PGBP Notes M22 For Students

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PGBP
Charging Section - 28
The profits and gains of any business or profession carried on by the assessee at any time during the previous
year shall be chargeable under the head PGBP (This is not the complete charging section. Complete charging
section is given at the end of the chapter)
Method of accounting – Section 145(1)
Income chargeable under this head shall be computed in accordance with the method of accounting regularly
employed by the assessee either cash or mercantile basis.
General Notes
● Under head PGBP we have to calculate the income/profit from business and profession.
● Profit/Income depends upon two variables, Revenue or Receipts and Expenses.
● The PGBP has its own law in regard to expenses and receipts.
● The basic principle of calculating profit is to say (Revenue – Expenses) will be the same but what has to
be taken as revenue and what expenses are to be allowed as deduction has to be checked as per the law
(Income-tax Act, 1961, PGBP Chapter).
● The Main focus is on Expenses.
General deduction Section 37
● It should have been incurred wholly and exclusively for business or profession.
● The expenditure should not be capital in nature
● It should have been incurred during the previous year.
● It should not be covered by section 30 to 36.
● Reserves/provisions for contingencies cannot be claimed as a deduction.
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Explanation 1 to Section 37
→ Any expenditure for any activity

→ which is an offence or which is prohibited under any law
→ Shall not be allowed as deduction.
→ Therefore, penalties paid under any Act shall not be allowed deduction.
→ But penalty for breach of contract shall be allowed deduction because that is not imposed under Act.
CSR expenditure - Not Deductible Explanation 2 to Section 37(1) – FA 2014
Any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to
in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee
for the purposes of the business or profession.
Advertisement expenditure in magazine etc published by political party - Not deductible Section
37(2B)
No allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any

souvenir, brochure, tract, pamphlet or the like published by a political party.
Income from illegal business is chargeable to tax? (Answered in video)
Revenue v. Capital Expenditure- HOMEWORK (For Knowledge

Purpose Only)
No definition is there in the Act. The distinction depends on the facts of each case. Following points are generally
kept in mind:-
1. Purchase of asset or routine expenditure: - If an expenditure is incurred for acquiring, improving or

extending a fixed asset it is capital. While revenue expenditures are incurred the normal course of
business.
2. Benefits of expenditure in one year or several years. Normally revenue expenditure is consumed within
one year, whereas capital expenditure produces benefit over several years.
3. Recurring or non-recurring: - generally the same revenue expenditure has to be incurred again while
capital expenditures are incurred for once.
Distinction between capital expenditure and revenue expenditure – Do it yourself
Capital expenditure Revenue expenditure

1. No deduction shall be allowed for capital Deduction shall be allowed for revenue
expenditure while computing taxable income, expenditure while computing the taxable income,
unless expressly specified in the law. unless specifically disallowed under the law.
2. Expenditure incurred on acquisition, extension or Expenditure incurred in the ordinary course of
improvement of fixed assets amounts to capital business amounts to revenue expenditure.
expenditure.
3. The benefits from capital expenditure extends to The benefits from revenue expenditure are
more than one year. normally consumed within a year.
4. Capital expenditure improves the earning capacity Revenue expenditure maintains the earning
of the business. capacity of the business.
5. Usually, capital expenditure is non-recurring. Revenue expenditure is recurring in nature.
The facts and circumstances of each case judge the nature of an expenditure, whether it is capital or
revenue, lump sum or periodic payment has no relevance.
Rent, Rates, Taxes, Repairs and Insurance for Buildings - Section 30
If the premises are owned by the assessee himself, he will be allowed to debit the following amounts–
1. Current repairs (accumulated repairs relating to the earlier years are not allowed.)
2. Municipal tax or local tax or land revenue (but on payment basis as per section 43B)
3. Premium for insurance of building
4. If the building is owned by the assessee, he is not allowed to debit rent on notional basis (No
income shall be computed with regard to this house property under the head house property).
5. If the building has been taken on rent, the assessee shall be allowed to debit the following
expenses –
a. Rent for the premises
b. If he has undertaken to bear the cost of repairs, the amount of such repairs
c. Municipal tax or local tax or land revenue (but on payment basis as per section 43B), if
borne by the lessee.
d. Premium for insurance of house, if borne by the lessee.
e. If any capital expenditure has been incurred he can claim depreciation on the same.
6. Premises used partly for business and partly for other purposes: Where the premises are used
partly for business and partly for other purposes, only a proportionate part of the expenses
attributable to that part of the premises used for purposes of business will be allowed as a
deduction
Repairs and insurance of machinery, plant and furniture - Section

31
In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or
profession, the following deductions shall be allowed—
1. The amount paid on account of current repairs.
2. Any premium paid for insurance.
Section 36 (No need to mug up sub-clauses etc)
Payment of premium for the insurance of stocks - Section 36(1)(i)

The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or
stores used for the purposes of the business or profession, shall be allowed to be debited.
Payment of premium in connection with Mediclaim policy - Section 36(1)(ib)

The amount of any premium paid by any mode of payment other than cash by the assessee as an employer
for an insurance on the health of his employees under a scheme framed in this behalf by the General
Insurance Corporation of India or any other insurer approved by IRDA i.e. payment towards medi-claim policy is
allowed.
Bonus and Commission - Section 36(1)(ii)

Any sum paid to an employee as bonus or commission for services rendered, where such sum would not
have been payable to him as profits or dividend if it had not been paid as bonus or commission shall be
allowed.
ABC Pvt. Ltd. has paid a bonus of Rs. 1 lakh to each of its shareholders Mr. A, Mr. B and Mr. C and this bonus
would have been otherwise paid to them as dividend if it has not been distributed as bonus, in this case,
bonus is not allowed.
As per section 43B, payment of bonus or commission is allowed only on actual payment basis.
Payment of Interest - Section 36(1)(iii)

The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession
shall be allowed. Further assessee is allowed to borrow to any extent and also he can pay interest at any rate.
Loan can be taken either to incur revenue expenditure or to incur capital expenditure.
Loan for acquiring capital asset
→ Any amount of the interest paid,
→ in respect of capital borrowed any tangible and intangible asset

→ for any period beginning from the date on which the capital was borrowed for acquisition of the asset
→ till the date on which such asset was first put to use,
→ shall not be allowed as deduction,
→ rather interest has to be capitalised
→ but interest subsequent to the date of putting the asset to use shall be allowed as deduction.
ABC Ltd. is an existing company and it has borrowed Rs. 20 lakhs @ 10% on 01.07.20XX for purchase of one
plant and machinery which was put to use on 01.01.20YY, in this case, interest for the period 01.07.20XX to
31.12.20XX shall be capitalized and any interest subsequent to 31.12.20YY shall be debited to the profit and loss
account.
Discount on Zero Coupon Bonds - Section 36(1)(iiia)

Zero Coupon Bond means a bond
● Issued by any infrastructure capital company or infrastructure capital fund or public sector
company.
● In respect of which no payment and benefit is received or receivable before maturity or redemption
from infrastructure capital company or infrastructure capital fund or public sector company and
● Which the Central Government may, by notification in the Official Gazette, specify on this behalf.
The pro rata amount of discount on a zero coupon bond having regard to the period of life of
such bond calculated in the manner as may be prescribed shall be allowed to be debited.
(i) “Discount” means the difference between the amount received by the infrastructure capital company or infrastructure capital fund or
public sector company or scheduled bank issuing the bond and the amount payable by such company or fund or public sector company
or scheduled bank on maturity.
(ii) “Period of life of the bond” means the period commencing from the date of issue of the bond and ending on the date of the maturity.
The minimum period shall be 10 years and maximum period shall be 20 years.
Contributions to provident and other funds

● Any sum paid by the assessee
● as an employer by way of contribution towards a
● recognized provident fund or an approved superannuation fund,
● subject to such limits as may be prescribed and
● subject to such conditions as the Board may think fit to specify
What is superannuation fund (Not for exams)

The Income-tax law prescribes that an employer should enter into a scheme of insurance and purchase an annuity (from the
superannuation fund pool) for ensuring regular pension payment to its retired employee. The employer may also give part of the
superannuation benefit in lump-sum up to a certain prescribed limit. So it’s a fund made for giving retirement benefits.
Employer’s contribution towards a Pension Scheme - Section 36(1)(iva) (To be studied with
deduction chapter)
● Any sum paid by the assessee as an employer by way of contribution towards
● a pension scheme, as referred to in section 80CCD,
● on account of an employee
● to the extent it does not exceed ten percent of the salary of the employee in the previous year.
In other words deduction shall be allowed of the amount deposited or 10% of the salary whichever is lower. -
"Salary" includes dearness allowance, if the terms of employment so provide, but excludes all other allowances
and perquisites.
Employer’s contribution towards approved Gratuity Fund - Section 36(1)(v)

Any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund
created by him for the exclusive benefit of his employees under an irrevocable trust
Employee’s contribution received by the employer - Section 36(1)(va)

● If the employer has received contribution from the employee towards provident fund or Superannuation
Fund or Employees State Insurance or towards any other welfare scheme of employees,
● It will be considered to be income of the employer under the head business/profession
● But if the employer has credited the amount to the relevant account within the time allowed in the
relevant Act (Provident Fund Act etc),
● Employers can debit the amount to the profit and loss account otherwise expenditure is disallowed.
As per the Employees Provident Funds Scheme, 1952, the amounts under consideration in respect of wages of the employees for any
particular month shall be paid within 15 days of the close of every month.
EXAMPLE
Employee Contribution Towards Recognised Provident Fund - ₹ 1,00,000
Deposited by Due Date - ₹ 60,000
₹ 40,000 not deposited by the due date will be added in the income of the employer. Deduction will not be allowed for this
even if it is deposited later on.
Amount of debt taken into account in computing the income of the assessee as per income tax to
be allowed as deduction in the previous year in which such debt or part thereof becomes
irrecoverable
The amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the
assessee for the previous year shall be allowed as deduction
● If any assessee has written off bad debts as irrecoverable in the books of accounts
● The debt has been taken into account as per income tax while computing the income of the assessee or
it should represent the money lent in the ordinary course of business of banking or money lending
carried on by the assessee.
Recovery of Bad-debts.
If any amount was debited as bad debts with regard to particular debt and subsequently some amount was
received in final settlement of the debt, in this case any deficiency shall be allowed as bad debt and any excess
shall be considered to be deemed income under section 41(4).
For more detailed information please see video
Example
During the previous year PK sold Goods worth ₹ 5,00,000 to Miss V. Amount received during the previous year = ₹ 50,000.
On 31st March of the previous year ₹ 1,60,000 was written off in books of accounts. In the next year PK recovers the
following amounts as full and final payments.
Case 1 - ₹ 75,000
Case 2 - ₹ 2,00,000
Case 3 - ₹ 3,50,000
Discuss the tax consequences in the previous year and the next year.
Expenditure on Family Planning - Section 36(1)(ix)
● Any expenditure incurred by a company for the purpose of promoting family planning among its
employees is allowable as deduction.
● If, however, such expenditure is of a capital nature, One –fifth of such expenditure is allowable as
deduction for the previous year in which it was incurred and the balance is deductible in equal
instalments in the next four years.
● Any family planning expenditure which is not allowed as deduction due to inadequacy of profit, shall be
carried forward and set off in the same manner as unabsorbed depreciation. i.e. expenditure can be set
off from any income under any head except casual income and carry forward is allowed for unlimited
periods. (This topic will be auto covered with unabsorbed depreciation.)
● If any capital asset has been purchased for the purpose of promotion of family planning norms among
the employees and subsequently the asset was sold, the sale proceeds shall be considered to be income
under the head business/profession as per section 41(3). but maximum to the extent of the amount
debited to the profit and loss account. If the business is not in existence at that time, even then it will
be considered to be income under the head business/profession.If subsequently there is any
amalgamation or demerger, the above provisions shall apply in case of amalgamated company or the
resulting company as they would have applied to the amalgamating company or the parent company.
(This topic will be auto covered with Sale of Scientific Research Asset)
Securities Transaction Tax - Section 36(1)(xv)

