PROFITS AND GAINS OF BUSINESS OR PROFESSION

Section Reference - Section 28 to Section 44D

Sectio
n
28
29
30
31
32
32AC
32AD

33AB
33ABA
35
35ABB
35AC
35AD
35CCA
35CCC
35CCD
35D
35DD
35DD
A
35E
36
37(1)
37(2B)
38
40
40A
41
42
43
43A
43B

Particulars
Profits and Gains of Business or Profession - Scope of Income under
this Head
Income from Profits and Gains of Business or Profession - how
computed ?
Rent, Rates, Taxes, Repairs and Insurance for Buildings
Repairs and Insurance of Machinery, Plant and Furniture
Depreciation
Incentive for acquisition and installation of new plant or machinery
by manufacturing Company
Manufacturing industries set up in the notified backward areas of
specified States to be eligible for a deduction @ 15% of the actual
cost of new plant & machinery acquired and installed during the
previous year.
Tea Development Account / Coffee Development Account and
Rubber Development Account
Site Restoration Fund
Expenditure on Scientific Research
Expenditure for obtaining licence to operate telecommunication
services
Expenditure on eligible projects or schemes
Deduction in respect of expenditure on specified business
Expenditure by way of payment to association or institutions for
Rural Development Programmes
Weighted Deduction of 150% for expenditure incurred on
agricultural extension project
Weighted Deduction of 150% for expenditure incurred by a
Company on Skill development project.
Amortisation of certain preliminary expenses
Amortisation in case of amalgamation or demerger
Amortisation of expenditure under Voluntary Retirement Scheme
(VRS)
Deduction for expenditure on prospecting etc., for certain minerals
Other Deductions
General Deductions
Advertisement to political parties
Building etc., partly used for business, etc., or not exclusively so
used
Amounts not deductible
Expenses or payments not deductible in certain circumstances
Deemed profits chargeable to tax
Special provisions for deductions in the case of business for
prospecting etc., for mineral oil
Definitions
Exchange Rate fluctuation
Certain deductions to be allowed only on actual payment
24

43C
43CA

Determination of Cost of acquisition of Stock-in-trade

Special provision for full value of consideration for transfer of assets
other than capital assets in certain cases
43D
Special provisions in case of income of public financial institutions
etc.,
44
Insurance Business
44A
Special provision for deduction in the case of trade, professional or
similar association
44AA
Maintenance of accounts by certain persons carrying on business or
profession
44AB
Compulsory Audit of accounts
44AD
Special provisions for computing profits and gains of any business
(excluding the business covered under section 44AE)
44AE
Special provisions for computing profits and gains of business of
plying, hiring or leasing goods carriages
44B
Special provisions for computing profits and gains of shipping
business in the case of non-residents
44BB
Special provisions for computing profits and gains in connection with
the business of exploration etc., of mineral oils.
44BBA Special provisions for computing profits and gains of business of
operation of aircraft in the case of non-residents
44BBB Special provisions for computing profits and gains of foreign
companies engaged in the business of civil construction, etc., in
certain turnkey power projects.
44C
Deduction of Head office expenditure in the case of non-residents
44DA
Special provisions for computing income by way of royalties etc., in
the case of foreign Companies.
44DB
Special provision for computing deductions in the case of business
reorganisation of co-operative Banks
Other Sections relating to the head "Profits and Gains of Business or
Profession"
Sectio
n
2(11)
2(13)
2(36)
2(29BA
)
145
145A

Particulars
Block of Assets - defined
Business - defined
Profession - defined
Manufacture - defined
Method of Accounting
Method of Accounting in certain cases

Introduction
Section 2(13) - Business:
Section 2(13) defines "Business" to include any trade, commerce or manufacture
or any adventure or concern in the nature of trade, commerce or manufacture.

25

Business connotes some activity which is carried on by devoting time, attention

and labour of a person either by himself or through others normally with a
motive to make profits.
Section 2(29BA) - Manufacture:
Section 2(29BA) defines the term "Manufacture" to mean a change in a nonliving physical object or article or thing:
a) resulting in transformation of the object or article or thing into a new and
distinct object or article or thing having a different name, character and
use; or
b) bringing into existence of a new and distinct object or article or thing with
a difference chemical composition or integral structure.
Section 2(36) - Profession:
Section 2(36) defines "Profession" to include a vocation.
Therefore, even if a person carries on any activity, not on the basis of ability and
knowledge acquired out of a professed study, degree or diploma but on account
of inborn talent, skill and attributes, any income derived there from shall also be
considered as professional income. For instance, income earned by rendering
discourses on philosophy, religion etc.,
It is to be noted that in the course of defining the word "Business", the legislature
has used the phrase 'Adventure or concern in the nature of trade, commerce or
manufacture'. The significance of this phrase has to be understood in order to
appreciate the definition of Business.
Adventure in the nature of trade:
The phrase 'Adventure or concern in the nature of trade, commerce or
manufacture' is not defined in the Act. In a general sense, a transaction not
frequently done but has the character of trade is viewed as "Adventure in the
nature of trade". Even an isolated transaction may be considered as business
under certain facts and circumstances. The following factors will be relevant to
decide as to whether execution of the transaction tantamount to the carrying on
the business or not:
a)
b)
c)
d)
e)
f)
g)

the nature of the item dealt with;

the intention of the person;
the periodicity of the transactions;
the efforts taken which culminate into the transaction;
value addition made to the quality of the commodity purchased;
the incidence associated with purchase and sale;
the element of pride of possession.

Further, it is to be noted that none of the above factors can independently

provide a conclusive test. But all these factors will have to be looked into in a
comprehensive manner to decide as to whether a transaction can be considered
as a Business transaction or not.
Section 28 - Chargeability or Scope

26

The scope of the head "Profits and Gains of Business or Profession" is governed
by Section 28, Section 41 and Section 176 of the Income Tax Act, 1961.
As per Section 28, Income from Business or profession carried on during the
previous year shall be chargeable to tax.
Section 41 identifies items which normally would not have the character of
income but are deemed as Income as they have been earlier allowed as a
deduction.
Section 176, relates to a situation where income is earned after discontinuance
of business or profession.
As per Section 28, the following items of income shall be chargeable to tax under
the head "Profits and gains of business or profession":
i.

ii.

iii.
iv.
v.
vi.

vii.

viii.

Income arising to any person by way of profits and gains from the
business, profession or vocation carried on by him at any time during the
previous year.
Any compensation or other payment due to or received by:
a) Any person, by whatever name called, managing the whole or
substantially the whole of (i) the affairs of an Indian company or (ii)
the affairs in India of any other company at or in connection with
the termination of his management or office or the modification of
any of the terms and conditions relating thereto;
b) any person, by whatever name called, holding an agency in India
for any part of the activities relating to the business of any other
person at or in connection with the termination of the agency or the
modification of any of the terms and conditions relating thereto;
c) any person, for or in connection with the vesting in the Government
or any corporation owned or controlled by the Government under
any law for the time being in force, of the management of any
property or business ;
Income derived by any trade, professional or similar associations from
specific services rendered by them to their members.
Profits on sale of a license granted under the Imports (Control) Order, 1955
made under the Imports and Exports (Control) Act, 1947.
Cash assistance (by whatever name called) received or receivable by any
person against exports under any scheme of the Government of India.
Any Customs duty or Excise duty drawback repaid or repayable to any
person against export under the Customs and Central Excise Duties
Drawback Rules, 1971.
Any profit on the transfer of the Duty Entitlement Pass Book Scheme,
being Duty Remission Scheme, under the export and import policy
formulated and announced under section 5 of the Foreign Trade
(Development and Regulation) Act, 1992.
Any profit on the transfer of Duty Free Replenishment Certificate, being
Duty Remission Scheme, under the export and import policy formulated
and announced under section 5 of the Foreign Trade (Development and
Regulation) Act, 1992.

27

ix.

The value of any benefit or perquisite whether convertible into money or

not, arising from business or the exercise of any profession.
Any interest, salary, bonus, commission or remuneration, by whatever
name called, due to or received by a partner of a firm from such firm will
be deemed to be income from business. However, where any interest,
salary, bonus, commission or remuneration by whatever name called, or
any part thereof has not been allowed to be deducted under section 40(b),
in the computation of the income of the firm the income to be taxed shall
be adjusted to the extent of the amount disallowed. In other words,
suppose a firm pays interest to a partner at 20% simple interest p.a. The
allowable rate of interest is 12% p.a. Hence the excess 8% paid will be
disallowed in the hands of the firm. Since the excess interest has suffered
tax in the hands of the firm, the same will not be taxed in the hands of the
partner.
Any sum received under a Keyman insurance policy including the sum
allocated by way of bonus on such policy will be taxable as income from
business. Keyman insurance policy means a life insurance policy taken
by a person on the life of another person who is or was the employee of
the first mentioned person or is or was connected in any manner
whatsoever with the business of the first mentioned person.
Any sum received or receivable, in cash or kind, on account of any capital
asset (in respect of which deduction has been allowed under section
35AD) being demolished, destroyed, discarded or transferred.
any sum whether received or receivable, in cash or kind, under an
agreement
a) for not carrying out any activity in relation to any business; or
b) not to share any 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.

x.

xi.

xii.

xiii.

However, the above sub-clause (a) shall not apply to

any sum, whether received or receivable, in cash or kind, on account of

transfer of the right to manufacture, produce or process any article or
thing or right to carry on any business, which is chargeable under the
head Capital gains;
any sum received as compensation, from the multilateral fund of the
Montreal Protocol on Substances that Deplete the Ozone layer under the
United Nations Environment Programme, in accordance with the terms of
agreement entered into with the Government of India.

Section 29 - Income from Profits and Gains of Business or Profession how computed ?
The provisions of Section 29 makes it clear that income referred to in Section 28
shall be computed in accordance with the provisions contained in Section 30 to
43D. It must, however, be remembered that in addition to the specific allowances
and deductions stated in sections 30 to 36, the Act further permits allowance of
items of expenses under the residuary section 37(1), which extends the
28

allowance to items of business expenditure not covered by sections 30 to 36,

where these are allowable according to accepted commercial practices.
An item of loss or expenditure not falling within any of the express deductions
may be allowed if it is deductible on the basis of common principles of
commercial expediency. Thus, in determining whether a particular item (other
than those covered by sections 30 to 36) is deductible from profits, it is
necessary first to enquire whether the deduction is expressly or by necessary
implication prohibited by the Act and then, if it is not so prohibited, to consider
whether it is of such nature that it should be charged against income in the
computation of the profits and gains of business or profession. Accordingly, a
loss due to embezzlement or theft of cash by an employee during the course of
business is allowable as a deduction in computing the business profit, even
though they are not covered by any specific provision of the Act. Losses of noncapital nature which are incidental to the trade and arise unexpectedly in the
regular course of the business would be allowed as losses incidental to the trade
though there is no specified provision in the Act for allowing such deductions.
Examples of such losses are embezzlement, theft, robbery or destruction of
assets, overdrawing by employees, loss of stock in trade by damage or by fire or
by ravages of white ants or by enemy action during war or by negligence or
fraud of employees, etc.
Section 30 - Rent, rates, taxes, repairs and insurance for buildings
1. Section 30 allows deduction in respect of the rent, rates, taxes, repairs and
insurance of buildings used by the assessee for the purpose of his
business or profession.
2. Where the premises are used partly for business and partly for other
purposes, only a proportionate part of the expenses attributable to that
part of the premises used for purposes of business will be allowed as a
deduction.
3. If the assessee is occupying the premises as a tenant, rent paid is
deductible. Further, if he undertakes to do the repairs, the cost of such
repairs is also deductible.
4. If the assessee is the owner, the expense incurred towards current repairs
is deductible.
5. Any Land revenue, local rates, municipal taxes and insurance in respect of
the premises used for the purposes of the business or profession are
deductible. Rates and taxes levied by a foreign Government are also
allowed.
6. However, any repair expenditure, which is of capital nature shall not be
allowed as deduction under this section.
Section 31 - Repairs & Insurance of Machinery, Plant and Furniture:
The following expenses are spelt out as deductible in respect of machinery, plant
and furniture used for assessee's business or profession:
1. Current repairs;
2. Insurance premium.

29

However, any repair expenditure of capital nature shall not be allowed as a

deduction under this section.
It is important to note that if machinery, plant and furniture are taken on hire,
the rent payable is not covered by Section 31 but shall be allowed as deduction
u/s 37(1).
Important points u/s 31:
An expenditure would qualify as "current repairs" if it is incurred to
'preserve and maintain' an already existing asset. Such expenditure
should not bring into existence any new asset or an advantage of an
enduring nature.
One has to examine whether the costs of replacements are revenue or
capital expenditure based on the following criteria:
what is replaced is only a part;
what is replaced had gone defective or old so as to require
replacement;
the replaced asset had to be sold either as junk or at nominal value
or it remains unsold and unusable;
there has been no significant increase in productive capacity after
the replacement.
In case if the above criteria is not satisfied, the expenditure can neither be
claimed u/s 31 nor u/s 37(1) but depreciation u/s 32 can be availed subject
to fulfillment of relevant conditions under the said section.
Section 32 - Depreciation
Under the provisions of the Income Tax Act, 1961 an assessee is allowed to claim
depreciation under either of the following two methods:
1. Written Down Value Method (WDV)
2. Straight Line Method (SLM)
Depreciation can be claimed in respect of :
a) Buildings, machinery, plant or furniture, being tangible assets; and
b) know-how, patents, copyrights, trademarks, licenses, franchises or any
other business or commercial rights of similar nature, being intangible
assets,
owned by the assessee and used for the purpose of business or profession of the
assessee. For this purpose, assets may be wholly or partly owned by the
assessee.
Conditions for claiming Depreciation:
The following conditions are required to be satisfied for availing depreciation u/s
32:
1. The assessee must be the owner of the asset.
2. The assessee must use the asset for the purpose of carrying on the
business or profession.
3. The asset must be used during the relevant previous year.
4. The asset must fall under eligible class of assets.
30

Note:
Assets may be wholly or partly owned by the assessee. i.e. Fractional
ownership is recognized u/s 32 for claiming Depreciation.
Exceptions to the condition that assessee must be owner of the asset:
1. If the assessee is occupying any building as a tenant for the
purpose of carrying on his business or profession, any capital
expenditure
incurred
towards
renovation,
extension,
or
improvement to such building can be treated as the value of
building belonging to him and depreciation can be claimed on such
amount. - Explanation 1 to Section 32.
2. In the case of hire purchase contract by which assessee acquires an
asset for the purpose of business or profession, depreciation can be
claimed by capitalising the value equivalent to cash price of such
asset. In these types of contract, the assessee becomes the owner
only after paying the last installment. Notwithstanding that,
Depreciation can be claimed.
3. It is not mandatory for the assessee to have the legal ownership of
a property. Merely because the title deed is not yet registered in the
assessee's name, depreciation cannot be denied. Beneficial
ownership in terms of possession, usage and control is sufficient to
claim depreciation u/s 32.
Usage includes "passive use" and not necessarily "active use".
If assets are continued in block (under the WDV method), so long as the
block is in use or available for use, normal depreciation can be claimed.
However, if an asset acquired during the previous year is put to use for
less than 180 days during that previous year, then, only 50% of the normal
depreciation is permissible in respect of that asset.
The asset in respect of which depreciation is claimed should fall within the
eligible class of assets. i.e. either under the Tangible assets or under the
Intangible assets.
Section 2(11) - Block of assets:
"Block of assets" means a group of assets falling within a class of assets
comprising of
a) 'tangible assets' being buildings, machinery, plant or furniture;
b) 'intangible assets' being know-how, patents, copyrights, trademarks,
licenses, franchises or any other business or commercial rights of similar
nature,
in respect of which the same percentage of depreciation is prescribed.
This concept of Block of assets is applicable only when depreciation is computed
according to Written Down Value (WDV) Method.
How to group assets into block ?
1. Assets are to be first classified as Tangible assets and Intangible assets.

31

2. All the tangible assets used for the purpose of business or profession and
eligible for depreciation shall then be classified into building, machinery,
plant and furniture.
3. After such segregation of tangible assets under these four classifications
of assets, grouping needs to be done within each such classification on the
basis of the rate of depreciation prescribed in the Income Tax Rules.
4. Each such group of assets will be identified as a block of assets.
5. Similar exercise has to be followed for intangible assets also.
Note:

If two assets fall under difference classification, they cannot be grouped

together even though the depreciation rate may be the same. For
example, pure temporary erections and books owned by professionals
being annual publications do qualify for the same percentage of
depreciation (100%) but cannot form part of the same block as they fall
under different class of assets.
It is to be noted 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.
For the purpose of Classification of various assets, the following points
have to be considered:

Buildings:
'Building' is not defined in the Act. Taking its general meaning
Buildings includes road, bridges, culverts, wells and tube wells.
Machinery:
Machinery is not defined in the Act but it is to be understood as any
asset which is directly connected with the production or
manufacture or processing of a product or an article or a thing.
Furniture:
Furniture is also not defined in the Act. It is generally understood
that furniture refers to assets used for convenience and decoration.
Plant - Section 43(3) - Plant defined:
Section 43(3) defines Plant. According to Section 43(3), "Plant"
includes ships, vehicles, books, scientific apparatus and surgical
equipments used for the purpose of business or profession, but
does not include tea bushes or live stock or buildings or furniture
and fittings. The term 'Plant' is to be understood in a wider sense so
as to include any assets not falling under other classifications but
which is essential or inevitable to carry on the business or
profession of a person. However, theatre building, hospital building
and hotel building though specially equipped for purposes of
business are still buildings and cannot be treated as plant for the
purpose of claiming depreciation.

Section 43(1) - Actual Cost:

Section 43(1) defines Actual Cost.
32

The expression actual cost means the actual cost of the asset to the assessee
as reduced by that portion of the cost thereof, if any, as has been met directly or
indirectly by any other person or authority
Actual cost in certain special situations [Explanations to section 43(1)]
Explanation 1
Where an asset is used for the purposes of business after it ceases to be
used for scientific research related to that business, the actual cost to the
assessee for depreciation purposes shall be the actual cost to the
assessee as reduced by any deduction allowed under section 35(1)(iv).
Explanation 2
Where an asset is acquired by way of gift or inheritance, its actual cost
shall be the written down value to the previous owner.
Explanation 3
Where, before the date of its acquisition by the assessee, the asset was at
any time used by any other person for the purposes of his business or
profession, and the Assessing Officer is satisfied that the main purpose of
the transfer of the asset directly or indirectly to the assessee was the
reduction of liability of income-tax directly or indirectly to the assessee (by
claiming depreciation with reference to an enhanced cost) the actual cost
to the assessee shall be taken to be such an amount which the Assessing
Officer may, with the previous approval of the Joint Commissioner,
determine, having regard to all the circumstances of the case
Explanation 4
Where any asset which had once belonged to the assessee and had been
used by him for the purposes of his business or profession and thereafter
ceased to be his property by reason of transfer or otherwise, is re-acquired
by him, the actual cost to the assessee shall be :
(a) the written down value at the time of original transfer; or
(b) the actual price for which the asset is re-acquired by him whichever is
less
Explanation 4A:
Where before the date of acquisition by the assessee say, Mr. A, the assets
were at any time used by any other person, say Mr. B, for the purposes of
his business or profession and depreciation allowance has been claimed in
respect of such assets in the case of Mr. B and such person acquires on
lease, hire or otherwise, assets from Mr. A, then, the actual cost of the
transferred assets, in the case of Mr. A, shall be the same as the written
down value of the said assets at the time of transfer thereof by Mr. B
Explanation 5:
Where a building which was previously the property of the assessee is
brought into use for the purposes of the business or profession, its actual
cost to the assessee shall be the actual cost of the building to the
assessee, as reduced by an amount equal to the depreciation calculated at
the rates in force on that date that would have been allowable had the
33

building been used for the purposes of the business or profession since the
date of its acquisition by the assessee
Explanation 6:
When any capital asset is transferred by a holding company to its
subsidiary company or by a subsidiary company to its holding company
then, if the conditions specified in section 47(iv) or (v) are satisfied, the
transaction not being regarded as a transfer of a capital asset, the actual
cost of the transferred capital asset to the transferee company shall be
taken to be the same as it would have been if the transferor company had
continued to hold the capital asset for the purposes of its own business
Explanation 7:
In a scheme of amalgamation, if any capital asset is transferred by the
amalgamating company to the amalgamated company, the actual cost of
the transferred capital assets to the amalgamated company will be taken
at the same amount as it would have been taken in the case of the
amalgamating company had it continued to hold it for the purposes of its
own business
Explanation 7A:
In the case of a demerger, where any capital asset is transferred by the
demerged company to the resulting company, the actual cost of the
transferred asset to the resulting company shall be taken to be the same
as it would have been if the demerged company had continued to hold the
asset. However, the actual cost shall not exceed the WDV of the asset in
the hands of the demerged company.
Explanation 8:
Certain taxpayers have, with a view to obtain more tax benefits and
reduce the tax outflow, resorted to the method of capitalizing interest paid
or payable in connection with acquisition of an asset relatable to the
period after such asset is first put to use. Certain judicial rulings also
favored this approach. This capitalization implies inclusion of such interest
in the Actual Cost of the asset for the purposes of claiming depreciation,
investment allowance etc. under the Income-tax Act, 1961. This was never
the legislative intent nor was it in accordance with recognized accounting
practices. Therefore, with a view to counter-acting tax avoidance through
this method and placing the matter beyond doubt, Explanation 8 to
section 43(1) provides that any amount paid or payable as interest in
connection with the acquisition of an asset and relatable to period after
asset is first put to use shall not be included and shall be deemed to have
never been included in the actual cost of the asset
Explanation 9:
Where an asset is or has been acquired by an assessee, the actual cost of
asset shall be reduced by the amount of duty of excise or the additional
duty leviable under section 3 of the Customs Tariff Act, 1975 in respect of

