00,000
Dearness Allowance (40% × ₹10,00,000) 4,00,000
Salary for the purpose of Section 36(1)(iva) (Basic Salary + DA) 14,00,000
Actual Contribution (20% of basic salary, i.e., 20% × ₹10,00,000) 2,00,000

Less: Permissible Deduction u/s 36(1)(iva) [10% of (Basic Salary + Dearness Allowance)] 1,40,000
(10% × ₹14,00,000)
Excess contribution disallowed u/s 40A(9) 60,000
Question 52 – July, 2021 – 6 Marks
Mr. Ramesh constructed a big house (construction completed in Previous Year 2008-09) with 3
independent units. Unit - 1 (50% of floor area) is let out for residential purpose at monthly rent of
₹15,000. A sum of ₹3,000 could not be collected from the tenant and a notice to vacate the unit was
given to the tenant. No other property of Mr. Ramesh is occupied by the tenant. Unit - 1 remains vacant
for 2 months when it is not put to any use. Unit - 2 (25% of the floor area) is used by Mr. Ramesh for
the purpose of his business, while Unit - 3 (the remaining 25%) is utilized for the purpose of his
residence. Other particulars of the house are as follows:
Particulars ₹
Municipal valuation 1,88,000
Fair rent 2,48,000
Standard rent under the Rent Control Act 2,28,000
Municipal taxes 20,000
Repairs 5,000
Interest on capital borrowed for the construction of the property 60,000
Ground rent 6,000
Fire insurance premium paid 60,000
Income of Ramesh from the business is ₹1,40,000 (without debiting house rent and other incidental
expenditure). Determine the taxable income of Mr. Ramesh for the assessment year 2023-24 if he does
not opt to be taxed under section 115BAC.
Solution
Computation of Taxable Income of Mr. Ramesh for A.Y. 2023-24

Particulars ₹
I. Income from House Property
Let Out Property
(i) Municipal Value 94,000
(ii) Fair Rent 1,24,000
(iii) Higher of (i) and (ii) 1,24,000
(iv) Standard Rent 1,14,000
(v) Expected Rent [Lower of (iii) and (iv)] 1,14,000
(vi) Actual Rent Received/Receivable (Note 1) 1,47,000
GAV [Higher of (v) and (vi)] 1,47,000
CA NISHANT KUMAR 58
Less: Municipal Taxes 10,000
NAV 1,37,000
Less: Deductions u/s 24
Less: 30% of NAV 41,100
Less: Interest on Loan (50% × ₹60,000) 30,000 71,100
Income from Let Out Property 65,900
.
Self Occupied Property
NAV -
Less: Interest on Loan (25% × ₹60,000) 15,000 (15,000)
Total Income from House Property (A) 50,900
.
II. Profits and Gains from Business or Profession
Business Income (without deducting rent and other incidental expenses) 1,40,000
Less: Municipal Expenses (25% × ₹20,000) 5,000
Less: Repairs (25% × ₹5,000) 1,250
Less: Interest on loan (25% × ₹60,000) 15,000
Less: Ground rent (25% × ₹6,000) 1,500
Less: Fire insurance premium paid (25% × ₹60,000) 15,000 37,750
Profits and Gains from Business or Profession (B) 1,02,250
Total Taxable Income (A) + (B) 1,53,150
Note 1 - Actual Rent Received/Receivable