If the assessee has paid securities transaction tax in connection with taxable securities transactions which are
part of his business, STT shall be allowed to be debited to the profit and loss account.
Deduction for commodities transaction tax paid in respect of taxable commodities transactions -
Section 36(1)(xvi)
● An amount
● equal to the CTT
● paid by the assessee in respect of the taxable commodities transactions
● entered into in the course of his business during the previous year shall be allowable as deduction,
● if the income arising from such taxable commodities transactions is included in the income computed
under the head "Profits and gains of business or profession".
43B - Certain Deduction on payment basis
Section 43B - Amendment by the Finance Act - 2019.
In section 43B of the Income-tax Act, following the following clause shall be inserted (in the list of expenses)
● any sum payable by the assessee as interest on any loan or borrowing from
○ deposit taking non-banking financial company or
○ systemically important non-deposit taking non banking financial company,
■ in accordance with the terms and conditions of the agreement governing such loan or
borrowing
New Explanation also added -

A deduction of any sum, being interest payable under new clause (as stated above), shall be allowed if such
interest has been actually paid and any interest referred to in that clause which has been converted into a loan
or borrowing shall not be deemed to have been actually paid.
Certain terms explained by inserting explanation
● Deposit taking non-banking financial company

○ means a non-banking financial company which is accepting or holding public deposits
○ and is registered with the Reserve Bank of India under the provisions of the Reserve Bank of
India Act, 1934 (2 of 1934);
● Non-banking financial company"

○ shall have the meaning assigned to it in clause (f) of section 45-I of the Reserve Bank of India
Act, 1934 (2 of 1934);
● "Systemically important non-deposit taking non-banking financial company"

○ means a non-banking financial company which is not accepting or holding public deposits
○ and having total assets of not less than five hundred crore rupees as per the last audited
balance sheet and is registered with the Reserve Bank of India under the provisions of the
Reserve Bank of India Act, 1934 (2 of 1934).'.
Amendment By Finance Act, 2021
Explanation added - Provisions of this section shall not apply and shall be deemed never to have been applied to
a sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause
(24) of section 2 applies. (If the employer has received contribution from the employee towards provident fund
or Superannuation Fund or Employees State Insurance or towards any other welfare scheme of employees,
It will be considered to be income of the employer under the head business/profession)
Amounts not deductible specific disallowances - Section 40
As per Section 40(a), notwithstanding anything to the contrary in Sections 30 - 38, the following amounts shall
not be deducted in computing the income chargeable under the head "Profits and gains of business or
profession" —
40(a)(i) - Payments outside India or to non-residents on which tax has not been deducted/paid:
(Not applicable on salary)
● Any interest, royalty, fees for technical services or other sum chargeable in the hands of recipient under
this Act and payable -
○ outside India; or
○ in India to a non-resident, not being a company or to a foreign company, (In Short NR)
● on which tax is deductible at source and such tax has not been deducted or, (जिस पर टै क्स DEDUCT होना था
और नहीं हुआ)
● after such deduction, has not been paid on or before the due date of furnishing return of income
specified under section 139(1). (Deduct तो हो गया पर 139(1) की Due Date से पहले Deposit नहीं हुआ )
● However, where in respect of any sum -
○ tax has been deducted in any subsequent year; or
○ has been deducted during the previous year but paid after the due date specified in section 139(1),
○ then, such sum shall be allowed as a deduction in computing the income of the subsequent
previous year in which the TDS has been so paid.
● Provided further that where an assessee fails to deduct the whole or any part of the tax on any such
sum
● but is not deemed to be an assessee in default under section 201,
● then, for the purposes of this sub-clause, it shall be deemed that the assessee has deducted and paid
the tax on such sum on the date of furnishing of return of income by the payee
■ When assessee is not deemed to be assessee in default
● ROI - The payee recipient has furnished his return of income.
● Taken in account - The payee recipient has taken into account the amount
received as income is his return of income
● Paid Tax - The payee recipient has paid the tax due on the income declared in such
return of income
● Certificate - The payer furnishes a certificate to this effect from a chartered

accountant in form no. 26A
40(a)(ia) - Payments to residents on which tax has not been deducted/paid - 30% of such sum
shall not be allowed as a deduction. (Applicable to all payments on including salary)
Following amount will be disallowed
● 30% of any sum payable to a resident on which -

○ tax is deductible at source and such tax has not been deducted; or (Tax Deduct होना था, Deduct नहीं
हुआ)
○ after such deduction, has not been paid on or before the due date of furnishing return of income
specified under section 139(1). (Deduct होने के बाद 139(1) तक pay नहीं हुआ)
● However, where in respect of any sum -
○ tax has been deducted in any subsequent year; or
○ has been deducted during the previous year but paid after the due date specified in section 139(1),
○ then, 30% of such sum shall be allowed as a deduction in computing the income of the
subsequent previous year in which the TDS has been so paid.
■ For example: The tax amounting to ₹ 10,000 was deductible in YEAR 1 in respect of interest
of ₹ 1 lakh payable to a resident Such interest of ₹ 1,00,000 will be allowed as deduction
during the YEAR only if the TDS of ₹ 10,000 is deducted in YEAR 1 and is paid on or before
due date specified u/s 139(1).
■ However, if such TDS is deducted in YEAR 1 and is paid in YEAR 2 after due date specified
u/s 139(1), then, 30% of such interest (i.e. Rs. 30,000) will not be allowed as deduction in
YEAR 1 but the same will be allowed as deduction in YEAR 2.
■ Further, if the TDS relating to such interest payment is not deducted in YEAR 1, then, 30%
of such interest shall not be allowed only in the YEAR 1, even if the same is paid on or
before due date specified in section 139(1) for furnishing return of Income for YEAR 1.
■ Deduction of such an expenditure will be allowed in the year in which the amount is
deducted and paid.
● Exception
■ Where an assessee fails to deduct the whole or any part of the tax on any such sum but
is not deemed to be an assessee in default (i.e. payee has deposited self-assessment tax
directly), then,
■ it shall be deemed that the assessee has deducted and paid the tax on such sum on the
date of furnishing of return of income by the resident payee.
■ When assessee is not deemed to be assessee in default
● The payee recipient has furnished his return of income.
● The payee recipient has taken into account the amount received as income is his
return of income
● The payee recipient has paid the tax due on the income declared in such return of
income
● The payer furnishes a certificate to this effect from a chartered accountant in
form no. 26A
40(a)(ii) - Income-tax
Any sum paid on account of tax or cess levied on profits on the basis of or in proportion to the profits and
gains of any business or profession.
40(a)(iib) - Certain fees, Royalty, service charges etc. payable by State Government undertaking
to the State Government
Any amount
○ paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or
charge, by whatever name called, which is levied exclusively on; or
○ which is appropriated, directly or indirectly, from, a State Government undertaking by the State
Government.
40(a)(iii) - Payment of Salaries outside India or to non-residents on which tax has not been
deducted and paid : Any payment which is chargeable under the head "Salaries", if it is payable
Any payment which is chargeable under the head "Salaries", if it is payable
● outside India; or
● to a non-resident,
and if the tax has not been paid thereon nor deducted there from under Chapter XVII-B.
Language not clear - The section provides that a disallowance will be made 'if the tax has not been paid thereon
nor deducted therefrom under Chapter XVII-B'. On a plain reading, a sum can be disallowed only if both the
conditions are fulfilled, that is, tax has not been paid nor deducted. In other words if one of the two conditions is
fulfilled, a disallowance cannot be made under section 40(a)(iii) of the Act. Thus, if tax has been paid without
deduction of tax at source, no disallowance can be made. Likewise, if tax has been deducted, then no
disallowance can be made even if the tax has not been paid. This interpretation is further supported by the fact
that unlike the amended section 40(a)(i), there is no provision under this section that provides for allowance in
respect of deduction or payment of tax in a subsequent year. If a view is taken that deduction is not allowed for
salaries in respect of which tax has been deducted but not paid in the same year, it would result in a complete
disallowance of all such year-end salaries whose payment is made in the subsequent year (e.g. tax on salaries for
March paid in April). Obviously, such an absurd interpretation cannot be upheld.
40(a)(iv) - Contribution towards Employees welfare fund

Any payment by the employer to provident fund or other fund established for the benefit of the employees of the
assessee, unless he has made effective arrangements to secure that tax shall be deducted at source from any payments
made from the fund which are taxable under the head "Salaries"
40(a)(v) - Tax paid by employer on non-monetary perquisites

Any tax actually paid by an employer on non-monetary perquisites, as referred to in Section 10(10CC).
Miscellaneous
Particulars Income Tax GST

(Direct Taxes)
Interest for delayed payment NA A
Interest on loan taken for payment of tax liability NA A
Penalty NA NA
Refund Not Taxable Taxable
Interest on Refund Taxable u/h OS Taxable PGBP
Litigation expenses A A
Compliance Expenses (Professional Fees etc paid for filing returns A A

etc)
Interest on delayed payment - Refunded NT Taxable
Payments to relatives and associates - Section 40A(2)
If the
● assessee incurs any expenditure in respect of which payment has been or is to be made to 'specified
persons'; and
● the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to-
○ the fair market value of goods, services or facilities for which the payment is made; or
○ the legitimate needs of the business or profession of the assessee; or
the benefit derived by or accruing to assessee there from;
then, so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable
shall not be allowed as deduction.
Thus, amount to be disallowed = Expenditure incurred - FMV of goods/services/facilities/benefit etc. received by

the assessee.
Specified Person
Assessee Specified Person
Individual ● Any relative of the individual assessee