34

which a claim of credit has been made and allowed under the Central
Excise Rules, 1944
Explanation 10:
Where a portion of the cost of an asset acquired by the assessee has been
met directly or indirectly by the Central Government or a State
Government or any authority established under any law or by any other
person, in the form of a subsidy or grant or reimbursement (by whatever
name called), then, so much of the cost as is relatable to such subsidy or
grant or reimbursement shall not be included in the actual cost of the
asset to the assessee.
However, where such subsidy or grant or reimbursement is of such nature
that it cannot be directly relatable to the asset acquired, so much of the
amount which bears to the total subsidy or reimbursement or grant the
same proportion as such asset bears to all the assets in respect of or with
reference to which the subsidy or grant or reimbursement is so received,
shall not be included in the actual cost of the asset to the assessee.
Explanation 11:
Where an asset is acquired outside India by an assessee, being a nonresident and such asset is brought by him to India and used for the
purposes of his business or profession, the actual cost of asset to the
assessee shall be the actual cost the asset to the assessee, as reduced by
an amount equal to the amount of depreciation calculated at the rate in
force that would have been allowable had the asset been used in India for
the said purposes since the date of its acquisition by the assessee

Explanation 12:
Where any capital asset is acquired under a scheme for corporatisation of
a recognized stock exchange in India approved by the SEBI, the actual cost
shall be deemed to be the amount which would have been regarded as
actual cost had there been no such corporatization
Explanation 13:
Explanation 13 has been inserted in section 43(1) to provide that the
actual cost of any capital asset, on which deduction has been allowed or is
allowable to the assessee under section 35AD, shall be NIL. This would be
applicable in the case of transfer of asset by the assessee where:
1. the assessee himself has claimed deduction under section 35AD; or
2. the previous owner has claimed deduction under section 35AD. This
would be applicable where the capital asset is acquired by the
assessee by way of a) gift, will or an irrevocable trust;
b) any distribution on liquidation of the company;
c) any distribution of capital assets on total or partial partition of a
HUF;

35

d) any transfer of a capital asset by a holding company to its

100% subsidiary company, being an Indian company;
e) any transfer of a capital asset by a subsidiary company to its
100% holding company, being an Indian company;
f) any transfer of a capital asset by the amalgamating company
to an amalgamated company in a scheme of amalgamation, if
the amalgamated company is an Indian company;
g) any transfer of a capital asset by the demerged company to the
resulting company in a scheme of demerger, if the resulting
company is an Indian company;
h) any transfer of a capital asset or intangible asset by a firm to a
company as a result of succession of the firm by a company in
the business carried on by the firm, or any transfer of a capital
asset to a company in the course of demutualization or
corporatization of a recognized stock exchange in India as a
result of which an association of persons or body of individuals
is succeeded by such company (fulfilling the conditions
specified);
i) any transfer of a capital asset or intangible asset by a sole
proprietary concern to a company, where the sole proprietary
concern is succeeded by a company (fulfilling the conditions
specified) which would have been regarded as actual cost had
there been no such corporatisation.
j) any transfer of a capital asset by a company to an LLP as a
result of conversion of the company into LLP (fulfilling the
conditions prescribed).
Important Note:
Explanation 5 to Section 43(1), deals with building alone, whereas, other
explanations deal with all types of assets. Therefore, it denotes that Explanation
5 shall not apply for any assets other than building. Thus, other assets shall be
recorded at their original cost of acquisition.

Depreciation Computation according to the Written Down Value (WDV) method:

Section 43(6) - Written Down Value (WDV):
Opening value of the block or the aggregate value of all the assets
forming part of the block at the beginning of the previous year
Add: Actual Cost of assets acquired during the previous year and
belonging to the same block (additions during the year)
Total
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
(deletions during the year)
WDV for the purpose of depreciation
Depreciation at the prescribed percentage - actually allowed
Closing value of the block
Note:
36

XXX
XXX
XXX
(XXX)

XXX
XXX
XXX

1. In the case of slump sale, the block value shall be reduced by the WDV of
the assets, which are subjected matter of slump sale in the hands of the
transferor.
2. WDV in the case of demerger shall be entitled to claim depreciation, after
demerger, in respect of the value arrived at by reducing the written down
value of assets prior to demerger by the WDV of assets transferred
pursuant to demerger.
3. In the case of resulting company, depreciation shall be allowed in respect
of assets transferred from the demerged company pursuant to demerger
on the WDV of such transferred assets of the demerged company
immediately before the demerger.
4. Where the WDV of any block comprise of assets with opening values as
well as the additions made during the year (which are put to use for more
than or less than 180 days) depreciation shall be computed in the
following manner:
a) 50% of the applicable rate of depreciation in respect of assets put to
use for less than 180 days; and
b) Depreciation at the normal rates on the balance amount in the
block.
Rates of Depreciation:
As per Appendix I to the Income Tax Rules, 1962 the various rates of depreciation
prescribed for the assets are as follows:
A
I
Block
1
Block
2
Block
3

Block
4
II
Block
1
III
Block
1
Block
2
Block
3

TANGIBLE ASSETS
BUILDING
Buildings (other than covered by sub-item (3) below)
which are
used mainly for residential purposes
Buildings which are not used mainly for residential
purposes
and not covered by sub-items (1) above and (3) below
Buildings acquired on or after the 1st September, 2002.
For installing machinery and plant forming part of water
supply project or water treatment system and which is put
to use for the purpose of business of providing
infrastructure facilities
under clause (i) of sub-section (4) of section 80-IA
Purely temporary erections such as wooden structures
FURNITURE AND FITTINGS
Furniture and fittings including electrical fittings
PLANT AND MACHINERY
Motors buses, motor lorries, motor taxis used in the
business of running them on hire
Aero planes, aero engines

RATE
%
5%
10%
100%

100%
10%
30%
40%

Specified air, water pollution control equipments, solid 100%

waste control
equipment and solid waste recycling and resource
recovery systems
37

Block
4

Energy Saving Devices; Sugar Works - Rollers; Flour Mills - 80%

Rollers; Iron and steel industry - Rolling mill rolls,;
Renewable energy devices
Motor cars other than those used in a business of running 15%
them on hire, acquired or put to use on or after 1-4-1990.
Computers including computer software
60%

Block
5
Block
6
Block
Annual publications owned by assessee carrying on a
7
profession
Block
Books owned by assessee carrying on business in running
8
lending libraries
Block
Books, other than annual publications, owned by assessee
9
carrying on a profession
Block 10Windmill (installed on or after 01.04.2014)
Block 11Plant & machinery (General rate)
IV
SHIPS
Block
Ocean going Ships
1
Block
Vessels ordinarily operating on inland waters not covered
2
by
sub-item (3) below
Block
Speed boats operating on inland water
3
PART
INTANGIBLE ASSETS
B
Block
Know-how, patents, copyrights, trademarks, licences,
1
franchises or any other business or commercial rights
of similar nature

100%
100%
60%
80%
15%
20%
20%
20%

25%

Note:
1. Appendix IA to the Income Tax Rules contains percentage of depreciation
prescribed for undertakings generating or generating and distributing
power which are following Straight Line Method on individual asset basis
as provided under Rule 5(1A).
2. According to Section 38, where any asset is used partly for business and
partly for personal purposes, only proportionate expenses and
depreciation as determined by the Assessing Officer can be claimed as
deduction. It is very important to note that depreciation disallowed cannot
go reduce the WDV.
Depreciation computation as per Straight Line Method (SLM):
The only method of depreciation that is recognized under Income Tax Law is WDV
method. However, undertakings engaged in the business of generation or
generation and distribution of power shall depreciate their capital assets under
Straight Line Method on individual asset basis instead of the block of assets
basis. The percentage of depreciation allowable asset wise is prescribed in
Appending IA of the Income Tax Rules. It is open to such an undertaking to opt
for claiming depreciation under the WDV method on the basis of percentage
prescribed in Appending I. Such an option has to be exercised before the due
date for furnishing the Return of Income u/s 139(1) of the Income Tax Act, 1961
for the assessment year relevant to the previous year in which it begins to
38

generate power. Such an option once exercised shall be final and shall apply to
all subsequent years.
Where an undertaking generating or generating and distributing power avails
depreciation on Straight Line Method in respect of each individual asset, the
'block of assets' concept does not apply. It needs mention that whether an
assessee claims depreciation as per SLM or WDV method only 50% of normal
depreciation is permissible in respect of the asset which is put to use for less
than 180 days during the previous year in which it is acquired.
Sale of assets by power sector following SLM method of depreciation:
Where any asset is sold, the following three provisions exclusively apply:
1. Where sale value or moneys payable is less than WDV:
Where any asset in respect of which SLM method of depreciation has been
claimed is sold, discarded, demolished or destroyed in the previous year,
the short gall, if any, in the moneys payable in respect of any such asset
as compared to the WDV shall be allowed as "Terminal Depreciation" in
that year. For this purpose, such deficiency is actually required to be
written off in the books of account of the assessee.
This treatment shall not apply if the asset is sold, discarded, demolished or
destroyed in the same previous year in which it is first brought into use. In
such a situation, the difference between the sale proceeds and actual cost
shall be treated as short term capital gain or loss, as the case may be.
2. Where sale value or moneys payable is more than WDV but less than the
Actual Cost:
As per Section 41(2), where any such asset used in the business in respect
of which depreciation has been claimed is sold, discarded, demolished or
destroyed and the moneys realizable thereof together with the amount of
scrap value, if any, exceeds the WDV then the excess to the extent of the
depreciation already allowed shall be assessable as 'balancing charge'
under the head 'Profits and gains of business or profession'
3. Where sale value or moneys payable is more than WDV as well as Actual
Cost:
Where any such asset used in the business in respect of which
depreciation has been claimed is sold, discarded, demolished or destroyed
and the moneys realizable thereof together with the amount of scrap
value, if any, exceeds the WDV then the excess to the extent of the
depreciation already allowed shall be assessable as 'balancing charge'
under the head 'Profits and gains of business or profession' and the
surplus over and above the actual cost if any, shall be assessed as Capital
Gains u/s 50A of the Income Tax Act, 1961.
Important Note:
It is to be noted that in respected of cases, other than undertaking engaged in
power sector and opting for SLM Method of Depreciation, "block of assets"
concept applies and depreciation shall be computed only on WDV basis. The
concept of 'Terminal Depreciation' u/s 32, 'Balancing Charge' u/s 41(2) and the
39

provisions of Section 50A as explained above shall apply only in respect of power
sector undertakings opted for SLM method of Depreciation.

Enhanced Depreciation / Additional Depreciation:

Enhanced Depreciation at the rate of 20% of the Actual Cost shall be allowed u/s
32 of the Act in respect of new machinery and plant (other than ships and
aircraft) acquired and installed during the year. This enhanced depreciation is
allowed in the year of acquisition/ installation in addition to normal depreciation.
Enhanced Depreciation in respect of new plant and machinery is allowable even
for existing business.
Enhanced Depreciation shall not be allowed in respect of:
1. any machinery or plant used earlier by any other person either within or
outside India (second hand plant/machinery); or
2. any machinery or plant installed in office or residence including guest
house; or
3. any office appliances or road transport vehicles; or
4. any machinery or plant, the whole of the actual cost of which is fully
allowed as a deduction in computing income under the head 'Profits and
gains of business or profession' in any one previous year.
Important Note:
1. Only an assessee engaged in the business of:
a) manufacture or production of any article or thing; or
b) generation or generation and distribution of power
can claim such enhanced depreciation.
2. The rate of enhanced depreciation of 20% shall be restricted to 10% i.e.
(50% of 20%) in case the plant and machinery is put to use for less than
180 days during the year of installation. Balance 50% of additional
depreciation will be allowed in the subsequent year, where the
plant and machinery is put to use for less than 180 days during
the previous year of acquisition and installation. To remove the
discrimination in matter of allowing additional depreciation on
plant and machinery used less than 180 days vis--vis used for
180 days or more, third proviso to section 32(1)(ii) has been
inserted to provide that the balance 50% of additional deduction
on new plant and machinery acquired and used for less than 180
days which has not been allowed in the year of acquisition and
installation of such plant or machinery, shall be allowed in the
immediately succeeding previous year.
3. Additional Depreciation @ 35% to be allowed to assessees setting
up manufacturing units in notified backward areas of specified
States and acquiring and installing of new plant & machinery.

40

Under Section 32(1) (iia), to encourage investment in new plant or

machinery, additional depreciation of 20% of the actual cost of plant or
machinery acquired and installed is allowed. Such additional depreciation
under section 32(1)(iia) is allowed over and above the normal depreciation
under section 32(1)(ii).
In order to encourage acquisition and installation of plant and machinery
for setting up of manufacturing units in the notified backward areas of the
States of Andhra Pradesh, Bihar, Telangana and West Bengal, a proviso has
been inserted to Section 32(1)(iia) to allow higher additional depreciation
at the rate of 35% (instead of 20%) in respect of the actual cost of new
machinery or plant (other than a ship and aircraft) acquired and installed
during the period between 1st April, 2015 and 31st March, 2020 by a
manufacturing undertaking or enterprise which is set up in the notified
backward areas of these specified States on or after 1st April, 2015.
Such additional depreciation shall be restricted to 17.5% (i.e., 50% of
35%), if the new plant and machinery acquired is put to use for the
purpose of business for less than 180 days in the year of acquisition and
installation.
The balance 50% of additional depreciation (i.e., 50% of 35%) would,
however be allowed in the immediately succeeding financial year.
Unabsorbed Depreciation:
1. Unabsorbed Depreciation shall be allowed to be carried forward u/s 32(2).
It shall be treated as part of current year depreciation. Even if there is no
depreciation claim in the current year, unabsorbed depreciation brought
forward shall be deemed as current year's depreciation. As a result of this,
such unabsorbed depreciation can be set off not only against income
under 'Profits and gains of business or profession' but also against income
under any other head except under the head "Salaries".
2. Unabsorbed Depreciation can be carried forward to the subsequent years
indefinitely for set off.
3. Continuity of business is not mandatory requirement in order to get the
benefit of carry forward of unabsorbed depreciation.
Explanation 5 to Section 32(1):
Depreciation allowable u/s 32(1) is mandatory and therefore, shall be allowed
even if the assessee has not claimed the deduction in respect of depreciation in
computing his total income. The assessing officer must all the depreciation in
accordance with the provisions of Law.
Section 32AC - Incentive for acquisition and installation of new plant or
machinery by manufacturing Company
Eligible Assessee: Any Company assessee engaged in the manufacture or
production of any article or thing.
Provisions effective from A.Y.2014-15:

41

Section 32AC was inserted by the Finance Act, 2013 w.e.f. A.Y.2014-15 to provide
a tax incentive by way of investment allowance to encourage huge investment in
plant or machinery.
As per section 32AC(1), a manufacturing company is entitled to deduction@15%
of aggregate investment in new plant and machinery if it is (a) engaged in the business of manufacture of an article or thing; and
(b) invests a sum of more than 100 crore in new plant or machinery during
the period beginning from 1st April, 2013 and ending on 31st March, 2015.
For A.Y. 2014-15, a manufacturing company was entitled to deduction of 15% of
aggregate amount of actual cost of new assets acquired and installed during the
financial year 2013-14, if the aggregate cost of such assets exceed 100 crore.
For A.Y.2016-17, a deduction of 15% of aggregate amount of actual cost of new
assets, acquired and installed during the period beginning on 1st April, 2013 and
ending on 31st March, 2015, as reduced by the deduction allowed, if any, for A.Y.
2014-15.
The deduction@15% under this section is in addition to the depreciation and
additional depreciation allowable under section 32(1). Further, the deduction
under section 32AC would not be reduced to arrive at the written down value of
plant and machinery.
Additional benefit under subsection (1A) inserted in Section 32AC by Finance (No.
2) Act, 2014, with effect from Assessment Year 2015-16:
This year, considering that growth of the manufacturing sector is critical for
employment generation and development of an economy, the deduction
available under section 32AC has been extended for investment made in plant
and machinery up to 31.03.2017.
Further, in order to rationalize the existing provisions of section 32AC and also to
make medium size investments in plant and machinery eligible for deduction,
new sub-section (1A) has been inserted to provide that deduction under section
32AC would be available if the company, on or after 1st April, 2014, invests more
than Rs. 25 crore in plant and machinery in a previous year.
Note:
Comparative analysis of Section 32AC(1) and Section 32AC(1A):
Assessment
Year
2014-15

2015-16

Quantum of Deduction u/s

32AC(1)
15% of the amount of Actual
Cost of new asset acquired
and
installed
between
01.04.2013 and 31.03.2014
where the cost of such new
asset exceeds Rs. 100 crores
15% of the aggregate amount
of actual cost of new asset
42

Quantum of Deduction u/s

32AC(1A)
Not applicable (since sub-section
1A was introduced by the
Finance (No. 2) Act, 2014

15% of actual cost of new asset

acquired and installed during the

2016-17

2017-18

acquired
and
installed
between
01.04.2013
and
31.03.2015,
where
the
aggregate cost of new asset
exceeds Rs. 100 Crores, as
reduced by the amount
allowed as deduction under
this
section
for
the
Assessment Year 2014-15
Not Applicable - since Subsection 1 is applicable only till
Assessment Year 2016-17
Not Applicable - since Subsection 1 is applicable only till
Assessment Year 2016-17

previous year 2014-15.

15% of actual cost of new asset

acquired and installed during the
previous year 2016-17
15% of actual cost of new asset
acquired and installed during the
previous year 2016-17

Important Points u/s 32AC:

1. Companies which are eligible to claim deduction under the existing
combined threshold limit of more than Rs. 100 crore for investment
made in previous years 2013-14 and 2014-15 shall continue to be eligible
to claim deduction under section 32AC(1), even if its investment in the
year 2014-15 is below the new threshold limit of investment of Rs. 25
crore.
2. New plant or machinery does not include
(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 appliances including computers or computer software;
(d)
any vehicle;
(e)
ship or aircraft; or
(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 Profits and gains of
business or profession of any previous year.
3. The new plant and machinery in respect of which deduction has been
claimed under section 32AC cannot be sold or otherwise transferred for a
period of 5 years from the date of installation. If it is sold or transferred
within this period, the deduction allowed earlier would be deemed as
income chargeable to tax under the head Profits and gains of business or
profession of the previous year in which such new plant and machinery is
sold or otherwise transferred. This would be in addition to the taxability of
gains on transfer of such plant and machinery.

43

In case of amalgamation or demerger, this restriction would continue to

apply to the amalgamated company or resulting company, as the case
may be, as it would have applied to the amalgamating or demerged
company.
4. Deduction u/s 32AC (1) / 32AC(1A) in respect of new plant and machinery
acquired and installed is in addition to the normal depreciation and
enhanced depreciation u/s 32.
Section 32AD - Manufacturing industries set up in the notified
backward areas of specified States to be eligible for a deduction @ 15%
of the actual cost of new plant & machinery acquired and installed
during the previous year
1) In order to encourage the setting up of industrial undertakings in the
backward areas of the States of Andhra Pradesh, Bihar, Telangana and
West Bengal, new Section 32AD has been inserted to provide a deduction
of an amount equal to 15% of the actual cost of new plant and machinery
acquired and installed in the Assessment Year relevant to the previous
year in which such plant and machinery is installed, if the following
conditions are satisfied by the assessee:
a) The assessee sets up an undertaking or enterprise for manufacture
or production of any article or thing on or after 1st April, 2015 in
any backward area notified by the Central Government in the State
of Andhra Pradesh or Bihar or Telangana or West Bengal; and
b) the assessee acquires and installs new plant and machinery for the
purposes of the said undertaking or enterprise during the period
between 1st April, 2015 and 31st March, 2020 in the said backward
areas.
2) Where the assessee is a Company, deduction under section 32AD would
be available over and above the existing deduction available under section
32AC, subject to the satisfaction of conditions there under.
Accordingly, if an undertaking is set up in the notified backward areas in
the States of Andhra Pradesh or Bihar or Telangana or West Bengal by a
Company, it shall be eligible to claim deduction under section 32AC as
well as under section 32AD if it fulfills the conditions specified in Section
32AC and the conditions specified under Section 32AD.
3) For the purposes of this section, "New plant and machine" does not
includea) any ship or aircraft;
b) any plant or machinery which before its installation by the assessee
was used either within or outside India by any other person;
c) any plant or machinery installed in any office premises or any
residential accommodation, including accommodation in the nature
of a guest house;
d) any office appliances including computers or computer software;
e) any vehicle;

44

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 Profits and
gains of business or profession of any previous year.
4) In order to ensure that the manufacturing units which are set up by
availing this incentive actually contribute to economic growth of these
backward areas by carrying out the activity of manufacturing for a
substantial period of time, a suitable safeguard restricting the transfer of
new plant and machinery for a period of 5 years has been provided.
Accordingly, section 32AD(2) provides that if any new plant and machinery
acquired and installed by the assessee is sold or otherwise transferred
except in connection with the amalgamation or demerger or reorganisation of business, within a period of 5 years from the date of its
installation, the amount allowed as deduction in respect of such new plant
and machinery shall be deemed to be the income chargeable under the
head "profits and gains from business or profession" of the previous year
in which such new plant and machinery is sold or transferred, in addition
to taxability of gains, arising on account of transfer of such new plant and
machinery.
5) However, this restriction shall not apply to the amalgamating or demerged
company or the predecessor in a case of amalgamation or demerger or
business reorganisation referred to in section 47(xiii), 47(xiiib) and 47(xiv),
within a period of five years from the date of its installation, but shall
continue to apply to the amalgamated company or resulting company or
successor, as the case may be.

Section 33AB - Tea or Coffee or Rubber Development Account

Eligible Assessee: Any assessee carrying on the business of growing and
manufacturing tea or coffee or rubber in India.
1.