Particulars ₹
Rent Received [(₹15,000 × 10) – ₹3,000] 1,47,000
Add: Rent Receivable 3,000
1,50,000
Less: Unrealised Rent 3,000
Actual Rent Received/Receivable 1,47,000
Agricultural Income
Agricultural income may arise in any one of the following three ways:
• It may be rent or revenue derived from land situated in India and used for agricultural
purposes.
• It may be income derived from such land by
o agriculture or
o the performance of a process ordinarily employed by a cultivator or receiver of rent in
kind to render the produce fit to be taken to the market or
o the sale, by a cultivator or receiver of rent in kind, of such agricultural produce raised
or received by him, in respect of which no process has been performed other than a
process of the nature mentioned in point mentioned above.
• Lastly, agricultural income may be derived from any farm building required for agricultural
operations.
Question 53 – ICAI SM – Chapter 3 – Illustration 1
Mr. B grows sugarcane and uses the same for the purpose of manufacturing sugar in his factory. 30%
of sugarcane produce is sold for ₹10 lacs, and the cost of cultivation of such sugarcane is ₹5 lacs. The
cost of cultivation of the balance sugarcane (70%) is ₹14 lacs and the market value of the same is ₹22
CA NISHANT KUMAR 59
lacs. After incurring ₹1.5 lacs in the manufacturing process on the balance sugarcane, the sugar was
sold for ₹25 lacs. Compute B’s business income and agricultural income.
Solution
Computation of Business Income and Agricultural Income of Mr. B

Particulars ₹
Sale of Sugarcane (Agricultural Income)
Sale Proceeds (30%) 10,00,000
Less: Cost of Cultivation 5,00,000
Agricultural Income 5,00,000
.
Sale of Sugar
Agricultural Income
Market Value of Sugarcane (70%) 22,00,000
.
Business Income
Sale Proceeds of Sugar 25,00,000
Less: Market Value of Sugarcane 22,00,000
Less: Cost of Processing 1,50,000 23,50,000
Mr. Kamal grows paddy and uses the same for the purpose of manufacturing of rice in his own Rice
Mill. The cost of cultivation of 40% of paddy produce is ₹7,00,000 which is sold for ₹15,00,000; and the
cost of cultivation of balance 60% of paddy is ₹12,00,000 and the market value of such paddy is
₹24,00,000. To manufacture the rice, he incurred ₹2,00,000 in the manufacturing process on the
balance (60%) paddy. The rice was sold for ₹30,00,000. Compute the business income and agricultural
income of Mr. Kamal.
Solution
Computation of Business Income and Agricultural Income of Mr. Kamal

Particulars ₹
Sale of Paddy (Agricultural Income)
Sale Proceeds (40%) 15,00,000
.
Sale of Rice
Agricultural Income
Market Value of Paddy (60%) 24,00,000
.
Business Income
Sale Proceeds of Rice 30,00,000
Less: Market Value of Paddy 24,00,000
Less: Cost of Manufacturing 2,00,000 26,00,000
CA NISHANT KUMAR 60
Rules for Apportioning Business Income and Agricultural Income in

Different Cases
Particulars Agricultural Income Business Income
Growing and manufacturing of rubber 65% 35%
Growing and curing of coffee 75% 25%
Growing, curing, roasting and grounding of coffee 60% 40%
Growing and manufacturing of tea 60% 40%
Income derived from saplings or seedlings grown in a nursery would be deemed to be agricultural
income whether or not the basic operations were carried out on land.
Mr. C manufactures latex from the rubber plants grown by him in India. These are then sold in the
market for ₹30 lacs. The cost of growing rubber plants is ₹10 lacs and that of manufacturing latex is ₹8
lacs. Compute his total income.
Solution
Computation of Business Income and Agricultural Income of Mr. C

Particulars ₹
Sale Proceeds 30,00,000
Less: Cost of Growing Rubber 10,00,000
Less: Cost of Manufacturing Latex 8,00,000 18,00,000
.
Business Income (35%) 4,20,000
Agricultural Income (65%) 7,80,000
Mr. Tony has estates in Rubber, Tea and Coffee. He derives income from them. He has also a nursery
wherein he grows and sells plants. For the previous year ending 31.3.2023, he furnishes the following
particulars of his sources of income from estates and sale of plants. You are requested to compute the
taxable income for the Assessment Year 2023-24:
S. No. Particulars ₹
(i) Manufacture of Rubber 5,00,000
(ii) Manufacture of Coffee grown and cured 3,50,000
(iii) Manufacture of Tea 7,00,000
(iv) Sale of plants from Nursery 1,00,000
Solution
Computation of Taxable Income of Mr. Tony

