PGBP Complete Theory

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Sec. 28
Chargeability or (i) Profits and gains of any business or profession carried on by the assessee at any time

during the previous year. scope-
(ii) Any compensation or other payment due to or received by a person in connection
with:-
(a) termination or modification of contract relating to management of affairs of an Indian
company or any other company.
(b) termination or modification of a contract relationg to any agency for business activity
in India.
(c) Vesting of the management of any business and property in favour of government or
any corporation owned by government under any law in force.
(iii) Income of any trade, professional or similar association from specific services
performed for its members.
(iv) In the case of an assessee carrying on export business, the following export
incentives:-
(iiia) Profit on sale of import-entitlements or EXIM Scrip.
(iiib) Cash assistance against exports (Cash Compensatory Support-CCS)
(iiic) Excise or custome duty repaid (Dudy drawback).
(iiid) Any profit on the transfer of the Duty Entitlement pass Book Scheme,
being the Duty Remission Scheme, under the Export & Import Policy
(iiie) Any profit on the transfer of the Duty Replenishment Certificate, being the
Duty Remisssion Scheme, under the Export & Import Policy.
(v) The value of any benefit or perquisite, whether convertible into money or not, arising
from business or exercise of a profession (the nexus between the business or
profession and the benefit should be proximate to attract this provision).
(vi) Any interest, salary, bonus, commission or remuneration due to or received by a
partner of a firm from such firm.
(vii) any sum received or receivable in cash or kind under an agreement for not :
i- carrying out any activity-
ii- Sharing know-how, patent, copyright, trade-mark, license, 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 for services.
(viii) Any sum received under a keyman insurance policy including the sum allocated by
way of bonus in such policy.
(ix) Any capital asset, in respect of which deduction has been allowed u/s 35 AD, has been
discarded, demolished, destroyed or transferred and consequent to that any sum has
been received or receivable, shall be subject to tax under the head 'Profit and Gains of
Business or Profession .

Sec 29
How to compute In accordance with the provisions contained in Sec 30 to Sec 43D.
Business Income:

Sec 30 Expenses 1. If the assessee is occupying the premises as a tenant, rent paid is deductible.

relating to
Further if he undertakes to do the repairs, the cost of such repairs is also

deductible.
building used

2. If the assessee is the owner, the expense incurred towards current repairs is
business deductible.
3. Any land revenue, local rates and municipal taxes are deductible.
4. Insurance premium in respect of the property is deductible.
However, any repair expenditure of capital nature shall not be allowed as deduction under this
section.
Sec 31 Expenses The following expenses are spelt out as deductible in respect of machinery, plant and furniture

relating

to
used for assessee's business or profession :

1.

Current repairs:
machinery,

2. Insurance premium.
pland and However, any repair expenditure of capital nature shall not be allowed as

furniture
deduction under this section.

If machinery, plant and furniture are taken on hire, the rent payable is not
covered by Sec. 31 but shall be allowed as deduction u/s 37 (1).

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Sec 32 Depreciation In respect of
Tangible or intangible asset
Dep shall be allowed on
Block of asset
By using WDV method of depreciation
To the owner of asset (including fractional ownership)
At the rates prescribed under this act.
In order to avail depreciation, following conditions must be satisfied:
1. Asset must be owned by the assessee
2. It must be used for the purpose of business or profession.
3. It should be used during the relevant previous year
4. Depreciation is available on tangible as well as intangible assets.

Ownership The asset should owned by the assessee or the assessee should be the co-owner of the
assets.
It is not necessary that the assessee should be the registered owner of the asset.
In the case of financial lease, the lessee can claim depreciation.

Depreciation in the case of hire purchase-

Depreciation can be claimed by the hirer

The asset, in respect of which depreciation is claimed, must have been used for
the purpose of business or profession. Even if an asset is put to use for trial
production depreciation can be claimed.

50% of Normal
Dep.
Normal depreciation (i.e., full year's) However, depreciation allowance is limited to 50%of
normal depreciation, if the following conditions are satisfied:
1- Asset acquired during the previous year and
2- It is put to use for the purpose of business or profession for less than 180 days
during the year.
Mandatory to claim Depreciation is available whether (or not) the assessee has claimed the
deduction for depreciation in computing his total income.
Tangible or
Intangible assets
Under the Income tax Act, one can claim depreciation in respect of the following assets-
Tangible assets : Building. machinery, plant or furniture
Intangible assets : Know-how, Patents, Copyrights, Trade marks, license, Commercial
rights etc.
Methods of Dep WDV method in all the cases
But in case of undertaking engaged in generation or generation and distribution of power
SLM method is available.
Sec 2 (11) Block of Assets Depreciation is admissible for block of assets.
Means the group of asset which falls under the same category and on which same rate of
depreciation is applicable.

Rates of Dep Building Residential other than hotel and boarding house 5%
Office, factory, godowns etc 10%
Furniture 10%
Plant & Machinary Computer including software 60%
Books for professional purposes 100%
Books others 60%
Pollution equipments 100%
Others 15%
Ships 20%
Intangible assets 25%

Note 1: "Printers, scanners, NT server, UPS. router, are part of computer and eligible for depreciation at the rate of 60 per
cent. However, EPABX and mobile phone are not computers.
Note 2 : However, theatre building, hospital building and hotel building specially equipped for purposes of
business are still buildings and cannot ne treated as plant for the purpose of claiming depreciation

Note 3 : It needs to be remembered that assets which do not qualify for depreciation such as land, personal assets etc., will
not form part of any block. While claiming depreciation for building, the cost of the land should be excluded.
Note 5 : The right of membership in a stock exchange, with specific reference to Bombay Stock Exchange Rules, can be
treated as a "business or commercial right." The right of membership, which included the right of nomination is a 'licence'
or "akin to a licence". The right to participate in the market had an economic and money value. Therefore, stock exchange
membership card acquired by an assessee shall be considered as an intangible asset.


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Sec 43(1) :-Definition of ACTUAL COST: -
Actual Cost means cost of the asset to the assessee shall be reduced by that portion of the cost which is directly or
indirectly met by any other person or authority.

Determination of "Actual cost" in certain specific circumstances
Expl. To Mode of acquisition Actual cost
Sec.43 (1)
1 Asset acquired for scientific research subsequently Acual cost less deduction availed u/s 35
brought into business use
2 Asset acquired from by way of gift or inheritance Actual cost to the previous owner less depreciation
already allowed to him.
3 Asset acquired from nany other person using the asset Actual cost to be determined by the Assessing Officer
for his business or profession with a view to claim with the prior approval of Joint Commissioner.
depreciation on enhanced cost and reduce tax liability
4 Asset transferred by the assessee and reacquired by The WDV at the time of original transfer or the price paid
him for reacquiring the asset, whichever is less.
4A Asset acquired by an assessee from another person The written down value of the asset to the transferor at
given on lease to the same person who had earlier the time of transfer to the assessee.
claimed depreciation on such asset.
5. Building used for private purpose subsequently The cost of purchase or construction of the building as
brought into business use. reduced bythe notional depreciation calculated up to the
year of bringing the asset to business use at the
depreciation rate applicable to the year in which the aset
is brought into business.
6 Asset transferred by a holding Co. to its subsidiary WDV to the transferor company will be adopted as the
co. or by a Subsidiary Co., to holding co. if the actual cost to the transferee company.
following two conditions are satisfied:-
i) Shares of the subsidiary Co. should be
wholly owned by the holding co. or its
nominees.
ii) The transferee co. should be an Indian
company.
7 Transfer of asset in a scheme of amalgamation by WDV to the amalgamating company will be adopted as
amalgamating company to amalgamated Indian the actual cost to the amalgamated company.
company.
7A Asset transferred by a demerged company to the Actual cost shall be the written down value in the hands
resulting Indian company. of the demerged company.
8 Asset acquired out of borrowed funds Interest on loan borrowed relating to the period after the
asset is first put to use shall not form part of actual cost.

9 Asset acquired subject to levy of excise duty or So much of the duty in respect of which a claim of credit
customs duty in respect of which CENVAT credit is has been made and allowed under the Central Excise
availed. Rules, 1944 shall be reduced from the actual cost.
10 A portion of the cost of an asset acquired is met Cost of the asset to the assessee less Subsidy or Grant.
directly or indirectly by government or any statutory
authority or any other person in the form of a subsidy
or grant or reimbursement.
11 Asset brought into India by a Non-resident assessee Actual cost as reduced by the amount of depreciation
for use in his business or profession. notionally calculated at the rate in force as if the asset
was used in India since the date of acquisition

12 Asset acquired under a scheme for corporatization of The amount which would have ben regarded as actual
a recognised stock exchange in India approved by cost had there been no such corporatization shall be

SEBI. deemed to be the actual cost.