Any assessee carrying on the business of growing and manufacturing tea

or coffee or rubber in India can deposit any amount with the National Bank
for Agriculture and Rural Development (NABARD) in a scheme approved by
Tea Board or Coffee Board or Rubber Board in accordance with the scheme
framed by the CBDT with the previous approval of the Central
Government. The said deposit has to be done within 6 months from the
end of the previous year or before the due date of filing the return of
Income, whichever is earlier and avail deduction.
2. Quantum of Deduction:
Deduction shall be allowed to the extent of lower of the following:
a) Amount deposited by the assessee; or
b) 40% of the profit computed under the head Profits and Gains of
Business or Profession.
3. Deduction shall be allowed before set-off of any loss brought forward u/s
72.

45

4. Where the deduction is allowed in any previous year, no deduction shall be

allowed in respect of that amount in any other previous year.
5. When an amount is withdrawn from the Deposit account and utilised in
any year, such amount withdrawn and utilised shall not be allowed as
deduction in computing the Profits and gains of business of the year of
utilisation. The amount withdrawn should be utilised in according with the
purpose specified in the scheme.
6. In case an assessee utilises the amount released by NABARD or withdrawn
from the deposit account, towards the purchase of non-eligible assets,
then the whole of such amount utilised shall be chargeable to tax in the
year in which such utilisation is done. For this purpose, non-eligible assets
means
a) plant and machinery used in any office or residence or guest house
or for manufacture of eleventh schedule items,
b) office appliances excluding computers,
c) Plant and machinery the cost of which are 100% deductible in one
year.
7. Where any asset acquired in accordance with the scheme is sold or
otherwise transferred before the expiry of 8 years from the end of the
previous year in which it was acquired, then the cost of the asset relatable
to the deduction shall be deemed to be the business income of the year in
which the asset is sold or otherwise transferred and shall accordingly be
charged to tax.
8. Audit of accounts and submission of audit report is necessary to avail
Deduction u/s 33AB.
Section 33ABA - Site Restoration Fund
Eligible Assessee: Any assessee carrying on business consisting of prospecting
for, or extraction or production of, petroleum or natural gas or both in India and
in relation to which the Central Government has entered into an agreement.
1. Quantum of Deduction:
Deduction shall be allowed to the extent of lower of the following:
a) the amount or aggregate of amounts deposited before the end of
the previous year with the State Bank of India in a special account
under a scheme approved by the Government of India, Ministry of
Petroleum and Natural Gas or in an account called 'Site Restoration
Account' opened under a scheme framed by the Ministry; or
b) 20% of the profits of such business, before making deduction under
this section.
2. Where any amount standing to the credit of the assessee in any of the
deposit accounts maintained with State Bank of India is utilised for the
purpose of any expenditure in accordance with the scheme then such
expenditure shall not be allowed as a deduction again in computing the
business income chargeable to tax and at the same time the amount
withdrawn will not be taxes. If the amount so withdrawn is not so utilised,
it shall be taxed in the year of withdrawal.
3. In case an assessee utilises the amount released by State Bank of India or
withdrawn from the special account, towards the purchase of non-eligible
46

assets, then the whole of such amount utilised shall be chargeable to tax
in the year in which such utilisation is done. For this purpose, non-eligible
assets means
a) plant and machinery used in any office or residence or guest house
or for manufacture of eleventh schedule items,
b) office appliances excluding computers,
c) Plant and machinery the cost of which are 100% deductible in one
year.
4. Where any asset acquired in accordance with the scheme is sold or
otherwise transferred before the expiry of 8 years from the end of the
previous year in which it was acquired, then the cost of the asset relatable
to the deduction shall be deemed to be the business income of the year in
which the asset is sold or otherwise transferred and shall accordingly be
charged to tax.
5. Audit of accounts and submission of audit report is necessary to avail
deduction under Section 33ABA.
Section 35 - Expenditure on scientific research
Section 43(4) - Definition of Scientific Research:
Scientific Research means any activity for the extension of knowledge in the
fields of natural or applied sciences including agriculture, animal husbandry or
fisheries.
Deduction u/s 35 is available in the following two ways:
a) Expenditure incurred by the assessee for own business
b) In case of contribution to outsiders
a) Expenditure incurred by the assessee for own business:
1. In all cases of in-house research, deduction shall be 100% of the following
expenses:
i.
any revenue expenditure and capital expenditure (other than cost
of acquisition of any Land) on scientific research incurred during the
year;
ii.
any expenditure incurred during the 3 years immediately preceding
the commencement of business, being salary to employees; or
purchase of materials used in such scientific research or any capital
expenditure (except cost of acquisition of any Land) shall be
allowed as deduction in the year of commencement of business.
2. In case of Companies in specified business - Section 35(2AB)
i.
200% of any expenditure shall be allowed in the case of companies
engaged in the business of bio-technology or in any business of
manufacture or production of any article or thing other than those
specified in the Eleventh Schedule.
ii.
Expenditure on cost of land is not allowed as deduction;
iii.
Cost of Building is eligible for 100% deduction;
iv.
No Company will be entitled to this deduction unless it enters into
an agreement with the prescribed authority for co-operation in such
research and development facility and fulfills the prescribed

47

v.

conditions with regard to maintenance and audit of accounts and

also furnishes prescribed reports in the prescribed manner.
The prescribed authority shall submit its report in relation to the
approval of the said facility to the Principal Chief Commissioner or
the Chief Commissioner or Principal Director General or Director
General in such form and within such time as may be prescribed.
The deduction under this section shall be allowed only up to 31st
March 2017.

Note: With Effective from A.Y 2016-17

(a)

(b)

(c)

In order to avail this deduction the company is required to enter

into an agreement with prescribed Authority, namely the
secretary, Department of Scientific and Industrial Research
(DSIR).
Further, the company is required to maintain the books of
accounts for the approved R&D facility and also required to get
those books audited. However, a copy of the audit report is
required to be submitted to the DSIR only.
Section 35(2AB)(4) has now been amended to provide that
prescribed authority to submit its report to principal Chief
Commissioner or Chief Commissioner or Principal Director General
or Director General in the prescribed manner, where as previously
that prescribed authority submits its report in relation to
approval of research and development facility to the Principal
Director General only.

List of Articles mentioned in the Eleventh Schedule:

Aerated waters used in the manufacture of concentrates, synthetic essence etc.,
Beer, wine and other alcoholic spirits, Confectionaries & Chocolates, Crown
corks, Cosmetics & toilet preparations, Gramophones, Latex foams sponge &
polyurethane foam, Office machines & apparatus, Pilfer-proof caps, Projectors
and Photographic apparatus, Steel furniture, Safes, strong boxes, cash boxes,
deed boxes, & strong room doors, Tobacco and tobacco preparations, Tooth
paste, dental cream, tooth powder & soap.
b) In case of contribution to outsiders:
Contribution made to certain specified institutions shall be entitled to weighted
deduction as detailed hereunder:
Sl.N
o
1
2
3
4

Contribution made
to
Research
association
Company
Research
association
National Laboratory,
University or Indian
Institute
of

Section
Reference
35(1)(ii)

To be used for

35(1)(ii a)
35(1)(iii)

Scientific research
Social
science
or
statistical research
Scientific
research
under a programme

35(2AA)

48

Scientific research

%
of
deduction
175
125
125
200

Technology
or
specified person
'Research Association'

Research Association for the purpose of sections 35(1)(ii) and 35(1)(iii) can be a
university, college or other institution or approved research association and
notified by the Central Government.
Company engaged in scientific research and receiving contribution as referred to
in Section 35(1)(iia) shall fulfill the following conditions:
a) Company should be registered in India;
b) Company should have scientific research and development as its main
object;
c) Company is approved by the prescribed authority in the prescribed
manner;
d) Sum paid to the Company shall be used for scientific research;
e) Company shall carry on scientific research through its own employees
using its own assets;
f) Company maintains separate statement of donations and books of
account in respect of sum received for scientific research, get the same
audited and furnish by the due date for filing the return of income.
Note:
1. Where deduction is allowed u/s 35 for any previous year in respect of a
capital asset, then no depreciation shall be allowed on such asset u/s 32.
2. Unabsorbed expenditure u/s 35 can be carried forward for an indefinite
period and can be set off against any of the other heads of Income.
Section 35ABB - Expenditure for obtaining license to operate
telecommunication services
1. Any capital expenditure actually paid for obtaining license to operate
telecommunication services shall be allowed as deduction in equal
installments during the number of years for which the license is in force. If the
payment is made before the commencement of the business, the deduction
shall be allowed beginning with the year of commencement of business. In
any other case, it will be allowed commencing from the year of actual
payment.
2. Treatment in case of sale of license:
a) If part of the license is sold for a consideration which is less than the
amount remaining to be allowed, then the balance shall be allowed as
deduction during the remaining number of years in equal installments.
b) If the entire license is sold for a consideration which is less than the
amount remaining to be allowed as deduction, then the balance shall be
allowed as deduction in the year of transfer.
c) If the whole or part of the license or the entire license is transferred for a
consideration which is more than the amount remaining to be allowed,
then:
i.
no further deduction shall be allowed;
49

ii.
iii.

the surplus to the extent of deduction already claimed with be taxed

as business income;
the remaining surplus, if any, is taxed as capital gain.

Note:
1. Any expenditure for which deduction is allowed u/s 35ABB shall not
qualify for depreciation u/s 32 for any previous year.
2. In a scheme of amalgamation or demerger, if the license is transferred
then the amalgamated company / resulting company would be entitled
to get the deduction which could have been availed by the
amalgamating company / demerged company had it continued to exist.
Section 35AC - Expenditure on eligible projects / schemes
1.

2.

3.
4.

5.

6.

Under this section, deduction will be allowed in computing profits of

business or profession chargeable to tax, in respect of the expenditure
incurred for an eligible project or scheme for promoting social and
economic welfare or uplift of the public as may be specified by the Central
Government on the recommendations of the National Committee. For
this purpose, National Committee will be the committee constituted by
the Central Government from amongst persons of eminence in public life.
The deduction will be allowed in case where the qualifying expenditure is
either incurred by way of payment to a public sector company, a local
authority or to an approved association or institution for carrying out any
eligible project or scheme.
However, companies will be allowed the deduction also in cases where
expenditure is incurred by them directly on an eligible project or scheme.
The claim for deduction under this section should be supported by a
certificate obtained from the public sector company, local authority or
approved association or institution as the case may be. Where the claim is
in respect of expenditure directly incurred by a company on an eligible
project or scheme, a certificate in Form No. 58B should be obtained from a
Chartered Accountant.
The deduction to which an assessee (i.e. the donor) is entitled on account
of payment of any sum by him to a public sector company or a local
authority or to an association or institution shall not be denied to the
assessee merely on the ground that after payment of such sum by him,
the approval granted to such association or institution has been withdrawn
or the notification notifying the eligible project or scheme referred to in
section 35AC has been withdrawn.
The National Committee can withdraw the approval to an association or
institution if it 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 if the association/institution has failed to furnish
to the National Committee, after the end of each financial year, a progress
report within the prescribed time in the prescribed form. The National
Committee, should however, give a reasonable opportunity to the
concerned association or institution of showing cause against the
proposed withdrawal. Further, a copy of the order withdrawing the
50

approval or notification should be forwarded to the Assessing Officer

having jurisdiction over the concerned association or institution.
7. Similarly, the National Committee can withdraw a notification regarding an
eligible project or scheme if it is satisfied that the project or the scheme is
not being carried out in accordance with all or any of the conditions
subject to which such project or scheme was notified or a report in respect
of such eligible project or scheme has not been furnished after the end of
each financial year, in the prescribed form within the prescribed time. The
National Committee should however, give a reasonable opportunity of
showing cause against the proposed withdrawal.
8. Further, a copy of the notification by which the eligible project or scheme
is withdrawn should be forwarded to the Assessing Officer having
jurisdiction over the concerned association, institution, public sector
company or local authority, as the case may be, carrying on such eligible
project or scheme.
9. Where the approval of the National Committee to an association or
institution is withdrawn or the notification for approval of the eligible
project or scheme is withdrawn due to violation of any of the conditions
thereof, the amount of contribution received by the public sector company
or the local authority or the association or the institution shall be deemed
to be the income for the year in which the approval is withdrawn. In the
case of the company, which claimed deduction of expenditure incurred on
eligible projects / scheme such deduction shall be deemed to be the
income of such company in the year of withdrawal of approval for the
eligible scheme or project. In either case, such deemed
income shall be
charged at Maximum Marginal Rate in force for that year.
Section 35AD - Deduction in respect of expenditure on specified
business
1. According to Section 35AD, deduction shall be allowed in respect of any
capital expenditure, other than acquisition of Land, goodwill and financial
instrument, incurred by an assessee during the previous year for specified
business subject to the fulfillment of certain conditions. Where the
expenditure was incurred prior to commencement of the operation of the
specified business, then the deduction shall be allowed in the year of
commencement of such business.
2. The following business commenced on or after the date indicated
hereunder shall be considered as specified business eligible for deduction
u/s 35AD:
a) setting-up and operating cold chain facilities for specified
products;
b) setting-up and operating warehousing facilities for storing
agricultural produce;
c) building and operating a hospital, anywhere in India, with at least
100 beds for patients;
d) developing and building a housing project under a notified scheme
for affordable housing framed by the Central Government or State
Government;
e) production of fertilizer in India;
51

f) 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;
g) building and operating a hotel of two-star or above category,
anywhere in India;
h) developing and building a housing project under a scheme for slum
redevelopment or rehabilitation framed by the Central Government
or a State Government, as the case may be, and notified by the
CBDT in accordance with the prescribed guidelines.
i) setting up and operating an inland container depot or a container
freight station notified or approved under the Customs Act, 1962;
j) bee-keeping and production of honey and beeswax;
k) setting up and operating a warehousing facility for storage of sugar;
l) laying and operating a slurry pipeline for the transportation of iron
ore (on or after 01.04.2014) ; and
m) setting up and operating a semiconductor wafer fabrication
manufacturing unit, if such unit is notified by the Board in
accordance with the prescribed guidelines (on or after 01.04.2014)
3. Quantum of Deduction:
Deduction for capital expenditure shall be allowed @ 100%. However, in
respect of business covered in serial number 'a' to 'e' above deduction
shall be allowed @ 150% of the amount of the capital expenditure,
provided such business is commenced on or after 01.04.2012.
4. Conditions to be satisfied for claiming Deduction u/s 35AD:
a) The specified business is not setup by splitting up, or the
reconstruction, of a business already in existence;
b) It is not setup by the transfer to the specified business of machinery
or plant previously used for any purpose. However in the following
situations, it shall not be regarded as machinery or plant previously
used for any purpose, where:
i.
such machinery or plant was not at any time used in India;
ii.
such machinery or plant is imported into India from any
country outside India; and
iii.
no deduction on account of depreciation has been allowed or
is allowable in respect of such machinery or plant to any
person earlier.
c) It is not formed by transfer of machinery or plant previously used for
any purpose except to the extent of 20% of total value of plant and
machinery;
d) No deduction shall be allowed under the provisions of Sec 10AA and
Chapter VIA, if the assessee avails deduction u/s 35AD for the
specified business, not only for the year in which deduction is
claimed u/s 35AD but also in any other assessment year;
e) No other deduction shall be allowed under any other section in any
other previous year in respect of the amount allowed as deduction
u/s 35AD.
5. Usage of assets for Specified Business - Section 35AD (7A) / (7B) / (7C) Introduced by Finance (No.2) Act, 2014
a) Section 35AD(7A) provides that any asset in respect of which a
52

deduction is claimed and allowed under section 35AD shall be used

only for the specified business for a period of eight years beginning
with the previous year in which such asset is acquired or
constructed.
b) If any asset on which a deduction under section 35AD has been
claimed and allowed, is demolished, destroyed, discarded or
transferred, the sum received or receivable for the same is
chargeable to tax under clause (vii) of section 28.
c) Accordingly, sub-section (7B) has been inserted to provide that if
such asset is used for any purpose other than the specified
business, the total amount of deduction so claimed and allowed in
any previous year in respect of such asset, as reduced by the
amount of depreciation allowable in accordance with the provisions
of section 32 as if no deduction had been allowed under section
35AD, shall be deemed to be income of the assessee chargeable
under the head Profits and gains of business or profession of the
previous year in which the asset is so used.
d) However, the deeming provision under sub-section (7B) shall not be
applicable to a company which has become a sick industrial
company under section 17(1) of the Sick Industrial Companies
(Special Provisions) Act, 1985, during the intervening period of eight
years specified in sub-section (7A). Further, the restriction of the
holding period of 8 years does not apply where the assets are
demolished, destroyed, discarded or transferred.
6. Special conditions in respect of natural gas, crude or petroleum oil:
a) Such business should be owned by a company formed and
registered in India under the Companies Act, 1956 or by a
consortium of such companies or by an authority or a board or a
corporation established or constituted under any Central or State
Act;
b) It should have been approved by the Petroleum and Natural Gas
Regulatory Board and notified by the Central Government in the
Official Gazette.
c) It should have made not less than such proportion of its total
pipeline capacity available for use on common carrier basis by any
person other than the assessee or an associated person. The
common carrier capacity condition prescribed by the regulations of
the Petroleum & Natural Gas Regulatory Board is
i.
one-third for natural gas pipeline network; and
ii.
one-fourth for petroleum product pipeline network.
d) should fulfill any other prescribed condition.
Note:
1. "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 the scientifically controlled
condition including refrigeration and other facilities necessary for the
preservation of such produce.
2. An assessee who builds a hotel of 2 star or above category and
subsequently transfers the operation thereof to another person without
divesting the ownership, shall be deemed to be carrying on the specified
business and therefore, would qualify for deduction.
53

Section 35CCA - Expenditure by way of payment to association or

institutions for Rural Development Programmes
1. Contributions made to approved associations / institutions for undertaking
rural development programmes, the training of persons for implementing
such programmes and contributions to National Fund for rural development
will be allowed as deduction. Similarly, contributions to the National Urban
Poverty Eradication Fund notified by the Central Government also qualify
for deduction. The assessee shall furnish a certificate from such institution
for claiming deduction under this section.
2. Where a deduction under this section is claimed and allowed no deduction
shall be allowed u/s 80G or any other provision of the Act for the same or
any other assessment year.
Note:
Institutions, Associations, University or Colleges which are granted approval for
Scientific Research u/s 35, Eligible Projects or Schemes U/s 35AC; and Rural
Development Programmes U/s 35CCA are eligible to receive donations /
contributions from the public. In case where the approval to such institutions,
etc, is withdrawn subsequently, the deduction available for the donations /
contribution made by any assessee shall not be denied, merely on the ground
that the approval is withdrawn.
Section 35CCC - Weighted Deduction of 150% for expenditure incurred
on agricultural extension project
Where an assessee incurs any expenditure on agricultural extension project
notified by the CBDT, a deduction to the extent of 150% of such expenditure
shall be allowed. No further deduction shall be allowed in respect of such
expenditure under any other provisions of the Act for the same or any other
assessment year.
Section 35CCD - Weighted Deduction of 150% for expenditure incurred
by a Company on Skill development project.
Where a Company incurs any expenditure (other than expenditure on cost of
Land or building) on any skill development project notified by the Board, a
deduction to the extent of 150% of such expenditure shall be allowed. No further
deduction shall be allowed in respect of such expenditure under any other
provisions of the Act for the same or any other assessment year.
Section 35D - Amortisation of certain preliminary expenses
Provision applies to whom ?:
This section applies
a) only to Indian companies and resident non-corporate assessees;
b) in the case of new companies to expenses incurred before the
commencement of the business;
c) in the case of extension of an existing undertaking to expenses incurred
till the extension is completed, i.e., in the case of the setting up of a new
54

unit - to expenses incurred till the new unit commences production or

operation
Eligible expenses:
The following expenditure are eligible for amortisation:
1. Expenditure in connection with - (a) the preparation of feasibility report (b)
the preparation of project report; (c) conducting market survey or any
other survey necessary for the business of the assessee; (d) engineering
services relating to the assessees business; (e) legal charges for drafting
any agreement between the assessee and any other person for any
purpose relating to the setting up to conduct the business of assessee.
2. Where the assessee is a company, in addition to the above, expenditure
incurred - (f) by way of legal charges for drafting the Memorandum and
Articles of Association of the company; (g) on printing the Memorandum
and Articles of Association; (h) by way of fees for registering the company
under the Companies Act, 2013, (i) in connection with the issue, for public
subscription, of the shares in or debentures of the company, being
underwriting commission, brokerage and charges for drafting, printing and
advertisement of the prospectus; and such other items of expenditure (not
being expenditure qualifying for any allowance or deduction under any
other provision of the Act) as may be prescribed by the Board for the
purpose of amortisation. However, the Board, so far, has not prescribed
any specific item of expense as qualifying for amortisation under this
clause.
3. In the case of expenditure specified in items (a) to (e) above, the work in
connection with the preparation of the feasibility report or the project
report or the conducting of market survey or any other survey or the
engineering services referred to must be carried out by the assessee
himself or by a concern which is for the time being approved in this behalf
by the Board.
Ceiling Prescribed:
1. Non company assessee:
5% of cost of project(cost of fixed assets)as on the last day of the relevant
previous year.
2. Company assessee:
5% of cost of project or 5% of capital employed at the option of the Indian
Company.
"Capital employed" means the aggregate of issued Share Capital,
debentures and long term borrowings (repayable during a period of not
less than 7 years) as on the last day of relevant previous year.
"Cost of Project" means 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 assessee as on last day of relevant
previous year.
Relevant previous year means the previous year in which business was
commenced or extension of undertaking was complete or the new unit
commenced production.
55

Quantum of Deduction:
The qualifying amount shall be allowed as deduction over a period of 5
years in equal installments, beginning from the year of commencement of
production or operation or the year in which extension is completed, as
the case may be.
Note:
1. In case of amalgamation or demerger of an Indian Company, the
amalgamated or resulting company are entitled to deductions from the
previous year in which the amalgamation or demerger takes place.
2. Audit of accounts is mandatory in case of assessee other than Company or
co-operative society and the assessee furnishes along with the return of
income for the first year in which the deduction is claimed, the report of
audit in the prescribed form.
Section 35DD - Amortisation of expenditure in case of amalgamation or
demerger
Where an Indian Company incurs any expenditure, wholly and exclusively for the
purposes of amalgamation or demerger of an undertaking, the assessee shall be
allowed the expenditure as a deduction over a period of 5 years in equal
installments beginning with the previous year in which the amalgamation or
demerger takes place.
Section 35DDA - Amortisation of expenditure incurred under VRS
Where any expenditure is incurred by way of payment of any sum to an
employee in accordance with any scheme of voluntary retirement, a deduction
over a period of 5 years in equal installments shall be allowed beginning with the
year in which such amount is paid.
Where an assessee pays the VRS compensation in installments or in part
payments, each such payment is independently eligible for amortization over a
period of 5 years.