● Any person who carries on a business or profession, if
○ the individual assessee has a substantial interest in the business of that
person or
○ any relative of the individual assessee has a substantial interest in the
business of that person
Company, Firm, ● Any director of the company, partner of the firm or member of the family or
HUF or AOP association or any relative of such director, partner or member.
● Any person who carries on a business or profession, in which the Company/ Firm/
HUF/ AOP or director of the company, partner of the firm or member of the family
or association or any relative of such director, partner or member has substantial
interest in the business of that person
● In case of a company assessee, any individual who has substantial interest in the
business or profession of the company or any relative of such individual.
All Assessee
Relative
"Relative" in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or
descendant of that individual.
Substantial interest
A person is deemed to have substantial interest in the business or profession, if such person is the beneficial
owner of at least 20 percent of equity capital (in the case of a company) or if such person is entitled to 20 per
cent profits of a concern (in any other case) at any time during the previous year.
NOTE - A lineal descendant, in legal usage, is a blood relative in the direct line of descent - the children, grandchildren,
great-grandchildren, etc. of a person.
Consider the following cases -

● X is a trader. He purchases goods from his brother. Market value is Rs. 1,30,000 whereas amount charged
by his brother is Rs. 1,40,000. The excess payment will be disallowed.
● A, B and C are three directors of X Ltd. X Ltd. employs Mrs. A or Mrs. B is paid by X Ltd. for her tax
advice. Any excess payment to these persons will be disallowed.
● X holds 20 per cent equity share capital in X Ltd. X Ltd. takes on hire trucks owned by the brother of X
and pays rent. Any excess payment of rent can be disallowed. (Relative of the person having substantial
interest)
● Mrs. X holds 20 per cent equity share capital in Y Ltd. X purchases goods from Y Ltd. Any excess
payment by X will be disallowed.
● X is a trader. He sells his goods to his brother. Amount of bill is Rs. 1,00,000 whereas market value is Rs.
1,40,000. In this case, X has not incurred any expenditure. Section 40A(2) would not be attracted. Business
income of X will be calculated by taking into consideration the amount of bill of Rs. 1,00,000.
Expenditure paid in aggregate exceeding Rs. 10,000 in a day,

otherwise than by account payee cheque or account payee bank draft
Section 40A(3)
Where –
● assessee incurs an expenditure, which is allowable and claimed as deduction; and

● the payment or aggregate of payments made to a person in a day in respect of such expenditure,
otherwise than by an account payee cheque drawn on a bank or account payee bank draft or electronic
clearing system or through such other electronic mode as may be prescribed, exceeds Rs. 10,000;
then, no deduction shall be allowed in respect of such expenditure.
Enhanced limit to Rs. 35,000 in case of goods transport agencies: In the case of payment made for plying, hiring
or leasing goods carriages, the aforesaid limit shall be Rs. 35,000 instead of Rs. 10,000.
CBDT has, vide this notification, inserted Rule 6ABBA to prescribe the following electronic modes through
which payment can be made or money can be received, for the purposes of above sections.
a. Credit Card;
b. Debit Card;
c. Net Banking;
d. IMPS (Immediate Payment Service);
e. UPI (Unified Payment Interface);
f. RTGS (Real Time Gross Settlement);
g. NEFT (National Electronic Funds Transfer), and
h. BHIM (Bharat Interface for Money) Aadhar Pay.
Examples
1. 3 Payments of Rs. 10,000 made in a single day for a single expenditure in cash. No deduction will be
allowed. Entire Rs. 30,000 will be disallowed.
2. 3 Payments of Rs. 10,000 made in a single day for3 different expenses of Rs. 10,000 each. Rs. 30,000 will
be allowed as deduction.
3. Expenditure Rs. 30,000 - Rs. 20,000 Paid in cash on Day 1 and Rs. 10,000 paid in cash on Day 2. - Rs.
20,000 paid on day 1 will be disallowed.
Dis-allowance to be made in the year of payment for expenditure incurred in earlier years Section
40A(3A)
Where-
● an allowance has been made in the assessment for any year in respect of any liability incurred by the
assessee for any expenditure; and (Assessee was following mercantile system of accounting)
● subsequently, during any subsequent year, the assessee makes payment in respect thereof, otherwise
than by an account payee cheque drawn on a bank or account payee bank draft or electronic clearing
system or through such other electronic mode as may be prescribed; and
● the payment or aggregate of payments so made to a person in a day exceeds Rs. 10,000;
then, the payment made shall be deemed to be the profits and gains of business or profession and accordingly
chargeable to income-tax as income of the subsequent year.
Cases where disallowances would not be attracted
Loan transactions: It does not apply to loan transactions because advancing of loans or repayments of the
principal amount of loan does not constitute an expenditure deductible in computing the taxable income.
Interest disallowance will be applicable as discussed above.
Payment made by commission agents for goods received by them for sale on commission or consignment
basis because such a payment is not an expenditure deductible in computing the taxable income of the
commission agent.
Rule 6DD Payments

● Where the payment is made to
○ RBI, any banking company,
○ State Bank of India or its subsidiary banks,
○ any co-operative bank or land mortgage bank,
○ any primary agricultural credit society or any primary credit society or

○ the Life Insurance Corporation of India;
● Where the payment is made to the Government and under the rules framed by it.
● Where the payment is made through any bank, including foreign bank, by any of these modes -
○ any letter of credit arrangements;
○ a mail or telegraphic transfer;
○ a bill of exchange made payable only to a bank;
○ Electronic clearing system;
○ a credit card;
○ a debit card;
● Where payment is made by way of adjustment against the amount of any liability incurred by the
payee for any goods supplied or services rendered by the assessee to such payee; (simply speaking payee
was liable to pay an amount the payer and the payment was adjusted against that amount)
● Where payment is made to the cultivator, grower or producer of the following for purchase thereof
○ agricultural or forest produce;
○ or produce of animal husbandry (including livestock, meat, hides and skins) or
○ dairy or poultry farming;
○ fish or fish products;
○ Products of horticulture etc.
The expression ‘fish or fish products’ above would include ‘other marine products such as shrimp, prawn,
cuttlefish, squid, crab, lobster etc.’.
The 'producers' of fish or fish products for the purpose of Rule 6DD(e) would include, besides the
fishermen, any headman of fishermen, who sorts the catch of fish brought by fishermen from the sea,
at the sea shore itself and then sells the fish or fish products to traders, exporters etc.
However, the above exception will not be available on the payment for the purchase of fish or fish
products from a person who is not proved to be a 'producer' of these goods and is only a trader, broker
or any other middleman, by whatever name called.
● Where the payment is made for the purchase of the products manufactured or processed without the
aid of power in a cottage industry, to the producer of such products;
● Where the payment is made in a village or town, which on the date of such payment is not served by
any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in
any such village or town;
● Where any payment is made to on employee of assessee or the heir of any such employee, on or in
connection with the retirement, retrenchment, resignation, discharge or death of such employee, on
account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such
sums payable to employee or his heir does not exceed Rs. 50,000;
● Where the payment is made by an assessee by way of salary to his employee after deducting the
income-tax at source, when such employee is temporarily posted for a continuous period of 15 days or
more in a place other than his normal place of duty or on a ship, and does not maintain any account in
any bank at such place or ship;
● Where the 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;
● Where the payment is made by an authorized dealer or money changer against purchase of foreign
currency or travelers cheques in the normal course of his business.
40A(4)
● Notwithstanding anything contained in any other law for the time being in force or in any contract,
● where any payment in respect of any expenditure has to be made by an account payee cheque drawn on
a bank or account payee bank draft or through such other electronic mode as may be prescribed in order
that such expenditure may not be disallowed as a deduction under sub-section (3),
● then the payment may be made by cheque or draft or through such other electronic mode as may be
prescribed; and where the payment is made or tendered, no person shall be allowed to raise, in any suit
or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or
in any other manner.
Provision made for Gratuity Section 40A(7)

No deduction shall be allowed in respect of any provision made by the assessee for the payment of gratuity to
his employees on their retirement or on termination of their employment for any reason.
However, any provision made by the assessee for the purpose of contribution towards an approved gratuity
fund, or for the purpose of payment of any gratuity, that has become payable during the previous year, shall be
allowed as a deduction.
Also keep in mind 40(a)(iv) – Payment towards any fund for the benefit of the employee shall not be allowed
unless there are effective arrangements for deducting Tax therefrom.
Payment of gratuity to retiring employee – Allowable
● Where any provision, made by the assessee for the payment of gratuity to his employees on their
retirement or termination of their employment,
● has been allowed as a deduction in computing the income of the assessee for any assessment year,
● then any sum paid out of such provision by way of contribution towards an approved gratuity fund or
by way of gratuity to any employee,
● shall not be allowed as a deduction in computing the income of the assessee of the previous year in
which the sum is so paid.
Note: The deduction allowed shall be subject to the provisions of Section 43B.
Payment made to Non-Statutory Funds - Not deductible Section

40A(9)
No deduction shall be allowed in respect of any sum paid by an employer towards the setting up or formation
of, or as a contribution to any fund, trust, company, association of persons, body of individuals, registered
society, or other institution for any purpose.
However, deduction shall be allowed in case such sum is paid as per provisions under section 36(1) (iv)/(iva)/(v)
or under any other law for the time being in force. (Funds etc. must be approved)
PGBP - Part 2
Depreciation
It is Deduction in respect to diminution or exhaustion in the value of certain capital assets.
In order to claim depreciation following conditions must be satisfied
Assets must be owned by the assessee.

● Where an assessee carries business and profession in a building not owned by him and he has incurred
any capital expenditure on that building he is entitled to claim depreciation on that capital expenditure.
● In case of Hire-Purchase, the hirer (Purchaser, NOT THE VENDOR) is entitled to claim depreciation.
● In case of lease (whether operating or financial) Lessor shall be entitled to claim depreciation.
● In case of building it is sufficient if the assessee is the owner of the building and not of the land.
● Part ownership will also be considered as ownership.
It must be used for the purpose of business or profession.