13 Asset acquired from specified busines activities as Actual cost shall be adopted as 'Nil"
referred to u/s. 35 AD
(i) by way of gift or will of irrevocable trust;

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(ii) On any distribution on liquidation of the
company;
(iii) transfer through any specified business
reorganization as referred to in Sec 47

Explanation 5 to sec. 43 (1), deals with building alone. Whereas, other Explanations deal with all types of assets.

Written down value (WDV)-Sec. 43 (6)
Opening value of the or the aggregate value of all assets forming part of the block at the beginning of the XXX
previous year
Add : Actual cost of assets acquired during the previous year and belonging to the same block (Additions during XXX
the year)
XXX
Less : 'Moneys payable' in respect of any asset in the block which is sold, discarded, demolished or destroyed,
together with the scrap value, if any.
XXX
WDV for the purpose of depreciation XXX
Depreciation at the prescribed percentage XXX
Closing value of the block XXX

Sec 50 When Block of Asset
get Cease to Exit
Situation 1: Written down value of the block of asset shall be considered to be Nil if the full
value of the consideration received for transferring the assets of the block exceeds the
following amounts

(i) Expenditure incurred in connection with transfer of the asset.
(ii) The written down value of the block of assets at the beginning of the previous year;
(iii)The actual cost of any asset of the same block acquired during the previous year,

Since entire written down value of the block has been recovered, w.d.v shall be considered
to be Nil and no depreciation is allowed, further such excess shall be deemed to be the capital
gains arising from the transfer of short term capital assets as per section 50.

Situation 2: If in the above case entire written down value of the block has been recovered but
no excess is left, in this case also written down value shall be considered to be Nil and no
depreciation is allowed and also there are no capital gains.

Situation 3: If all the assets of the block are sold, written down value shall be considered to be
Nil .
Sec 33AB Tea, Coffee & Rubber
development reserve
Assessee: The assessee is engaged in the business of growing and manufacturing tea or coffee
or rubber in India.
Time Limit : The assessee has deposited any amount to specific reserve within six months
from the end of the previous year or before the due date of filing the return of income
whichever is earlier;
Where to Deposit: Deposited any amount with National Bank of Agriculture and Rural
Development (NABARD) under a scheme by the Tea Board/Coffee Board/Rubber Borad. OR
Deposited any amount in an account opened by the assessee in accordance with the scheme
approved by the appropriate board with the previous approval of Central Government.
Ceiling : The deduction shall be lower of the following:
(a) Amount Deposited
(b) 40% of P/G/B/P before 33SAB and before setting of business loss u/s 72
Utilisation : The amount kept in deposit account shall be utilised for the purpose of business
other than declaration of dividends or distribution of profits .
The amount deposited with NABARD/Deposit Account shall not be utilized for the
purpose of
(a) Plant and Machinery to be installed in office or residential accommodation including a
guesthouse.
(b) any office appliance other than computers.
(c) Plant and machinery the whole of the actual cost of which is allowed as a deduction in
one previous year in computing P/G/B/P (by way of depreciation or otherwise)
(d) Any new Plant and Machinery installed in a industrial undertaking for the purpose of
business of construction, manufacture or production of any article or thing specified in

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XI Schedule.
Withdrawn : Any amount can be withdrawn from NABARD/Deposit Account for the
purpose specified in the scheme or in the following circumstances.
(a) Closure of business (b) Death of the assessee (c) Partition of HUF (iv) Dissolution of
Firm (V) Liquidation of company
However in the case of withdraw at the time of closure of business and dissolution of
firm, the withdraw are taxable. In any other cases i.e. partition of HUF, death of assessee
and liquidation of the company, withdraw are not taxable.
Withdrawal of deduction: If the amount withdrawal during the previous year and (a) not
utilised with in the previous year, or (b) utilised for any purpose other than specified under the
scheme, then it shall be treated as income of the previous year.
If an asset is acquired as per the scheme specified and the same is sold or otherwise transferred
before expiry of 8 years from the date of its acquisition, such part of the cost of assets as
relates to the deduction already allowed under this section shall be deemed to be profit in a
year of such transfer/sale. However this provision is not applicable if the asset transferred to
Government, Local Authority, Statutory Corporation or Government Company.
Sec 33ABA Site Restoration Fund Deduction is allowed to the persons who are engaged in extraction or production of mineral oil
and natural gas. Deduction is allowed to the extent the amount has been deposited with State
Bank and maximum deduction allowed shall be upto 20% of the profit before charging any
amount under this section and the amount in this account shall be utilised for restoring the site
from where mineral etc. has been extracted.

Application of Rule 7A/7B/8 : Deduction u/s 33 AB shall be computed before apportioning the income under the Rule 7A / 7B / 8 as
under :
Particulars Amount (Rs.)
Business Profit before deduction u/s 33AB
Less: Deduction u/s 33AB-Least of the following:
(a) 40% profit of the business
(b) Amount deposit in deposit account before the stipulated time
XXXXXX

XXXXXX
Profit of Business XXXXXX
Apply provision of Rule 7A/7B/8 ON The above profit
(a) Agricultural Income (60%, 75%, 65% as the case may be)
(b) Business Income (35%, 25%, 40% as the case may be)

Sec 35 Expenditure on
Scientific Research
Meaning Scientific research means any activities for the extension of knowledge in the
fields of natural or applied science including agriculture, animal husbandry or fisheries and
expenditure incurred on scientific research shall include all expenditure incurred for the
prosecution, of scientific research.
Deduction for
Scientific Research
Expenditure

If any person has incurred expenditure whether revenue or capital in connection with scientific
research relating to business, such expenditure is allowed to be debited without any restriction
however expenditure incurred on land is not allowed. If the assessee has incurred expenditure
on purchase/construction of building, expenditure is allowed excluding the value of land.
Expenditure incurred
before
Commencement of
Business
Any expenditure incurred during 3 years immediately preceding the year of commencement of
business, being salary to employees (except perquisites) or purchase of material used in
scientific research or any Capital Exp (except land) shall be allowed as deduction in the year of
commencement of business.
Donation/Contribution
to Research
Association

An amount equal to 175% of any sum paid to an approved research association
which is engaged in scientific research or to an approved university, college or other
institution shall be allowed.
If donation is given to an Indian company approved by prescribed authority for the
purpose of scientific research, deduction allowed shall be 125% of the donation.
Deduction allowed shall be 125% of the donation if donation is given to any approved
institution for the purpose of research in social science or statistical research.
Where the assessee pays any sum to a National Laboratory or a University or an
Indian Institute of Technology or specified persons as approved by the prescribed authority
with a specific direction that the said sum shall be used for scientific research undertaken
under a programme approved in this behalf by the prescribed authority then there shall be
allowed a deduction of a sum equal to 200% of the sum paid.
Special provision with
regard to
COMPANIES

[SECTION 35(2AB)]
Where a company engaged in the business of bio-technology or in any business of
manufacture or production of any article or thing not being an article or thing specified in
the list of the eleventh schedule incurs any expenditure on scientific research on in-house
research and development facility as approved by the prescribed authority, then, there shall be
allowed a deduction of a sum equal to 200% of the expenditure so incurred. In case of
expenditure on purchase or construction of building, expenditure shall be allowed to the extent
of 100%. Expenditure incurred on land shall not be allowed. If the expenditure has been
incurred prior to the year of commencement of business, expenditure shall be allowed only to

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the extent of 100%.
Imp. Points (i) No depreciation shall be allowed in respect of assets for which deduction has been claimed
u/s 35.
(ii) It is not necessary that the assessee should carry out scientific research himself. If scientific
c research is carried out by some other person for the business of the assessee, payment made
to such person will be treated as expenditure on scientific research.
(i) Sale of Scientific
research asset [Section
41(3)]
(a) If a Scientific research asset is sold without used for other purpose following is taxable as
PGBP.
(a) Sale Proceeds ------------Whichever is less
(b) Deduction under Section 35
This shall apply even if business is not in existence.

(a) If sale price is more than actual cost, then such excess shall be taxable u/h capital gain
which can be short term or long term depending upon the period of holding.
(b) Where the scientific research asset is used in the business after it ceases to be used for
scientific research, then the actual cost of such asset shall become NIL.
Carry forward of
capital expenditure of
scientific research

The provisions of section 32(2) shall be applicable with regard to the capital expenditure of
scientific research as they apply to unabsorbed depreciation i.e. carry forward shall be allowed
for unlimited period and brought forward expenditure can be adjusted from any income under
any head except casual income.