Circular No. 09/2014, dated 23.04.2014

Clarification regarding treatment of expenditure incurred for development of
roads/highways in Build-Operate-Transfer (BOT) agreements under the Incometax Act, 1961
The CBDT has, vide this Circular clarifies
agreement with the Government for
maintenance of infrastructural facility
construction shall be amortised and
expenditure in the following manner:

56

that where a developer enters into an

the construction / development or
of roads / highways, the cost of
claimed as an allowable business

a) the cost incurred in creation of infrastructural facility will be amortised

over the period of agreement after excluding the time taken for creation of
such facility;
b) where the assessee has claimed any deduction of cost so incurred in
earlier years, such deduction will be reduced from the initial cost and the
balance shall be amortised equally over the remaining period of
agreement.
Section 35E - Expenditure on prospecting for certain minerals
Eligible assessee: Indian Company and non-corporate resident assessee
1. In the case of an Indian Company and non-corporate resident assessee the
expenditure incurred on prospecting or extraction or production of certain
minerals listed in Seventh Schedule to the Income Tax Act, can be claimed
as deduction provided it is incurred during the period of 5 years ending
with the year of commencement of commercial production.
2. Expenditure incurred wholly and exclusively on operations relating to
prospecting for any minerals specified in Seventh Schedule or on the
development of mine or other natural deposit of such minerals as reduced
by expenditure incurred by any other person or authority, directly or
indirectly and by sale, salvage, compensation or insurance money realised
in respect of any property or rights existing as a result of the expenditure
shall qualify for deduction.
3. The deduction is allowable over a period of 10 years in equal installments,
beginning with the year of commercial production. Amount of deduction in
each year shall be lower of:
a) 1/10th of expenditure referred above; or
b) income arising from commercial exploitation.
The shortfall in installment claimed due to inadequacy of income shall be
carried forward for set-off, but not beyond the 10th year.
4.

Capital expenditure in respect of building, plant machinery or furniture in

respect of which depreciation is admissible u/s 32, expenditure on
acquisition of site of the source of mineral or right in or over such site and
expenditure on acquisition of the deposits of minerals or right in or over
such deposits will not qualify for deduction.
5. Audit of accounts is necessary to claim deduction in case the assessee is
a non-corporate or a co-operative society.
6. No deduction will be available under any other section in respect of
expenditure claimed under this section.

Section 36 - Other Deductions

The provisions of Sec 36(1) provide for the following other deductions in the
computation of income from business or profession:

57

1. If insurance policy has been taken out against risk, damage or destruction
of the stock or stores of the business or profession, the premia paid is
deductible. But the premium in respect of any insurance undertaken for
any other purpose is not allowable under the clause.
2. Deduction is allowed in respect of the amount of premium paid by a
Federal Milk Co-operative Society to effect or to keep in force an insurance
on the life of the cattle owned by a member of a co-operative society
being a primary society engaged in supply of milk raised by its members
to such Federal Milk Co-operative Society. The deduction is admissible
without any monetary or other limits
3. This clause seeks to allow a deduction to an employer in respect of premia
paid by him by any mode of payment other than cash to effect or to keep
in force an insurance on the health of his employees in accordance with a
scheme framed by (i) the General Insurance Corporation of India and
approved by the Central Government; or (ii) any other insurer and
approved by the IRDA.
4. Bonus or Commission are deductible in full provided the sum paid to the
employees as bonus or commission shall not be payable to them as profits
or dividends if it had not been paid as bonus or commission. It is a
provision intended to safeguard against a private company or an
association escaping tax by distributing a part of its profits by way of
bonus amongst the members, or employees of their own concern instead
of distributing the money as dividends or profits.
5. Under section 36(1), deduction of interest is allowed in respect of capital
borrowed for the purposes of business or profession in the computation of
income under the head "Profits and gains of business or profession".
Capital may be borrowed for several purposes like for acquiring a capital
asset, or to pay off a trading debt or loss etc. The scope of the expression
for the purposes of business is very wide. Capital may be borrowed in the
course of the existing business as well as for acquiring assets for
extension of existing business. Explanation 8 to section 43(1) clarifies that
interest relatable to a period after the asset is first put to use cannot be
capitalised. Interest in respect of capital borrowed for any period from the
date of borrowing to the date on which the asset was first put to use
should, therefore, be capitalised.
Section 36(1)(iii) provides that no such deduction shall be allowed in
respect of any amount of interest paid, in respect of capital borrowed for
acquisition of new asset (whether capitalised in the books of account or
not) for any period beginning from the date on which the capital was
borrowed for acquisition of the asset till the date on which such asset was
first put to use.
ICDS IX on Borrowing Costs also requires borrowing costs which are
directly attributable to the acquisition, construction or production of a
qualifying asset to be capitalised as part of the cost of that asset.
6. Section 36(1)(iiia) provides deduction for the discount on Zero Coupon
Bonds (ZCB) on pro rata basis having regard to the period of life of the
58

bond to be calculated in the manner prescribed. The Explanation seeks to

provide the meaning of the expression discount as a difference of the
amount
received
or
receivable
by
an
infrastructure
capital
company/infrastructure capital fund/public sector company/ scheduled
bank on issue of the bond and the amount payable by such company or
fund or bank on maturity or redemption of the bond. The expression
period of life of the bond has been defined to mean the period
commencing from the date of issue of the bond and ending on the date of
the maturity or redemption.
7. Contribution to recognized 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 provides for, but excludes
all other allowances and perquisites.
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.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. It is to be noted that the
amount so received from employees is treated as income u/s 2(24)(x) 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 under any Act, rule, order or notification issued there
under or under any standing order, award, contract of service or
otherwise.
Note:
The Delhi High Court in CIT vs AIMIL Ltd (2010) 321 ITR 508 has held that
the amount of employees contribution can be availed as deduction by the
employer even though it is paid beyond the due date prescribed under the
relevant law, but before the due date for filing of return of income u/s
139(1). While rendering this decision, the High Court has held that if there
is any delay in remittance of dues, the employer assessee shall be liable t
pay interest and can incur penalties under the relevant Acts. As far as the
Income Tax Act is concerned, the employer assessee shall have to consider
the employee's contribution as income u/s 2(24) and avail deduction u/s
36(1)(va) by making payment before the due date for filing the return of
income. Thus, in view of this decision, the employee's contributions have
been brought at par with employer's contribution to welfare funds.
11.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.
12.The amount of bad debt written off as irrecoverable in the accounts of the
assessee for the previous year subject to the following conditions:
59

a) the debt should be incidental to the business;

b) it should have been taken into account in computing the income of
the assessee or it should represent money lent in the ordinary
course of banking or money lending business; and
c) it should have been written off in the books of account.
Note: Deduction under section 36(1)(vii) for bad debts is limited to the
amount by which bad debts exceed credit balance in the provision for
doubtful debts account under section 36(1)(viia).
13.Provision for bad and doubtful debts:
The following banks and financial institutions can claim deduction for
provision for bad and doubtful debts to the extent prescribed here below:
Banks
A) Banks incorporated within India:
- scheduled / non-scheduled banks;
-co-operative banks
(not being a primary agricultural credit
society
or
primary
co-operative
agricultural and rural development
bank).
B) Banks incorporated outside India
C) Public Financial Institution; or
State Financial Corporation; or
State Industrial Investment
Corporation

% of provision of bad & doubtful debts

allowed
i. rural branches - 10% of aggregate
average advances; and
ii. Other branches - 7.5% of Gross Total
Income.

5% of Gross total Income

5% of Gross total Income

Note:
a) "Gross Total Income" means total income before making deductions under
this clause and Chapter VIA.
In addition to the above limits, a scheduled / non-scheduled bank shall be
allowed a further deduction of an amount not exceeding the income
derived from redemption of securities in a scheme framed by the Central
Government. No deduction shall be allowed unless such income is
disclosed in the return of income under the head "Profits and gains of
Business or Profession".
b) For scheduled commercial banks, the amount of deduction in respect of the
bad debts actually written off u/s 36(1)(vii) shall be restricted to the
amount by which such bad debts exceeds the credit balance in the
provision for bad & doubtful debts account, without any distinction
between rural advances and other advances.
It is clarified that there shall be only one account in respect of provision for
bad & doubtful debts u/s 36(1)(viia) and such account relates to all types of
advances including advances made by rural branches - Explanation to
Section 36(1)(vii). Thus, there is no distinction made in respect of provision
for bad & doubtful debts under clause (viia) between rural and urban
advances.
14. Special Reserve Account:

60

In case of the following specified entities, any amount transferred to

special reserve account is deductible subject to a maximum of 20% of
profits from eligible business. If the aggregate amount transferred to the
reserve exceeds twice the amount of the paid-up capital and general
reserves of the assessee, no allowance is available in respect of such
excess amount.
Sl.No
1

Specified Entity
LIC, UTI, IDFC; or a financial
corporation in the public sector;
or a banking company; or a cooperative bank other than a
primary
agricultural
credit
society/ primary co-operative
agricultural
and
rural
development Bank
A housing finance company

Any other financial corporation

including a public company

Eligible Business
The business of providing longterm finance for industrial or
agricultural
development
or
development of infrastructure
facility in India; or development
of housing in India.

The business of providing longterm finance for construction or

purchases of houses in India for
residential purposes.
The business of providing long
term finance for development of
infrastructure facility in India.

Any loan or advance where the terms provide for repayment of the same
along with interest thereof during a period of not less than 5 years shall be
regarded as "long term finance".
15.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 years in equal installments. Unabsorbed expenditure on family planning,
if any, shall be carried forward for set-off similar to that of unabsorbed
depreciation.
16.Any expenditure incurred by a Statutory corporation is allowed as
deduction if the following conditions are satisfied:
a) the tax payer is a corporation or a body corporate constituted or
established by a Central, State or Provincial Act;
b) the above mentioned corporation or body corporate is notified by the
Government having regard to the objects and purposes of the Act
under which it is constituted or established;
c) the expenditure is incurred for the objects and purposes of the Act
under which it is constituted or established;
d) the expenditure is not capital expenditure.
17. Any sum paid by a public financial institution by way of contribution to
notified credit guarantee fund trust for small industries shall be allowed as
deduction.
18.Securities transaction tax (STT) paid in respect of the taxable securities
transactions entered into in the course of business

61

19.Commodities Transaction Tax (CTT) paid in respect of the taxable

commodities transactions entered into in the course of business.
20.Amount of expenditure incurred by a co-operative society for purchase of
sugarcane at price fixed by the Government is allowable as deduction.
The new clause (xvii) has been inserted in section 36 to provide
deduction for the expenditure incurred by co operative society for
purchase of sugarcane at price fixed by government allowable as
deduction for those whom are engaged in the business of
manufacture of sugar (price of the sugarcane should be less than
or equal to government rate )
Section 37 - General Deductions
This is a residuary section under which only business expenditure is allowable as
deduction. The deduction is limited only to the amount actually expended and
does not extend to a reserve created against a contingent liability.
The following conditions should be fulfilled in order that a particular item of
expenditure may be deductible under this section :
a. The expenditure should not be of the nature described in sections 30 to
36.
b. It should have been incurred by the assessee in the accounting year.
c. It should be in respect of a business carried on by the assessee the
profits of which are being computed and assessed.
d. It must have been incurred after the business was set up.
e. It should not be in the nature of any personal expenses of the
assessee.
f. It should have been laid out or expended wholly and exclusively for the
purposes of such business.
g. It should not be in the nature of capital expenditure.
h. The expenditure should not have been incurred by the assessee for any
purpose which is an offence or is prohibited by law.
Disallowance of Corporate Social Responsibility (CSR) expenditure:
Section 135 of the Companies Act, 2013 read with Schedule VII thereto and
Companies (Corporate Social Responsibility) Rules, 2014 are the special
provisions under the new Company law regime imposing mandatory CSR
obligations.
According to Section 135 of the Companies Act, 2013 every Company, listed or
unlisted, private or public, having a
a) Net worth of Rs. 500 Crore or more (Net worth criteria); or
b) Turnover of Rs. 1,000 Crore or more (Turnover criteria); or
c) Net Profit of Rs. 5 Crore ore more (Net Profit criteria)
during any financial year has to constitute a CSR Committee of the Board;
CSR Committee has to formulate CSR policy and the same has to be approved by
the Board;
Such company to undertake CSR activities as per the CSR Policy;
62

Such Company to spend in every financial year, at least 2% of its average net
profits made in the immediately three preceding financial years, on the CSR
activities specified in Schedule VII to the Companies Act, 2013.
This expenditure incurred on activities relating to Corporate Social Responsibility
referred to in Section 135 of the Companies Act, 2013 shall not be allowed as
deduction. - Explanation 2 to Section 37.
The rationale behind the disallowance is that CSR expenditure, being an
application of income, is not incurred wholly and exclusively for the purpose of
carrying on business.
However, the Explanatory Memorandum to the Finance (No.2) Bill, 2014 clarified
that CSR expenditure, which is of the nature described in sections 30 to 36, shall
be allowed as deduction under those sections subject to fulfillment of conditions,
if any, specified therein.
Circular No. 5/2012 dated 1-8-2012 - Inadmissibility of expenses incurred in
providing freebees to medical practitioner by pharmaceutical and allied health
sector industry
Section 37(1) provides for deduction of any revenue expenditure (other than
those falling under sections 30 to 36) from the business income if such expense
is laid out or expended wholly or exclusively for the purpose of business or
profession. However, the Explanation below section 37(1) denies claim of any
such expenses, if the same has been incurred for a purpose which is either an
offence or prohibited by law.
The CBDT, considering the fact that the claim of any expense incurred in
providing freebees to medical practitioner is in violation of the provisions of
Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations,
2002, has clarified that the expenditure so incurred shall be inadmissible under
section 37(1) of the Income-tax Act, 1961, being an expense prohibited by the
law. The disallowance shall be made in the hands of such pharmaceutical or
allied health sector industry or other assessee which has provided aforesaid
freebees and claimed it as a deductible expense in its accounts against income.
This circular has also clarified that a sum equivalent to value of freebees enjoyed
by the aforesaid medical practitioner or professional associations is also taxable
as business income or income from other sources, as the case may be,
depending on the facts of each case.
Section 37(2B) - Advertisement in publications of a political party
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. However, donation given to political party shall be allowed as
deduction u/s 80GGB or 80GGC, as the case may be.
Section 38 - Building etc., partly used for business, etc., or not
exclusively so used:

63

According to Section 38, where any asset is used partly for business and partly
for personal purposes, only proportionate expenses and depreciation as
determined by the Assessing Officer can be claimed as deduction.
Inadmissible Expenditure - Sections 40, 40A and 43B
The provisions of Sec 40, 40A and 43B provide for certain disallowances. Certain
expenses are totally disallowable and certain other expenses are disallowable
either due to non-fulfillment of certain conditions or on account of exceeding
certain limits prescribed.
Section 40(a) - Disallowance in the case of all assessees:
Section 40(a)(i) - Payment made to Non-residents:
1. According to Sec 40(a)(i), any Interest, royalty, fees for technical services
or other sum chargeable under this Act, which is payable outside India; or
in India to a non-resident or to a foreign company, on which tax is
deductible at source shall be disallowed ifa) such tax has not been deducted; or
b) such tax, after deduction, has not been paid during the previous
year or the subsequent year before expiry of time limit prescribed in
Section 139(1).
2. In case the tax is deducted in any subsequent year or has been deducted
in the previous year but paid after the due date specified in Section
139(1), such sum shall be allowed as a deduction in computing the income
of the previous year in which such tax has been paid.
Section 40(a)(ia) - Payment made to Residents:
1. According to Section40(a)(ia), any sum payable to a resident on which tax
is deductible at source shall be disallowed to the extent of 30% of such
sum, if the assessee:
a) fails to deduct tax at source; or
b) deducts tax at source but has not paid the same on or before the
due date for filing the return of income u/s 139(1).
2. 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, 30% of such sum which was earlier disallowed shall be allowed as
a deduction in computing the income of the previous year in which such
tax has been paid.
3. Where an assessee fails to deduct tax at source as referred above, he is
not deemed to be an assessee in default if the following conditions are
satisfied:
a) The payee resident has furnished his return of income u/s 139;
b) He has taken into account such sum for computing his total
income;
c) He has paid tax due on the income declared by him in such return
of income; and
d) the person who failed to deduct tax at source furnishes a certificate
of a Chartered Accountant in Form 26A that the payee has fulfilled
the above mentioned conditions.

64

then such assessee shall be deemed to have deducted and paid the tax on
the date of furnishing the return of income by the resident payee. - proviso to
Sec 40(a)(ia)
Section 40(a)(ii) & Section 40(a)(iia):
Income tax and Wealth tax paid are not deductible. Income tax also includes
Interest paid on delayed payment of Income tax, Interest paid on delayed filing
of Income tax and TDS returns, tax paid in any other country for which the relief
is available under sections 90, 90A, 91 of the Income Tax Act, 1961.
Section 40(a)(iib) - Payment made to State Government:
1. According to Sec. 40(a)(iib), deduction shall not be allowed in respect of
any amount paid by way of royalty, licence fee, service fee, privilege fee,
service charge, or any other fee or charge by whatever name called, which
is levied exclusively on a State Government undertaking by the State
Government even if any such amount is appropriated, directly or
indirectly, from a State Government undertaking by the State
Government.
2. For this purpose, a State Government Undertaking includesa) a Corporation established by or under any Act of the State
Government.
b) a Company in which more than 50% of the paid up equity share
capital is held by the State Government.
c) a Company in which more than 50% of the paid up equity share
capital is held by any of the above mentioned entities (whether
singly or taken together).
d) a Company or Corporation in which the State Government has the
right to appoint the majority of the directors or to control the
management or policy decisions directly or indirectly in any manner.
e) an authority, a board or an institution or a body established or
constituted by or under any Act by State Government or owned or
controlled by the State Government.
Section 40(a)(iii) - Salary payable outside India or to a non-resident:
Any salary payable outside India or to a non-resident shall be disallowed, if tax
has not been deducted or paid.
Section 40(a)(iv):
Any payment to a Provident Fund or other fund for the benefit of the employee
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"
Section 40(a)(v):
Any tax on non-monetary perquisites borne by the employer, on behalf of the
employee which is exempt u/s 10(10CC) in the hands of the employee shall be
disallowed.
Section 40(b) - Disallowance in the case of partnership firms:
65

In the case of any firm assessable as such or a limited liability partnership (LLP)
the following amounts shall not be deducted in computing the income from
business of any firm/LLP:
1. Any salary, bonus, commission, remuneration by whatever name called,
to any partner who is not a working partner.
2. Any remuneration paid to the working partner or interest to any partner
which is not authorised by or which is inconsistent with the terms of the
partnership deed;
3. It is possible that the current partnership deed may authorise payments
of remuneration to any working partner or interest to any partner for a
period which is prior to the date of the current partnership deed. The
approval by the current partnership deed might have been necessitated
due to the fact that such payment was not authorised by or was
inconsistent with the earlier partnership deed. Such payments of
remuneration or interest will also be disallowed. However, it should be
noted that the current partnership deed cannot authorise any payment
which relates to a period prior to the date of earlier partnership deed.
Next, by virtue of a further restriction contained in sub-clause (iii) of
section 40(b), such remuneration paid to the working partners will be
allowed as deduction to the firm from the date of such partnership deed
and not for any period prior thereto. Consequently, if, for instance, a firm
incorporates the clause relating to payment of remuneration to the
working partners, by executing an appropriate deed, say, on July 1, but
effective from April 1, the firm would get deduction for the remuneration
paid to its working partners from July 1 and onwards, but not for the
period from April 1 to June 30. In other words, it will not be possible to
give retrospective effect to oral agreements entered into vis a vis such
remuneration prior to putting the same in a written partnership deed.
4. Any interest payment authorised by the partnership deed falling after
the date of such deed to the extent such interest exceeds 12% simple
interest p.a.
5. Any remuneration paid to a partner, authorised by a partnership deed
and falling after the date of the deed in excess of the following limits:
Book Profits
On the first Rs. 3,00,000/- or in case of
a loss
On the balance

Remuneration as a % of book profits

Rs. 1,50,000 or 90%, whichever is
higher
60%

There are four Explanations to section 40(b):

Explanation 1:
Explanation 1 provides that where an individual is a partner in a firm in a
representative capacity:
a) interest paid by the firm to such individual otherwise than as partner in
a representative capacity shall not be taken into account for the
purposes of this clause.
b) interest paid by the firm to such individual as partner in a
representative capacity and interest paid by the firm to the person so
represented shall be taken into account for the purposes of this clause.
66