S. Business
Source of Income Gross Agricultural
No. % ₹
1 Income from growing and manufacture of 5,00,000 35% 1,75,000 3,25,000
rubber
CA NISHANT KUMAR 61
2 Income from manufacture of Coffee grown and 3,50,000 25% 87,500 2,62,500
cured
3 Income from manufacture of Tea 7,00,000 40% 2,80,000 4,20,000
4 Sale of Plants from Nursery 1,00,000 0% - 1,00,000
Total 16,50,000 5,42,500 11,07,500
.
Total Taxable Income 5,42,500
Question 57 – ICAI – Chapter 4 – Unit 3 – Illustration 18
Miss Vivitha, a resident and ordinarily resident in India, has derived the following income from various
operations (relating to plantations and estates owned by her) during the year ended 31-3-2023:
S. No. Particulars ₹
(i) Income from sale of centrifuged latex processed from rubber plants grown in 3,00,000
Darjeeling
(ii) Income from sale of coffee grown and cured in Yercaud, Tamil Nadu. 1,00,000
(iii) Income from sale of coffee grown, cured, roasted and grounded, in Colombo. 2,50,000
Sale consideration was received at Chennai.
(iv) Income from sale of tea grown and manufactured in Shimla. 4,00,000
(v) Income from sapling and seedling grown in a nursery at Cochin. Basic operations 80,000
were not carried out by her on land.
You are required to compute the business income and agricultural income of Miss Vivitha for the A.Y.
2023-24.
Solution
Computation of Business Income and Agricultural Income of Ms. Vivitha for A.Y. 2023-24
S. Business Agricultural
Source of Income Gross
No. % ₹
1 Sale of centrifuged latex processed from 3,00,000 35% 1,05,000 1,95,000
rubber plants grown in India
2 Sale of coffee grown and cured in India 1,00,000 25% 25,000 75,000
3 Sale of coffee grown, cured, roasted and 2,50,000 100% 2,50,000 -
grounded outside India (Note 1)
4 Sale of tea grown and manufactured in India 4,00,000 40% 1,60,000 2,40,000
5 Income from sapling and seedling grown in a 80,000 0% - 80,000
nursery at Cochin
Total 11,30,000 5,40,000 5,90,000
.
Total Taxable Income 5,40,000
Notes:
1. Since the process of growing, curing, roasting and grounding of coffee took place outside India,
the entire proceeds will be treated as Business Income. It doesn't matter that the proceeds
were received in India.
2. Income derived from saplings or seedlings grown in a nursery are deemed to be agricultural
income whether the basic operations were carried out on land or not.
Question 58 – ICAI – Chapter 4 – Unit 3 – Question 10; May, 2010 (6 Marks)
CA NISHANT KUMAR 62
Mr. Tenzingh is engaged in composite business of growing and curing (further processing) coffee in
Coorg, Karnataka. The whole of coffee grown in his plantation is cured. Relevant information pertaining
to the year ended 31.3.2023 are given below:
Particulars ₹
Opening balance of car (only asset in the block) as on 1.4.2022 (i.e., WDV as on 3,00,000
31.3.2021 (-) depreciation for P.Y. 2021-22)
Opening balance of machinery as on 1.4.2022 (i.e., WDV as on 31.3.2022 (-) 15,00,000
depreciation for P.Y. 2021-22)
Expenses incurred for growing coffee 3,10,000
Expenditure for curing coffee 3,00,000
Sale value of cured coffee 22,00,000
Besides being used for agricultural operations, the car is also used for personal use; disallowance for
personal use may be taken at 20%. The expenses incurred for car running and maintenance are
₹50,000. The machines were used in coffee curing business operations. Compute the income arising
from the above activities for the A.Y. 2023-24.
Solution
Computation of Income of Mr. Tenzingh for A.Y. 2023-24