Sec. 35ABB Amortisation of
Telecom Licence Fees
this section provides for amortisation of capital expenditure incurred and actually paid by an
assessee for acquiring any right to operate telecommunication services over the period of
licence. The amortisation will be allowable in the previous year in which the licence fee is
actually paid and the subsequent previous years, during which the licence is in force.
If the payment is made in instalment, the amount shall be allowed starting from the year in
which the payment has been made and ending with the year in which the licence expires.

Sale of License Full -
Loss
Loss : Unallowed Capital Exp Sale Proceeds of License
Loss will be allowed in the same PY in which it sold / transferred.
Sale of License Full -
Profit
Profit : Unallowed Capital Exp Sale Proceeds of License
Profit to the extent of allowed capital exp will be treated as Revenue Income.
Profit above the actual cost of license will be taxed as Capital Gains.
Sale of License Part Any unallowed Capital exp will be claimed as deduction for remaining life of license.

In case of Profit :

Profit : Unallowed Capital Exp Sale Proceeds of License
Profit to the extent of allowed capital exp will be treated as Revenue Income.
Profit above the actual cost of license will be taxed as Capital Gains.
Sec 35 AD Deduction in respect of
expenditure on
Specified Business
In case of certain business, the assessee shall be allowed deduction of capital expenditure to
the profit and loss account and such business shall be called specified business
and further amount allowed to be debited shall be 1.5 times of the expenditure incurred
provided the business is commenced w.e.f 01.04.2012 onwards and such business are as
given below:

1. Setting up and operating a cold chain facility. Cold chain facility means a chain of
facilities for storage or transportation of agricultural and forest produce, meat and meat
products, poultry, marine and dairy products, products of horticulture, floriculture and
apiculture and processed food items under scientifically controlled conditions including
refrigeration and other facilities necessary for the preservation of such produce.

2. Setting up and operating a warehousing facility for storage of agricultural produce.

3. Building and operating, anywhere in India, a Hospital with at least one hundred beds for
patients.

4. 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 which is notified by the Board in this behalf in accordance with guidelines as
may be prescribed.

5. Production of fertilizer including increase in installed capacity of an existing plant.

In the following cases amount allowed to be debited shall be equal to the expenditure
incurred instead of 1.5 times.


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1. on or after the 1st day of April, 2007, where the specified business is in the nature of
Laying and operating a cross-country natural gas or crude or petroleum oil pipeline
network for distribution, including storage facilities being an integral part of such
network.

2. Building and operating, anywhere in India, a Hotel of two star or above category as
classified by the Central Government. Such business should commence its operations on
or after 01.04.2010.

developing and building a housing project under a scheme for affordable housing
framed by the Central Government or a State Government, as the case may be, and
notified by the Board in this behalf in accordance with the guidelines as may be
prescribed.

setting up and operating an inland container depot or a container freight station notified
or approved under the Customs Act, 1962;

5. on or after the 1st day of April, 2012, where the specified business is in the nature of bee-
keeping and production of honey and beeswax;

setting up and operating a warehousing facility for storage of sugar.

The capital expenditure incurred before commencement of business shall also be allowed to
be debited in the year in which the business has commenced.

The following capital expenditure shall not be allowed

1 Acquisition of any land; or
2 Goodwill; or
3 Financial instrument

Therefore, expenditure on acquisition of land, goodwill and any financial instrument is not
eligible for deduction under section 35AD whether such expenditure is incurred before or
after the commencement of business.
If any capital asset which was debited to profit and loss account, has been sold, amount
received on sale shall be considered to be income under the head business/profession as per
section 28.
As per section 73A, loss of specified business can be set off only from profits and gains of
any other specified business and carried forward is allowed for unlimited periods and in the
subsequent years also, the loss can be set off only from income of specified business.

Sec 35 AC Expenditure on eligible
Projects or Schemes
Where an assessee incurs any expenditure by way of payment of any sum to a public sector
company or a local authority or to an association or institution approved by the National
Committee for carrying out any eligible project or scheme, the assessee shall, be allowed a
deduction of the amount of such expenditure incurred during the previous year.

Provided that a company may incur expenditure either by way of payment of any sum as
aforesaid or directly on the eligible project or scheme.

Where an association or institution is approved by the National Committee and
subsequently

(i) that Committee is satisfied that the project or the scheme is not being carried on in
accordance with all or any of the conditions subject to which approval was granted; or

(ii) such association or institution, to which approval has been granted, has not furnished to
the National Committee, after the end of each financial year, a report in such form and setting
forth such particulars and within such time as may be prescribed, the National Committee
may, at any time, after giving a reasonable opportunity of showing cause against the
proposed withdrawal to the concerned association or institution, withdraw the approval.

(a) National Committee means the Committee constituted by the Central Government,

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from amongst persons of eminence in public life, in accordance with the rules made under
this Act.

(b) Eligible project or scheme means such project or scheme for promoting the social and
economic welfare of, or the uplift of, the public as the Central Government may, specify.

Sec. 35CCA Payment to associations
and institutions for
carrying out rural
development
programmers
any sum paid to the following is eligible for deduction under section 35CCA-
a. any association or institution to be used for carrying out any programme of rural
development approved before March 1, 1983;
b. an association or institution which has its object the training of persons for
implementation of a rural development programme approved before March 1, 1983;
c. the National Fund for Rural Development; and notified National Urban Poverty
Eradication Fund.
Sec. 35CCC Weighted deduction for
expenditure incurred on
agricultural extension
project
It provides that where a assessee incurs any expenditure on agricultural extension project,
then he will be eligible to claim a weighted deduction of 150 per cent of such expenditure.
Sec. 35CCD Weighted deduction for
expenditure for skill
development
It provides that where a company incurs any expenditure (not being expenditure in the nature
of cost of any land or building) on any notified skill development project, ten such company
can claim a weighted deduction of 150 per cent to such expenditure.
Sec 35 D Amortisation of certain
Preliminary Expenses
1 Assessee
Deduction shall be allowed to an Indian company or a person who is resident in India
(i.e. deduction is not allowed to a foreign company and also deduction is not allowed to
non-residents) provided he has incurred the expenditure before the commencement of his
business, or after the commencement of his business, in connection with the extension of
his undertaking or in connection with his setting up a new unit.

2 Mode of deduction
Expenditure shall be allowed in 5 annual equal instalments starting from the year in
which the business has commenced.

3 Notified expenditure
The expenditures covered under this section are as given below:

1. Expenditure in connection with

(i) preparation of feasibility report.

(ii) preparation of project report.

(iii) conducting market survey or any other survey necessary for the business of the
assessee.

(iv) engineering services relating to the business of the assessee.

Provided that the work in connection with the preparation of the feasibility report or the
project report or the conducting of market survey or of any other survey or the engineering
services is carried out by the assessee himself or by a concern which is approved by the
Central Board of Direct Taxes.

2. Legal charges for drafting any agreement between the assessee and any other person for
purpose of the business of the assessee.

3. Where the assessee is a company, also expenditure

(i) by way of legal charges for drafting the Memorandum and Articles of
Association of the company.

(ii) on printing of the Memorandum and Articles of Association.

(iii) by way of fees for registering the company under the provisions of the Companies
Act.

(iv) in connection with the issue of shares or debentures of the company, being
underwriting commission, brokerage and charges for drafting, typing, printing and
advertisement of the prospectus.


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4. Such other items of expenditure as may be prescribed.

4 Maximum expenditure allowed
Maximum expenditure allowed shall be upto 5% of the project cost but an Indian
company has the option to take 5% of the capital employed.
5 Meaning of cost of project and capital employed
Cost of the project means
(i) in a case of new business, the actual cost of the fixed assets, being land, buildings,
leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure
on development of land and buildings), which are shown in the books of the assessee as on
the last day of the previous year in which the business of the assessee commences.

(ii) in a case of extension of undertaking, the actual cost of the fixed assets, being land,
buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including
expenditure on development of land and buildings), which are shown in the books of the
assessee as on the last day of the previous year in which the extension of the undertaking is
completed or, as the case may be, the new unit commences production or operation, in so
far as such fixed assets have been acquired or developed in connection with the extension
of the undertaking or the setting up of the new unit of the assessee.

Capital employed means
(i) in a case of new business, the aggregate of the issued share capital, debentures and
long-term borrowings as on the last day of the previous year in which the business of the
company commences.

