Section 28 – 44DB - Profits and Gains of Business and Profession [PGBP]

Business – Meaning
1) Section 2(13) - Business includes any trade, commerce or manufacture or any adventure or
concern in the nature of trade, commerce or manufacture.
2) ‘business’ denotes an activity capable of producing a profit which may be taxed.
3) Pari Mangaldas Girdhardas v CIT
1. Intention of acquisition of subject matter
2. Treatment of subject matter
3. Whether company documents authorise purchase/ sale of article in question
4. Volume and frequency

Profession – Meaning
• Section 2(36) – profession includes vocation
• Involves the idea of an occupation requiring either intellectual skill or any manual skill. E.g.
service rendered by a lawyer, engineer, doctor etc.

Section 28
The following income shall be chargeable to income-tax under the head "Profits and gains of
business or profession",—
1. The profits and gains of any business or profession which was carried on by the assessee at any
time during the previous year ;
i. Net profit is chargeable to tax under this head and to arrive at net profit certain losses
and expenditures are to be deducted from gross profits.
ii. Business is not required to have been carried on by the assessee throughout the whole
year or till the end of the previous year
iii. Business need not necessarily be carried on by the assessee personally
iv. Income derived from letting out of asset of a business is regarded as business income if
the letting is temporary and not permanent
v. Illegal business is also business for the purpose of this section. If assessee carried on a
business which is illegal, tax cannot be avoided on the ground that the business is
illegal

2. Any compensation or other payment due to or received by –

i. any person, by whatever name called, managing the whole or substantially the whole of
the affairs of company, at or in connection with the termination of his management or
the modification of the terms and conditions relating thereto;
ii. an agent, managing the whole or substantially the whole of the affairs of any person, at
the termination his management or modification of the terms and conditions relating
thereto
iii. any person, by whatever name called, at or in connection with the termination or the
modification of the terms and conditions, of any contract relating to his business

3. Income derived by a trade, professional or similar association from specific services performed
for its members.
4. Import-Export Incentives - Cash assistance received against exports; Duty draw back against
export etc.
5. The value of any benefit or perquisite whether convertible into money or not, arising from
business or the exercise of profession.

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6. Any interest, salary, bonus, commission or remuneration due to or received by a partner of a
firm from the firm provided that it has been allowed as deduction in computing the taxable
profits of such firm.
7. Non-compete fees [fee under an agreement for not carrying out any activity in relation to any
business or profession or not sharing any know-how, patent, copyright, trademark etc.]
8. Any amount received by employer from KIP;
9. Conversion of SIT into capital asset then FMV of such stock is taxable under head PGBP
10. Any sum received 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 deduction u/s 35AD.

Section 29 - Manner of Computation of Income

1. Calculate real income under section 28 or deemed income under section 41
2. Deduct allowable expenses [section 30-37]
3. Add back disallowable expenses [section 38 – 43D]

Section 30 to 37 - Allowable Expenses

Section 37 - Expenses that satisfy following conditions are allowed as deductions-
(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being
in the nature of capital expenditure or personal expenses of the assessee), laid out or expended
wholly and exclusively for the purposes of the business or profession shall be allowed in computing
the income chargeable under the head "Profits and gains of business or profession".
Explanation 1.— any expenditure incurred by an assessee for any purpose which is an offence or which
is prohibited by law shall not be deemed to have been incurred for the purpose of business or
profession and no deduction or allowance shall be made in respect of such expenditure.
Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section
(1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility
referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an
expenditure incurred by the assessee for the purposes of the business or profession.
Explanation 3.—For the removal of doubts, it is hereby clarified that the expression "expenditure
incurred by an assessee for any purpose which is an offence or which is prohibited by law"
under Explanation 1, shall include and shall be deemed to have always included the expenditure
incurred by an assessee,—
(i) for any purpose which is an offence under, or which is prohibited by, any law for the time being
in force, in India or outside India; or
(ii) to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a
business or exercising a profession, and acceptance of such benefit or perquisite by such person
is in violation of any law or rule or regulation or guideline, as the case may be, for the time being
in force, governing the conduct of such person; or
(iii) to compound an offence under any law for the time being in force, in India or outside India.