● Section 38 Assets not used exclusively for business/profession.
● Deduction under section 30, 31 & 32 shall be allowed proportionately and that proportion will be
determined by the assessing officer having regard to the usage of the asset for the purpose of business
or profession.
● It should be used during the relevant previous year. Used means put to use.
● Even if an asset is put to use for trial production still depreciation will be allowed.
● Put to use means ready to use not actually used.
Methods
There are two main methods of calculating depreciation under income tax .
● One is calculating depreciation on the closing WDV of Block of Asset and
● Another is the Straight Line method . - Used exclusively in case of power generating undertakings.
WDV - Block of Asset Method.
On what amount/value depreciation shall be allowed?
To get the best out of these notes visit www.neerajaroraclasses.com PGBP Part 2 | 1 of 26
Depreciation shall be allowed on closing WDV of Block of Assets. Now we need to learn 2 concepts.
1. Block of assets
2. Closing WDV (Written down value)
Block of assets
"Block of assets" means a group of assets falling within a class of assets in respect of which the same
percentage of depreciation is prescribed. – Section 2 (11)
Class of assets
There are mainly 5 classes of assets in Income tax
● Buildings
● Plant & Machinery
● Ships
● Furniture & Fittings
● Intangible Assets
Further following are the rates prescribed for different assets
Buildings
1. Buildings which are used mainly for residential purposes except hotels and boarding houses 5%
Buildings which are not used mainly for residential purposes and not covered by Block (1) above and
2. (3) below 10%
Buildings acquired on or after 1st September, 2002
for installing machinery and plant forming part of water supply project or water treatment system and which
3. is put to use for the purpose of business of providing infrastructure facilities 40%
4. Purely temporary erections such as wooden structures 40%
Furniture and Fittings

1. Furniture and fittings including electrical fittings 10%
PLANT & MACHINERY

1. Motors buses, motor lorries, motor taxis used in the business of running them on hire 30%
2. Motor cars other than those used in business of running them in hire 15%
3. Moulds used in rubber and plastic goods factories
4. Aeroplanes, Aero engines 40%
Specified air pollution control equipments, water pollution control equipments, solid waste control
5. equipment and solid waste recycling and resource recovery systems 40%
6. Plant & Machinery used in semiconductor industry covering all Integrated Circuits 30%
7. Life saving medical equipment 40%
Machinery and plant, acquired and installed on or after the 1 st day of September, 2002 in a water supply
project or a water treatment system and which is put to use for the purpose of business of providing
8. infrastructure facility 40%
9. Oil wells 15%
Renewable Energy Saving Devices

● Windmills and any specially designed devices which run on windmills installed on or after 1.4.2014 40%
● Any special devices including electric generators and pumps running on wind energy installed on or
after 1.4.2014 would be eligible for depreciation
40%
● Windmills and any specially designed devices running on windmills installed on or before 31.3.2014 and
any special devices including electric generators and pumps running on wind energy installed on or
10. before 31.3.2014 15%
11. Computers including computer software 40%
Books (Annual Publications or other than annual publication owned by assessees carrying on a
12. profession 40%
13. Books owned by assessees carrying on business in running lending libraries 40%
14. Plan & machinery general rate 15%
SHIPS
1. Ocean-going ships 20%

2. Vessels ordinarily operating on inland waters not covered by Block (3) below 20%
3. Speed boats operating on inland water 20%
Intangible assets
Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial
1. rights of similar nature, not being goodwill of a business or profession 25%
Increased rate of depreciation in respect of motor vehicles acquired and put to use during the period from
23.8.2019 to 31.3.2020 [Notification 69/2019 dated 20.9.2019]
Particulars Dep allowable as a % of

WDV
Motor buses, motor lorries and motor taxis used in a business of running them 45%
on hire, acquired during the period from 23.8.2019 to 31.3.2020 and put to use on
or before 31.3.2020
Motor cars other than those used in a business of running them on hire, 30%
acquired during the period from 23.8.2019 to 31.3.2020 and put to use on or
before 31.3.2020
Miscellaneous Points
1. Printers, scanners, UPS etc. are part of computers and eligible for depreciation at the rate of 40 percent.
Alternative view is possible.
2. Mobile phones are not computers.
3. There are different views on tablets etc.
4. Assets given by the employer to the employees are considered as being used in business of the
assessee and therefore depreciation will be allowed on such assets, irrespective of the fact that these
assets are used by the employees as their personal assets for personal purpose.
Example – Employer gave Fridge to his employee which is used by employee for his personal purpose. Employer
can claim depreciation on the same
NOTE: There is no depreciation on land.
How to form blocks

The following are the assets owned by X as on 1.4.20XX
Asset WDV Rate of Depreciation (%)

Building A 2,40,000 10
Building B 3.60,000 10
Building C 1,20,000 5
Building D 5,20,000 10
Machinery A 40,000 15
Machinery B 1,00,000 15
Machinery C 1,60,000 30
Machinery D 80,000 15
Car X 2,20,000 15
Furniture & Fixture 2,40,000 10
Furniture & Fixture used in Meeting hall 3,00,000 10
Classify the above assets into different block of assets
How to find Closing WDV
WDV of block of assets shall be computed as follows
Aggregate of Written Down Value of all the assets falling within that block of assets
as at the beginning of the previous year
ADD Actual cost of any asset falling within that block, acquired during the previous year
Value of Block
LESS Moneys payable (including scrap) in respect of any asset falling within that block
which is sold, discarded, demolished or destroyed during the previous year, to the
extent it does not exceed the sum of the above two
WDV at the end of the year
Less Depreciation at block rate
Opening WDV for next year
Points to be noted
1. Opening + Acquired during the year is also known as Value of block.
2. Revaluation of assets is of no importance under Income Tax Act. It should be completely ignored
Depreciation special case – Put to Use for less than 180 days
If an asset is acquired by the assessee during the previous year and the same is put to use for less than 180
days during that previous year, then the depreciation will be limited to 50% of the depreciation allowable on
such asset - 2nd Proviso to section 32(1).
Note: If the asset is used for less than 180 days in any subsequent previous year (i.e. year subsequent to the
year of acquisition), then the depreciation is fully allowable.
If asset is purchased in a year (20XX-YY) and put to use on or before 3rd October 20XX (same year) then during
year XX-YY assessee used it from 3rd October 20XX to 31-3-20YY (exactly 180 days, date of purchase shall be
included, in February 20YY 28 days). Therefore full depreciation shall be allowed on such asset or any asset put
to use before that date.
If any asset purchased in 20XX-YY is put to use on 4th October 20XX or after that then half depreciation shall be
allowed on that.
In case of leap year, the cut -off date shall be 4th October . Assets purchased and put to use till 4th October –
Full depreciation shall be allowed.
Example
Mr. X purchased machinery eligible for depreciation of 30% on 1.4.XX calculate the depreciation allowed to him if
he put to use the machine on the following dates
Put to use For Rate of depreciation

1. 1.4. _ _ P/Y _ _ - _ _
2. 31.3. _ _ P/Y _ _ - _ _
3. 1.4.._ _ P/Y _ _ - _ _
P/Y _ _ - _ _
4. 31.3. _ _ P/Y _ _ - _ _
P/Y _ _ - _ _
Additional depreciation Section 32(1)(iia)
● Additional depreciation is available on new machinery or plant (other than ships and aircraft), which has
been acquired and installed.
● This provision is applicable only in case of an assessee engaged in the business of manufacture or
production of any article or thing as well as assessees engaged in the business of generation or
generation, distribution or transmission of power.
● It is applicable to only those assessees who claim depreciation on block of assets u/s 32(l)(ii). (Not applicable in
case of assessee claiming depreciation on the basis of SLM – Power Generating Undertakings – To Be Studied Later)
● Deduction: A further deduction of 20% of actual cost of such plant and machinery is allowed.
● However, in case the asset acquired during the previous year is put to use for a period of less than 180
days then additional depreciation on such asset will be calculated @ 10% of actual cost. In a case where
10% depreciation is allowed in 1 year the remaining 10% additional depreciation shall be allowed in the
next year.
● No Deduction: Additional depreciation is not allowed in respect of the following

○ Plant and machinery which, before its installation by assessee, was used whether in India or
outside India by any other person;
○ Any office appliances or road transport vehicles.
○ Plant or machinery installed in the office premises or the residential accommodation (including
the guest houses).
○ Plant and machinery whose whole of the actual cost is deductible (by way of depreciation or
otherwise) in computing income under this head of any one previous year.
NOTE: Furniture & Buildings are not eligible for additional depreciation.
The CBDT has, vide this Circular, clarified that the business of printing or printing and publishing amounts to
manufacture or production of an article or thing and is, therefore, eligible for additional depreciation under
section 32(1)(iia).
Amount to be ignored while calculating actual cost.

Where the assessee incurs any expenditure for acquisition of any asset or part thereof in respect of which
● a payment or aggregate of payments made to a person
● in a day,
● otherwise than by
● an account payee cheque drawn on a bank or
● an account payee bank draft or
● use of electronic clearing system through a bank account,
● exceeds ten thousand rupees,
such expenditure shall be ignored for the purposes of determination of actual cost.
Example - From the following data, calculate the depreciation admissible to an individual carrying on business.
Particulars Amount (Rs.)
Plant and Machinery (Block Rate 15%) (WDV of Plant A and Plant B on 01-04-20_ _ ) 25,00,000
Additions - Plant C on 30-06-20_ _ (Rs. 5,00,000 is paid in cash and balance Rs. 10,00,000 is paid through
15,00,000
account payee cheque)
Plant D on 31-12-20 _ _ (Rs. 4,80,000 is paid in cash and balance Rs. 7,20,000 through RTGS transfer) 12,00,000
Sales - Plant A on 01-12-2018 6,00,000
Solution
Opening WDV 25,00,000
Add Actual Cost of the assets acquired during the year
Plant C
Plant D
Value of Block
Moneys Payable (Sales Proceeds) 6,00,000
Closing WDV For Depreciation
Depreciation
For Assets Put To Use Less than 180 Days
Others
Closing WDV After Depreciation
Sale of Depreciable assets
When entire block is not sold

● If sale consideration on transfer of one or more capital asset in the block exceeds the value of the block
the excess shall be STCG.
● If sale consideration of one or more capital assets in the block does not exceed the value of the block, no
special treatment. Calculate the closing WDV and charge depreciation on it.
When entire block is sold