Explanation 2:
Explanation 2 provides that where an individual is a partner in a firm otherwise
than in a representative capacity, interest paid to him by the firm shall not be
taken into account if he receives the same on behalf of or for the benefit of
any other person.
Explanation 3:
Explanation 3 defines the term book profit. It means the net profit as shown
in the P & L A/c for the relevant previous year computed in accordance with
the provisions for computing income from profits and gains.
The above amount should be increased by the remuneration paid or payable
to all the partners of the firm if the same has been deducted while computing
the net profit.
Explanation 4:
Explanation 4 defines a working partner.
Accordingly, it 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.
Section 40(ba) - Disallowance in the case of association of persons
and body of individuals:
Any payment of interest, salary, commission, bonus or remuneration made by
an association of persons or body of individuals to its members will also not be
allowed as a deduction in computing the income of the association or body.
There are three Explanations to section 40(ba):
Explanation 1 - Where interest is paid by an AOP or BOI to a member who has
paid interest to the AOP/BOI, the amount of interest to be disallowed under
clause (ba) shall be limited to the net amount of interest paid by AOP/BOI to
the partner.
Explanation 2 - Where an individual is a member in an AOP/BOI on behalf of
another person, interest paid by AOP/BOI shall not be taken into account for
the purposes of clause (ba). But, interest paid to or received from each person
in his representative capacity shall be taken into account.
Explanation 3 - Where an individual is a member in his individual capacity,
interest paid to him in his representative capacity shall not be taken into
account
Sec 40A - Expenses or payments not deductible
There are certain expenses or payments which are not deductible in certain
circumstances as provided in sub-section (2), (3), (7) and (9) of Sec 40A. The
provisions of Sec. 40A shall have overriding effect over other provisions of the
Income Tax Act in computation of income chargeable under the head "Profits
and gains of business or profession".
Sec. 40A(2) - Excessive or unreasonable expenditure:

67

Sub-section (2) of section 40A provides that where the assessee incurs any
expenditure in respect of which a payment has been or is to be made to a
relative or to an associate concern so much of the expenditure as is
considered to be excessive or unreasonable shall be disallowed by the
Assessing Officer. While doing so he shall have due regard to :
a) the market value of the goods, service of facilities for which the
payment is made; or
b) the legitimate needs of the business or profession carried on by the
assessee; or
c) the benefit derived by or accruing to the assessee from such a
payment.
The word relative as defined in the section 2(41) means, in relation to
individual, the spouse, brother or sister of any lineal ascendant or
descendant of that individual. Whether the assessee is a firm, H.U.F. or
an association of persons the relationship will have to be reckoned for
the purpose, with reference to the partners of the firm and the
members of the family or association. Similarly, where the assessee is a
company the relationship will have to be reckoned with reference to the
directors or persons having substantial interest in the company.
The related person as mentioned in section 40A(2) includes, inter alia, a
company, firm, association of persons or Hindu undivided family having
a substantial interest in the business or profession of the assessee or
any director, partner or member of such company, firm, association or
family, or any relative of such director, partner or member. Further, the
related person in relation to a company shall include any other
company carrying on business or profession in which the first
mentioned company has substantial interest.
A person shall be deemed to have a substantial interest in a business or
profession if a) in a case where the business or profession is carried on by a company,
such person is, at any time during the previous year, the beneficial
owner of equity shares carrying not less than 20% of the voting power
and
b) in any other case such person is, at any time during the previous year,
beneficially entitled to not less than 20% the profits of such business or
profession.
Sec. 40A(3) - Payment made otherwise than by way of account payee
cheque or account payee draft:
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 by an account payee bank draft
exceeds Rs. 20,000, such expenditure shall not be allowed as a deduction.
In case of an assessee following mercantile system of accounting, if an
expenditure has been allowed as deduction in any previous year on due basis,
and payment has been made in a subsequent year otherwise than by account
payee cheque or account payee bank draft, then the payment so made shall
be deemed to be the income of the subsequent year if such payment or
68

aggregate of payments made to a person in a day exceeds Rs 20,000 [Section

40A(3A)].
This limit of Rs. 20,000 has been raised to Rs. 35,000 in case of payment
made to transport operators for plying, hiring or leasing goods carriages.
Therefore, payment or aggregate of payments up to Rs. 35,000 in a day can
be made to a transport operator otherwise than by way of account payee
cheque or account payee bank draft. In all other cases, the limit would
continue to be Rs. 20,000.
However, no disallowance would be made in such cases and under such
circumstances as may be prescribed, having regard to the nature and extent
of banking facilities available, considerations of business expediency and
other relevant factors.
The provision applies to all categories of expenditure involving payments for
goods or services which are deductible in computing the taxable income. It
does not apply to loan transactions because advancing of loans or repayments
of the principal amount of loan does not constitute an expenditure deductible
in computing the taxable income. However, interest payments of amounts
exceeding Rs. 20,000 at a time are required to be made by account payee
cheques or drafts as interest is a deductible expenditure. This requirement
does not apply to payment made by commission agents for goods received by
them for sale on commission or consignment basis because such a payment is
not an expenditure deductible in computing the taxable income of the
commission agent. For the same reason, this requirement does not apply to
advance payment made by the commission agent to the party concerned
against supply of goods. However, where commission agent purchases goods
on his own account but not on commission basis, the requirement will apply.
The provisions regarding payments by account payee cheque or draft apply
equally to payments made for goods purchased on credit.
Exceptions - Rule 6DD:
Rule 6DD provides for cases and circumstances in which a payment or
aggregate of payments exceeding twenty thousand rupees may be made to a
person in a day, otherwise than by an account payee cheque drawn on a bank
or account payee bank draft. As per this rule, no disallowance under subsection (3) of section 40A shall be made and no payment shall be deemed to
be the profits and gains of business or profession under sub-section (3A) of
section 40A where 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 twenty thousand rupees in the cases and
circumstances specified hereunder, namely:
a. where the payment is made to
i.
the Reserve Bank of India or any banking company;
ii.
the State 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;
v.
the Life Insurance Corporation of India.
b. where the payment is made to the Government and, under the rules
69

framed by it, such payment is required to be made in legal tender;

c. where the payment is made by
i.
any letter of credit arrangements through a Bank;
ii.
a mail or telegraphic transfer through a bank;
iii.
a book adjustment from any account in a bank to any other
account in that or any other bank;
iv.
a bill of exchange made payable only to a bank;
v.
the use of electronic clearing system through a bank account;
vi.
a credit card;
vii.
a debit card.
d. where the payment is made by way of adjustment against the
amount of any liability incurred by the payee for any goods supplied
or services rendered by the assessee to such payee;
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 dairy or poultry farming; or
iii.
fish or fish products; or
iv.
the products of horticulture or apiculture,
to the cultivator, grower or producer of such articles, produce
or products;
However, the above exception will not be available on the payment
for the purchase of fish or fish products from a person who is not
proved to be a 'producer' of these goods and is only a trader, broker
or any other middleman, by whatever name called.
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 payment is not served by any bank, to any person who
ordinarily resides, or is carrying on any business, profession or
vocation, in any such village or town;
h. where any payment is made to an employee of the assessee or the
heir of any such employee, on or in connection with the retirement,
retrenchment, resignation, discharge or death of such employee, on
account of gratuity, retrenchment compensation or similar terminal
benefit and the aggregate of such sums payable to the employee or
his heir does not exceed fifty thousand rupees;
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 section 192 of the Act, and when such employee -

j.

i. 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
ii. does not maintain any account in any bank at such
place or ship;
where the payment was required to be made on a day on which the
banks were closed either on account of holiday or strike;

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;
l. where the payment is made by an authorised dealer or a money
70

changer against purchase of foreign currency or travellers cheques in

the normal course of his business.
Section 40A(7) - Provision for gratuity:
No deduction shall be allowed in respect of any provision made by the assessee
for the payment of gratuity to his employees on their retirement or on
termination of their employment for any reason. However, any provision made by
the assessee for the purpose of payment of any contribution towards 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.
Section 40A(9)
contributions:

Non

statutory

unrecognised

welfare

fund

Any contribution made by the assessee to unrecognised or non-statutory welfare

fund accounts is not deductible.
Section 43B - Deduction based on actual payment
The following sums are allowed as deduction only on the basis of actual payment
within the time limits specified in section 43B.
a. Any sum payable by way of tax, duty, cess or fee, by whatever name
called, under any law for the time being in force.
b. Any sum payable by the assessee as an employer by way of
contribution to any provident fund or superannuation fund or gratuity
fund or any other fund for the welfare of employees.
c. Bonus or Commission for services rendered payable to employees.
d. Any sum payable by the assessee as interest on any loan or borrowing
from any public financial institution or a State Financial Corporation or a
State Industrial Investment Corporation.
e. Interest on any loan or advance from a scheduled bank on actual
payment basis.
f. Any sum paid by the assessee as an employer in lieu of earned leave of
his employee.
The above sums can be paid by the assessee on or before the due date for
furnishing the return of income under section 139(1) in respect of the previous
year in which the liability to pay such sum was incurred and the evidence of such
payment is furnished by the assessee along with such return.
'Any sum payable' means:
For the purposes of clause (a), any sum payable means a sum for which the
assessee incurred liability in the previous year even though such sum might not
have been payable within that year under the relevant law. For example, an
assessee may collect sales tax from customers during the month of March, 2014.
However, in respect of such collections he may have to discharge the liability
only within say 10th April, 2014 under the sales tax law. The explanation covers
this type of liability also. Consequently, if an assessee following accrual method
of accounting has created a provision in respect of such a liability the same is not
deductible unless remitted within the due date specified in this section.
'Scheduled Bank' means:
For this purpose, scheduled bank has the meaning assigned to it in clause (iii) of
71

the Explanation to section 11(5), that is, the State Bank of India (SBI), a
subsidiary of SBI, a nationalised bank or any other bank included in the Second
Schedule to the Reserve Bank of India Act, 1934.
"State Industrial Investment Corporation" means:
"State Industrial Investment Corporation" means a Government company within
the meaning of section 617 of the Companies Act, 1956, engaged in providing
long-term finance for industrial projects and eligible for deduction under section
36(1)(iii).
Explanation 3B provides that where a deduction in respect of earned leave
encashment paid to any employee is allowed in computing the business income
of the employer for the previous year in which the liability to pay was incurred
(applicable for previous year 2000-2001 or any earlier year), no deduction shall
be allowed in respect of such sum in the previous year in which the sum is
actually paid.
Explanation 3C & 3D clarifies that if any sum payable by the assessee as interest
on any such loan or borrowing or advance referred to in (d) and (e) above, is
converted into a loan or borrowing or advance, the interest so converted and not
actually paid shall not be deemed as actual payment, and hence would not be
allowed as deduction.
The clarificatory explanations only reiterate the
rationale that conversion of interest into a loan or borrowing or advance does not
amount to actual payment.
The manner in which the converted interest will be allowed as deduction has
been clarified in Circular No.7/2006 dated 17.7.2006. The unpaid interest,
whenever actually paid to the bank or financial institution, will be in the nature of
revenue expenditure deserving deduction in the computation of income.
Therefore, irrespective of the nomenclature, the deduction will be allowed in the
previous year in which the converted interest is actually paid.
Section 41 - Deemed Profit
This section enumerates certain receipts which are deemed to be income under
the head Business or profession. Such receipts would attract charge even if the
business from which they arise had ceased to exist prior to the year in which the
liability under this section arises. The particulars of such receipts are given
below:
Section 41(1) - Remission or cessation of trading liability:
Where deduction was allowed in respect of loss, expenditure or trading liability
for any year and subsequently during any previous year the assessee or
successor of the business has obtained any amount in respect of such loss or
expenditure or some benefit in respect of such trading liability by way of
remission or cessation thereof, the amount obtained or the value of benefit
accrued shall be deemed to be the income.
Successor in Business:
The provisions are applicable even to the successor who receives the amount.
The successor in business for this purpose, means:
a. Where there has been an amalgamation of a company with
another company, the successor will be the amalgamated
company.
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b. Where a firm carrying on a business or profession is

succeeded by another firm the successor will be the other
firm.
c. In any other case, where one person is succeeded by any
other person in that business or profession the other
person will be the successor.
d. In case of a demerger, the successor will be the resulting
company.
Remission or cessation of a trading liability includes remission or
cessation of liability by a unilateral act of the assessee by way of writing
off such liability in his accounts.
Section 41(2) - Balancing Charge:
In the case of an undertaking engaged in the generation or generation and
distribution of power, option is available to claim depreciation on straight line
method with reference to each individual asset. If such option is exercised, block
of asset concept does not apply. In the case of such an assessee, where any
building, machinery, plant or furniture is transferred for a consideration which is
more than the depreciated value, the surplus to the extent of depreciation
already allowed shall be assessed as business income in the year in which it
becomes due. This is known as 'balancing charge'.
Section 41(3) - Sale of asset used for scientific research:
Any amount realised on transfer of an asset used for scientific research is taxable
as business income to the extent of deduction allowed u/s 35 in the year in which
the transfer takes place. Apart from sale proceeds, receipts in the nature of
insurance, salvage or compensation, if any, shall also be considered under this
section.
Section 41(4) - Recovery of bad debts written off:
Any amount recovered by the assessee against bad debt earlier allowed as
deduction shall be taxed as income in the year in which it is received. However,
any bad debts of the predecessor subsequently recovered by the successor shall
not be treated as income in the hands of the successor.
Section 41(4A) - Withdrawal from reserves created:
Any amount withdrawn from a Special Reserve created and maintained by a
Financial Corporation or a public company as specified u/s 36(1)(viii) in respect of
which deduction has been allowed, shall be deemed to be the profit of the year
of such withdrawal and shall be charged to tax accordingly. The chargeability
applies even if the business is no longer in existence during the relevant previous
year.
Section 41(5) - Profits from discontinued business:
In case an assessee who is chargeable to tax in respect of any amount deemed
as profit u/s 41 relating to a discontinued business, other than a speculative
business, then, any loss incurred in the year in which the business was
discontinued shall be allowed to be set-off against such profit and only the
73

balance, if any, shall be taxed.

Section 42 - Special provisions for deductions in the case of business for
prospecting etc., for mineral oil:
This section has been enacted to permit an assessee to claim an allowance which
may on general principles be inadmissible, e.g., allowance in respect of
expenditure which would be regarded as an accretion to capital on the ground
that it brings into existence an asset of enduring benefit or to constitute initial
expenditure incurred on the setting up of a profit-earning machinery in motion. It
must further be noted that this concession can be availed of only in relation to
contract or arrangements entered into by the Central Government for
prospecting for, or the extraction or production of mineral oils.

The deduction or allowances stipulated in such agreements will be permissible

even if they are not provided for under the Act. The allowances are as follows:
a. expenditure by way of in fructuous or abortive exploration expenses in
respect of an area surrendered prior to the beginning of commercial
production by the assessee;
b. expenditure incurred by the assessee, whether before or after such
commercial production in respect of drilling or exploration activities in
services in respect of physical assets used in that connection (except
those assets which qualify for depreciation allowance under section
32); and
c. for the depletion of mineral oil in the mining area in respect of the
assessment year relevant to the previous year in which commercial
production is begun and for such succeeding years as may be specified
in the agreement.
Amount of deduction:
The sum of those allowance should be computed and deduction should be made
in the manner specified in the agreement entered into by the Central
Government with any person for the association or participation in the business
of the Central Government for the prospecting or exploration of mineral oil. It has
been specifically provided that the other provisions of the Act are being deemed,
for the purpose of this allowance, to have been modified to the extent necessary
to give effect to the terms of the agreement. It may be noted that allowances in
this regard are made in lieu of or in addition to the other allowances permissible
under the Act, depending upon the terms of the agreement.
Subject to the provisions of the agreement entered into by the Central
Government, where the business of assessee consisting of the prospecting for or
extraction or production of petroleum and natural gas is transferred or any
interest therein is transferred, wholly or partly, in accordance with the aforesaid
agreement, various situations would arise. The tax treatment in respect of those
situations are as follows:
1. Where the proceeds of the transfer so far as they consist of capital sums
are less than the expenditure incurred remaining unallowed, a deduction
equal to such expenditure remaining unal-lowed, as reduced by the
proceeds of transfer, shall be allowed in respect of the previous year in
74

2.

which such business or interest is transferred.

Where such proceeds exceed the amount of the expenditure incurred
remaining unallowed, so much of the excess as does not exceed the
difference between the expenditure incurred in connection with the
business or to obtain interest therein and the amount of such expenditure
remaining unallowed, shall be chargeable to income-tax as profits and
gains of the business in the previous year in which the business or interest
therein, whether wholly or partly, had been transferred.
However, in a case where the provisions of this clause do not
apply, the deduction to be allowed for expenditure incurred
remaining unallowed shall be arrived at by subtracting the
proceeds of transfer (so far as they consist of capital sums) from
the expenditure remaining unallowed.

Explanation - Where the business or interest in such business is

transferred in a previous year in which such business carried on
by the assessee is no longer in existence, the provisions of this
clause shall apply as if the business is in existence in that
previous year.
3. Where such proceeds are not less than the amount of the expenditure
incurred remaining unallowed, no deduction for such expenditure shall be
allowed in respect of the previous year in which the business or interest in
such business is transferred or in respect of any subsequent year or years.
Special provisions in case of amalgamation/demerger:
Where in a scheme of amalgamation, the amalgamating company sells or
otherwise transfers the business to the amalgamated company (being an Indian
company), the provisions of this sub-section
a. shall not apply in the case of the amalgamating company and
b. shall, as far as may be, apply to the amalgamated company as
they would have applied to the amalgamated company if the
latter had not transferred the business or interest in the business.
The section provides for similar provisions in the case of demerger where the
resulting company, being an Indian company, shall claim the production under
the said section.
Section 43A - Exchange rate fluctuation:
Where an assessee acquired an asset from abroad, for the purpose of his
business or profession and in consequence of the variation in the exchange rate,
the liability of the assessee in terms of payment towards the acquisition of that
asset increases or decreases, then the actual cost of that asset should also be
increased or reduced only in the year in which the actual payment is made
irrespective of method of accounting followed by the assessee.
Such increased or reduced cost of the asset shall be taken into consideration for
the purpose of deduction u/s 32, 35(1)(iv), 35A, 36(1)(ix) and for the purpose of
computation of capital gains u/s 48, not being a capital asset u/s 50.
Where the whole or any part of the liability aforesaid is met, not by the assessee,
but, directly or indirectly, by any other person or authority, the liability so met
shall not be taken into account for the purposes of this section.
75

Section 43C - Determination of cost of acquisition of stock-in-trade

Sl.No
1

Mode of Acquisition
Amalgamation

Gift

Partition of HUF

Will

Irrevocable Trust

Cost of Acquisition
1) Cost to the amalgamating Company
2) cost of improvement
3) Expenses incurred for transfer
1) Cost to the donor
2) Cost of improvement
3) Expenses incurred for accepting the
gift and the gift tax paid by the donor
1) Cost to the HUF.
2) Cost of improvement
3) Expenses incurred for partition
1) Cost to the previous owner
2) Cost of improvement
3) Expenses incurred for probating the
will
1) Cost to the previous owner
2) Cost of improvement
3) Expenses incurred for establishing the
trust.