(2B) Notwithstanding anything contained in sub-section (1), 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.

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Section 30 – Rent, Taxes, Repairs and Insurance of Building
Section 31 – Repair and Insurance of Machinery, Plant and Furniture
Section 32 – Depreciation
 Assessee should be the owner of asset
 Allowed on all tangible assets except land and all intangible assets except goodwill
 Asset must be put to use at any point during the previous year by assessee for business/
profession
 System - Block of asset [means group of asset having same rate of depreciation within same
class of asset]. Method of depreciation followed is WDV method.
 The assets in respect of which depreciation is claimed must belong to either of the following
categories
I II III IV
Building Furniture @ 10% Plant and machinery Intangible Asset @
1. Residential 1. Motor vehicle 25%
building - 5% used for hiring
1. General building - business – 30%
10% 2. Other motor
2. Temporary vehicle – 15%
building - 40% 3. Ship – 20%
4. Air craft – 40%
5. Computer and
computer
software – 40%
6. Books – 40%
7. Pollution control
equipment – 40%
8. Oil well – 15%
9. Other plant and
machinery –
15%

Section 32(iia) - Additional depreciation

 Allowed if assessee is engaged in the business of manufacture or production of any article or
thing or in the business of generation, transmission or distribution of power
 Assessee has acquired and installed new P&M during the P.Y. in his factory
 Additional depreciation is allowed @ 20 % only in the 1st year in which asset is put to use.
 If new P&M is put-to-use for less than 180 days in the year of acquisition, then 10% additional
depreciation is allowed in current year and remaining 10% is allowed in the subsequent year.
 Not allowed in the following cases -
o Assessee purchased Second hand P&M
o P&M installed in office premise or residential accommodation
o P&M on which 100% deduction is allowed in the same year

[Section 38] Asset partly used for business and partly for other purpose - If any asset is partly used
for business purpose and partly for personal purpose then expenses related to that asset like fuel,
insurance, depreciation etc. are allowed for business use only.

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Section 50 – Computation of capital gains in case of depreciable assets
1) In case of depreciable asset, there is always STCG
2) In any block, there can be either depreciation or STCG but not both

Section 36 – Specific expenditure deductions

1) Premium paid for insurance against risk of damage or destruction of stock or stores used for the
purpose of the business or profession shall be allowed [s 36(1)(i)]
2) Health insurance premium for EEs is allowed as deduction if premium is paid in any mode other
than cash [ s 36(1)(ib)]
3) Any sum paid to an EE as bonus or commission are allowed as deduction subject to section 43B
[s 36(1)(ii)]
4) Interest on loan [s 36(1)(iii)]
a) allowed as deduction only if loan is utilized for business purpose
b) interest on loan taken from schedule bank, co-operative bank, NBFC shall be allowed as
deduction subject to section 43B
5) Discount on ZCB – pro rata amount of discount on ZCB shall be amortized over the life of ZCB
[s 36 (1)(iiia)]
6) ER’s contribution to RPF/ SF shall be allowed as deduction subject to section 43B [s 36(1)(iv)]
7) ER’s contribution to pension fund u/s 80CCD shall be allowed as deduction, subject to section
43B. [s 36(1)(iva)]
8) ER’s contribution to approved gratuity fund shall be allowed as deduction subject to section 43B
[s 36(1)(v)]
9) EE’s contribution to PF/ SF or welfare funds [s 36(1)(va)]
a) Any sum received by the ER from EE as contribution to PF, SF etc. must be deposited by the
assessee on or before the due date of that fund
b) If not deposited within the due date, to be treated as PGBP income of the ER.
10) Loss on animal used in business otherwise than as SIT due to death or becoming permanently
useless for business purpose, shall be allowed as deduction. [s 36(1)(vi)]
11) Amount written off as bad debt shall be allowed as deduction if [section 36(1)(vii) –
a) Related to income
b) Related to money lent in the ordinary course of the business of banking
12) Family planning expenditure [s 36(1)(ix)]
a) Allowed only to company assessee
b) Revenue expenditure – fully allowed
c) Capital expenditure – allowed as 1/5th deduction each year over 5 years