● If entire block is transferred, then following shall be STCG/STCL
○ Sale consideration
○ Less: value of the block
○ Less: expenditure on transfer
■ Where the value of the block is
■ Opening WDV
■ Add: cost of assets acquired during the year.
Notes
● WDV at the end of the year can never be negative. If Sales price is greater than Value of Block then
refer to Section 50, sale of depreciable assets.
● If Entire block is sold then irrespective of WDV at the end of the year/Closing WDV we will consider it
as Zero.
Amendment By Finance Act, 2021.
● The Finance Act, 2021 provides that goodwill of a business or profession ("the Goodwill") will not be
considered as a depreciable asset and hence, not eligible for depreciation.
● Effect on WDV of the block of assets for the purpose of calculating depreciation.
○ Where goodwill of a business or profession was part of the block of assets on which depreciation
was allowed to the assessee upto the immediately preceding previous year.
○ Actual cost of goodwill as reduced by the depreciation actually allowed to the assessee till the
preceding year as if the Goodwill was the only asset in the relevant block..
Apportionment of depreciation in case of amalgamation/ demerger/

business reorganization
In case of
● succession of firm or proprietary concern by a company or
● amalgamation or demerger of a company;
● or conversion of a private/unlisted company into a limited liability partnership
the provisions for allowability of depreciation shall be as under –
● The amount of depreciation in any previous year, on tangible and intangible assets, allowable to
predecessor and successor; or to amalgamating company and amalgamated company; or to demerged
company and resulting company, shall not exceed the depreciation calculated at prescribed rates, had
been such succession or amalgamation or demerger not taken place.
● Such depreciation determined shall be apportioned between predecessor and successor, or amalgamating
company and amalgamated company, or demerged company and resulting company, in the ratio of the
number of days of use of assets by them during that previous year.
Section 43A – Change in rate of exchange of foreign currency
As per section 43A, the gain, arising at the time of making payment in respect of an imported machinery, due
to change in rate of exchange of foreign currency, has to be reduced from the actual cost of machinery, and
depreciation would be computed on such reduced cost. In case of loss such loss shall be added in the cost of the
machinery.
Miscellaneous Points – Related To Depreciation
Actual Cost – Section 43(1) & Explanations thereof. (only relevant portion for CA Inter)
● It means actual cost of asset to the assessee, reduced by cost met by any other person.
● Any interest for the period starting from the date of loan till the date on which such asset is first put
to use shall not be allowed deduction u / s 36.
● (Will be covered automatically with the sale of scientific research). If an asset is used in business after
it ceases to be used for scientific research, the actual cost shall be nil.
● If a building is used for personal purpose and subsequently brought in to use for business purpose, in
that case actual cost of building minus all depreciation that would have been allowable had the building
been used for the business since its acquisition.
Example
A car purchased by Dr. Milind on 10.08.2018 for Rs. 15,25,000 for personal use was brought into
professional use on 1.07.2021 by him, when its market value was Rs. 7,50,000.
Compute the actual cost of the car and the amount of depreciation for the assessment year 2022-23
assuming the rate of depreciation to be 15%.
As per section 43(1), the expression “actual cost” would mean the actual cost of asset to the assessee.
The purchase price of Rs 15,25,000 is, therefore, the actual cost of the car to Dr. Milind. Market value (i.e.
Rs 7,50,000) 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.2022-23 would be Rs 2,28,750,
being Rs. 15,25,000 x 15%
● If credit is taken on taxes paid on capital goods, no depreciation shall be charged on such tax portion, but
if no credit is available then charge depreciation on such taxes as they will form part of the cost.
● Inventory converted into capital asset and used for business or profession: Where inventory is converted
or treated as a capital asset and is used for the purpose of business or profession, the fair market value
of such inventory as on the date of its conversion into capital asset determined in the prescribed
manner, shall be the actual cost of such capital asset to the assessee.
● Where an asset is acquired by way of gift or inheritance, its actual cost shall be the actual cost to the
previous owner minus depreciation allowable to the assessee as if asset was the only asset in the
relevant block of assets.
● Second hand asset: Where, before the date of its acquisition by the assessee, the asset was at any time
used by any other person for the purposes of his business or profession, and the Assessing Officer is
satisfied that the main purpose of the transfer of the asset directly or indirectly to the assessee was
the reduction of liability of income-tax directly or indirectly to the assessee (by claiming depreciation
with reference to an enhanced cost) the actual cost to the assessee shall be taken to be such an
amount which the Assessing Officer may, with the previous approval of the Joint Commissioner,
determine, having regard to all the circumstances of the case.
● Where any asset which had once belonged to the assessee and had been used by him for the purposes
of his business or profession and thereafter ceased to be his property by reason of transfer or
otherwise, is re-acquired by him, the actual cost to the assessee shall be least of the following —
○ the actual cost when he first acquired the asset minus depreciation allowable to the assessee as
if asset was the only asset in the relevant block of assets; or
○ the actual price for which the asset is re-acquired by him
● A person (say “A”) owns an asset and uses it for the purposes of his business or profession. A has
claimed depreciation in respect of such assets. The said asset is transferred by A to another person (say
“B”). A then acquires the same asset back from B on lease, hire or otherwise. B being the new owner will
be entitled to depreciation. In the above situation, the cost of acquisition of the transferred assets in the
hands of B shall be the same as the written down value of the said assets at the time of transfer.
● Subsidy or grant or reimbursement: Where a portion of the cost of an asset acquired by the assessee
has been met directly or indirectly by the Central Government or a State Government or any authority
established under any law or by any other person, in the form of a subsidy or grant or reimbursement
(by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or
reimbursement shall not be included in the actual cost of the asset to the assessee.
● However, where such subsidy or grant or reimbursement is of such nature that it cannot be directly
relatable to the asset acquired, so much of the amount which bears to the total subsidy or
reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with
reference to which the subsidy or grant.
● Where an asset is acquired outside India by an assessee, being a non-resident and such asset is brought
by him to India and used for the purposes of his business or profession, the actual cost of asset to the
assessee shall be the actual cost the asset to the assessee, as reduced by an amount equal to the
amount of depreciation calculated at the rate in force that would have been allowable had the asset
been used in India for the said purposes since the date of its acquisition by the assessee
Power generating Undertaking Depreciation on SLM Basis
● Undertaking engaged in generation and distribution of power has option to claim depreciation:
a. On the basis of WDV method for each block of asset or
b. On the basis of straight line method on the actual cost of each asset separately.
● The option will be an irrevocable option. If no option has been exercised, depreciation shall be allowed on
the basis of SLM.
● If the asset is sold in the previous year in which it was acquired, then there will be short-term capital
gain/(loss) on sale of such asset.
Terminal depreciation
→ If any asset, on which depreciation is claimed on basis of SLM,

→ is sold and
→ sale price is less than WDV of such asset,
→ Depreciation shall be allowed equal to WDV minus sale price
→ In the year of sale.
→ Such Depreciation shall be known as terminal depreciation and
→ Will be allowed as expenditure for calculating income under the head PGBP.
Balancing charge Section 41(2)
→ If any asset, on which depreciation is claimed on basis of SLM,

→ is sold and
→ the sale price exceeds WDV of such asset,
→ then following shall be taxable under the head PGBP:
→ Difference between aggregate of money payable and WDV.
→ This shall be taxable u/h PGBP even if business is not in existence.
→ But in case Moneys payable exceed Actual Cost
→ then Any amount received in excess of Actual cost
→ shall be taxable under the head capital gains,
→ such capital gains can be short term or long term.
Expenditure on Scientific Research - Section 35
Any Assessee - Expenditure
NOTES
● No depreciation will be admissible on any capital asset represented by expenditure which has been
allowed as a deduction under section 35 whether in the year in which deduction under section 35 was
allowed or in any other previous year.
● Capital expenditure incurred on scientific research which cannot be absorbed by the business profits of
the relevant previous year can be carried forward to the immediately succeeding previous year and shall
be treated as the allowance for that year. In effect, this means that there is no time bar on the period
of carry forward. It shall be accordingly allowable for that previous year.
Examples
Mr A engaged in has incurred Rs.3 lakhs on scientific research, in this case, expenditure is allowed, but if the research is
not related to the business of the assessee, expenditure is not allowed.
ABC Ltd. has purchased one plant and machinery on 01.07.20XX for the purpose of scientific research for Rs. 30 lakhs, in
this case, the entire amount is allowed to be debited to the profit and loss account in the year 20XX-YY. But if the company
has purchased land for the purpose of scientific research, expenditure is not allowed.
Similarly if a building has been purchased for Rs. 40,00,000 and cost of land is Rs.25,00,000, expenditure allowed shall be
Rs.15,00,000.
Deduction for Donation
Notes
No contribution which qualifies for deduction under this clause will be entitled to deduction under any other
provision of the Act.
It has been clarified that the deduction to which an assessee is entitled on account of payment of any sum by
him to an approved National Laboratory, University, Indian Institute of Technology or a specified person for the
approved programme shall not be denied to the donor-assessee merely on the ground that after payment of
such sum by him, the approval granted to any of the aforesaid donee-entities or the programme has been
withdrawn.
Only to manufacturing company
NOTE
● The exclusion list comprises of beer, wine and other alcoholic spirits, tobacco and tobacco preparations,
cosmetic and toilet preparations, tooth paste, dental cream, tooth powder and soap, confectionery and
chocolates, office machines and apparatus, steel furniture etc
Sale of scientific research asset Section 41(3)
If a scientific research asset is sold

● Without using for any purpose other than research
● The following amount shall be charged under PGBP in the year of sale.
○ Sale proceeds
○ Deduction under section 35 (Most important)
Whichever is less.
● This shall apply even if business is not in existence.

● If sale price is more than actual cost, then excess shall be taxable u/h capital gain which can be
short term or long term.
● If such asset is used for business then such asset shall form part of the respective block of
asset and in that case its WDV shall be taken to be NIL.
Deduction in respect of expenditure on Specified Business - Section

35AD.
Meaning of Specified business - Specified business means any one or more of the following business namely
● Cold chain facilities: Setting up and operating cold chain facilities for specified products.
● Warehousing Facilities-Agricultural produce: Setting up and operating warehousing facilities for storing
agricultural produce.
● Hospitals: Building and operating, anywhere in India, a hospital with at least one hundred beds for
patients.
● Housing Projects: Developing and building a housing project under a notified scheme for affordable
housing framed by the Central Government or a State Government, as the case may be, and notified by
the CBDT in this behalf.
● Fertilizer plant: Production of fertilizer in India in a new plant or in a newly installed capacity in an
existing plant.
● Cross-country natural gas pipeline network: Laying & operating a cross-country natural gas pipeline
network for distribution, including storage facilities being an integral part of such network.
● Cross-country crude or petroleum oil pipeline network: Laying and operating a cross-country crude or
petroleum oil pipeline network for distribution, including storage facilities being an integral part of such
network.
● Hotel: Building and operating, anywhere in India, a hotel of two star or above category as classified by
Central government.
● Slum redevelopment housing project: Developing and building a housing project under a scheme for slum
redevelopment or rehabilitation framed by the Central Government or a State Government, as the case
may be, and notified by the CBDT.
● ICD/CFS : Setting up and operating an inland container depot or a container freight station notified or
approved under the Customs Act, 1962,
● Bee-keeping and production of honey and beeswax: Bee-keeping and production of honey and beeswax.
● Warehousing facilities-Sugar: Setting up and operating a warehousing facility for storage of sugar.
● Slurry pipe line: Laying and operating a slurry pipeline for the transportation of iron ore.
● Semiconductor wafer fabrication manufacturing unit; Setting up and operating a semiconductor wafer
fabrication manufacturing unit.
● developing or maintaining and operating or developing, maintaining and operating a new infrastructure
facility
Eligible deduction
Deduction for Capital Expenditure:

● 100% of the capital expenditure incurred during the previous year, wholly and exclusively for the above
businesses would be allowed as deduction from the business income.
● However, expenditure incurred on acquisition of any land, goodwill or financial instrument would not be
eligible for deduction.
● Further, any expenditure in respect of which payment or aggregate of payment made to a person of an
amount exceeding ₹ 10,000 in a day otherwise than by account payee cheque drawn on a bank or an
account payee bank draft or use of electronic clearing system through a bank account would not be
eligible for deduction.
Expenditure prior to commencement of operation
Further, the expenditure incurred, wholly and exclusively, for the purpose of specified business prior to
commencement of operation would be allowed as deduction during the previous year in which the assessee
commences operation of his specified business.
The amount incurred prior to commencement should be capitalized in the books of account of the assessee on
the date of commencement of its operations.
Conditions to be fulfilled in respect of specified business in order to claim deduction
The specified business must fulfill the following conditions namely –
(a) it is not set up by splitting up, or the reconstruction, of a business already in existence; or
(b) it should not be set up by the transfer to the specified business of machinery or plant previously
used for any purpose; In order to satisfy this condition, the total value of the plant or machinery
so transferred should not exceed 20% of the value of the total plant or machinery used in such
specified business
For the purpose of this condition, machinery or plant would not be regarded as previously used if it had been
used outside India by any person other than the assessee provided the following conditions are satisfied:
● such plant or machinery was not, at any time prior to the date of its installation by the assessee, used
in India;
● the plant or machinery was imported into India from a foreign Country; and
● no deduction on account of depreciation in respect of such plant or machinery has been allowed to any
person at any time prior to the date of installation by the assessee.
Minimum holding period of capital asset - 8 years

Any asset in respect of which a deduction is claimed and allowed under this section shall be used only for the
specified business, for a period of eight years beginning with the previous year in which such asset is acquired
or constructed.
Assets used for purposes other than specified business - Consequences thereof
Where any asset, in respect of which a deduction is claimed and allowed under this section, is used for a
purpose other than the specified business during the period of 8 years,
● the total amount of deduction so claimed and allowed in one or more previous years,
● as reduced by the amount of depreciation allowable in accordance with the provisions of section 32, as if no
deduction under this section was allowed,
● shall be deemed to be the income of the assessee chargeable under the head "Profits and gains of business
or profession" of the previous year in which the asset is so used.
However, above provision shall not apply to a company which has become a sick industrial company during the
period of 8 years as specified above.
Sale proceeds of assets of specified business
Any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or
goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the
expenditure on such capital asset has been allowed as a deduction under section 35AD is chargeable to tax as
income under the head PGBP. – Section 28 (It is the charging section of PGBP)
Owner of a hotel eligible for deduction even if he transfers the operation of the hotel to another
person
The assessee shall be deemed to be carrying on the specified business of building and operating hotel if -
● the assessee builds a hotel of two-star or above category;
● thereafter, he transfers the operation of the hotel to another person;
● he, however, should continue to own the hotel.
Deduction allowed under this section, not to be claimed under any other provision
● Where a deduction under this section is claimed and allowed in respect of the specified business for any
assessment year,
● no deduction shall be allowed under the provisions of Chapter VI-A i.e. section 80-IA to 80- RRB or
● Section 10AA in relation to such specified business for the same or any other assessment year.
Carry forward and set off loss from specified business
As per Section 73A, loss from specified business can be carried forward and set off only from profits of
specified business. Further, it can be carried forward for an indefinite period. (To be covered with chapter of Set
off & Carry Forward)
Amortisation of Preliminary Expenditure Section 35D
Types of assessee
The deduction is available to Indian company or non corporate resident assessee.
Eligible expenditure
● Incurred before the commencement of business or
● Incurred after the commencement for
○ Extension of existing undertaking or
○ For setting up new unit
Such expenditure may be for (i) feasibility report (ii) project report (iii) survey (iv) drafting of agreement
between the assessee and any other person (v) expenditure of Memorandum of association, Articles of
association registration or issue of share or debenture (vi) other expenditure as may be prescribed.
Maximum Deduction
● For non-corporate assessee it cannot exceed 5% of cost of project. Or actual expenditure whichever is
lower
● For a company it cannot exceed
○ 5% of (a) cost of project or (b) capital employed whichever is higher will be compared with actual
expenditure, whichever is lower
● Deduction is allowed in 5 equal installments.
NOTES: -
1. Cost of project: means actual cost of fixed asset on the last day of P/Y in which the business is
commenced or extension is completed or new unit commences operation, as the case may be.
2. Capital employed: means issued share capital + debentures + long terms borrowing on the last
day of the same P/Y as referred above.
3. Amount must be audited by CA and report should be furnished along with return.
Example ABC Ltd. has incurred expenditure of Rs. 30,00,000 and its project cost is Rs. 1,00,00,000 and capital
employed is Rs. 1,20,00,000, amount allowed to the company shall be Rs. 30,00,000 but subject to a maximum of
(120,00,000 x 5%) i.e. Rs. 6,00,000 Installment allowed shall be = 6,00,000 / 5 = Rs. 1,20,000
Expenditure incurred under voluntary retirement scheme Section

35DDA
● Expenditure on payment to employee in connection with his voluntary retirement as per with voluntary
retirement scheme. shall be allowed deduction in five equal installments for five years.starting from the
year of payment.
● Deduction shall start only from the year in which amount has actually been paid
● If payment is made by the employer in more than one year, then deduction shall be allowed in five
installments starting from the year of every payment
● No deduction shall be allowed of such expenditure under any other provision.
PGBP - Part 3
Maintenance of accounts by certain persons carrying on profession or
business. Section 44AA Rule 6F
Specified Professionals
Such Books of Accounts …

Every person carrying on the
● legal,
● medical,
● engineering or
● architectural profession or
● accountancy or
● technical consultancy or
● interior decoration or
● authorised representative
● film artist
● profession of company secretary
● information technology professionals
must maintain such books of accounts and other documents as may enable the assessing officer to compute
his total income in accordance with the provisions of the Income-tax Act, 1961.
When PRESCRIBED books of accounts are required to be maintained

Rule 6F of the Income-tax Rules contains the details relating to the books of account and other documents to
be maintained by certain professionals.
As per Rule 6F, every person carrying on any profession specified above shall keep and maintain the books of
account and other documents specified in Rule 6F(2) in the following cases.
● if his gross receipts exceed ₹ 1,50,000 in all the 3 years immediately preceding the previous year.
● if, where the profession has been newly set up in the previous year, his gross receipts are likely to
exceed ₹ 1,50,000 in that year.
NOTE: - Even if the specified professional is not falling in the above situation, they are required to maintain
such books of accounts as may enable the Assessing Officer to compute the total income in accordance with
the provisions of this Act.
What are prescribed books of accounts

Prescribed books of accounts and other documents [Sub-rule (2) of Rule 6F]:
The following books of account and other documents are required to be maintained.
● a cash book;
● a journal, if accounts are maintained on mercantile basis ;
● a ledger;
● Carbon copies of bills and receipts issued by the person whether machine numbered or otherwise
serially numbered, in relation to sums exceeding ₹ 25;
● Original bills and receipts issued to the person in respect of expenditure incurred by the person,
○ or where such bills and receipts are not issued, payment vouchers prepared and signed by the
person,
○ provided the amount does not exceed ₹ 50.
○ Where the cash book contains adequate particulars, the preparation and signing of payment
vouchers is not required.
In case of a person carrying on medical profession, he will be required to maintain the following in addition to
the list given above:
● a daily case register in Form 3C.
● an inventory under broad heads of the stock of drugs, medicines and other consumable accessories as
on the first and last day of the previous year used for his profession
Place at which books to be kept and maintained

The books and documents shall be kept and maintained at the place where the person is carrying on the
profession, or where there is more than one place, at the principal place of his profession. However, if he
maintains a separate set of books for each place of his profession, such books and documents may be kept and
maintained at the respective places.
Period of Maintenance
The above books of account and documents shall be kept and maintained for a minimum of 6 years from the
end of the relevant assessment year.
Persons other than specified professionals
In case of Individual or HUF

An Individual or HUF carrying on any business or profession other than notified / specified professions must
maintain such books of account and other documents as may enable the Assessing Officer to compute his
total income in accordance the provisions of the Income-tax Act, 1961 in the following circumstances
Existing business or profession

In cases where the
● income from the existing business or profession exceeds ₹ 2,50,000 or
● the total sales, turnover or gross receipts, as the case may be, in the business or profession exceed ₹
25,00,000
● in any one of three years immediately preceding the accounting year.
Newly set up business or profession

In cases where the business or profession is newly set up in any previous year,
● if his income from business or profession is likely to exceed ₹ 2,50,000 or
● his total sales, turnover or gross receipts, as the case may be, in the business or profession are likely to
exceed ₹ 25,00,000 during the previous year.
Person (other than individual or HUF)

Every person (other than individual or HUF) carrying on any business or profession (other than the notified
professions referred to in section 44AA(1)) must maintain such books of account and other documents as may
enable the Assessing Officer to compute his total income in accordance the provisions of the Income-tax Act,
1961 in the following circumstances
Existing business or profession

In cases where the
● income from the business or profession exceeds ₹ 1,20,000 or
● the total sales, turnover or gross receipts, as the case may be, in the business or profession exceed ₹
10,00,000 in any one of three years immediately preceding the accounting year; or
Newly set up business or profession

In cases where the business or profession is newly set up in any previous year,
● if his income from business or profession is likely to exceed ₹ 1,20,000 or
● his total sales, turnover or gross receipts, as the case may be, in the business or profession are likely to
exceed ₹ 10,00,000 during the previous year
Showing lower income as compared to income computed on presumptive basis under section
44AE (or section 44BB or section 44BBB)
Where profits and gains from the business are calculated on a presumptive basis under section 44AE (or
section 44BB or section 44BBB) and the assessee has claimed that his income is lower than the profits or gains
so deemed to be the profits and gains of his business.
Where the provisions of section 44AD(4) are applicable in his case and his income exceeds the
basic exemption limit in any previous year:
In cases, where an assessee not eligible to claim the benefit of the provisions of section 44AD(1) for five
assessment years subsequent to the assessment year relevant to the previous year in which the profit has not
been declared in accordance with the provisions of 44AD(1) and his income exceeds the basic exemption limit
during the previous year.
Audit of accounts of certain persons carrying on business or

profession.
It is mandatory for the persons falling in the below category to get his accounts audited before the “specified
date” by a Chartered Accountant
Business
Business in General
In case of a person carrying on business
● If his total sales, turnover or gross receipts in business > ₹ 1 crore in the relevant PY.
But in case of such person carrying on business

● Aggregate cash receipts in the relevant PY ≤ 5% of total receipts (incl. receipts for sales, turnover, gross
receipts); and
● Aggregate cash payments in the relevant PY ≤ 5% of total payments (incl. amount incurred for
expenditure)
○ If his total sales, turnover or gross receipts in business > ₹ 10 crore in the relevant PY.
Payment or receipt by NON-ACCOUNT Payee Cheque or Draft