Section 43CA - Special provision for full value of consideration for

transfer of assets (land and building) other than capital assets.
1. At present, the provisions of section 50C require adoption of stamp duty
value of land or building or both, which are held as a capital asset, if the
same are transferred for a consideration which is less than the value
adopted, assessed or assessable by any authority of a State Government
for the purpose of payment of stamp duty in respect of such transfer.
2. However, such provisions are not applicable in case of transfer of
immovable property, held by the transferor as stock-in-trade.
3. Therefore, as an anti-avoidance measure, new section 43CA has been
inserted to provide 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 or assessed or assessable (i.e.,
the stamp duty value) shall be deemed to be the full value of the
consideration for the purposes of computing income under the head
Profits and gains of business of profession.
4. Further, where the date of an agreement fixing the value of consideration
for the transfer of the asset and the date of registration of the transfer of
the asset are not same, the stamp duty value may be taken as on the date
of the agreement for transfer instead of on the date of registration for such
transfer, provided at least a part of the consideration has been received by
any mode other than cash on or before the date of the agreement.
5. The Assessing Officer may refer the valuation of the asset to a valuation
officer as defined in section 2(r) of the Wealth-tax Act, 1957 in the
following cases 76

a. Where the assessee claims before any Assessing Officer that the
value adopted or assessed or assessable by the authority for
payment of stamp duty exceeds the fair market value of the
property as on the date of transfer and
b. the value so adopted or assessed or assessable by such authority
has not been disputed in any appeal or revision or no reference
has been made before any other authority, court or High Court.
6. Where the value ascertained by the Valuation Officer exceeds the value
adopted or assessed or assessable by the Stamp Valuation Authority, the
value adopted or assessed or assessable shall be taken as the full value of
the consideration received or accruing as a result of the transfer.
The term assessable covers transfers executed through power of
attorney. The term assessable has been defined to mean the price which
the stamp valuation authority would have, notwithstanding anything to the
contrary contained in any other law for the time being in force, adopted or
assessed, if it were referred to such authority for the purposes of the
payment of stamp duty.
Section 43D - Special provisions in case of income of public financial
institutions etc.,
In the case of a public financial institution or a scheduled bank or a State
financial corporation or a State industrial investment corporation, the
income by way of interest on such categories of bad and doubtful debts, as
may be prescribed having regard to the guidelines issued by the Reserve
Bank of India in relation to such debts, shall be chargeable to tax in the
previous year in which it is credited to the profit and loss account by the
said institutions for that year or in the previous year in which it is actually
received by them, whichever is earlier. This provision is now applicable to
co-operative banks also.
In the case of a public company, the income by way of interest in relation
to such categories of bad and doubtful debts as may be prescribed having
regard to the guidelines issued by the National Housing Bank established
under the National Housing Bank Act, 1987 in relation to such debts shall
be chargeable to tax in the previous year in which it is credited to the
profit and loss account by the said public company for that year or in the
previous in which it is actually received by it, whichever is earlier.
Section 44 - Insurance Business:
The profits and gains of a mutual insurance company or a co-operative
society carrying on the business of insurance shall be computed under the
head "Profits and gains of business or profession" in accordance with the
rules contained in the First Schedule to the Income Tax Act.
Section 44A - Special provision for deduction in the case of trade,
professional or similar association:
The concept of 'mutuality' means that the contributors and the
beneficiaries are identical. Since one cannot make profit by dealing with
himself, there is no taxable profit involved wherever such concept applies.
77

A mutual concern or association stands on the same principle. All the

contributors to the common fund are entitled to participated in the surplus
and all participants to the surplus are contributors in the case of a mutual
concern. The excess of income over expenditure in a year shall
supplement the common fund for future utilisation to the benefit of the
contributors and the excess of expenditure over income shall be absorbed
by the common fund.
Generally, the surplus derived by a mutual concern is not chargeable to
tax. However, in the case of a trade, professional or similar associations,
any income derived from specific services performed for its members is
chargeable to tax u/s 28. Similarly, income from non-mutual source such
as Interest on fixed deposits shall also be taxable. Thus, surplus from
subscriptions etc., shall be exempt and income from non-mutual source
shall be taxed.
In the case of such trade, professional or similar associations, if the
amount received from its members by way of subscription or membership
fees falls short of the expenditure incurred, such deficit will be allowed as
deduction in computing the income chargeable under the head profits
and gains of business or profession. If there is no such income, then, it
will be allowed as a deduction in computing the income under any other
head.
However, only an amount up to 50% of total taxable income of the
association can be set off against the deficiency aforementioned. In
computing the taxable income of the association, effect must first be given
to the allowances or losses brought forward under any other section of the
Act. This section applies only to such associations which do not distribute
their income amongst their members except in the form of grants to
affiliated associations.
Section 44AA - Maintenance of accounts by certain persons carrying on
business or profession:
This section provides that every person carrying on the legal, medical,
engineering or architectural profession or accountancy or technical consultancy
or interior decoration or any other profession as has been notified by the Central
Board of Direct Taxes in the Official Gazette must statutorily maintain such books
of accounts and other documents as may enable the Assessing Officer to
compute his total income in accordance with the provisions of the Income-tax
Act. The persons carrying on these professions are statutorily obliged to maintain
the prescribed books of account and other documents regardless of the quantum
of their income and also regardless of the question whether the profession was
set up prior to or after the coming into force of this new provision.
The professions notified so far are as the profession of authorised representative;
the profession of film artiste (actor, camera man, director, music director, art
director, editor, singer, lyricist, story writer, screen play writer, dialogue writer
and dress designer); the profession of Company Secretary; and information
technology professionals.
Every taxpayer carrying on any business or profession (other than the
professions specified above) must maintain the books of account prescribed by
78

the Central Board of Direct Taxes in the following circumstances:

a) in cases where the income from the business or profession exceeds Rs.
1,20,000 or the total sales turnover or gross receipts, as the case may be,
in the business or profession exceed Rs. 10,00,000 in any one of three
years immediately preceding the accounting year; or
b) in cases where the business or profession is newly set up in any previous
year, if his income from business or profession is likely to exceed Rs.
1,20,000 or his total sales turnover or gross receipts, as the case may be,
in the business or profession are likely to exceed Rs. 10,00,000 during the
previous year ;
c) in cases where profits and gains from the business are calculated on a
presumptive basis under section 44AE or 44BB or 44BBB and the assessee
has claimed that his income is lower than the profits or gains so deemed
to be the profits and gains of his business.
d) in cases where the profits and gains from the business are deemed to be
the profits and gains of the assessee under section 44AD and he has
claimed such income to be lower than the profits and gains so deemed to
be the profits and gains of his business and his income exceeds the basic
exemption limit during such previous year.
The Central Board of Direct Taxes has been authorised, having due regard to the
nature of the business or profession carried on by any class of persons, to
prescribe by rules the books of account and other documents including
inventories, wherever necessary, to be kept and maintained by the taxpayer, the
particulars to be contained therein and the form and manner in which and the
place at which they must be kept and maintained. Further, the Central Board of
Direct Taxes has also been empowered to prescribe, by rules, the period for
which the books of account and other documents are required to be kept and
maintained by the taxpayer.
Rule 6F:
Rule 6F of the Income-tax Rules contains the details relating to the books of
account and other documents to be maintained by certain professionals under
section 44A.
As per Rule 6F, every person carrying on legal, medical, engineering, or
architectural profession or the profession of accountancy or technical
consultancy or interior decoration or authorised representative or film artist shall
keep and maintain the books of account and other documents specified in subrule (2) in the following cases :
a) if his gross receipts exceed Rs. 1,50,000 in all the 3 years immediately
preceding the previous year ; or
b) if, where the profession has been newly set up in the previous year, his
gross receipts are likely to exceed Rs. 1,50,000 in that year
Note : It is to be noted that professionals whose gross receipts are less than the
specified limits given above are also required to maintain books of account but
these have not been specified in the Rule. In other words, they are required to
maintain such books of account and other documents as may enable the
Assessing Officer to compute the total income in accordance with the provisions
of this Act.
Sub-rule (2) of Rule 6F: The following books of account and other documents are
79

required to be maintained.
a) a cash book;
b) a journal, if accounts are maintained on mercantile basis ;
c) a ledger;
d) Carbon copies of bills and receipts issued by the person whether machine
numbered or otherwise serially numbered, in relation to sums exceeding
Rs. 25;
e) Original bills and receipts issued to the person in respect of expenditure
incurred by the person, or where such bills and receipts are not issued,
payment vouchers prepared and signed by the person, provided the
amount does not exceed Rs. 50. Where the cash book contains adequate
particulars, the preparation and signing of payment vouchers is not
required.
In case of a person carrying on medical profession, he will be required to
maintain the following in addition to the list given above:
a. a daily case register in Form 3C.
b. an inventory under broad heads of the stock of drugs, medicines and
other consumable accessories as on the first and last day of the
previous year used for his profession.
The above books of account and documents shall be kept and maintained for a
minimum of 6 years from the end of the relevant assessment year. However,
where the assessment in relation to any assessment year has been reopened
under section 147 within the period specified in section 149, all the books of
account and other documents which were kept and maintained at the time of
reopening the assessment shall continue to be so kept and maintained till the
assessment so reopened has been completed.
The books and documents shall be kept and maintained at the place where the
person is carrying on the profession, or where there is more than one place, at
the principal place of his profession. However, if he maintains separate set of
books for each place of his profession, such books and documents may be kept
and maintained at the respective places.
Section 44AB - Compulsory Audit of accounts:
It is obligatory in the following cases for a person carrying on business or
profession to get his accounts audited before the specified date by a Chartered
Accountant:
1. if the total sales, turnover or gross receipts in business exceeds Rs. 100
lakh in any previous year; or
2. if the gross receipts in profession exceeds Rs. 25 lakh in any previous year;
or
3. where the assessee is covered under section 44AE, 44BB or 44BBB and
claims that the profits and gains from business are lower than the profits
and gains computed on a presumptive basis. In such cases, the normal
monetary limits for tax audit in respect of business would not apply.
4. where the assessee is covered under section 44AD, and he claims that the
profits and gains from business are lower than the profits and gains
computed on a presumptive basis and his income exceeds the basic
exemption limit.
80

The person mentioned above would have to furnish by the specified date a report
of the audit in the prescribed forms. For this purpose, the Board has prescribed
under Rule 6G, Forms 3CA/3CB/3CD containing forms of audit report and
particulars to be furnished therewith.
In cases where the accounts of a person are required to be audited by or under
any other law before the specified date, it will be sufficient if the person gets his
accounts audited under such other law before the specified date and also furnish
by the said date the report of audit in the prescribed form in addition to the
report of audit required under such other law. Thus, for example, the provision
regarding compulsory audit does not imply a second or separate audit of
accounts of companies whose accounts are already required to be audited under
the Companies Act, 2013. The provision only requires that companies should get
their accounts audited under the Companies Act, 2013 before the specified date
and in addition to the report required to be given by the auditor under the
Companies Act, 2013 furnish a report for tax purposes in the form to be
prescribed in this behalf by the CBDT.
However, the requirement of audit under section 44AB does not apply to a
person who derives income of the nature referred to in sections 44B and 44BBA.
Specified date:
The expression specified date in relation to the accounts of the previous year
or years relevant to any assessment year means the due date for furnishing the
return of income under section 139(1).
It may be noted that under section 271B, penal action can be taken for not
getting the accounts audited and for not filing the audit report by the specified
date.
Note:
In case of an assessee carrying on more than one business activity, the
aggregate sales, turnover and / or gross receipts of all businesses carried on
would be taken into consideration for the limit of Rs. 1 crore.
Section 44AD - Special provisions for computing profits and gains of any
business (excluding the business covered under section 44AE):
1. In the case of an assessee, being a resident individual, HUF or a firm other
than a LLP, carrying on any business whose gross receipts from such
business does not exceed Rs. 1 crore, a sum equal to 8% of the gross
receipts paid or payable to the assessee or such higher sum as declared
by the assessee in the return of income shall be deemed to be the income
from such business.
2. 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 VIA specifically relating to income based deductions.
3. An assessee who is covered under the provisions of Sec 44AD is not
required to pay advance tax.
4. 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 basis exemption limit, he shall
maintain books of account as per Sec 44AA and get the same audited u/s
81

44AB.
5. the provisions of Section 44AD shall not apply to :
a) a person carrying on any profession referred to in Sec 44AA
b) a person earning income in the nature of commission or brokerage
c) a person carrying on any agency business.
Further Sec 44AD shall not apply to business of plying, hiring or leasing
goods carriage
referred to in Sec 44AE.
Section 44AE - Special provisions for computing profits and gains of
business of plying, hiring or leasing goods carriages:
1. In the case of 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. 7,500/from 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 of the
amount payable is still due shall be deemed to be the owner of such goods
carriage.
3. Where the profits and gains 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 under this section , assessee
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 Sec 44AE shall be
excluded.
Common points for Sec 44AD and Sec 44AE:
1. All deductions u/s 30 to 38 including depreciation shall be deemed to have
been allowed.
2. WDV of assets used for the purposes of such business shall be calculated
as if the depreciation has been actually allowed.
3. In the case of an assessee which is a firm to which the provisions of Sec
44AD or Sec 44AE 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).
Section 44B - Special provision for computing the profits and gains of
shipping business in case of non-residents:
1. This section provides for computation of the profits and gains of the
business of shipping carried on by non-residents to the extent they are
chargeable to income-tax in India. According to this, a sum equal to 7%
of the aggregate of the following amounts must be deemed to be the
profits and gains of the business of shipping chargeable to tax under the
head profits and gains of business or profession.
a) The amount paid or payable, whether within India or
outside, to the assessee or to any person on his behalf on
account of the carriage of passengers, livestock, mail or
goods shipped at any port in India.
82

b) The amount received or deemed to be received in India by

the assessee himself or by any other person on behalf of or
on account of the carriage of passengers, livestock, mail or
goods shipped at any port outside India.
The total of the above two amounts must be ascertained and 7
% thereof would be calculated and taken as the income from the
business chargeable to tax in India. These provisions for
computation of the income from the shipping business in case of
non-residents would apply notwithstanding anything to the
contrary contained in the provisions of sections 28 to 43A of the
Income-tax Act, 1961. In other words, the income would be
computed on this basis without applying the various provisions
contained in sections 28 to 43A. Consequential provisions are also
seen in section 172.
For the purposes of sub-section (2), receipts forming the basis of
estimates on nonresident shipping lines will include demurrage
and handling charges.
Section 44BB - Provisions for computation of taxable income from
activities connected with exploration of mineral oils:
The computation of taxable income of non-resident taxpayer engaged in the
business of providing services and facilities in connection with or supplying plant
and machinery on hire, used or to be used in the exploration for, and exploitation
of mineral oils involves a number of complications.
As a measure of simplification, section 44BB provides for determination of
income of such taxpayer at 10% of the aggregate of certain amounts. The
amounts in respect of which the provisions will apply would be the amounts paid
or payable to the taxpayer or to any person on his behalf whether in or out of
India, on account of the provision of such services or facilities or supplying plant
and machinery for the aforesaid purposes. This amount will also include facilities
or supply of plant and machinery. This provision will not, however apply to any
income to which the provisions of section 42, 44D, 44DA, 115A or 293A apply. It
may be noted that section 44BB applies only to non-resident assessees.
Such taxpayers may claim lower income than the present presumptive rate of
10%, if they keep and maintain books of accounts and documents as required
under sub-section (2) of section 44AA and get their accounts audited under the
provisions of section 44AB of the Act. The assessment in all such cases shall be
done by the Assessing Officer under section 143(3)
Note - If the income of a non-resident is in the nature of fees for technical
services, it shall be taxable under the provisions of either section 44DA or section
115A irrespective of the business to which it relates. Section 44BB would apply
only in a case where consideration is for services and other facilities relating to
exploration activity which are not in the nature of technical services.
Section 44BBA - Special provision for computing profits and gains of the
business of operation of aircraft in the case of non-residents:
Under section 44BBA(1), a sum equal to 5% of the aggregate of the amounts
specified in sub-section (2) is deemed to be the profits and gains chargeable to
83

tax under the head "Profits and gains of business or profession".

Sub-section (2) specifies the following amounts a. the amount paid or payable, whether in or out of India, to the assessee
or to any person on his behalf on account of the carriage of passengers,
livestock, mail or goods from any place in India; and
b. the amount received or deemed to be received in India by or on behalf of
the assessee on account of the carriage of passengers, livestock, mail or
goods from any place outside India.

Section 44BBB - Special provision for computing profits and gains of

foreign companies engaged in the business of civil construction etc., in
certain turnkey power projects.
Under this provision in the case of a foreign company engaged in the business of
construction or the business of erection of plant or machinery or testing or
commissioning thereof in connection with a turnkey power project approved by
the Central Government in this behalf, a sum equal to 10% of the amount paid or
payable (whether in or out of India) to the said assessee or to any person on his
behalf on account of such civil construction, erection, testing or commissioning
shall be deemed to be the profits and gains of such business chargeable to tax
under the head profits and gains of business or profession.
However, such taxpayers may claim lower income than the present presumptive
rate of 10%, if they keep and maintain books of accounts and documents as
required under section 44AA(2) and get their accounts audited under the
provisions of section 44AB. The assessment in all such cases shall be done by the
Assessing Officer under section 143(3).
Section 44C: Deduction of Head office expenditure in the case of nonresidents:
In the case of non-resident, deduction for the head office expenditure incurred
outside India and attributable to the business or profession carried on in India
cannot exceed the following limits:
i.
an amount equal to 5% of adjusted total income; or
ii.
actual head office expenditure attributable to the business or profession of
the assessee in India
whichever is less.
Adjusted Total Income:
Adjusted Total Income means the total income computed in accordance with the
provisions of this Act before allowing deduction under this section or unabsorbed
depreciation or brought forward losses or deduction sunder Chapter VI A or
deduction u/s 36(1)(ix).
In case the adjusted total income of the assessee is a loss, the amount under
clause (i) shall be computed at the rate of 5% of the average adjusted total
income of the assessee.
Average Adjusted Total Income:

84

Average Adjusted Total Income meansa) in cases where the total income of the assessee is assessable for each of
the three assessment years immediately preceding the relevant
assessment year - one-third of the aggregate amount of the adjusted total
income of the previous years relevant to the aforesaid three assessment
years.
b) where the total income of the assessee is assessable for only two of the
aforesaid three assessment years - one-half of the aggregate amount of
the adjusted total income in respect of the two previous years relevant to
the aforesaid two assessment years;
c) in cases where the total income of the assessee becomes assessable only
for one of the three assessment years, aforesaid - the amount of adjusted
total incomes in respect of the previous year relevant to that assessment
year.
Head Office Expenditure:
Head Office Expenditure means the executive and general administration
expenditure incurred by the assessee outside India.
Section 44DA - Special provision for computing income by way of
royalties, etc., in case of non-residents:
1. The income by way of royalty or fees for technical services received from
Government or an Indian concern in pursuance of an agreement made by
a non-corporate non-resident or a foreign company with Government or
the Indian concern after the 31st March, 2003 in respect of such noncorporate non-resident or a foreign company which carries on business in
India, shall be computed on the basis of books of accounts required to be
maintained under the Act.
2. Such business should be carried on through a permanent establishment, or
the assessee should perform professional services from a fixed place of
profession in India.
3. They should keep and maintain books of account and other documents in
accordance with the provisions contained in section 44AA.
4. They should get their accounts audited by an accountant as defined in the
Explanation below section 288(2) and furnish along with the return of
income, the report of such audit in the prescribed form duly signed and
verified by such accountant.
5. No deduction will be allowed while computing income of such nonresident, of the expenditure which is not wholly and exclusively incurred
for the business of such permanent establishment or fixed place and also
of any amount paid by the permanent establishment to its head office or
any of its offices.
6. There have been legal decisions which have expressed contradictory views
regarding the scope and applicability of section 44BB vis--vis section
44DA on the issue of taxability of fee for technical services relating to the
exploration sector.
7. In order to reflect the correct legislative intention regarding taxation of
income by way of fee for technical services, section 44BB has been
amended to exclude the applicability of section 44BB to the income which
is covered under section 44DA. A similar amendment has been made in
section 44DA to provide that provisions of section 44BB would not be
applicable in respect of the income covered under section 44DA.
8. Therefore, if the income of a non-resident is in the nature of fees for
85

technical services, it shall be taxable under the provisions of either section

44DA or section 115A irrespective of the business to which it relates.
Section 44BB would apply only in a case where consideration is for
services and other facilities relating to exploration activity which are not in
the nature of technical services.
Section 44DB - Special provision for computing deductions in the case
of business reorganisation of co-operative Banks.
The deduction under sections 32, 35D, 35DD and 35DDA shall be applicable in
case of business reorganisation involving amalgamation or demerger of cooperative bank.
In the year in which amalgamation or demerger takes place, the deduction u/s
32, 35D, 35DD and 35DDA shall be calculated as under:
Compute the amount of deduction in the aforesaid section of the previous year in
which change of ownership takes place because of amalgamation or demerger
on the assumption that the amalgamation or demerger has not taken place.
The amount of deduction so determined shall be apportioned between the
a) amalgamating co-operative bank and amalgamated co-operative bank; or
b) demerged co-operative bank and resulting co-operative bank, as the case
may be,
in the ratio of number of days for which the assets are used by them during the
previous year in which ownership changes.
Speculation Business:
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. 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 stocks and shares, is periodically or ultimately settled otherwise than
by actual delivery or transfer of the commodity or scrip.
Where the assessee carried on both speculative and non-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 nonspeculative business activities on a reasonable basis.
It may be noted that according to Sec.73, loss of a speculation business cannot
be set off against income from regular business or against income under any
other head of income but it should be carried forward and set off only against
speculation income. It can be carried forward and set off within 4 years.
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 stocks and shares entered into by a "dealer or
86

investor" to guard against loss 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 loss in the
ordinary course of business;
d) An eligible transaction in respect of trading in derivatives in a recognized
stock exchange; and
e) An eligible transaction in respect of trading in commodity derivatives in a
recognized association, which is chargeable to commodities transaction
tax.

Questions on Profits and Gains of Business or Profession:

Q1:
A car purchased by Dr. Soman on 10.08.2013 for Rs.5,25,000 for personal use is brought into
professional use on 1.07.2015 by him, when its market value was Rs.2,50,000.
Compute the actual cost of the car and the amount of depreciation for the assessment year 201617 assuming the rate of depreciation to be 15%.

Q2:
M/s. Dollar Ltd., a manufacturing concern, furnishes the following particulars:
Particulars

Rs.

Opening Written down value of plant and machinery (01.04.2015) (15% block)

5,00,000

Purchase of plant and machinery (put to use before 01.10.2015)

2,00,000

Sale proceeds of plant and machinery which became obsolete- the plant and
machinery was purchased on 01-04-2013 for Rs.5,00,000.

5,000

Further, out of purchase of plant and machinery:

a) Plant and machinery of Rs.20,000 has been installed in office.
b) Plant and machinery of Rs.20,000 was used previously for the purpose of business by the
seller.
Compute depreciation and additional depreciation as per Income-tax Act, 1961 for the Assessment
Year 2016-17.

Q3:

87

Mr. Abhimanyu is engaged in the business of generation and distribution of power. He always opts
to claim depreciation on written down value for income-tax purposes. From the following details,
compute the depreciation allowable as per the provisions of the Income-tax Act, 1961 for the
assessment year 2016-17:
(Rs.in
lacs)
Opening WDV of block (15% rate)

42

New machinery purchased on 12-10-2015

10

Machinery imported from Colombo on 12-4-2015.

This machine had been used only in Colombo earlier and the assessee is
the first user in India.
New computer installed in generation wing of the unit on 15-7-2015

Q4:
Harish Jayaraj Pvt. Ltd. is converted into Harish Jayaraj LLP on 1.1.2016. The following particulars
are available to you:
Particulars

Rs

Cost of land
WDV of machinery as on 1.4.2015
Patents acquired on 1.6.2015
Building acquired on 12.3.2014 for which deduction was allowed U/s.35AD.
Above building was revalued as on the date of conversion into LLP as
Unabsorbed business loss as on 1.4.2015 (Related to A.Y. 2012-13)

5,00,000
3,30,000
3,00,000
7,00,000
12,00,000
9,00,000

Though the conversion into LLP took place on 1.1.2016, there was disruption of business and the
assets were put into use by the LLP only from 1st March, 2016 onwards.
The company earned profits of Rs.8 lacs prior to computation of depreciation.
Assuming that the necessary conditions laid down in section 47(xiiib) of the Income-tax Act, 1961
have been complied with, explain the tax treatment of the above in the hands of the LLP.

Q5:
Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose written down value on
01.04.2015 was Rs.40 lacs. It purchased another asset (second-hand plant and machinery) of the
same block on 01.11.2015 for Rs.14.40 lacs and put to use on the same day. Sai Ltd. was
amalgamated with Shirdi Ltd. with effect from 01.01.2016.
You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the previous
year ended on 31.03.2016 assuming that the assets were transferred to Shirdi Ltd. at Rs.60 lacs.