Section 35 – expenditure on scientific research

(A) Donations to outsider for scientific research and development related or unrelated to business
1) Approved research association, university, college 100% amount paid
2) Approved Indian company registered for scientific research
3) National Laboratory, university, IITs
(B) In-house expenditure related to the business of assessee
Revenue expenditure 1) 100% incurred in CY [all items]
2) 100% incurred on material and salary in last 3 years preceding
commencement of business
Capital expenditure 1) 100% incurred in CY on B/P&M/ other CAPEX (not land)
2) 100% incurred in last 3 years preceding commencement of business
on B/P&M/ other CAPEX (not land)

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Section 35AD

Note -
1. Deduction is allowed only if business is new
2. Depreciation is not allowed if deduction claimed u/s 35AD
3. Sale proceeds of asset u/s 35AD shall be treated as PGBP income
4. Any expenditure incurred before commencement of business is also allowed as deduction in the
year in which business is commenced
Section 38 – 43D - Disallowable Expenses
Section 40(a) – amounts not deductible - Notwithstanding anything to the contrary in sections
30 to 38, the following amounts shall not be deducted in computing the income chargeable under
the head "Profits and gains of business or profession" -
1) Amount payable outside India or in India to NR/ foreign co shall be disallowed (100%) if –
a) TDS is not deducted in PY or
b) deducted but not paid to govt. Up to due date of return filling. [section 40(a)(i)]
2) 30% of amount paid or credited to resident is disallowed if
a) TDS is not deducted in PY or
b) deducted but not paid to govt. Up to due date of return filling. [section 40(a)(ia)]
3) No deduction shall be allowed for Income tax paid [section 40(a)(ii)]
4) Royalty, license fee, service fee etc. levied exclusively on a state government undertaking by
state government shall be disallowed. [section 40(a)(iib)]
5) Salary payable outside India or to a NR not allowed (100%) if TDS is not deducted in PY or
deducted but not paid to govt. up to due date of return filling. [section 40(a)(iii)]
6) PF payment without tax deduction at source i.e. any payment to a provident or other fund
established for the benefit of employees of the assessee, unless the assessee has made effective
arrangements to secure that tax shall be deducted at source from any payments made from the
fund which are chargeable to tax under the head "Salaries" [section 40(a)(iv)]
7) Tax on non-monetary perquisite paid by ER for EE is not allowed as deduction. [section 40(a)(v)]
Section 40A – payments not deductible
1) In case of payment made to relative/related party, AO can disallow excessive or unreasonable
amount [section 40A(2)]
2) Where the assessee incurs any expenditure in respect of which
a) a payment made to a person in a day exceeds Rs. 10,000,
b) no deduction shall be allowed in respect of such expenditure if payment has been made
otherwise than by -

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 i) an account payee cheque or account payee bank draft, or use of electronic clearing
system through a bank account or
ii) through such other electronic mode as may be prescribed. [section 40A(3)]
3) Provision for payment for gratuity under section 40A(7) - No deduction is allowed in computing
business income in respect of a mere provision made by the assesse in his books of account for
the payment of gratuity to his employees on retirement

Section 43B – deductions on payment basis i.e. payment for the following expenses shall be allowed
as deduction only if the payment is made within the same P.Y. or within return filing date. If payment
is made after return filing date, then it will be allowed as deduction in the P.Y. in which actual payment
is made.
1) Tax, duty, cess or fee payable to govt. e.g. GST
2) Bonus or commission to EE
3) Leave salary to EE
4) ER’s contribution to PF or other fund for welfare of EEs
5) Interest on loan from scheduled bank, co-operative bank, NBFC
6) Sum payable to Indian railways for the use of railway asset
Section 41 – Deemed Income
1) Recovery against any deduction in respect of loss, expenditure or trading liability already
claimed. [section 41(1)]
2) Sale of scientific research asset - where any capital asset used in scientific research is sold
without having been used for other purposes and the sale proceed exceeds the amount of
capital expenditure, such surplus or the amount of deduction allowed w.e.l. is chargeable to tax
as business income in the year in which the sale took place. [section 41(3)]
3) Bad debt recovery. [section 41(4)]

