Profits1 and Gains of Business2 or Profession [Ss.

28 to 44 DB]

Under Section 28 of the Income Tax Act, the following types of incomes are chargeable to tax under the
head “Profits and Gains of Business or Profession”.
(i) Profits and gains of any business or profession which was carried on by the assessee at any time during
the previous year;
(ii) Compensations due to or received:
Any compensation or other payment due to or received for termination of an appointment or modification
of its terms by –
(a) A person, managing the whole or substantially the whole of the affairs of an Indian company;
(b) a person, managing the whole or substantially the whole of the affairs in India of a non – Indian
company;
(c) a person, holding an agency in India for any part of the activities relating to the business of any other
person3;
(d) any compensation paid or due for or in connection with the vesting of the management of any
property or business in the government or a government controlled corporation.
(iii) Income of Trade Association etc. :
Income derived by a trade, professional or similar association from specific services performed for its
members;
(iv) Receipts in connection with foreign trade:
(a) Profits on sale of a licence granted under the Imports (Contro) Order, 1955 usually called as Import
Entitlement Licences;
(b) Cash assistance (by whatever name called) received or receivable by any person against exports under
any scheme of the Government of India;
(c) Repayment of any Customs or Excise Duty to any person against exports usually called as draw back
of Customs or Excise Duties for exports;
(d) Any profit on the transfer of the Duty Entitlement Pass Book scheme, being duty Remission Scheme
under the Export and Import Policy
(v) Value of any Benefit or Perquisite:
The value of any benefit or perquisite, whether convertible into money or not, arising from business or the
exercise of a profession4;
(vi) Receipts of a partner from the firm:
Any interest, salary, bonus, commission or remuneration received by a partner from firm;
Other receipts:
(vii) Any sum whether received or receivable in cash or kind under an agreement for not carrying out any
activity in relation to any business or not to share any know how, patent, copyright, trademark, licence,
1
The charge is not on gross receipts but on Profits and Gains. Profits are ascertained on ordinary principles of commercial
trading and commercial accounting. According to Section 145 income has to be computed in accordance with the method of
accounting regularly and consistently employed by the assessee. The assessee may follow cash system of accounting or
mercantile system of accounting. Profit is computed after deducting expenses and losses incurred for earning the income unless a
particular expenditure or loss is expressly or by necessary implication is disallowed by the Act.
Profit is Income derived from the regular business activity, by deploying caplital labour and time. In other words it is the return
on the capital employed after deducting all working capital and fixed expenses. usually appears on the liabilities side of the
balance sheet.
Gain is Income derived on investment over a period of time not falling under regular business activity. It is the return derived on
investment. 
2
Business usually means a continuous, systematic and organized course of activity with a set purpose.
3
Compensation received by a person on cancellation of consultancy agreement is a capital receipt and not assessable u/s 28(ii)
(c).
4
For example, where a lawyer is given free accommodation by his client, sum received by a lawyer from various liquor dealers
who are not his clients but are benefited by his professional services in a case against prohibition, foreign trips granted free by a
company to assessee and his family whose product the assessee is selling, rewards given to a manufacturer of a medicine by the
patients who are cured by such medicine etc.

1
franchise or any other business or commercial right of similar nature; or information or technique likely
to assist in the manufacture or processing of goods or provision for services.
(viii) Any sum received under Keyman Insurance Policy5
(ix) Income from speculative transaction6 [Explanation 2]
Income from the aforesaid activities is computed in accordance with the provisions laid down in
Sections 29 to 44DB.
Business7: (Meaning)
Section 2(13) of the Income Tax Act defines the term, business as including any trade, commerce,
manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
The definition is inclusive and not exhaustive i.e. it may cover other activities also as business which are
not specifically included her if that activity is business in its ordinary sense. The inclusive definitions
have an extending force and do not limit the meaning of the term. For example, the rendering of various
and continuous services as managing agents to a company amounts to carrying on a business even though
such services are not covered by this inclusive definition.[Lakshminarayan vs. Govt. of Hyderabad
(1954) 25 ITR 449 (SC)]. Similarly performing services which are not manufacture and neither trade nor
commerce such as repairing services, STD booth and many other services will be covered under carrying
on business.
The word ‘business’ connotes some real, substantive and systematic or organized course of activity or
conduct with a set purpose.
Trade: Justice Shah in State of Punjab vs. Bajaj Electricals Ltd. [1968] 70 ITR 730(SC) observed that
trade in its primary meaning is the exchanging of goods for goods or goods for money.
Commerce: If a person purchases goods with a view to selling them at profit, it is an ordinary case of
trade. If such transactions are repeated on a large scale, it is called commerce.
Manufacture In General sense:

5
Keyman insurance can be defined as an insurance policy where the proposer as well as the premium payer is the employer, the
life to be insured is that of the employee and the benefit, in case of a claim, goes to the employer. The `keyman’ here would be
any person employed by a company having a special skill set or substantial responsibilities and who contributes significantly to
the profits of that organization. Anybody with specialized skills, whose loss can cause a financial strain to the company are
eligible for Keyman Insurance. For example, they could be: Directors of a Company, Key Sales People, Key Project Managers,
or People with Specific Skills
All claims – maturity, surrender value or death benefit received by the company are taxable. In case of the keyman retiring, the
company may surrender the policy for its cash value, or assign the policy absolutely in favour of the keyman. In case of an
assignment, the surrender value of the policy at the time of assignment may be treated as perquisite in the hands of the employee,
and taxed accordingly by the assessing authority.
6
Explanation 2 to Section 28 specifically provides that where an assessee carries on speculative business, that business of the
assessee must be deemed as distinct and separate from any other business. This becomes necessary because Section 73 provides
that losses in speculation business unlike other business cannot be set off against the profits of any business other than a
speculation business. Similarly, a loss in speculation business carried forward to a subsequent year can be set off only against the
profit and gains of any speculative business in the subsequent year. Profits and Losses resulting from speculative transaction
must, therefore, be treated as separate and distinct from profits and losses of other business and profession.
Section 43(5) defines speculative transaction means a transaction in which a contract for the purchase or sale of any commodity
including stocks and shares is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity
or scrips.
However, payment of damages for breach of contract is not the same thing as settlement of contract otherwise than actual
delivery of commodities. In CIT vs. Shantilal (P) Ltd., [1983] 144 ITR 57 (SC) – a company contracted to sell a certain
commodity to a party but was unable to effect delivery due to a sharp rise in the price of the commodity. The dispute which arose
because of such breach of Contract was settled by payment of damages as decided by an arbitrator. The transaction could not be
described as a speculative transaction within the meaning of S. 43(5).
7
Profession [S. 2 (36)] – simply says profession includes vocation. Neither the word profession not the word vocation is defined
in the Income Tax Act. Profession generally means the activities for earning livelihood which require intellectual skill or manual
skill, e.g., the work of a lawyer, doctor, auditor, engineer and so on, are in the nature of profession.
Vocation means activities which are performed in order to earn livelihood, e.g. brokerage, insurance agency, music, dancing, etc.
As the rules for the assessment of business, profession or vocation are the same, there is no importance of making any distinction
between them for income tax purposes.

2
In U.o.I. vs. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791 it was held that manufacture means
‘bringing into existence a new substance’ i.e. a new commercial commodity different from that out of
which it is made. Article produced should bear a new name in the market. 8
It does not mean the material from which the thing is manufactured should lose its basic or essential
properties.
When Goldsmith takes a lump of gold and makes ornament, carpenter makes tables, chairs then these are
manufacturing. But retreading of tyres, printing of saris are not manufacture. Similarly when a tailor
makes a suit or clothe, it does not cease to be cloth but commercially it is a different thing.
Test of Irreversibility is an important criterion to ascertain as to whether a given process amounts to
manufacture.
Adventure in the nature of Trade:
The words indicate that a single and isolated transaction may fall within the definition of business, as
being an adventure in the nature of trade. But a single transaction will not be a trading adventure unless it
bears clear indicia of trade. A single plunge may be enough provided it is shown to the satisfaction of the
court that the plunge is made in the waters of trade.
In G. Venkataswami Naidu & Co. vs. C.I.T. (1959) 35 ITR 594 (SC) Justice Gajendragadkar gave the
following factors to test whether a transaction is in the nature of trade:
1. Is the purchaser a trader and are the purchases of the commodities and its resale, allied to his usual
trade or business, incidental to it? [Affirmative answers to these questions may furnish relevant data for
determining the character of the transaction.]
2. What is the nature of commodity purchased and resold and in what quantity has it purchased and
resold? If the commodity purchased is generally the subject matter of trade, and if it is purchased in a
very large quantity, it would tend to eliminate the possibility of investment for personal use, possession or
enjoyment.
3. Does the purchaser by an act subsequent to the purchase improve the quality of the commodity
purchased and thereby made it readily resaleable?
4. What are the incidents associated with the purchase and resale? Are they similar to the operations
usually associated with the trade or business? Are the transactions repeated?
6. In regard to the purchase of the commodity and subsequent possession by the purchaser, does the
element of pride of possession come into the picture? A person may purchase a piece of art, hold it for
some time and if a profitable offer is received, may sell it. During the time that the purchaser has its
possession, he may be able to claim pride of possession and aesthetic 9 satisfaction; and if such a claim is
upheld, that would be a factor against the contention that the transaction is in the nature of trade.
7. Is the purchase made with the intention to resell it at profit? It is often said that a transaction of
purchase followed by resale can either be an investment or an adventure in the nature of trade. Some
judicial decisions apply the test of the initial intention to resell in distinguishing adventures in the nature
of trade from transactions of investments. Even in application of this test, distinction will have to be made
between initial intention to resell at a profit which is present but not dominant or sole; in other words,
cases do often arise where the purchaser may be willing and may intend to sell the property purchased at
profit; but he would also intend and be willing to hold and enjoy it if a really high price is not offered.
The intention to resell may in such cases be coupled with the intention to hold the property. Cases may,
however, arise where the purchase has been made solely and exclusively with the intention to resell at a
profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or
using it. The presence of such an intention is no doubt a relevant factor and unless it is offset by the

8
In this case Delhi Cloth Mill was manufacturing Vanaspati from groundnut and til oil. During manufacture ‘refined oil’ got
produced at intermediate stage which was consumed within factory for manufacture of Vanaspati. During the relevant period
there was no excise duty on Vanaspati but refined oil was excisable. The refined oil produced during intermediate stage was not
deodorized. It was held that in the market, the product is not known as ‘refined oil’ unless it is deodorized, hence no excise could
be imposed on ‘refined oil’
9
Love to beauty and art

3
presence of other factors, it would raise a strong presumption that the transaction is an adventure in the
nature of trade.