(ii) in a case of extension of undertaking, the aggregate of the issued share capital,
debentures and long-term borrowings as on the last day of the previous year in which the
extension of the undertaking is completed, or, as the case may be, the new unit commences
production or operation, in so far as such capital, debentures and long-term borrowings
have been issued or obtained in connection with the extension of the undertaking or the
setting up of the new unit of the company.

Long-term borrowings means
(i) any moneys borrowed by the company from the Government or the Industrial Finance
Corporation of India or the Industrial Credit and Investment Corporation of India or any
other financial institution or any banking institution.

(ii) any moneys borrowed or debt incurred by it in a foreign country in respect of the
purchase outside India of capital plant and machinery, where the repayment thereof during
a period of not less than seven years.

6 Deduction in case of amalgamation/Demerger
In case of amalgamation, the provisions of this section shall, apply to the amalgamated
company as they would have applied to the amalgamating company if the amalgamation
had not taken place.

In case of demerger, the provisions of this section shall, apply to the resulting company, as
they would have applied to the demerged company, if the demerger had not taken place.

Meaning of Amalgamation Section 2(1B)
Amalgamation, means the merger of one or more companies with an existing company or the merger of two or more
companies to form a new company.

The company which is so merged is called the amalgamating company and the company with which it is merged is called
amalgamated company.

The merger should be in such a manner that

(i) All the property of the amalgamating company should become the property of the amalgamated company.

(ii) All the liabilities of the amalgamating company should become the liabilities of the amalgamated company.

(iii) Shareholders holding not less than 75% of the shares in terms of value in the amalgamating company become
shareholders of the amalgamated company.

Meaning of Demerger Section 2(19AA)
Demerger, means the transfer, by a demerged company of its one or more undertakings to any resulting company in

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such a manner that

(i) all the property of the undertaking, being transferred should become the property of the resulting company.

(ii) all the liabilities relatable to the undertaking, being transferred should become the liabilities of the resulting company.

(iii) the property and the liabilities of the undertaking are transferred at values appearing in its books of account
immediately before the demerger.

(iv) the shareholders holding not less than 75% of the shares in term of value in the demerged company become
shareholders of the resulting company.

(v) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company
on a proportionate basis.

Sec. 35DD Amortization of
expenditure in the case
of
amalgamation/demerger
If an Indian company incurs any expenditure for the purpose of amalgamation or demerger, it
is allowed as deduction in five successive years in five equal installments. The first
installment is deductible in the previous year in which amalgamation or demerger takes
place. A similar provision is applicable in the case of amalgamation or demerger of co-
operative banks.
Sec. 35DDA Amortisation of
expenditure under
voluntary retirement
scheme
Expenditure by way of payment of any sum to an employee in connection with his voluntary
retirement (under any scheme of voluntary retirement). is deductible in 5 successive years in
5 equal installments. The first instalment is deductible in the year in which such amount is
actually paid (deduction is available on payment basis and not on accrual basis). Each part of
the payment in connection with voluntary retirement is deductible in 5 years in 5 equal
installments.
Treatment in case of amalgamation
In case of amalgamation, the provisions of this section shall, apply to the amalgamated
company as they would have applied to the amalgamating company if the amalgamation had
not taken place.

Treatment in case of demerger
In case of demerger, the provisions of this section shall, apply to the resulting company, as
they would have applied to the demerged company, if the demerger had not taken place.

Treatment in case of succession by a company
Where there has been reorganisation of business, whereby a firm is succeeded by a company
a proprietary concern is succeeded by a company, the provisions of this section shall, as far
as may be, apply to the successor company, as they would have applied to the firm or the
proprietary concern, if reorganisation of business had not taken place.

Imp. Notes 1-- The above rule is applicable even if the scheme of voluntary retirement has not been
framed in accordance with guidelines prescribed under section 10(10C).
2-- Where voluntary retirement payment is made by predecessor and before completion of 5
years is succeeded in a scheme of business reorganization (like amalgamation/merger of
Indian companies or co-operative banks, conversion of firm/proprietary concern/private or
unlisted company into company/LLP), the deduction for the remaining years will be available
to the successor from the year in which the conversion takes place.
Sec 36 Other Deductions 1-- Insurance premium paid in respect of insurance against risk of damage or destruction of
stocks or stores used for purposes of business or profession.
2--Insurance premium paid by federal milk co-operative society for insurance on the life of
cattle owned by a member of primary co-operative society
3--Insurance premium paid by any mode other than cash for insuring the health of the
employees under an approved insurance scheme, framed by insurers approved by Central
Government or by Insurance Regulation and Development Authority (IRDA).
4--Bonus or commission paid to employees for services rendered, where such sum would not
have been payable as profits or dividends to such employees (Subject to sec. 43B)
5--Interest paid in respect of capital borrowed for the purpose of business or profession,
Interest on loans borrowed from public financial institutions or state financial institutions and
interest on term loans borrowed from schedule bank shall be allowed subject to sec. 43B.
6--Discount on Zero Coupon Bonds (ZCBs) on pro rata basis having regard to the period of
life of such ZCBs.

"Discount" means the difference between the amount received or receivable by the
infrastructure capital company or infrastructure capital fund or public sector company or

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scheduled Bank issuing the bond and the amount pabable by such company or fund or
public sector company or scheduled bank on maturity or redemption of such bond ;

"Period of life of the bond" means the period commencing from the date of issue of the
bond and ending on the date of the maturity or redemption of such bond.
7--Contribution in recognised provident fund or approved superannuation fund (Subject to
Sec. 43B) by the employer.
8--Contribution by an employer towards a pension scheme as referred to in Sec. 80CCD on
account of an employee to the extent it does not exceed 10% of the salary of the employee.
For this clause. 'salary' includes dearness allowance if the terms of employment.
9-- Any sum paid by 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.
10-- In respect of animals used for the purposes of business or profession otherwise than as
stock-in-trade and have died or become permanently useless for such purposes, the difference
between the actual cost and the amount, if any, realised in respect of the carcasses or
animals.
11-- Any expenditure incurred by a company for promoting family planning among
employees shall be allowed as a deduction. If the expenditure incurred is of a capital nature,
deduction shall be allowed over a period of 5 yeaes in equal installments. Unabsorbed
expenditure on family planning, if any, shall be carried forward for set off similar to that of
unabsorbed depreciation.
12-- Securities transaction tax (STT) paid in respect of the taxable securities transactions
entered into in the course of business.
13-- The amount of bad dept written off as irrecoverable in the accounts of the assessee in the
previous year subject to the following conditions:
(a) The debt should be incidental to the business
(b) It should have been taken into acount in computing the income of the assessee or it
should represent money lent in the ordinary course of banking or money lending
business.
(c) It should be written of in the books of account.
(d) The business in repect of which the debt is incurred should be confinued during the
previous year.

14-- Any sum received from any of the employees towards their contribution to the welfare
fund accounts, if such sum is remitted on or before the relevant due date to the concerned
fund account. (the amount so received from employees is treated as income u/s. 2(24) and it
is allowed as deduction only if it is paid within the stipulated due date). "Due date" means
the date by which the assessee is required as an employer to credit an employee's
contribution to the employee's account in the relevant fund .

Sec 37 Residuary Sec. 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.

If any expenditure has been 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. i.e. expenditure can be claimed as deduction under section 37(1) provided the
following conditions are satisfied.

(i) The expenditure must be in the nature of revenue expenditure and not a capital
expenditure.

(ii) The expenditure must be laid out or expended wholly and exclusively for the purposes
of business or profession.

(iii) The expenditure must not be in the nature of expenditure described in sections 30 to
36.

(iv) The expenditure should not be in the nature of personal expenditure of the assessee.

(v) It has been further provided by the explanation to the section that any expenditure
incurred by the assessee for any purpose which is an offence or which is prohibited by law will

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not be allowed as deduction.

Examples : Allowed 1. Expenditure in connection with advertisement
2. Expenditure on travelling including the expenses of boarding and lodging.

3. Salary paid to the staff.

4. Expenditure in connection with entertainment of the employees or the customers.

5. Expenditure in connection with opening ceremony (Mahurat) of the business/profession.
Security under own your telephone scheme or tatkal telephone scheme. Similarly, if any
security has been paid in connection with telex, it is allowed and any refund shall be
considered to be income.