For this purpose, the payment or receipt, as the case may be, by a cheque drawn on a bank or by a bank draft,
which is not account payee, would be deemed to be the payment or receipt, as the case may be, in cash.
Example Amount in Crores
Particulars Cash Others Total Cash as % age of Total Tax Audit?
Sales 1 4 5 20 Yes
Purchase 2 1 3 66.67
Sales .01 .89 90 1.11

Purchase .10 1.35 1.45 6.89
Sales .20 4.45 4.65 4.30

Purchase 0.15 4.70 4.85 3.09
Sales Nil 10.65 10.65 0

Purchase Nil 1 1 0
44AE
In case of an assessee covered u/s 44AE i.e., an assessee engaged in the business of plying, hiring or leasing
goods carriages who owns not more than 10 goods carriages at any time during the P.Y.
● If such assessee claims that the profits and gains from business in the relevant P.Y. are lower than the
profits and gains computed on a presumptive basis u/s 44AE [i.e., ₹ 1000 per ton of gross vehicle weight
or unladen weight in case of each heavy goods vehicle and ₹ 7,500 for each vehicle, other than heavy
goods vehicle, for every month or part of the month for which the vehicle is owned by the assessee
44AD
In case of an eligible assessee carrying on business, whose total turnover, sales, gross receipts ≤ ₹ 200 lakhs,
and who has opted for section 44AD in any earlier PY (say, P.Y.202021)
● If he declares profit for any of the five successive PYs (say, P.Y.2021-22) not in accordance with section
44AD (i.e., he declares profits lower than 8% or 6% of total turnover, sales or gross receipts, as the case
may be, in that year), then, he cannot opt for section 44AD for five successive PYs after the year of such
default (i.e., from P.Y.2022-23 to P.Y.2026-27). For the year of default (i.e., P.Y.2021-22) and five successive
previous years (i.e., P.Y.2022-23 to P.Y.2026-27), he has to maintain books of account u/s 44AA and get
them audited u/s 44AB, if his income exceeds the basic exemption limit.
Profession
Profession in general
In case of persons carrying on profession
● If his gross receipts in profession > ₹ 50 lakh in the relevant PY
44ADA
● In case of an assessee carrying on a notified profession under section 44AA(1) i.e., legal medical,
engineering, accountancy, architecture, interior decoration, technical consultancy, whose gross receipts ≤ ₹
50 lakhs
○ If such resident assessee claims that the profits and gains from such profession in the relevant
PY are lower than the profits and gains computed on a presumptive basis u/s 44ADA (50% of
gross receipts) and his income exceeds the basic exemption limit in that PY.
Audit Report
The persons mentioned above would have to furnish by the specified date a report of the audit in the prescribed
forms. For this purpose, the Board has prescribed under Rule 6G, Forms 3CA/ 3CB/ 3CD containing forms of
audit report and particulars to be furnished therewith.
Accounts audited under other statutes are considered

In cases where the accounts of a person are required to be audited by or under any other law before the
specified date, it will be sufficient if the person gets his accounts audited under such other law before the
specified date and also furnish by the said date the report of audit in the prescribed form in addition to the
report of audit required under such other law.
Thus, for example, the provision regarding compulsory audit does not imply a second or separate audit of
accounts of companies whose accounts are already required to be audited under the Companies Act, 2013. The
provision only requires that companies should get their accounts audited under the Companies Act, 2013 before
the specified date and in addition to the report required to be given by the auditor under the Companies Act,
2013 furnish a report for tax purposes in the form to be prescribed in this behalf by the CBDT.
Specified date
The expression “specified date” in relation to the accounts of the previous year or years relevant to any
assessment year means the date one month prior to the due date for furnishing the return of income under
section 139(1).
The due date for filing return of income in case of assessees (other than companies) who are required to get
their accounts audited is 31 st October of the relevant assessment year. Hence, the specified date for tax audit
would be 30 thSeptember of the relevant assessment year
Penal provision
It may be noted that under section 271B , penal action can be taken for not getting the accounts audited and
for not filing the audit report by the specified date.
Special provision for computing profits and gains of business on

presumptive basis. Section 44AD
1. This scheme overrules full chapter of PGBP (Section 28 to 43C)

2. Under this income will be 8% of the total turnover or a higher amount claimed by the assessee.
3. Available only for eligible business
a. any business except the business of plying, hiring or leasing goods carriages referred to in
section 44AE; and
b. Whose total turnover or gross receipts in the relevant previous year does not exceed an amount
of 2 crores.
4. Available only to eligible assessee (R-I/HUF/PF - NOT LLP – No Ded. u/s 10 or Part C of C-VI-A)
a. An individual, Hindu Undivided Family or a partnership firm,
i. who is a resident,
ii. but not a limited liability partnership firm.
b. who has not claimed deduction under any of the
i. Sections 10A, 10AA, 10B, 10BA or
ii. Deduction under any provisions of Chapter VIA under the heading “C. - Deductions in
respect of certain incomes” in the relevant assessment year i.e. the following deductions
should not be taken.-Section 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE, 80JJA, 80JJAA,
80QQB, 80RRB.
c. Companies, AOP, BOI are also not eligible for 44AD.
5. This scheme cannot be availed by (Specified Profession – Com/Brokerage – Agency Business)

a. a person carrying on specified profession as referred to in section 44AA;
b. a person earning income in the nature of commission or brokerage; or
c. a person carrying on any agency business.
6. Any deduction allowable under the provisions of section 30 to 38 shall be deemed to have been already
given full effect to and no further deduction under those sections shall be allowed.
7. The written down value of any asset of an eligible business shall be deemed to have been calculated as
if the eligible assessee had claimed and had been actually allowed the deduction in respect of the
depreciation for each of the relevant assessment years.
8. Deduction under chapter VI-A shall be allowed from Income computed under this section.
9. Set off, carry forward & set –off of losses are allowed.
10. Deduction of unabsorbed depreciation is not allowed.
44AD (4)
● Where an eligible assessee declares profit for any previous year
● in accordance with the provisions of this section and he declares profit for any of the five assessment
years relevant to the previous year succeeding such previous year
● not in accordance with the provisions of this section,
● he shall not be eligible to claim the benefit of the provisions of this section for five assessment years
subsequent to the assessment year relevant to the previous year in which the profit has not been
declared in accordance with the provisions of this section.
44AD(5)
● Notwithstanding anything contained in the foregoing provisions of this section,
● an eligible assessee to whom the provisions of sub-section (4) are applicable
● and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be
required to keep and maintain such books of account and other documents as required under
sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required
under section 44AB. (irrespective of turnover)
Amendment by FA 2017 in Section 44AD
In section 44AD of the Income-tax Act, in sub-section (1), the following proviso shall be inserted, namely:—
'Provided that this sub-section shall have effect as if for the words "eight per cent", the words "six per cent" had
been substituted, in respect of the amount of total turnover or gross receipts which is received by an account
payee cheque or an account payee bank draft or use of electronic clearing system through a bank account
during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that
previous year.'.
In simple words the presumptive rate of 6% of total turnover or gross receipts will be applicable in respect of
amount which is received
• by an account payee cheque or

• by an account payee bank draft or
• by use of an electronic clearing system through a bank account, including the

prescribed modes.
during the previous year or before the due date of filing of return under section 139(1) in respect of that
previous year.
However, the existing rate of 8% for computation of business profit would continue to apply in respect of the
total turnover or gross receipts received in any other mode.
Illustration - M/s ABC, an eligible assessee carrying out eligible business under section 44AD provides following
details
● Total turnover for the financial year 20XX-YY is Rs. 150 lakh
● Out of the above:
o Rs. 25 lakh received by cheque
o Rs. 50 lakh received by cash
o Rs. 25 lakh received by cheque before the due date of filing of return;
Rs. 50 lakh not received till due date of filing of return.
Computation of presumptive income under section 44AD(1) for assessment year 20YY-ZZ:
Mode of receipt of turnover Taxable @ 8% Taxable @ 6%
by cheque during the financial year 25
by cash during the financial year 50
by cheque before the due date of filing of return 25
Not received till due date of filing of return 50
Total turnover 100 50
Deemed business profit 8 (8 % of 100) 3 (6% of 50)
Therefore, in view of the amendment, in the above case, total business profit would be Rs. 11 lakhs (8 lakhs + 3
lakhs).
A Discussion on Applicability of Tax Audit
● Turnover above 1 crore conditions of cash receipt and payment not satisfied, generally speaking tax audit
is required, but if assessee is taking benefit of 44AD, then tax audit will not be required till his turnover
is upto Rs. 2 Crores.
● Mr A, Turnover Rs. 1.5 Crore, Cash Receipt or Payments Exceeds 5 % of Total receipts or Payments
○ Check whether he is taking benefit of 44AD
■ Yes (Tax Audit Not Required)
■ No (Tax audit is required)
● Turnover less than 1 Crore, no question of Tax Audit

● Turnover above 1 crore upto 2 crore, check applicability of 44AD, if not applicable, check Cash Conditions
and then decide.
● If Turnover exceeds 2 Crore, check cash conditions only and decide.
● Exceptional case - Turnover Less than 1 Crore, Still Audit will be required
○ Assesee falling in 44AD(4),
○ Turnover 80 Lakhs
○ Income shown 4%
○ Income exceeds the maximum amount not chargeable to tax.
○ Nothing to be checked, Tax audit will be conducted.
Special provision for computing profits and gains of profession on

presumptive basis. 44ADA
44ADA. (1)
Notwithstanding anything contained in sections 28 to 43C,
● in case of an assessee, being an individual or a partnership firm other than a limited liability
partnership
● who is a resident in India, and
○ is engaged in a profession referred to in sub-section (1) of section 44AA and
○ whose total gross receipts do not exceed fifty lakh rupees in a previous year,
■ a sum equal to fifty per cent of the total gross receipts of the assessee in the previous
year on account of such profession or, as the case may be,
■ a sum higher than the aforesaid sum claimed to have been earned by the assessee,
○ shall be deemed to be the profits and gains of such profession chargeable to tax under the head
"Profits and gains of business or profession
44ADA. (2)
Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be
deemed to have been already given full effect to and no further deduction under those sections shall be allowed.
44ADA. (3)
The written down value of any asset used for the purposes of profession shall be deemed to have been
calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the
depreciation for each of the relevant assessment years.
44ADA. (4)
Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his
profits and gains from the profession are lower than the profits and gains specified in sub-section (1) and
whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to
keep and maintain such books of account and other documents as required under sub-section (1) of section
44AAand get them audited and furnish a report of such audit as required under section 44AB.
44AE - Special provision for computing profits and gains of business

of plying, hiring or leasing goods carriages.
Applicability
● Any assessee
● Who owns not more than ten goods carriage at any time during the previous year
● Who is engaged in the business of plying, hiring or leasing such goods carriages
Income
● Heavy Goods Vehicle
○ one thousand rupees per ton of gross vehicle weight or unladen weight, as the case may be, for
every month or part of a month during which the heavy goods vehicle is owned by the assessee
in the previous year or
○ an amount claimed to have been actually earned from such vehicle,
■ whichever is higher.
○ Heavy Goods Vehicle - It means any goods carriage, the gross vehicle weight of which exceeds
12000 kilograms.
● Other than heavy goods vehicle,