Particulars ₹
Sale value of cured coffee 22,00,000
Less: Expenses for growing coffee 3,10,000
Less: Expenses for curing coffee 3,00,000
Less: Running and Maintenance of Car (80% × ₹50,000) 40,000
Less: Depreciation on Car (80% × 15% × ₹3,00,000) 36,000
Less: Depreciation on Machinery (15% × ₹15,00,000) 2,25,000 9,11,000
Total Profits 12,89,000
.
Business Income (25% × ₹12,89,000) 3,22,250
Agricultural Income (75% × ₹12,89,000) 9,66,750
Notes:
1. Since car is used only 80% for business, only 80% of depreciation and running and maintenance
expenses shall be allowed.
2. Where the assessee is engaged in the business of growing and curing coffee, 25% of his total
income is considered to be Business Income and 75% is considered to be Agricultural Income.
Partial Integration of Agricultural Income with Non-Agricultural Income

If three conditions are satisfied, the agricultural income shall be partially integrated with non-
agricultural income. The conditions are:
1. Assessee should be Individual/HUF/AOP/BOI/AJP

2. Net Agricultural Income exceeds ₹5,000 p.a., and
3. Non-agricultural income exceeds the basic exemption limit relevant to the assessee.
The calculation in such cases is done as follows:
1. Add non-agricultural income with net agricultural income. Compute tax on the aggregate
amount.
2. Add net agricultural income and the maximum exemption limit available to the assessee (i.e.,
₹2,50,000/₹3,00,000/₹5,00,000). Compute tax on the aggregate amount.
CA NISHANT KUMAR 63
3. Deduct the amount of income tax calculated in step 2 from the income tax calculated in step
1 i.e., Step 1 – Step 2.
4. The sum so arrived at shall be increased by surcharge, if applicable. It would be reduced by the
rebate, if any, available u/s 87A.
5. Thereafter, it would be increased by health and education cess @4%.
The process of partial integration and calculation of tax liability is best understood with the questions.
Mr. X, a resident, has provided the following particulars of his income for the P.Y. 2021-22.
Particulars ₹
1. Income from Salary (Computed) ₹2,80,000
2. Income from house property (computed) ₹2,50,000
3. Agricultural income from a land in Jaipur ₹4,80,000
4. Expenses incurred for earning agricultural income ₹1,70,000
Compute his tax liability for A.Y. 2022-23 assuming his age is –
1. 45 years
2. 70 years
Assume that Mr. X does not opt for the provisions of section 115BAC.
Solution
Computation of Tax Liability assuming the age is 40 years
Calculation of Tax Liability

Particulars ₹
Income from Salary 2,80,000
Income from House Property 2,50,000
Net Agricultural Income (₹4,80,000 – ₹1,70,000) 3,10,000
Less: Exempt u/s 10 3,10,000 -
Gross Total Income 5,30,000
Less: Deductions under Chapter VI-A -

Step 1 Calculation of Tax on Total Income (Including Agricultural Income)
Particulars ₹
Non Agricultural Income 5,30,000
8,40,000
Tax Liability:
First ₹2,50,000 -
From ₹2,50,001 to ₹5,00,000 12,500
From ₹5,00,000 to ₹8,40,000 68,000
80,500
.
Step 2 Calculation of Tax on Agricultural Income + Basic Exemption Limit
Particulars ₹
CA NISHANT KUMAR 64
Basic Exemption Limit 2,50,000
5,60,000
Tax Liability:
First ₹2,50,000 -
From ₹2,50,001 to ₹5,00,000 12,500
From ₹5,00,000 to ₹5,60,000 12,000
24,500
.
Step 3 Difference between the liabilities of Step 1 and Step 2
Particulars ₹
Tax Liability as per Step 1 80,500
56,000
.
Step 4 Total Tax Payable
Particulars ₹
Add: Health and Education Cess @ 4% 2,240
Total Tax Payable 58,240
Computation of Tax Liability assuming the age is 70 years

Particulars ₹
Income from Salary 2,80,000
Income from House Property 2,50,000
Net Agricultural Income (₹4,80,000 – ₹1,70,000) 3,10,000
Less: Exempt u/s 10 3,10,000 -
Gross Total Income 5,30,000
Less: Deductions under Chapter VI-A -