7. Expenditure on occasion of Diwali provided the expenses are not of religious nature or
personal nature.

8. Interest on late payment of VAT / Excise Duty / Service Tax.

9. Expenditure in connection with legal proceedings.

10. Legal charges for obtaining a loan from bank or financial institution etc.

11. Damages paid to a worker in connection with his termination from the job.

12. Damages for failure to complete a contract in time.

13. Professional tax paid by a person carrying on business or profession.

14. If there are expenditures like the expenditure on the filing of return of income, filing of
appeal, payment of salary to the expert staff for handling income tax or wealth tax matters or
there is any audit fee, expenditure is allowed.

15. Expenses on registration of trade marks.

16. Payment of gratuity to an employee who died abroad while on business .

17. Fees to an architect for valuation of building .

18. Legal charges in connection with amendment to Articles of Association.

19. Replacement of worn out parts of machineries.

20. Interest on overdraft utilised for payment of dividend .

21. Contribution to Government for construction of health centre .

22. Payment made to suggest improved method of production .

23. Retrenchment compensation and notice pay at the time of closure of one of the units of the
business .

24. Expenditure on issue of bonus shares is revenue expenditure and is accordingly allowed to
be debited to profit and loss account as decided in CIT v. General Insurance Corporation
(2006) 156 Taxman 96 (SC). The court held that issuance of bonus shares does not result in
inflow of fresh funds rather it is merely a reallocation of companys funds, hence it cannot be
said that company has acquired a benefit or advantage of enduring nature. The expenditure is
revenue in nature.

25. Any other expenditure which is revenue in nature and it is related to business or profession.

Not Allowed 1. Payment of income tax in foreign countries
2. Cost of erecting the statue of the founder.
3. Any fine or penalty for violating the provisions of law.
4. Interest on late payment of income tax.
Sec 37(2B) Expenditure in
connection with
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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advertisement in the
newspaper etc. of a
Political Party

Sec 38 Expenditure in
connection with assets
which are partly in
business use and
partly in personal use
If any person has any asset in business or profession as well as in personal use, expenditure is
allowed only to the extent the asset is in the use of the business or profession.
Sec.40(a) Disallowance in the
case of all assesses
1-- Any interest, royalty, fees for technical services or other sum shareable under this Act
which is payable outside India or to a non-resident including a foreign company either in India
or outside India on which tax is deductible at source shall be disallowed if-
a. Such tax has not been deduct; or
b. Such tax after deduction has not been paid during the previous or in the subsequent year
before the expiry of the time prescribed u/s 200(1).
In case the tax is deducted in any subsequent year or has been deducted in the previous year
but paid in any subsequent year after the expiry of time prescribed under law, such sum shall
be allowed as a deduction in computing the income of the previous year in which such tax has
been paid

The time prescribed u/s. 200 read with Rule 30 is 7 days from the end of the month in which
credit or payment is made except where the amount pertains to the month of March of the
relevant previous year, the time allowed is 30th April of the immediately following financial
year.
2-- According to Sec. 40(a), in respect of any expenditure payable to a resident in the nature or
brokerage (sec. 194A); (ii) contract payments (sec.194C) (iii) commission or brokerage
(sec.194H); (iv) rent (sec.194I); (v) royalty (sec. 194J); (vi) fees for professional services or
fees for technical services (sec.194J) on which tax is deductible at source and the assessee:
a. fails to deduct tax at source; or
b. deducts tax at source but not paid the same on or before the due date for fling the
return of income u/s.139 (1).
Where tax is deducted in any subsequent year or where the tax deducted during the
previous year is paid after the due date for filing the return of income, such sum
shall be allowed as a deduction in computing the income of the previous year in
which such tax has been paid
3--Income tax and Wealth tax are not deductible, Income tax also includes tax paid in any
other country for which the relief is available under sections 90, 90A, 91 of the Income-tax
Act.
4-- Any salary payable outside India or to a non-resident shall be disallowed, if tax has not
been deucted or paid-Sec. 40 (a) (iii).
5-- Any payment to a provident or other fund for the benefit of the employees shall be
disallowed unless the employer 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.
6-- Any tax on non-monetary perquisites borne by the employer, on behalf of the employee
which is exempt u/s. 10(10CC) in the hand of the employee shall be disallowed-Sec. 40 (a) (v).
Additional points
(i) Interest paid in delayed payment of income tax is a part and parcel of the
income tax itself and accordingly disallowed.
(ii) The assessee obtained supply of goods from a non-resident and had agreed to
pay interest to the supplier for the delay in payment towards supplies. It is
held that as the amount due to the foreign supplier was towards the supply
bills and not towards loan and such interest is not disallowable.

Assessee obtained know-how through a technical collaboration agreement, The consideration
was payable in three equal installments and as per the agreement, the assessee has to bear the
tax on behalf of the supplier of know-how. The entire consideration including the amount of
income-tax borne by the assessee shall be qualify for deduction and the assessing officer shall
not disallow the income-tax paid by the assessee as part of the lump sum consideration for
acquiring know-how.
Sec 184 Taxability in case of
Partnership Firm
Assessment as a firm

(1) A firm shall be assessed as a firm for the purposes of this Act, if

(i) the partnership is evidenced by an instrument ; and
(ii) the individual shares of the partners are specified in that instrument.

(2) A certified copy of the instrument of partnership referred to in sub-section (1) shall

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accompany the return of income of the firm of the previous year in respect of which
assessment as a firm is first sought.

Explanation.For the purposes of this sub-section, the copy of the instrument of partnership
shall be certified in writing by all the partners (not being minors) or, where the return is made
after the dissolution of the firm, by all persons (not being minors) who were partners in the
firm immediately before its dissolution and by the legal representative of any such partner who
is deceased.

Sec. 40(b) Disallowance in the
case of partnership
firms
Interest paid to a partner by a firm is not deductible unless the following conditions are
fulfilled :
1. It should be authorised by and in accordance with the partnership deed.
2. It should relate to a period falling after the date of the partnership deed.
3. It should not exceed 12% p.a. (simple interest).
Explanation 1 :Where a person is a partner in his representative capacity in the firm and
receives interest in his individual capacity from the firm, such interest should not be
disallowed.
Explanation 2 :Where a person who ia a partner in his individual capacity receives interest
for and on behalf of someone else from the firm in which he is a partner, such interest should
not be disallowed.

Salary, bonus, commission or remuneration paid by a firm to a partner is not deductible in
the computation of income of the firm unless the following conditions are fulfilled :
1. It should be authorised by and in accordance with partnership deed.
2. It should relate to a period falling after the date of the partnership deed.
3. It should be paid to a working partner.
4. It should be within the prescribed limits. The prescribed limits are as follows :
Book Profits Remuneration as a % of book profits
On the first Rs. 3,00,000 or in case of a loss Rs. 1,50,000 or 90% whichever is higher
On the balance 60%

"Book profit" means the net profit, as shown in the profit and loss account for the relevant
previous ryear. computed in the manner laid down in Chapter-IV-D as increased by the
aggregate amount of the remuneration paid or payable to all the aprtners of the firm if such
amount has been deducted while computing the net profit
"Working partner" means an individual who is actively engaged in conducting the affairs of
the business or profession of the firm of which he is a partner

The deductible amount of interest and alary shall be the amount payable as per partnership
deed or amount calculated u/s 40(b) whichever is less. Further, rent paid to a partner by the
firm in respect of assets belonging to the partner and used by the firm is not covered by
Sec. 40(b) and therefore deductible.
Case law
1. According to Sec. 40 (b) payment of salary & interest in accodance with the
partnership deed shall be allowed as deduction. In a case where payments are mde for specific
services rendered by the partners to the firm not in the capacity of partners, but because of
contractual relationship undertaken by the partners for the specific services shall be allowed as
deduction-CIT vs. Rajam Ramaswamy & Sons (2008) 298 ITR 325 (Mad).
2. The deduction of remuneration to partners shall be allowed to the extent it is
authorized by and in accordance with the partnership deed. Even where no specific amount is
mentioned but a method of computation of the remuneration payable to a partner is stipulated,
the same shall be considered for the purpose of allowability CIT vs. Anil Hardware Store
(2010)323 ITR 368 (HP).
Disallowance in the case of association of persons and body of individuals-Sec. 40 (ba)
1- Any payment by way of interest, salary, bonus, commission or remuneration paid by
an association of persons or body of individuals to any of its embers shall be
disallowed.
2- In a case where the member who received interest from the AOP or BOI also pays
interest to the AOP or BOI during the same previous year only the net excess interest
paid by the AOP or BOI to such member should be disallowed-Explanation 1.

3- Where a person is a member in his representative capacity in the AOP or BOI and if
he received interest in his individual capacity from the AOP or BOI such interest
should not be disallowed-Explanation 2.