○ shall be an amount equal to seven thousand five hundred rupees for every month or part of a
month during which the goods carriage is owned by the assessee in the previous year
○ or an amount claimed to have been actually earned from such goods carriage, whichever is
higher.
Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of this section, be deemed to have been already
given full effect to and no further deduction under those sections shall be allowed
The written down value of any asset used for the purpose of the business referred to in this section shall be deemed to have been
calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the
relevant assessment years.
Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim lower profits and gains than the
profits and gains specified above, if he keeps and maintains such books of account and other documents as required under section
44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB.
In case of a firm, salary and interest paid to partners is deductible subject to the conditions and limits specified in section 40(b)
PGBP Part 4
COMPUTATION OF BUSINESS INCOME IN CASES WHERE INCOME IS

PARTLY AGRICULTURAL AND PARTLY BUSINESS IN NATURE
Rule Nature of Composite Income Business Income (Taxable Agricultural Income

Part) (Exempt)
7A Income from the manufacture of rubber 35% 65%
7B Income from the manufacture of coffee

- sale of coffee grown and cured 25% 75%
- sale of coffee grown, cured, roasted and 40% 60%
grounded
8 Income from the manufacture of tea 40% 60%
Miss Savitha B., 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 31-3-20YY.
S.No. Particulars ₹
1. Income from manufacture of rubber in west-bengal 6,00,000
2. Income from the sale of coffee grown and cured in Telangana 3,00,000
3. Income from the sale of coffee grown, cured, roasted and grounded, in australia. 2,50,000
Sale consideration was received in Delhi.
4. Income from tea grown and manufactured in assam 5,00,000
5. Income from sapling and seedlings grown in a nursery 1,00,000
Compute the agricultural and non-agricultural income of Savitha B. for the year ended 31.03.20YY.
Section 28 (Related to Partnership Firm and Partners only)
● Any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by,
a partner of a firm from such firm will be taxable under the head PGBP.
● Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called,
or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income
under this clause shall be adjusted to the extent of the amount not so allowed to be deducted
Section 40(b)
In the case of any firm assessable as such or a limited liability partnership (LLP) the following amounts shall
not be deducted in computing the business income
● Remuneration to non-working partners - Any salary, bonus, commission, remuneration by whatever

name called, to any partner who is not a working partner. (In the following discussion, the term
‘remuneration’ is applied to denote payments in the nature of salary, bonus, commission)
● Remuneration to a working partner not authorized by deed - Any remuneration paid to the working
partner or interest to any partner which is not authorised by or which is inconsistent with the terms of
the partnership deed.
● Interest to any partner in excess of 12% p.a.- Any interest payment authorised by the partnership deed
falling after the date of such deed to the extent such interest exceeds 12% simple interest p.a.
● Remuneration to a working partner in excess of prescribed limits - Any remuneration paid to a working
partner, authorised by a partnership deed and falling after the date of the deed in excess of the
following limits
Book Profits Quantum of deduction
On the first ₹ 3 lakh of book profit or in case of ₹ 1,50,000 or 90% whichever is higher of book profit,
loss
On the balance of book profit 60% of book profit
Book Profit
● The net profit as shown in the profit and loss account for the relevant previous year computed in
accordance with the provisions for computing income from profits and gains.
● The above amount should be increased by the remuneration paid or payable to all the partners of the
firm if the same has been deducted while computing the net profit.
A firm has paid ₹ 9,50,000 as remuneration to its partners for the P.Y.20XX-YY, in accordance with its partnership
deed, and it has a book profit of ₹ 12 lakh. What is the remuneration allowable as a deduction?
Mehta & Gupta, a partnership firm consisting of two partners, reports a net profit of ₹ 8,00,000 before deduction
of the following items:
1. Salary of ₹ 25,000 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) ₹ 2,50,000.
3. Interest on capital at 16% per annum (as per the deed of partnership). The amount of capital eligible for
interest is ₹ 5,00,000.
Compute
● Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
● Allowable working partner salary for the assessment year 20YY-ZZ as per section 40(b).
Section 28 - Relevant Portion for CA Intermediate
The various items of income chargeable to tax as income under the head ‘profits and gains of business or
profession’ are as under:
● Income from business or profession

○ Income arising to any person by way of profits and gains from the business or profession
carried on by him at any time during the previous year.
● Sum for termination of contract
○ any person, by whatever name called, at or in connection with the termination or modification of
the terms and conditions of any contract relating to his business.
● Income from specific services performed for its members by a trade or professional association
○ Specific services means some benefits which would not be available to the members unless they
pay a specific fee or charge for them.
● Exporters are given export incentives by way of
○ Cash assistance against exports under any scheme of GoI
○ Duty drawback
■ In case of re-exports of imported goods, an exporter is eligible to claim 98% of the duty
paid by him as drawback. (This is subject to relevant section of Customs Law in India)
○ Import entitlement license. (Profit)
○ ETC.
■ Such export incentives are taxable under the head PGBP.
● Value of any benefit or perquisite
○ The value of any benefit or perquisite whether convertible into money or not, arising from
business or the exercise of any profession.
● Sum due to, or received by, a partner of a firm
○ Any interest, salary, bonus, commission or remuneration, by whatever name called, due to or
received by a partner of a firm from such firm will be deemed to be income from business.
However, where any interest, salary, bonus, commission or remuneration by whatever name
called, or any part thereof has not been allowed to be deducted under section 40(b), in the
computation of the income of the firm the income to be taxed (In the hands of the partner )
shall be adjusted to the extent of the amount disallowed.
● Any sum whether received or receivable, in cash or kind, under an agreement
○ for not carrying out any activity in relation to any business or profession;
○ for not sharing any know-how, patent, copyright, trade mark, licence, franchise or any other
business or commercial right of similar nature or information or technique likely to assist in the
manufacture or processing of goods or provision of services.
■ However, the following sums received or receivable would not be chargeable to tax under
the head “profits and gains from business or profession”:
● any sum, whether received or receivable, in cash or kind, on account of transfer of
the right to manufacture, produce or process any article or thing or right to carry
on any business or profession, which is chargeable under the head “Capital gains”.
● any sum received as compensation, from the multilateral fund of the Montreal
Protocol on Substances that Deplete the Ozone layer under the United Nations
Environment Programme, in accordance with the terms of agreement entered into
with the Government of India.
● Any sum received under a Keyman insurance policy

○ Any sum received under a Keyman insurance policy including the sum allocated by way of bonus
on such policy will be taxable as income from business.
● Fair market value of inventory on its conversion as capital asset
○ Fair market value of inventory on the date of its conversion or treatment as a capital asset,
determined in the prescribed manner, would be chargeable to tax as business income.
● Sum received on account of capital asset referred under section 35AD
○ Any sum received or receivable, in cash or kind, on account of any capital asset (in respect of
which whole of the expenditure on such capital asset has been allowed as a deduction under
section 35AD) being demolished, destroyed, discarded or transferred.
SPECULATION BUSINESS
Where an assessee carries on speculative business, that business of the assessee must be deemed as distinct
and separate from any other business.
Profits and losses resulting from speculative transactions must therefore 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 sale of any commodity including stocks and shares is periodically or ultimately settled otherwise
than by the actual delivery or transfer of the commodity or scripts.
Transactions not deemed to be speculative transactions
1. Hedging contract in respect of raw materials or merchandise:

2. Hedging contract in respect of stocks and shares.
3. Forward contract.
4. Trading in derivatives.
5. Trading in commodity derivatives
PLEASE NOTE - However, the requirement of chargeability of commodities transaction tax is not applicable in
respect of trading in agricultural commodity derivatives.

PGBP Notes M22 For Students

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Method of accounting – Section 145(1)

General deduction Section 37

→ Any expenditure for any activity

CSR expenditure - Not Deductible Explanation 2 to Section 37(1) – FA 2014

No allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any

Income from illegal business is chargeable to tax? (Answered in video)

Revenue v. Capital Expenditure- HOMEWORK (For Knowledge

1. Purchase of asset or routine expenditure: - If an expenditure is incurred for acquiring, improving or

Distinction between capital expenditure and revenue expenditure – Do it yourself

Capital expenditure Revenue expenditure

Rent, Rates, Taxes, Repairs and Insurance for Buildings - Section 30

Repairs and insurance of machinery, plant and furniture - Section

Section 36 (No need to mug up sub-clauses etc)

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

Payment of premium in connection with Mediclaim policy - Section 36(1)(ib)

Bonus and Commission - Section 36(1)(ii)

Payment of Interest - Section 36(1)(iii)

Loan for acquiring capital asset

→ Any amount of the interest paid,

→ in respect of capital borrowed any tangible and intangible asset

Discount on Zero Coupon Bonds - Section 36(1)(iiia)

Contributions to provident and other funds

What is superannuation fund (Not for exams)

Employer’s contribution towards approved Gratuity Fund - Section 36(1)(v)

Employee’s contribution received by the employer - Section 36(1)(va)

For more detailed information please see video

Expenditure on Family Planning - Section 36(1)(ix)

Securities Transaction Tax - Section 36(1)(xv)

43B - Certain Deduction on payment basis

Section 43B - Amendment by the Finance Act - 2019.

New Explanation also added -

Certain terms explained by inserting explanation

● Deposit taking non-banking financial company

● Non-banking financial company"

● "Systemically important non-deposit taking non-banking financial company"

Amendment By Finance Act, 2021

Amounts not deductible specific disallowances - Section 40

● Certificate - The payer furnishes a certificate to this effect from a chartered

Following amount will be disallowed

● 30% of any sum payable to a resident on which -

40(a)(iv) - Contribution towards Employees welfare fund

40(a)(v) - Tax paid by employer on non-monetary perquisites

Particulars Income Tax GST

Interest for delayed payment NA A

Interest on loan taken for payment of tax liability NA A

Refund Not Taxable Taxable

Interest on Refund Taxable u/h OS Taxable PGBP

Compliance Expenses (Professional Fees etc paid for filing returns A A

Interest on delayed payment - Refunded NT Taxable

Payments to relatives and associates - Section 40A(2)

Thus, amount to be disallowed = Expenditure incurred - FMV of goods/services/facilities/benefit etc. received by

Assessee Specified Person

Individual ● Any relative of the individual assessee

Consider the following cases -

Expenditure paid in aggregate exceeding Rs. 10,000 in a day,

● assessee incurs an expenditure, which is allowable and claimed as deduction; and

then, no deduction shall be allowed in respect of such expenditure.

Cases where disallowances would not be attracted

Rule 6DD Payments

○ any primary agricultural credit society or any primary credit society or

Provision made for Gratuity Section 40A(7)