Q6:
Mr.Gopi carrying on business as proprietor converted the same into a company by name Gopi Pipes
(P) Ltd. from 01-07-2015. The details of the assets are given below:

Particulars

Amount (in Rs)

Block - I WDV of plant & machinery (rate of depreciation @

15%)

12,00,000

Block - II WDV of Building (rate of depreciation @ 10%)

25,00,000

The Company Gopi Pipes (P) Ltd. acquired plant and machinery in December 2015 for Rs.
10,00,000/-. It has been doing the business from 01-07-2015.

88

Compute the quantum of depreciation to be claimed by Mr. Gopi and successor Gopi Pipes Private
Limited for the assessment year 2016-17.
Note: Ignore additional depreciation.

Q7:
M/s Sidhant & Co., a sole proprietary concern is converted into a company, Sidhant Co. Ltd. with
effect from November 29, 2015. The written down value of assets as on April 1, 2015 is as follows:
Items

Rate of Depreciation

WDV as on 1st April, 2015

Building
Furniture
Plant and Machinery

10%
10%
15%

Rs.3,50,000
Rs.50,000
Rs.2,00,000

Further, on October 15, 2015, M/s Sidhant & Co. purchased a plant for Rs.1,00,000 (rate of
depreciation 15%). After conversion, the company added another plant worth Rs.50,000 (rate of
depreciation 15%).
Compute the depreciation available to (i) M/s Sidhant & Co. and (ii) Sidhant Co. Ltd. for
Assessment Year 2016-17.

Q8:
What are intangible assets? Give four examples. What is the rate of depreciation on a block of
intangible assets?

Q9:
A car purchased by S on 10.8.2010 for Rs.3,25,000 for personal use is brought into the business
of the assessee on 01.12.2015, when its market value is Rs.1,50,000.
Compute the actual cost of the car and the amount of depreciation for the Assessment year 201617 assuming the rate of depreciation to be 15%.

Q10:
Gopichand Industries furnishes you the following information:
Block I

WDV of Plant and machinery (consisting of 10 looms)

Rate of depreciation 15%
Block II WDV of Buildings (consisting of 3 buildings)
Rate of depreciation 10%
Acquired on 5-07-2015 5 looms for
Sold on 7-12-2015 15 looms for
Acquired on 10-01-2016 2 looms for
Compute depreciation claim for the Assessment year 2016-17.

Rs.
5,00,000
12,50,000
4,00,000
10,00,000
3,00,000

Q11:
M/s. QQ & Co., a sole proprietary concern, was converted into a company on 1.9.2015. Before the
conversion, the sole proprietary concern had a Block of Plant and Machinery (Rate of depreciation
15%), whose WDV as on 1.4.2015 was Rs.3,00,000. On 1st April itself, a new plant of the same
block was purchased for Rs.1,20,000. After the conversion, the company has purchased the same
type of Plant on 1.1.2016 for Rs.1,60,000.
Compute the depreciation that would be allocated between the sole proprietary concern and the
successor company.
Note: Ignore additional depreciation.

Q12:
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Honest Industry furnishes you the following details pertaining to the financial year 2015-16
Plant &

Description

Machinery

Rate of depreciation
Opening balance as on 01-04-2015

15%
Rs.14,50,00
0
Rs.12,00,00
0
Rs.4,00,000

Acquired before 30-09-2015

Acquired after 01-12-2015
Transferred in March 2016, one of the
patents held for the past 2 years

Building

Intangible
assets (patents)

10%
Rs.25,00,00
0
Nil

25%
Rs.15,00,000

Rs.18,00,00
0
-

Nil

Rs.5,00,000

Rs.3,00,000

A machinery acquired in July 2015 original cost Rs.1,50,000 was destroyed by fire and the
assessee received compensation of Rs.50,000 from the insurance company.
Newly acquired building given above includes value of land of Rs.3,00,000.
Calculate the eligible depreciation claim for the assessment year 2016-17.
Note: Ignore additional / accelerated depreciation.

Q13:
Mr. Praveen Kumar has furnished the following particulars relating to payments made towards
scientific research for the year ended 31.3.2016:
Particulars

Rs.(in lacs)

Payments made to K Research Ltd.

Payment made to LMN College
Payment made to OPQ College
Payment made to National Laboratory
Machinery purchased for in-house scientific research
Salaries to research staff engaged in in-house scientific research

20
15
10
8
25
12

Note: K Research Ltd. and LMN College are approved research institutions and these payments
are to be used for the purposes of scientific research.
Compute the amount of deduction available under section 35 of the Income-tax Act, 1961 while
arriving at the business income of the assessee.

Q14:
Vivitha Bio-medicals Ltd. is engaged in the business of manufacture of bio-medical items. The
following expenses were incurred in respect of activities connected with scientific research:
Year ended

Item

Amount (Rs.)

31.03.2013
(Incurred after 1.9.2012)
31.03.2014
31.03.2015
31.03.2016

Land
Building
Plant and machinery
Raw materials
Raw materials and salaries

10,00,000
25,00,000
5,00,000
2,20,000
1,80,000

The business was commenced on 01-09-2015.

In view of availability of better model of plant and machinery, the existing plant and machinery
were sold for Rs.8,00,000 on 1.03.2016.
Discuss the implications of the above for the assessment year 2016-17 along with brief
computation of deduction permissible under section 35 assuming that necessary conditions have
been fulfilled. You are informed that the assessees line of business is eligible for claiming
deduction under section 35 at 200% on eligible items.

90

Q15:
Swadeshi Ltd., which follows mercantile system of accounting, obtained licence on 1.4.2014 from
the Department of telecommunication for a period of 10 years. The total licence fee payable is
Rs.18,00,000. The relevant details are:
Year ended

Licence fee payable

for the year (Rs.)

Payments made

31st March

Date

Amount (Rs.)

2015

10,00,000

2016

8,00,000

30.03.2015
15.05.2015
28.02.2016

3,70,000
6,30,000
5,40,000

Balance of Rs.2,60,000 is pending as on 31.3.2016.

Compute the amount of deduction available to the assessee under section 35ABB for the
assessment years 2015-16 and 2016-17. Can any deduction be claimed under section 32 also?

Q16:
Win Limited commenced the business of operating a three star hotel in Tirupati on 1-4-2015.
It furnishes you the following information:
Cost of land (acquired in June 2013)
Cost of construction of hotel building
Financial year 2013-14
Financial year 2014-15
Plant and Machineries (all new) acquired during financial year 2014-15
[All the above expenditures were capitalized in the books of the company]
Net profit before depreciation for the financial year 2015-16

Rs.60 lakhs
Rs.30 lakhs
Rs.150 lakhs
Rs.30 lakhs
Rs.80 lakhs

Determine the amount eligible for deduction under section 35AD of the Income-tax Act, 1961, for
the assessment year 2016-17.

Q17:
MNP Ltd. commenced operations of the business of a new four-star hotel in Chennai on 1.4.2015.
The company incurred capital expenditure of Rs.40 lakh during the period January, 2015 to March,
2015 exclusively for the above business, and capitalized the same in its books of account as on 1st
April, 2015. Further, during the previous year 2015-16, it incurred capital expenditure of Rs.2.5
crore (out of which Rs.1 crore was for acquisition of land) exclusively for the above business.
Compute the income under the head Profits and gains of business or profession for the
assessment year 2016-17, assuming that MNP Ltd. has fulfilled all the conditions specified for
claim of deduction under section 35AD and has not claimed any deduction under Chapter VI-A
under the heading C. Deductions in respect of certain incomes. The profits from the business of
running this hotel (before claiming deducting under section 35AD) for the assessment year 201617 is Rs.80 lakhs. Assume that the company also has another existing business of running a fourstar hotel in Kanpur, which commenced operations 5 years back, the profits from which was
Rs.130 lakhs for assessment year 2016-17.
Would MNO Ltd. be entitled to deduction under section 35AD if it transfers the operation of the
hotel in Chennai to PQR Ltd, while continuing to own the said hotel?

Q18:
Briefly discuss about the provisions relating to deductibility of interest on capital borrowed for the
purpose of business or profession.

Q19:
Comment on the allowability of the following claim made by the assessee:

91

Mr. Achal, a hotelier, claimed expenditure on replacement of Linen and carpets in his hotel as
revenue expenditure.

Q20:
What are the conditions to be satisfied for the allowability of expenditure under section 37 of the
Income-tax Act, 1961?

Q21:
State with reasons, for the following sub-divisions, whether the following statements are true or
false having regard to the provisions of the Income-tax Act, 1961:
a) For a dealer in shares and securities, securities transaction tax paid in a recognized stock
exchange is permissible business expenditure.
b) Where a person follows mercantile system of accounting, an expenditure of Rs.25,000 has
been allowed on accrual basis and in a later year, in respect of the said expenditure, assessee
makes the payment of Rs.25,000 through a cheque crossed as "& Co., disallowance of
Rs.25,000 under section 40A(3) can be made in the year of payment.
c)

It is mandatory to provide for depreciation under section 32 of the Income-tax Act, 1961,
while computing income under the head Profits and Gains from Business and Profession.

d) The mediclaim premium paid to GIC by Mr. Lomesh for his employees, by a draft, on
27.12.2015 is a deductible expenditure under section 36.
e) Under section 35DDA, amortization of expenditure incurred under eligible Voluntary
Retirement Scheme at the time of retirement alone, can be done.
f)

An existing assessee engaged in trading activities, can claim additional depreciation under
Section 32(1)(iia) in respect of new plant acquired and installed in the trading concern, where
the increase in value of such plant as compared to the approved base year is more than 10%.

Q22:
State, with reasons, the allowability of the following expenses under the Income-tax Act, 1961
while computing income from business or profession for the Assessment Year 2016-17:
a) Provision made on the basis of actuarial valuation for payment of gratuity Rs.5,00,000.
However, no payment on account of gratuity was made before due date of filing return.
b) Purchase of oil seeds of Rs.50,000 in cash from a farmer on a banking day.
c)

Tax on non-monetary perquisite provided to an employee Rs.20,000.

d) Payment of Rs.50,000 by using credit card for fire insurance.

e) Salary payment of Rs.2,00,000 outside India by a company without deduction of tax.
f)

Sales tax deposited in cash Rs.50,000 with State Bank of India.

g) Payment made in cash Rs.30,000 to a transporter in a day for carriage of goods

Q23:
Ramji Ltd., engaged in manufacture of medicines (pharmaceuticals), furnishes the following
information for the year ended 31.03.2016:
a) Municipal tax relating to office building Rs.51,000 not paid till 30.09.2016.
b) Patent acquired for Rs.20,00,000 on 01.09.2015 and used from the same month.
c)

Capital expenditure on scientific research Rs.10,00,000 which includes cost of land

Rs.2,00,000.

d) Amount due from customer X, outstanding for more than 3 years, written off as bad debt in
the books Rs.5,00,000.
e) Income-tax paid Rs.90,000 by the company in respect of non-monetary perquisites provided
to its employees.
f)

Provident fund contribution of employees Rs.5,50,000 remitted in July, 2016.

92

g) Expenditure towards advertisement in souvenir of a political party Rs.1,50,000.

h) Refund of sales tax Rs.75,000 received during the year, which was claimed as expenditure in
an earlier year.
State with reasons the taxability or deductibility of the items given above under the Income-tax
Act, 1961.
Note: Computation of total income is not required.

Q24:
Answer the following with reference to the provisions of the Income-tax Act, 1961:
a.

Bad debt claim disallowed in an earlier assessment year, recovered subsequently. Is the
sum recovered chargeable to tax?

b.

Tax deducted at source on salary paid to employees not remitted till the due date for filing
the return prescribed in section 139. Is the expenditure to be disallowed under section 40(a)
(ia)?

c.

X Co. Ltd. paid Rs.120 lakhs as compensation as per approved Voluntary Retirement Scheme
(VRS) during the financial year 2015-16. How much is deductible under section 35DDA for the
assessment year 2016-17?

d.

Bad debt of Rs.50,000 written off and allowed in the financial year 2013-14 recovered in the
financial year 2015-16.

Q25:
State with reasons, whether the following statements are true or false, with regard to the
provisions of the Income-tax Act, 1961:
a) Payment made in respect of a business expenditure incurred on 16th February, 2015 for
Rs.25,000 through a cheque duly crossed as "& Co." is hit by the provisions of section 40A(3).
b)

It is a condition precedent to write off in the books of account, the amount due from debtor to
claim deduction for bad debt.

Failure to deduct tax at source in accordance with the provisions of Chapter XVII-B,

inter alia,

from the amounts payable to a resident as rent or royalty, will result in

disallowance while
computing the business income where the resident payee has not paid the tax due on such
income.
c)

Co-operative banks are not allowed to claim provision for bad and doubtful debts in respect of
advances made by rural branches of such banks.

Q26:
Write short notes on:
a) Restrictions on deductions allowable to the partnership firm in respect of salary and interest to
its partners under section 40(b) of the Income-tax Act, 1961.
b) Carry forward and set off of unabsorbed depreciation.
c)

Additional depreciation.

Q27:
Rao & Jain, a partnership firm consisting of two partners, reports a net profit of Rs.7,00,000 before
deduction of the following items:
i.

Salary of Rs.20,000 each per month payable to two working partners of the firm (as
authorized by the deed of partnership).

93

ii.

Depreciation on plant and machinery under section 32 (computed) Rs.1,50,000.

iii.

Interest on capital at 15% per annum (as per the deed of partnership). The amount of
capital eligible for interest Rs.5,00,000.

Compute:
a) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
b) Allowable working partner salary for the assessment year 2016-17 as per section 40(b).

Q28:
During the financial year 2015-16, the following payments/expenditure were made/incurred by Mr.
Yuvan Raja, a resident individual (whose turnover during the year ended 31.3.2015 was Rs.99
lacs):
a) Interest of Rs.12,000 was paid to Rehman & Co., a resident partnership firm, without
deduction of tax at source;
b) Interest of Rs.4,000 was paid as interest to Mr. R.D. Burman, a non-resident, without
deduction of tax at source;
c)

Rs.3,00,000 was paid as salary to a resident individual without deduction of tax at source;

d) Commission of Rs.15,000 was paid to Mr. Vidyasagar on 2.7.2015. without deduction of tax at
source.
Briefly discuss whether any disallowance arises under the provisions of section 40(a)(i)/40(a)(ia)
of the Income-tax Act, 1961.

Q29:
M/s. Arora Ltd., submits the following details of expenditure pertaining to the financial year 2015-16:
a) Payment of professional fees to Mr. Mani Rs.50,000. Tax was not deducted at source.
b) Interior works done by Mr. Hari for Rs.2,00,000 on a contract basis. Payment made in the
month of March 2016. Tax deducted in March 2015 was paid on 30.06.2016.
c)

Factory Rent paid to Mr. Rao Rs.15,00,000. Tax deducted at source and paid on
01.10.2016.

d) Interest paid on Fixed Deposits Rs.2,00,000. Tax deducted on 31.12.2015 and paid on
28.09.2016.
Examine the above with reference to allowability of the same in the assessment year 2016-17
under the Income-tax Act, 1961. You answer must be with reference to section 40(a) read with
relevant tax deduction at source provisions. Assume that the due date of filing the return of
income is 30.09.2016.

Q30:
Vinod is a person carrying on profession as film artist. His gross receipts from profession are
as under:
Financial year 2013-14

1,15,000

Financial year 2014-15

1,80,000

Financial year 2015-16

2,10,000

What is his obligation regarding maintenance of books of accounts for each Assessment Year under
section 44AA of Income-tax Act, 1961?

Q31:
Ramamurthy had 4 heavy goods vehicles as on 1.4.2015. He acquired 7 heavy goods vehicles on
27.6.2015. He sold 2 heavy goods vehicles on 31.5.2015.

94

He has brought forward business loss of Rs.50,000 relating to assessment year 2012-13 of a
discontinued business. Assuming that he opts for presumptive taxation of income as per section
44AE, compute his total income chargeable to tax for the assessment year 2016-17.

Q32:
Mr. Praveen engaged in retail trade, reports a turnover of Rs.98,50,000 for the financial year 201516. His income from the said business as per books of account is computed at Rs.7,20,000. Retail
trade is the only source of income for Mr. Praveen.
a) Is Mr. Praveen eligible to opt for presumptive determination of his income chargeable to tax
for the assessment year 2016-17?
b) If so, determine his income from retail trade as per the applicable presumptive provision.
c)

In case Mr. Praveen does not opt for presumptive taxation of income from retail trade,
what are his obligations under the Income-tax Act, 1961?

d) What is the due date for filing his return of income under both the options?

Q33:
Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April, 2015, he owns
10 trucks (out of which 6 are heavy goods vehicles). On 2nd May, 2015, he sold one of the heavy
goods vehicles and purchased a light goods vehicle on 6th May, 2015. This new vehicle could
however be put to use only on 15th June, 2015.
Compute the total income of Mr. Sukhvinder for the assessment year 2016-17, taking note of the
following data:
Particulars

Rs.

Freight charges collected

Rs.
12,70,00
0

Less : Operational expenses

Depreciation as per section 32
Other office expenses
Net Profit

6,25,000
1,85,000
15,000

Other business and non- business income

8,25,000
4,45,00
0
70,000

Q34:
X Ltd. follows mercantile system of accounting. After negotiations with the bank, interest of Rs.4
lakhs (including interest of Rs.1.2 lakhs pertaining to year ended 31.03.2016 has been converted
into loan. Can the interest of Rs.1.2 lakhs so capitalized be claimed as business expenditure?

Q35:
Mr. B.A. Patel, a non-resident, operates an aircraft between London to Ahmedabad. For the
Financial year ended on 31st March, 2016, he received the amounts as under:
a) For carrying passengers from Ahmedabad Rs.50 lacs.
b) For carrying passengers from London Rs.75 lacs received in India.
c)

For carrying of goods from Ahmedabad Rs.25 lacs.

The total expenditure incurred by Mr. B.A. Patel for the purposes of the business for the financial
year 2015-16 was Rs.1.4 crores.
Compute the income of Mr. B.A. Patel under the head Profits and Gains from business or
profession for the financial year ended on 31st March 2016 relevant to assessment year 2016-17.

Q36:

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List six items of expenses which otherwise are deductible shall be disallowed, unless payments are
actually made within the due date for furnishing the return of income under Section 139(1). When
can the deduction be claimed, if paid after the said date?

Q37:
Mr. Asim, a 60 year old individual, engaged in the business of roasting and grounding of coffee,
derives income of Rs.10 lacs during the financial year 2015-16. Compute the tax payable by him
assuming he has not earned any other income during the financial year 2015-16. What would be
your answer if Mr. Asim is also engaged in the business of growing and curing coffee?

Q38:
Mr. Tenzingh is engaged in composite business of growing and curing (further processing) coffee in
Coorg, Karnataka. The whole of coffee grown in his plantation is cured. Relevant information
pertaining to the year ended 31.3.2016 are given below:
Particulars

Rs.

WDV of car as on 1.4.2015

WDV of machinery as on 1.4.2015 (15% rate)
Expenses incurred for growing coffee
Expenditure for curing coffee
Sale value of cured coffee

3,00,000
15,00,000
3,10,000
3,00,000
22,00,000

Besides being used for agricultural operations, the car is also used for personal use; disallowance
for personal use may be taken at 20%. The expenses incurred for car running and maintenance
are Rs.50,000. The machines were used in coffee curing business operations.
Compute the income arising from the above activities for the assessment year 2016-17. Show the
WDV of the assets as on 31.3.2016.

Q39:
Miss Vivitha, a resident and ordinarily resident in India, has derived the following income from
various operations (relating to plantations and estates owned by her) during the year ended
31.03.2016:
Particulars

Rs.

Income from sale of centrifuged latex processed from rubber plants grown in Darjeeling.
Income from sale of coffee grown and cured in Yercaud, Tamilnadu
Income from sale of coffee grown, cured, roasted and grounded, in Colombo. Sale
consideration was received at Chennai.
Income from sale of tea grown and manufactured in Shimla.
Income from sapling and seedling grown in a nursery at Cochin.
Basic operations were not carried out by her on land.

3,00,000
1,00,000
2,50,000
4,00,000
80,000

You are required to compute the business income and agricultural income of Miss Vivitha for the
assessment year 2016-17.

Q40:
Mr. Tony has estates in Rubber, Tea and Coffee. He derives income from them. He has also a
nursery wherein he grows and sells plants. For the previous year ending 31.3.2016, he furnishes
the following particulars of his sources of income from estates and sale of plants.
You are requested to compute the taxable income for the Assessment Year 2016-17:
Particulars

Rs.

Manufacture of Rubber
Manufacture of Coffee grown and cured
Manufacture of Tea
Sale of plants from Nursery

5,00,000
3,50,000
7,00,000
1,00,000

96

Q41:
Mr. Gupta is having a trading business and his Trading and Profit & Loss Account for the financial
year 2015-16 is as under:
Particulars

Rs.

Particulars

Rs.

To Opening stock
To Purchase
To Gross profit
Total

1,00,000
49,00,000
20,50,000
70,50,00
0
5,00,000
1,00,000
50,000
50,000
50,000
20,000

By Sales
By Closing stock

70,00,000
50,000

Total

70,50,000

By Gross Profit b/d

20,50,000

Total

20,50,000

Salary to employees (Including Contribution to PF)

Donation to Prime Minister Relief Fund
Provision for bad debts
Bonus to employees
Interest on bank loan
Family
planning
expenditure
incurred
on
employees
Depreciation
Income-tax

30,000
1,00,000

To Net profit

11,50,000

Total

20,50,00
0

Other information:
a) Depreciation allowable Rs.40,000 as per Income-tax Rules, 1962.
b) No deduction of tax at source on payment of interest on bank loan has been made.
c)

Payment of bonus to workers made in the month of October, 2015 on the occasion of Diwali
festival.

d) Out of salary, Rs.25,000 pertains to his contributions to recognized provident fund which was
deposited after the due date of filing return of income. Further, employees contribution of
Rs.25,000 was also deposited after the due date of filing return of income.
Calculate gross total income of Mr. Gupta for the Assessment Year 2016-17.