4- Where a person who is a member in his individual capacity received interest for and
on behalf of someone else from the AOP or BOI in which he is a member such

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interest should not be disallowed-Explanation 3

Sec. 40A (1) Expenses or payments
not deductible
1- Excessive and unreasonable expenditure-Sec.40A(2)
If an assessee incurs expenditure toward goods supplied, services rendered or facilities
provided by specified persons, the Assessing Officer can disallow such expenditure to the
extent it is excessive or unreasonable. The extent to which the expenditure is excessive or
unreasonable shall be determined having regard to the fair market value of the 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 him there from.

The persons who are specified for the purpose of this provision with reference to the following
assessees are as follows:
SI.
No.
Assessee Specified persons
i) Individual Any relative of the assessee; any person in whose business or
profession the assessee or his relative has a substantial
interest.
ii) Company, firm,
AOP or HUF
Any Director, partner or member or relative of such person;
any person in whose businss or profession the assessee or
director, partner or member of the assessee or any relative of
such person has a substantial interest.
iii) All assesses a) any individual who has substantial interest in
assessee's business or profession. b) a company,
firm, AOP or HUF having a substantial interest in
assessee's business or profession or any relative of
any director, partner or member of any such entity
or any relative of any such director, partner or
member. c) a company, firm, AOP or HUF of
which a director, partner or member has a
substantial interest in assessee's business or any
director, partner or member of any such entity or
any relative of any such director, partner or
member.

Case law
Discount allowed to sister concerns was sought to be disallowed u/s. 40A (2) to the
extent considered to be excessive. It has been held that the provisions of Sec. 40A
(2) pertains to disallowance of an expenditure i.e. an amount actually spent by the
assessee. A trade discount is not an expenditure and therefore, the provisions of Sec.
40A (2) do not apply-United Expprts vs. CIT (2011) 33 ITR 5549 (Del).
When a holding company purchases raw materials from its subsidiary company, the
provisions of Sec. 40A (2) cannot be applied. While the holding company is a
member of its subsidiary company, the subsidiary company is not a member of the
holding company. Therefore, the subsidiary company is not a related person within
the meaning of Sec.40A(2). Besides, the price paid is not abnormally more than the
market proce. The assesse as well as its subsidiary were in the same tax bracket also
assumes importance. Admittedly, it is not a case of tax evasion. Therefore, no part of
payment could be disallowed.
2- Payment made otherwise than by way of account payee cheque or account payee
draft-Sec-40A(3)
a) Where the assessee incurs any expenditure 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 account payee bank draft, exceeds Rs.
20,000/-, no deduction shall be allowed in respect of such expenditure.
However, in the case of payment made for plying, or leasing goods carriages,
the amount specified is Rs 35,000/-,
b) Any payment made in excess of the above limits during the previous year, for
which deduction was allowed on accrual basis in any preceding previous year,
otherwise than by way of account payee cheque or account payee draft, then the
payment so made shall be deemed to be the business income in the previous
year in which such payment is made-sec 40A (3A).
c) However, no disallowance shall be made u/s. 40A(3) in case such payments
have been made under any specific circumstances as may be prescribed, having
to:
i. The nature and extent of banking facilities available;
ii. Business expediency considerations; and
iii. Other relevant factors.

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as laid out in Rule 6DD
d) This provision shall not apply in respect of expenditure for which no deduction
is claimed, namely, capital expenditure, For example, if land is purchased by
remitting cash, no disallowance can be made u/s.40A(3). Similarly, if
machinery is purchased be remitting cash in excess of the prescribed limit, no
disallowance can be made as the assessee does not claim any deduction for the
machinery but only avails depreciation allowance at the percentage. On the
other hand, if equipment is purchased for scientific research and deduction is
claimed u/s.35, then the provisions of Sec.40A (3) shall apply if payment is
made in cash
Exceptions-Rule 6DD
In the following case, no disallowance shall be made u/s. 40A (3):
(a) Where payments are made to :
i) Reseve Bank of India any banking company defined in Banking
Regulation Act, 1949
ii) Reserve Bank of India or any subsidiary bank as defined in State
Bank of India Act, 1959.
iii) Any co-operative Bank or land mortgage bank
iv) Any Primary Agricultural Credit Society or any Primary Credit
Society as defined under Banking Regulation Act, 1949.
v) Life Insurance Corporation of India
b) Where the payment is made to Government and, where such payment is required to
be made in legal tender (cash);
c) Where the payment is made by-
i) letter of credit arrangements through a bank; ii) mail or telegraphic transfer
through a bank; iii) book adjustment from any account in a bank to any
other account in taht or any other bank; iv) bill of exchange made payable
only to a bank; v) use of electronic clearing system through a bank
account; vi) credit card; vii) debit card.
d) Where the payment is made by way of adjustment against the amount of any liability
incurred by the payee for nay goods supplied or services rendered by the assesee to
such payee.
e) Where the payment is made for the purchase of-
i) Agricultural or forest produce; or
ii) The produce of animal husbandry (including livestock, meat, hides and
skins) or diary or poultry farming; or diary or poultry farming; or
iii) fish or fish products; or
iv) the products of horticulture or apiculture,
to 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.
f) 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.
g) Where the payment is made in a village or town which on the date of such ayment 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;
h) Where any payment by way of gratuity, retrenchment compensation, etc. is paid to
an employee or his legal heirs if the income chargeable under the head "Salaries"
does not exceed Rs. 5,000.
i) Where the payment is made by an assessee by way of salary to his employee after
deducting the Income-tax from salary in accordance with the provisions of Sec. 192
of the Income-tax Act, 1961, and when such employee-
(1) is temporarily posted for a continuous period of fifteen days or more in a place
other than his normal place of duty or on a ship; and
(2) does ot maintain any account in any bank at such place or ship;
(j) Where the payment was required to be made on a day on which the banks
were closed either on account of holiday or stiks;
(k) 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.
(i) Where the payment is made by an authorizes dealer or a money changer
against purchase of foreign currency or travelers cheques in the normal course
of his business.

3-- Provision for gratuity Sec.-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

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employment for any reason. However, any provision made by the assessee for the purpose of
payment of any contribution an approved gratuity fund or for the purpose of payment of any
gratuity which has become payable during the previous year shall be allowed as deduction.
4-- Non statutory/unrecognized welfare fund contributions-Sec 40A (9)
Any contribution made by the assessee to unrecognised or non-statutory welfare fund
accounts is not deductible. It may be noted that any sum paid by the assesse as an employer
towards recognized provident fund or an approved superannuation fund Sec. 36 (1) (iv);
Approved pension scheme-Sec. 36 (iva) and approved gratuity fund Sec. 36 (1) (v) shall be
allowed deduction.

Sec.43 B Deduction based on
actual payment
Certain expenses which are otherwise deductible shall be disallowed unless payment is made
within the stipulated time limit and the evidence for payment of such tax is furnished along
with the return of income. The nature of such expenses an the time stipulated for payment
are as follows.
1. Any sum payable by the assessee by way of-
i. Any tax, duty, cess or under any law in force;
ii. contribution to any recognized provident fund or superannuation fund or gratuity
fund or any other fund for the welfare of the employees.
iii. any bonus or commission to employees;
iv. Any interest on borrowing from any public financial institution or State financial
corporation or State industrial investment corporation;
v. interest on loans and advances from a scheduled bank,
vi. any sum payable by the assessee as an employer in lieu of any leave at the
credit of his employee, Shall not be allowed as deduction unless the payments are
actually made within the due date for filing the return of income u/s. 139(1). If the
payment is made after the due date for filing the return, deduction can be claimed only in
the year of actual payment.

Note: Interest payable on term loans to specified financial institutions and interest payable on
any loans and advances to scheduled banks are governed by the provisions of Sec. 43B. There
are instances where in case of default of payment of interest by the assessee, such unpaid
interest is converted into loan by the financial institutions/scheduled banks, Such conversion of
unpaid interest into loan shall not be deemed to be payment of interest for the purpose of
Sec.43B and hence, disallowance u/s. 43B shall apply. Accordingly, such interest converted as
loan, shall be allowed as deduction only in the year in which the converted loan is actually
paid.
Case law
1. In case where assessee repaid the refund of excise duty along with interest as per
the courts order, such interest could not be treated as statutory liability and
therefore, does not partake the character of tax, cess, duty or fee as covered u/s.43B-
CIT vs. Dinesh Mills Ltd. (2008) 32 ITR 164 (Guj).
2. Royalty payable to government for extraction limestone is a tax for all purpose
including Sec. 43B of the Income-tax Act. Therefore, unpaid liability for royalty
within the due date prescribed u/s. 43B shall disallowed-Gorelal Dubey vs. CIT,
(2001)248 ITR 3 (SC).
Circular No 496 dt: 25.09.1987
Some of the State Governments have introduced sales tax deferred payment scheme as part of
incentives for setting up the industries in the backward area, accordingly, these units are
allowed to retain the sales tax collected by them for certain period. In such cases, the sales tax
shall be considered to have been paid for the purpose of section 43B.