Accounts and Audit

Maintenance of accounts [section 44AA]
A) Specified profession – legal, medical, engineering, architectural, accounting, technical
consultancy, interior decoration or any other notified profession
Gross receipt > 1,50,000 in each year of the 3 PPY Maintain prescribed books under rule 6F
Any other case Maintain books that may enable the A.O to
compute taxable income
B) Business or non-specified profession
I/ HUF Income exceeds 2,50,000 in any of the 3 PPY or Maintain books that may enable the
turnover exceeds 25,00,000 in any of the 3PPY A.O to compute taxable income
Others Income exceeds 1,20,000 in any of the 3 PPY or Maintain books that may enable the
turnover exceeds 10,00,000 in any of the 3PPY A.O to compute taxable income
Note – Assessee is not required to maintain books of accounts if above conditions are not satisfied.
Tax Audit
Business Total sales, T/O, gross receipts exceeds 1 cr in the PY
Profession Gross receipt exceeds 50 lac in the PY
Note –
1) Can be done by CA
2) Due date of audit is 30th Sept of A.Y
3) Penalty u/s 271 B if assessee fails to get accounts audited.

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Section 44AD, 44ADA - Presumptive Taxation Scheme [PTS}
A) Presumptive PGBP Income for business [sec 44AD]
Eligible assessee I/ HUF/ Firms (excluding LLP)
Eligible business All other than –
1) Specified profession as per S 44 AA
2) Business in the nature of commission or brokerage
3) Agency business
4) S44 AE business
Turnover limit Turnover should not exceed 2 CR
Presumptive income 8% * turnover
Note –
1) If sec 44AD applies then deduction of expense u/s 30-37 shall be deemed to have been given
and disallowances under section 40, 40A etc. shall be deemed to have been already disallowed.
2) Benefit – no need to maintain regular books of account, no need of tax audit
3) Once opted for PTS, assessee should continue it for next 5 years

B) Presumptive PGBP Income for profession [section 44 ADA]

Eligible assessee I/ Firm (excluding LLP) engaged in specified profession as referred in S
44AA [legal, medical, engineering, architectural, accounting, technical
consultancy, interior decoration or any other notified profession]
Gross receipt Should not exceed 50 lac
Presumptive income 50% * gross receipt
Note –
1) If sec 44AD applies then deduction of expense u/s 30-37 shall be deemed to have been given
and disallowances under section 40, 40A etc. shall be deemed to have been already disallowed.
2) Benefit – no need to maintain regular books of account, no need of tax audit
3) If assessee claims that his income under normal taxation provision is lower than presumptive
income scheme and total income exceeds the basis exemption limit then he must get his book
tax audited

C) Presumptive PGBP Income for Goods Carriage [section 44EC]

Eligible assessee All
Eligible business Applicable to business of plying, hiring, leasing goods
Ownership limits Max ownership = 10 trucks [whether or not put to use]
Presumptive Income [Heavy goods vehicle i.e. unladen weight > 12 tonnes] - 1000 per ton
per month of gross vehicle weight
Other than heavy goods vehicle – 7500 p.m.
Note –
1) If assessee claims that his income under normal taxation provision is lower than presumptive
income scheme and total income exceeds the basis exemption limit then he must get his book
tax audited

New Tax Regime [Individual and HUF]

1) S 32(1)(iia) –additional depreciation @ 20% is not available
2) S 35 – deduction not available in respect of donations to outsiders
3) S 35AD – 100% deduction of CAPEX for specified business is not available

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