Step 1 Calculation of Tax on Total Income (Including Agricultural Income)
Particulars ₹
Non Agricultural Income 5,30,000
8,40,000
Tax Liability:
First ₹3,00,000 -
From ₹3,00,001 to ₹5,00,000 10,000
From ₹5,00,000 to ₹8,40,000 68,000
78,000
.
Step 2 Calculation of Tax on Agricultural Income + Basic Exemption Limit
Particulars ₹
Basic Exemption Limit 3,00,000
CA NISHANT KUMAR 65
6,10,000
Tax Liability:
First ₹3,00,000 -
From ₹3,00,001 to ₹5,00,000 10,000
From ₹5,00,000 to ₹6,10,000 22,000
32,000
.
Step 3 Difference between the liabilities of Step 1 and Step 2
Particulars ₹
46,000
.
Step 4 Total Tax Payable
Particulars ₹
Add: Health and Education Cess @ 4% 1,840
Total Tax Payable 47,840
CA NISHANT KUMAR 66

Chapter 6 - Profits and Gains From Business or Profession - Notes

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Chapter 6 - Profits and Gains From Business or Profession - Notes

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Chapter 6 – Profits and Gains from

Section 28: Charging Section

Section29: Computation of Profits and Gains from Business or

Sections Section Other

Section 31: Repairs and Insurance of Machinery, Plant and Furniture

Section 32: Depreciation

Conditions to Claim Depreciation

Furniture and Plant &

Assessee Engaged in the Business of

SLM or WDV Always WDV

Individual Asset System Block of Asset System

Same as Accounts WDV Method

1. Calculate WDV for Depreciation

WDV for Depreciation

No Depreciation Half Rate Full Rate

Opening WDV of Block = ₹10,00,000

Asset acquired and put to use on 30-12-2022 = ₹4,00,000

Asset sold on 15-11-2022 = ₹3,00,000

Rate of Depreciation is 15%. Calculation depreciation to be allowed.

Opening WDV of Block = ₹10,00,000

Asset acquired and put to use on 30-12-2022 = ₹4,00,000

Asset sold on 15-11-2022 = ₹12,50,000

Rate of Depreciation is 15%. Calculation depreciation to be allowed.

Question 5 – ICAI SM – Illustration 3

S. Description Date of Date when Put Amount

Additional Depreciation [Section 32(1)(iia)]

Question 6 – ICAI SM – Illustration 1

Mr. X, a proprietor engaged in manufacturing business, furnishes the following particulars:

Computation of Normal Depreciation and Additional Depreciation

Note 1 - Computation of WDV for Depreciation

Note 2 - Composition of Plant and Machinery in WDV

M/s NISH10 Ltd., a manufacturing concern, furnishes the following particulars:

1. Plant and machinery of ₹20,000 has been installed in office.

Computation of Normal Depreciation and Additional Depreciation

Note 1 - Computation of WDV for Depreciation

Computation of Normal Depreciation and Additional Depreciation

1. Computation of WDV for Depreciation

Particulars Plant and Machinery (15%) Computer (40%)

Question 9 – ICAI SM – Question 1

• All assets were purchased by A/c payee cheque.

Computation of Normal Depreciation and Additional Depreciation

1. Computation of WDV for Depreciation

Particulars Plant and Machinery (15%) Computer (40%)

Depreciation in Case of Amalgamation/Demerger/Succession

Apportionment of Depreciation Between Two Companies

1. Computation of WDV for Depreciation:

Particulars Plant and Machinery (15%)

Plant and Machinery

Note: Ignore additional depreciation.

Note – Computation of WDV for Depreciation

Section 43(1): Actual Cost

Calculation of Actual Cost

Question 13 – ICAI SM – Illustration 2

Section 43(1): Actual Cost (Contd.)

Section 50: Sale of Assets When it is a Part of Block of Assets

Calculation of WDV for Depreciation

Calculation of Capital Gains

Calculation of WDV for Depreciation

Calculation of Capital Gains

Calculation of WDV for Depreciation

Calculation of Capital Gains

Calculation of WDV for Depreciation

Calculation of WDV as on 01-04-2022