Circular No. 674 dt: 29.12.1993
Some of the State Governments, instead of amending the Sales Tax Act, have issued orders
that sales tax shall be deemed to have been collected and subsequently disbursed as loan,
Board has clarified that even in these cases, deduction of sales tax shall be allowed to the
assessee on due basis.
Sec 43CA Sec 50C is applicable if a Capital Asset (land or /& building) is transferred for a consideration
which is lessser than stamp duty. This sec is not applicable if land or building is transferred as
SIT.
Sec 43CA has been inserted from AY 14-15 . It provides that where the consideration for the
transfer of an Asset (other than capital asset), being land or building or both, is less than the
stamp duty value, the value so adopted shall be deemed to be the full value of the
consideration for the purpose of computing income under the head PGBP.
When date of registration and date of agreement are not same: Where the date of an
agreement fixing the value of consideration for the transfer of the assets & the date of
registration of the transfer of the asset are not same, the stamp value may be taken as on the
date of the agreement for transfer. However this exception shall apply only in those cases

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where amount of consideration (or part thereof) FOR THE TRANSFER HAS been received
by any other mode (other than cash) on or before the date of the agreement.
Challenge to stamp value duty: The assessee can claim the the value adopted for stamp duty
purposes exceeds the FMV of the property as on the date of transfer. If this claim is made
before AO & assessee has not disputed the value so adopted in any appeal or revision or
reference before any authority or court, the AO shall refer it to the valuation officer u/s 55A. If
the value determined by the valuation officer is less than the value adopted for stamp duty
purposes, the AO may take such FMV .
Sec 32AC Investment Allowance This Sec has been inserted to provide for investment allowance in order to encourage
substantial investment in new plant and machinery . This allowances is in addition to
Depreciation.,
Investment Allowance will be allowed if the following conditions are satisfied:
1- Assessee: Company
2- It engaged in the business of manufacture or production of any article or things.
3- Purchase of new plant & machinery, except the following :
a- Any plant or machinery which before its installation by the assessee was
used either within or outside India by any other person.
b- Any plant or machinery installed in any office premises or any residential
accommodation including accommodation in the nature of a guest house.
c- Any office appliance including computer or computer software.
d- Any vehicle
e- Ship or aircraft
f- Any plant or machinery the whole of the actual cost of which is allowed
as deduction (whether by way of depreciation or otherwise) in computing the income
chargeable under the head PGBP of any previous year.
4- The new asset should be acquired & installed (both) within 1-4-13 to 31-3-15 .
5- The agreegate amount of actual cost of such new asset should be more than Rs 100
crores
If the above conditions are satisfied then the Investment Allowance will be available for AY
14-15 & 15-16 as follows:
a- AY 14-15: 15% of actual cost of new asset acquired and installed during the PY 13-
14.
b- AY 15-16 : Amount of deduction is to be calculated as follows:

Actual cost of new asset acquired and installed during 1-4-13 to 31-3-15 A
Less: Investment allowances allowed for AY 14-15 B
Investment allowance for AY 15-16 A-B

Withdrawal : The new asset should not be sold or otherwise transferred within a period of 5
years from the date of its installation. If transfereed then the allowances allowed to assessee
shall be deemed to be the income of the assessee to the PY in which such asset is sold or
otherwise transferred. That income is taxable under the head PGBP. Such income shall be
taxable in addition to taxability of capital gain which arises u/s 45 read with sec 50.

Exception: The above restriction shall not apply in a case of amalgamation or demerger.

Sec.44AA Maintenance of books
of account

Business assesses
In the case of any assessee carrying on business or profession the books of account are
required to be maintained in the following cases:
(1) Where the income from such business or profession has exceeded Rs. 1,20,000 in any of
the three preceding previous years; or is likely to exceed Rs. 1,20,000 during the current
previous year in case of newly setup business or profession.
(2) If the turnover or sales or gross receipts has exceeded Rs. 10,00,000 in any of the three
preceding years; or is likely to exceed Rs. 10,00,000 during the current previous year in
case of newly setup business or profession.
(3) Where the profits and gains from the business are deemed to be the profits and gains of
the assessee under sections 44AE, 44BBB and the assessee has claimed his income to
be lower than the income prescribed in those provisions during the previous year.
(4) Where the profits and gains from the business are deemed to be the profits and gains of
the assessee u/s. 44AD and during such previous year his income exceeds the basic
exemption limit.
These assessees are required to maintain such books of account and documents as may
enable the Assessing Officer to compute the total income in accordance with the
provisions of the Income Tax Act, 1961
Books to be maintained : The above mentioned assessees are required to maintain the

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following :-
a. cash book
b. Ledger
c. Journal (if mercantile system is adopted)
d. Copies of bills issued for amounts exceeding Rs. 25
e. Original bills for expenditure exceeding Rs. 50
f. In the case of a medical practitioner, the following additional books are to be maintained
1- Daily case register (Form 3C)
2- Inventory as on the first and the last day of the previous year, showing the stock
medicines and other consumable accessories (where drugs and medicines are
dispensed the course of practice).
Place and period of maintenance: The books of account are required to be maintained at
the place of profession and it there is more than one place of business at the principal
place of profession. The books so maintained are required to be kept for a period of six
years from the end of the relevant assessment year. However, where the assessment in
relation to any assessment year has been re-opened u/s. 147, all the books of account and
other documents shall continue to be kept and maintained till such re-assessment has
been completed.
In the case of any assessee carrying on any of the businesses eligible for presumptive
taxation, books of account must be compulsorily maintained as required under Sec. 44
AA if the assessee claims that the income is lower than the prescribed amount
Sec.44AB Audit of accounts In the case of any person-
a. Carrying on business where the total sales, turnover or gross receipts exceeds Rs. 60
lakhs; or
b. Carrying on profession where the gross receipts exceed Rs. 15 lakhs; or
c. Carrying on the business referred to in sections 44AE or 44BB or 44BBB and claiming
his income from any such business to be lower than the income prescribed under the
relevant section; or
d. Where the profits and gains from the business are deemed to be the profits and gains of
the assessee u/s.44AD and the assessee has claimed his income lower than the income
prescribed u/s.44AD and during such previous year his income exceeds the basic
exemption limit,

The books of account for the relevant previous year are required to be audited by a
Chartered Accountant before the specified date and the audit report obtained under this
provision is required to be furnished by that date.

Where any such person is required to get his accounts audited under any other law, it is
sufficient if the person gets the accounts audited under such other law and furnish the report
in the form prescribed under this section.

The "specified date' prescribed for this purpose is 30
th
September of the relevant assessment
year. However, CBDT may extend the due date by way of notification.

In the case of an agent who earns only commission income, the audit of accounts is required
only if the comission exceeds Rs. 60 lakhs.

It may be noted that the requirement of audit u/s. 44AB does not apply to a person who
derives income of the nature referred to in the sections 44B and 44BBA.

Penalty for violating provisions of Section 44AB Section 271B
If any person fails to get his accounts audited as per the provisions of this section, penalties
may be imposed under section 271B equal to % of total turnover or gross receipt subject to
a maximum of `1,50,000.
Sec.44AD Presumptive Income 1. In the case of an assessee, being an individual. HUF or a firm other than a LLP,
carrying on any business except the business of plying, hiring or leasing goods
carriages referred in se.44AE and whose gross receipts from such business does not
exceed Rs. 100 lakhs, a sum equal to 8% of the gross receipts aid or payable to the
assessee or such higher sum as declared by the gross receipts paid or payable to the
assessee or such higher sun as declared by the assessee in the return of income shall be
deemed to be the income from such business.
2. In the case of eligible business u/s. 44AD, the provisions relating to payment of
advance tax shall not apply. This presumptive scheme of taxation shall not apply to an
assessee who has availed deduction u/s.10AA or any other deductions claimed under
Chapter VI-A specifically relating to income based deductions.
3. An assessee who is covered under the provisions of Sec. 44 AD is not subject to pay
advance tax as stipulated under the provisions of Chapter X VII-C.