Q42:
Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit & Loss
Account for the year ended 31.03.2016:
Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2016
Particulars

Rs.

Particulars

Rs.

To
To
To
To

71,000
16,99,000
5,70,000
10,60,000
34,00,00
0
3,26,000
5,000

By Sales
By Closing stock

32,00,000
2,00,000

Opening Stock
Purchase of Raw Materials
Manufacturing Wages & Expenses
Gross Profit

To Administrative charges
To State VAT penalty
To State VAT paid
To General Expenses
To Interest to Bank (On machinery
term loan)

1,10,000
54,000
60,000

97

34,00,000
By Gross Profit
By Dividend from domestic
companies
By Income from agriculture (net)

10,60,000
15,000
1,80,000

To Depreciation
To Net Profit

2,00,000
5,00,000
12,55,00
0

12,55,000

Following are the further information relating to the financial year 2015-16:
a) Administrative charges include Rs.46,000 paid as commission to brother of the assessee. The
commission amount at the market rate is Rs.36,000.
b) The assessee paid Rs.33,000 in cash to a transport carrier on 29.12.2015. This amount is
included in manufacturing expenses (Assume that the provisions relating to TDS are not
applicable to this payment.)
c)

A sum of Rs.4,000 per month was paid as salary to a staff throughout the year and this has
not been recorded in the books of account.

d) Bank term loan interest actually paid upto 31.03.2016 was Rs.20,000 and the balance was
paid in October 2016.
e) Housing loan principal repaid during the year was Rs.50,000 and it relates to residential
property occupied by him. Interest on housing loan was Rs.23,000. Housing loan was taken
from Canara Bank. These amounts were not dealt with in the profit and loss account given
above.
f)

Depreciation allowable under the Act is to be computed on the basis of following information:
Plant & Machinery (Depreciation rate @ 15%)

Rs.

Opening WDV (as on 01.04.2015)

Additions during the year (used for more than 180 days)
Total additions during the year
Note: Ignore additional depreciation under section 32(1)(iia)

12,00,000
2,00,000
4,00,000

Compute the total income of Mr. Raju for the assessment year 2016-17.
Note: Ignore application of section 14A for disallowance of expenditures in respect of any exempt
income.

Q43:
Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss Account for the
year ended 31st March, 2016:
Trading and Profit and Loss Account for the year ended 31.03.2016
Particulars

Rs.

Particulars

Rs.

To Opening stock
To Purchases
To Gross Profit

90,000
10,04,000
3,06,000
14,00,000
60,000
36,000
15,000
1,05,000
23,200
1,640
8,100
7,060
50,000

By Sales
By Income from UTI
By Closing stock

12,11,500
2,400
1,86,100
14,00,000
3,06,000

To
To
To
To
To
To
To
To
To

Salary
Rent and rates
Interest on loan
Depreciation
Printing & stationery
Postage & telegram
Loss on sale of shares (Short term)
Other general expenses
Net Profit

3,06,000
Additional Information:

98

By Gross profit b/d

3,06,000

a) It was found that some stocks were omitted to be included in both the Opening and Closing
Stock, the values of which were:
Opening stock

Rs. 9,000

Closing stock

Rs.18,000

b) Salary includes Rs.10,000 paid to his brother, which is unreasonable to the extent of
Rs.2,000.
c)

The whole amount of printing and stationery was paid in cash by way of onetime payment.

d) The depreciation provided in the Profit and Loss Account Rs.1,05,000 was based on the
following information :
The written down value of plant and machinery is Rs.4,20,000 as on 01.04.2015. A new plant
falling under the same block of depreciation was bought on 1.7.2015 for Rs.70,000. Two old
plants were sold on 1.10.2015 for Rs.50,000.
e) Rent and rates includes sales tax liability of Rs.3,400 paid on 7.4.2016.
f)

Other general expenses include Rs.2,000 paid as donation to a Public Charitable Trust.

You are required to advise Mr. Sivam whether he can offer his business income under section 44AD
i.e. presumptive taxation.

Q44:
Following is the profit and loss account of Mr. Q for the year ended 31-03-2016:
Particulars

Rs.

Particulars

Rs.

To Repairs on Building
To Amount paid to IIT, Mumbai for an
approved scientific research programme
To Interest
To Travelling
To Net Profit

1,81,000
1,00,000

By Gross Profit
By I.T. Refund

6,01,000
8,100

1,10,000
1,30,550
93,950

By Interest on Company Deposits

6,400

6,15,500

6,15,500

Following additional information is furnished:

(1) Repairs on building includes Rs.1,00,000 being cost of building a new toilet.
(2) Interest payments include Rs.50,000 on which tax has not been deducted and penalty for
contravention of Central Sales Tax Act of Rs.24,000.
Compute the income chargeable under the head "Profits and gains of Business or Profession" of Mr.
Q for the year ended 31-03-2016 ignoring depreciation.

Q45:
Following is the profit and loss account of Mr. A for the year ended 31.3.2016:
Particulars

Rs.

Particulars

Rs.

To Repairs on building
To Advertisement
To Amount paid to Scientific Research
Association approved u/s.35
To Interest
To Traveling
To Net Profit

1,30,000
51,000
1,00,000

By Gross profit
By Income Tax Refund
By Interest from company
deposits
By Dividends

6,01,000
4,500
6,400

1,10,000
1,30,000
94,500
6,15,50
0

Following additional information is furnished:

99

3,600

6,15,50
0

(1) Repairs on building includes Rs.95,000 being cost of raising a compound wall for the own
business premises.
(2) (2) Interest payments include interest of Rs.12,000 payable outside India to a non-resident
Indian on which tax has not been deducted and penalty of Rs.24,000 for contravention of
Central Sales Tax Act.
Compute the income chargeable under the head Profits and gains of business or profession of
Mr. A for the year ended 31.3.2016 ignoring depreciation.

Q46:
Briefly explain the term "substantial interest". State three situations in which the same assumes
importance.

Q47:
Raghav Industries Ltd. furnishes you the following information for the year ended 31-03-2016:
a) Scientific research expenditure related to its business Rs.2,40,000 fully revenue in nature.
b) Building acquired for scientific research (including cost of land Rs.5,00,000) in June 2015 for
Rs.12,00,000.
c)

Amount paid to Indian Institute of Science, Bangalore for scientific research Rs.50,000.

d) Demerger expenses incurred in financial year 2014-15 Rs.5,00,000.

e) Contribution to the account of employees as per pension scheme referred to in section 80CCD
amounted to Rs.30,00,000. Amount above 10% of the salary of employees is Rs.7,00,000.
f)

Amount recovered from employees towards provident fund contribution Rs.12,00,000 of which
amount remitted upto the end of the year was Rs.7,00,000 and the balance was remitted
before the 'due date' for filing the return prescribed in Section 139(1).

g) Tax on non-monetary perquisites provided to the employees, borne by the employer

Rs.4,50,000.
h) Gain due to change in the rate of exchange of foreign currency Rs.1,00,000 related to import
of machinery. The machinery was acquired two years ago and put to regular use since then.
Explain in brief how the above said items would be dealt with for the A.Y. 2016-17.
Note: Computation of total income not required.

Q48:
Explain the tax treatment of Limited Liability Partnership under the Income-tax Act, 1961.

Q49:
XYZ Ltd., a manufacturing concern, furnishes the following particulars:
Sl.N
o

Particulars

Amount (Rs)

Opening WDV of Plant and Machinery as on 01.04.2015

30,00,000

New Plant and Machinery purchased and put to use on 08.06.2015

20,00,000

New Plant and Machinery acquired and put to use on 15.12.2015

8,00,000

Computer acquired and installed in the Office premises on 02.01.2016

3,00,000

Compute the amount of depreciation and additional depreciation as per the Income Tax Act, 1961
for the Assessment Year 2016-17.

Q50:
A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has acquired the
following assets in his office during F.Y. 2014-15 at the cost shown against each item. Calculate the
amount of depreciation that can be claimed from his professional income for A.Y.2016-17:

100

Sl.
No.

Description

Date
of
acquisition

Date when put

to use

Amount
(in Rs)

1.

Computer

27 Sept., 15

1 Oct., 15

35,000

2.

Computer software

2 Oct., 15

8 Oct., 15

8,500

3.

Computer printer

1 Oct., 15

1 Oct., 15

12,500

4.

Books (of which books being annual 1 Apr., 15

publications are of Rs.12,000)

1 Apr., 15

13,000

5.

Office furniture

1 Apr., 15

1 Apr., 15

3,00,000

26 Sep., 15

8 Oct., 15

43,000

(Acquired from a
practising C.A.)
6.

Laptop

Q51:
Gamma Ltd. was incorporated on 1.1.2015 for manufacture of tyres and tubes for motor
vehicles. The manufacturing unit was set up on 1.5.2015. The company commenced its
manufacturing operations on 1.6.2015. The total cost of the plant and machinery installed in
the unit is Rs. 120 crore. The said plant and machinery included second hand plant and
machinery bought for Rs. 20 crore and new plant and machinery for scientific research
relating to the business of the assessee acquired at a cost of Rs. 15 crore.
Compute the amount of depreciation allowable under section 32 of the Income-tax Act, 1961
in respect of the assessment year 2016-17.

Q52:
Lights and Power Ltd. engaged in the business of generation of power, furnishes the following
particulars pertaining to P.Y.2015-16. Compute the depreciation allowable under section 32 for
A.Y.2016-17, while computing its income under the head Profits and gains of business or
profession. The company has opted for the depreciation allowance on the basis of written
down value.

1.
2.
3.
4.
5.
6.
7.

Particulars
Opening Written down value of Plant and Machinery (15% block) as on
01.04.2015 (Purchase value Rs 8,00,000/-)
Purchase of second hand machinery (15% block) on 29.12.2015 for
business purpose
Machinery Y (15% block) purchased and installed on 12.07.2015 for the
purpose of power generation
Acquired and installed for use a new air pollution control equipment on
31.7.2015
New air conditioner purchased and installed in office premises on 8.9.2015
New machinery Z (15% block) acquired and installed on 23.11.2015 for
the purpose of generation of power
Sale value of an old machinery X, sold during the year (Purchase value
Rs. 4,80,000, WDV as on 01.04.2015 Rs 3,46,800)

Rs.
5,78,000
2,00,000
8,00,000
2,50,000
3,00,000
3,25,000
3,10,000

Q53:
B Ltd., a Company engaged in the business of manufacture of sports equipments, furnishes the
following particulars pertaining to P.Y.2014-15 and P.Y.2015-16. Compute the depreciation
allowable under section 32 as well as the deduction allowable under Section 32AC for A.Y2015-16

101

and A.Y.2016-17, while computing its income under the head "Profits and gains of business or
Profession". Also, compute the written down value of Plant and Machinery as on 01.04.2015 and
01.04.2016.
Sl.No

Particulars

Rs. in Crore

Written down value of Plant and Machinery (15% block) as on

01.04.2014

25.00

Sold Plant and Machinery on 20.05.2014 (15% block)

4.00

Purchase of second hand machinery (15% block) on 29.05.2014 for

business purpose ( the machinery was put to use immediately)

12.00

Purchased new Computers (60% block) on 08.11.2014 for office

0.40

Acquired and installed new Plant and Machinery (15% block) on

31.07.2014 (Rs. 50 Crore) and on 31.10.2014 (Rs. 40 Crore)

90.00

New air conditioners purchased and installed in office premises on

30.06.2014

0.15

Acquired and installed new plant and machinery (15% block) on

02.04.2015

15.00

Q54:
X Ltd. set up a manufacturing unit in notified backward area in the State of Telangana on
01.06.2015. It invested Rs. 30 Crore in new plant and machinery on 01.06.2015. Further, it
invested Rs. 25 Crore in the Plant and Machinery on 01.11.2015, out of which Rs. 5 Crore was
second hand plant and machinery. Compute the depreciation allowable under section 32. Is X Ltd.,
entitled for any other benefit in respect of such investment ? If so, what is the benefit available ?
Would your answer change where such manufacturing unit is set up by a firm, say X & CO., instead
of X Ltd.?

Q55:
A Ltd. furnishes the following particulars for the P.Y.2015-16. Compute the deduction allowable
under section 35 for A.Y.2016-17, while computing its income under the head Profits and gains of
business or profession.

1.
2.
3.

4.
(a)
(b)

Particulars
Rs
Amount paid to Indian Institute of Science, Bangalore, for scientific 1,00,000
research
Amount paid to IIT, Delhi for an approved scientific research programme 2,50,000
Amount paid to X Ltd., a company registered in India which has as its 4,00,000
main object scientific research and development, as is approved by the
prescribed authority
Expenditure incurred on in-house research and development facility as
approved by the prescribed authority
Revenue expenditure on scientific research
3,00,000
Capital expenditure
(including
cost
of
acquisition
7,50,000
of
land Rs. 5,00,000) on scientific research

Q56:
102

Mr. A commenced operations of the businesses of setting up a warehousing facility for storage of
food grains, sugar and edible oil on 1.4.2015. He incurred capital expenditure of Rs. 80 lakh, Rs.
60 lakh and Rs 50 lakh, respectively, on purchase of land and building during the period January,
2015 to March, 2015 exclusively for the above businesses, and capitalized the same in its books of
account as on 1st April, 2015. The cost of land included in the above figures are Rs 50 lakh, Rs 40
lakh and Rs 30 lakh, respectively. Further, during the P.Y.2015-16, it incurred capital expenditure
of Rs 20 lakh, Rs 15 lakh & Rs 10 lakh, respectively, for extension/ reconstruction of the building
purchased and used exclusively for the above businesses. Compute the income under the head
Profits and gains of business or profession for the A.Y.2016-17 and the loss to be carried
forward, assuming that Mr. A has fulfilled all the conditions specified for claim of deduction under
section 35AD and has not claimed any deduction under Chapter VI-A under the heading C.
Deductions in respect of certain incomes. The profits from the business of setting up a
warehousing facility for storage of food grains, sugar and edible oil (before claiming deduction
under section 35AD and section 32) for the A.Y. 2016-17 is Rs 16 lakhs, Rs 14 lakhs and Rs 31
lakhs, respectively.

Q57:
XYZ Ltd. commenced operations of the business of a new three-star hotel in Madurai, Tamil Nadu
on 1.4.2015. The company incurred capital expenditure of Rs 50 lakh during the period January,
2015 to March, 2015 exclusively for the above business, and capitalized the same in its books of
account as on 1st April, 2015. Further, during the P.Y.2015-16, it incurred capital expenditure of Rs
2 crore (out of which Rs 1.50 crore was for acquisition of land) exclusively for the above business.
Compute the income under the head Profits and gains of business or profession for the A.Y.201617, assuming that XYZ Ltd. has fulfilled all the conditions specified for claim of deduction under
section 35AD and has not claimed any deduction under Chapter VI-A under the heading C.
Deductions in respect of certain incomes. The profits from the business of running this hotel
(before claiming deduction under section 35AD) for the A.Y.2016-17 is Rs 25 lakhs. Assume that
the company also has another existing business of running a four-star hotel in Coimbatore, which
commenced operations 5 years back, the profits from which are Rs 120 lakhs for the A.Y.2016-17.

Q58:
ABC Ltd. is a company having two units Unit A carries on specified business of setting up and
operating a warehousing facility for storage of sugar; Unit B carries on non-specified business of
operating a warehousing facility for storage of edible oil. Unit A commenced operations on
1.4.2014 and it claimed deduction of Rs 100 lacs incurred on purchase of two buildings for Rs 50
lacs each (for operating a warehousing facility for storage of sugar) under section 35AD for
A.Y.2015-16. However, in February, 2016, Unit A transferred one of its buildings to Unit B.
Examine the tax implications of such transfer in the hands of ABC Ltd.

Q59:
X Ltd. contributes 20% of basic salary to the account of each employee under a pension scheme
referred to in section 80CCD. Dearness Allowance is 40% of basic salary and it forms part of pay of
the employees. Compute the amount of deduction allowable under section 36(1)(iva), if the basic
salary of the employees aggregate to Rs 10 lakh. Would disallowance under section 40A(9) be
attracted, and if so, to what extent?

Q60:
The following are the particulars in respect of a scheduled bank incorporated in Indiah

Particulars

103

` in
lakh

(i)

Provision for bad and doubtful debts under section 36(1)(viia) upto A.Y.2015-16

100

(ii)

Gross Total Income of A.Y.2016-17 [before deduction under section 36(1)(viia)]

800

(iii)

Aggregate average advances made by rural branches of the bank

300

(iv) Bad debts written off (for the first time) in the books of account (in respect of
urban advances only) during the previous year 2015-16

210

Compute the deduction allowable under section 36(1)(vii) for the A.Y.2016-17.

Q61:
Isac limited is a company engaged in the business of biotechnology. The net profit of the company
for the financial year ended 31.03.2016 is Rs 15,25,890 after debiting the following items:

S.No.

Particulars

1.

Purchase price of raw material used for the purpose of in-house

research and development
Purchase price of asset used for in-house research and development
wrongly debited to profit and loss account:

2.

(1)
3.
4.

Land

5,00,000
3,00,000

(2) Building
Expenditure incurred on notified agricultural extension project

1,50,000

Expenditure on notified skill development project:

(1) Purchase of land

2,00,000
2,50,000

(2) Expenditure on training for skill development

5.

`
1,80,000

Expenditure incurred on advertisement in the souvenir published by 75,000

a political party

Compute the income under the head Profits and gains of business or profession for the A.Y.
2016-17 of Isac Ltd.

Q62:
Delta Ltd. credited the following amounts to the account of resident payees in the month of March,
2016 without deduction of tax at source. What would be the consequence of non-deduction of tax
at source by Delta Ltd. on these amounts during the financial year 2015-16, assuming that the
resident payees in all the cases mentioned below, have not paid the tax, if any, which was required
to be deducted by Delta Ltd. ?

Sl.No

Particulars

Amount (in Rs)

Salary to its employees (credited and paid in March,

2016)

12,00,000

Non-compete fees to Mr. Rajesh (credited and paid in

March, 2016)

1,10,000

Director's remuneration (credited in March, 2016 and

paid in April, 2016)

28,000

Would your answer change if Delta Ltd. has deducted tax on Director's Remuneration in April, 2016
at the time of payment and remitted the same in July, 2016 ?

Q63:
104

A firm has paid Rs 7,50,000 as remuneration to its partners for the P.Y.2015-16, in accordance
with its partnership deed, and it has a book profit of Rs 10 lakh. What is the remuneration
allowable as deduction?

Q64:
Hari, an individual, carried on the business of purchase and sale of agricultural commodities like
paddy, wheat, etc. He borrowed loans from Andhra Pradesh State Financial Corporation and Indian
Bank and has not paid interest as detailed hereunder:

`
(i)
(ii)

Andhra Pradesh State Financial Corporation (P.Y. 2014-15 & 2015-16)

Indian Bank (P.Y. 2015-16)

15,00,000
30,00,000
45, 0 0, 00 0

Both Andhra Pradesh State Financial Corporation and Indian Bank, while restructuring the loan
facilities of Hari during the year 2015-16, converted the above interest payable by Hari to them as
a loan repayable in 60 equal installments. During the year ended 31.3.2016, Hari paid 5
installments to Andhra Pradesh State Financial Corporation and 3 installments to Indian Bank.
Hari claimed the entire interest of Rs. 45,00,000 as an expenditure while computing the income
from business of purchase and sale of agricultural commodities. Discuss whether his claim is valid
and if not what is the amount of interest, if any, allowable.

Q65:
An assessee owns a light commercial vehicle for 9 months 15 days, a medium goods vehicle for 9
months and a medium goods vehicle for 12 months during the previous year. Compute his income
applying the provisions of section 44AE.

Q66:
Mr. X commenced the business of operating goods vehicles on 1.4.2015. He purchased the
following vehicles during the P.Y.2015-16. Compute his income under section 44AE for A.Y.201617.

(1)
(2)
(3)

Type of Vehicle

Number

Date
of
purchase

Light Goods Vehicles

10.4.2015

15.3.2016

16.7.2015

2.1.2016

29.8.2015

23.2.2016

Medium Goods Vehicles

Heavy Goods Vehicles

Would your answer change if the two light goods vehicles purchased in April, 2015 were put to use
only in July, 2015?

Q67:
Mr. Tiwari, a non-resident, operates an aircraft between Bangkok and Mumbai. He received the
following amounts in the course of the business of operation of aircraft during the year ending
31.3.2016:
(i) Rs. 3 crore in India on account of carriage of passengers from Mumbai.
(ii) Rs. 2 crore in India on account of carriage of goods from Mumbai.
(iii) Rs. 1 crore in India on account of carriage of passengers from

105

Bangkok.
(iv) Rs. 2 crore in Bangkok on account of carriage of passengers
from Mumbai.
The total expenditure incurred by Mr. Tiwari for the purposes of the business during the year
ending 31.3.2016 was Rs. 1.8 crore.
Compute the income of Mr. Tiwari chargeable to tax in India under the head Profits and gains of
business or profession for the assessment year 2016-17

Q68:
Alpha Co-operative Bank amalgamated with Beta Co-operative Bank on 1.12.2015. The
depreciation for the year ended 31.3.2016 calculated as per Income-tax Rules, 1962, allowable to
Alpha Co-operative Bank had the amalgamation had not taken place amounts to Rs 2,40,000.
Compute the deduction on account of depreciation allowable in the hands of Alpha Co-operative
Bank and Beta Co-operative Bank for A.Y. 2016-17.

106