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4. Where the profits and gains from the busines are deemed to be the profits and gains of
the assessee u/s. 44 AD and the assessee has claimed his income lower than the
income prescribed u/s. 44AD and during such previous year his income exceeds the
basic exemption limit shall maintain books of account as per Sec. 44AA and get the
same audited u/s. 44AB
It needs mention that in order to apply presumptive rate of 8% u/s. 44AD to determine
the income of the contractor, gross receipts shall not include any value of materials
supplied ad fixed cost by the contracted. The Supreme Court while upholding this view
in Brij Bhushan Lal Parduman Kumar vs. CIT (1996) 115 ITR 824, has held that since
there is no profit element to the contractor on supply of materials by the contractile, the
gros receipts shall not be included with the value of materials so supplied.
Sec.44AE Business of Plying,
hiring or leasing goods
carriages
1. In the case on an assessee who carries on the business of plying hiring or leasing
goods carriages and who owns not more than 10 goods carriages at any time during
the year, the income shall be deemed to be Rs. 5,000/-from a heavy goods vehicle
and Rs. 4,500/-from than a heavy goods vehicle for every month or part of the
month during which such goods vehicle is owned by the assessee in the previous
year or such higher sum as declared in the return of income by the assessee.
2. An assessee who is in possession of a goods carriage, whether taken on hire
purchase or on installments and for which the whole or part amount payable is still
due shall be deemed to be the owner of such goods carriage.
3. Where the profits and from the business are deemed to be the profits and gains of
the assessee u/s.44AE and the assessee has claimed his income lower than the
income prescribed this section, shall maintain books of account as per Sec. 44AA
and get the same audited u/s. 44AB.
4. In computing the monetary limits for Sec. 44AA and Sec. 44AB, the gross receipts
or the income from the business covered by 44AE shall be excluded.

Common Points for Sec 44AD & 44AE:
1. All deductions u/s.30 to 38 including depreciation shall be deemed to have been allowed.
2. Written down value of assets used for the purposes of such business shall be calculated as if the depreciation has actually
allowed.
3. In the case of an assessee which is a firm to which the provisions of sec.44AD or 44 AE are applied, the salary and interest
paid to its partners shall be deducted from the income computed under these provisions. The allowance of the salary and
interest shall be subject to the conditions and limits specified in Sec. 40 (b).

Speculation
business
A speculative transaction is defined u/s. 43 (5) to mean a transaction in which a contract for purchase or sale of any
commodity including stock and shares is periodically or ultimately sellled otherwise than by actual delivery or transfer of
the commodity or scrip.
Exceptions:
The following transactions shall not be considered as speculative activities :
a. A contract in respect of raw materials or merchandise entered in the normal course of business to guard against
loss due to price fluctuations in respect of the contracts for actual delivery ;
b. A contract in respect of stock and shares entered into by a dealer or investor to guard against los through price
fluctuations;
c. A contract entered into by a member of forward market or a stock exchange in the course of jobbing or
arbitrage to guard against los in the ordinary course of business.
d. An eligible transaction in respect of trading in derivatives.
For this purpose, "Eligible transaction" with reference to derivatives means-

(a) any transaction carried out electronically on screen-based systems through a stock broker or sub-
broker in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 or the
Securities and Exchange Board of India Act, 1992 or the Depositories Act, 1996 and the rules,
regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a
recognized stock exchange ; and
(b) which is supported by a time stamped contract note issued by such stock broker or sub-broker to
every client indicating in the contract note the unique client identity number allotted under Securities
Contracts (Regulation) Act, or the Securities and Exchange Board of India Act, or the Depositories
Act, and Permanent Account Number allotted under the Income-tax Act-Explanation to Sec. 43 (5)
Addition points
1. According to Explanation 2 to Sec. 28, where an assessee carries on speculative transactions which constitute a
business, such business shall be considered as a separate and distinct business.
2.Where the assessee carries on both speculative and speculative transactions on a composite basis and maintains
common accounts, it is necessary to determine the income or loss separately and distinctly from speculative business and
non-speculative business, For this purpose, the business expenditure incurred should be allocated between speculative
business activities and non-speculative business activities on a reasonable basis-Sind National Super Mills Pvt. vs. CIT
(1980)121 ITR 742 (Bom)

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Adventure in
the nature of
trade
A transaction not frequently done but has the character of trade is viewed as 'Adventure in nature of trade.' Even an
isolated transaction may be considered as business under certain facts and circumstances
Sec 145 METHOD OF ACCOUNTING- Profits are to be computed in accordance to the cash or mercantile method of
accounting regularly employed in accordance with Accounting Standard notified by the Central Government.The Central
Government has notified two Accounting Standard for the assessee following mercantile system of
accounting. AS 1: Discloser of Accounting Policies. ASII: Disclosure of prior period and extraordinary items and
changes in accounting policies
Sec. 145A METHOD OF ACCOUNTING IN CERTAIN CASES
The valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under
the head Profits and gains of business or profession shall be
(a) in accordance with the method of accounting regularly employed by the assessee; and
(b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called actually
paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

It may be noted that even if the assessee is allowed modvat/cenvat credit of excise or CVD of customs paid by him, such
excise or CVD of customs shall be included in the valuation of purchase and sale of goods and inventory in determining
the business income..
Book entries
are not final
and
conclusive-

Courts have held that book entries are not decisive or conclusive in determining the allow ability or taxability of a
particular item of expenditure or income. Mere existence or absence of ebtries in books of account does not lead to any
conclusion under the Income-tax Act.

An item of income as appearing in the books of account shall be considered for taxation, only if it is an income under the
Income-tax Act. To illustrate, where assets are revalued and the appreciation is quantified and credited to the profit and
los account, there is no generation of income merely by such book entry. Such amount cannot be charged to tax. Only
when the asset is transferred, the taxability of the income or gain arises-CIT vs. Hazarimal Milapchand Surana. (2003)
262 ITR 573 (Raj)

The assessee claimed interest on loans, which was not provided for in the accounts, as deduction. The Assessing Officer
disallowed the claim on the ground that the expenditure was not proided for in the accounts. Merely because entries in
the books of account were not made would not disentitle the claim or deduction of the amount of interest payable on the
loans, which accrued during the year under consideration-CIT vs. U.P. Electronics Corporation Ltd (2006)282 ITR (All)
Some Important Points:
Issue expenses
of shares and
debentures
Share issue expenses are capital in nature and therefore cannot be claimed as deduction. The only provision under which
deduction can be claimed in respect of share issue expenses is section 35D of the Income-tax Act subject to eligibility
and fulfillment of the relevant conditions. Similarly, expenses incurred for rights issue of shares is also capital
expenditure.

Fees paid to the Registrar of Companies for enhancement of capital is a capital expenditure and not deductible u/s.37(1).

When bonus shares are issued, there is no fresh inflow of funds or increase in the capital employed. The reserves of the
entity get converted into share capital of the company. The total funds available with the entity remain the same, both
before and after the issue of bonus shares. Accordingly, any expenditure incurred in connection with issue of bonus
shares is revenue expenditure.

The expenses incurred on raising finance through borrowings either by issue of debentures or otherwise is deductible as
revenue expenditure.

Expenses incurred by a company on issue of convertible debentures shall be revenue expenditure.

Where redeemable debentures are issued at a discount, the discount incurred is revenue expenditure.
Travelling Expense incurred for travel abroad to explore the possibility of expansion of existing business is revenue expenditure.
Know-how
expenses
Where the assessee obtains a mere right to use for a limited period the techical knowledge, there is no acquisition of any
asset in the nature of know-how and therefore it is revenue expenditure.
Compensation
for workmen
If compensation is paid to laborers upon closure of entire business it is capital expenditure. If it is for closing down any
division or unit while the remaining business is continued, it shall be regarded as revenue in nature.
Valuation of
closing Stock
When a firm is dissolved and the business is discontinued by the firm which is taken over by the partner, the closing
stock needs to be valued at market value and not at cost-ALA Firm vs. CIT, (1991) 189 ITR 285 (SC).

If the firm is dissolved due to death of a partner and the surviving partners reconstitute the firm and continue the business
as before, the firm is entitled to adopt cost or market price whichever is lower. Since the firm has not discontinued the
business, the question of adopting fair market value does not arise-Sakthi trading Co. vs. CIT, (2001) 250 ITR 871 (SC).

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In the case of financial lease, the lessee can claim depreciation.

Depreciation in the case of hire purchase-

Depreciation can be claimed by the hirer

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