Business incomes not taxable under the head “Profits and Gains of Business or Profession”:
In the following cases income from trading or business is not taxable under Section 28 under the head
“profits and Gains of Business or Profession.”
1. Rent of house property is taxable under Section 22 under the head “income from house property” even
if property constitutes stock – in – trade of the recipient of rent or the recipient of rent is engaged in the
business of letting properties on rent.
2. Dividends on shares are taxable under Section 56(2) (i) under the head “income from other sources”
even if they are derived from shares held as stock – in – trade or the recipient of dividends is dealer in
shares10.
3. Sums received after discontinuance of a Business or Profession: Sums received after discontinuance of
business is taxable under Section 176 (3A) and not under Section 28.
Income from letting out business asset:
In C.E.P.T. vs. Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC) the assessee was doing the business of
manufacturing silk cloth and also dyeing silk yarn. During the relevant accounting year the assessee let it
out on a monthly rent. The Supreme Court observed that the dyeing plant did not cease to be a
commercial asset merely because it could not be used as a commercial asset by the assessee himself at the
time it was let out and held that the rent received from the lessees was assessable as income from
business.
In Universal Plast Ltd. vs. CIT [1999] 237 ITR 454 (SC) it was held that where all the assets of the
business are let out, the period for which the assets are let out is a relevant factor to find out whether the
intention of the assessee is to go out of business altogether or to come back and restart the same. In
former case rent will be taxable under the head Income from Other Sources, in latter case as business
income. If only a few of the business assets are let out temporarily, while the assessee is carrying on his
other business activities, income from letting out will be taxable as business income.
But when the assessee’s business has come to a close or when closed or when the assessee lets out the
assets with the intention of closing the business, the property which at one time was a commercial asset
would cease to be so, and the income from letting our such an asset would not be business income and
would be chargeable as income from other sources under Section 56 (2) (ii).
Illegal Business:
In the leading case of Minister of Finance vs. Smith (1927) AC 193 (PC) it has been held by the Privy
Council that the illegality of a business, profession or vocation does not exempt its profits from tax. Thus
the assessee may be prosecuted for the offence and at the same time taxed upon the profits arising out of
its commission.
Further, expenses though tainted with illegality are deductible, just as income tainted with illegality is
assessable. Even in an illegal business it is the profits and not the gross receipts that are taxable. [ CIT vs.
Kothari (1971) 82 ITR 794 (SC)]
In CIT vs Piara Singh (1980)124 ITR 40 (SC) a smuggler of gold or currency was held entitled to claim
the loss arising from confiscation of such gold or currency. However see effect of Explanation to Section
37 added by Finance Act, 1998.
Similarly in T.A. Qureshi vs. CIT [2006] 287 ITR 547 (SC) it was held that loss arising as a result of
seizure and confiscation of illegal stock – in – trade is allowable as a business loss against income from
illegal business. In this case Heroin worth Rs. 2 lakh was seized from the assessee who being a medical

10
Now dividend received by a shareholder from a domestic Company is exempted u/s 10 (34).

4
practitioner was also involved in this illegal trade. It was held Explanation to Section 37 11 has no
application to this case as the claim was of a business loss and not business expenditure.
Business or Profession should have been carried on during the previous year:
Section 28 makes it clear that income from business or profession is chargeable to tax under this head
only if the business or profession is carried on by the assessee at any time during the previous year. It is,
therefore, not essential that business or profession should be carried on throughout the previous year.
Further if the business is carried on in the previous year, its profits would be taxable although it may not
be carried on in the assessment year.
Sums received after discontinuance of a business or profession:
If the business is discontinued before the commencement of the previous year, the profits of the business
received in the previous year cannot be taxed, because the source of income does not exist in the previous
year at all. In such a case if the accounts are maintained on mercantile basis, any receipt after the
discontinuance of the business or profession must necessarily have accrued and been charged during the
continuance of the business or profession and nothing would be chargeable to tax in the year of receipt of
income. If, however, the accounts are maintained on receipt basis and some of the profits are received in
the previous year, such profits would not be taxable under Section 28 where no business is carried on at
any time in the previous year. Such profits received after the discontinuance of business or profession
would be chargeable to tax by virtue of Section 176 (3A) and (4) in the year of receipt of income even if
business or profession was not carried on during that year. The correct head of assessment in such cases
would be “Profits and gains of business or profession.”

Deductions Expressly Allowed:

1. Expenses in respect of Business Premises [Section 30]

A. Where Assessee is a Tenant Business Premises:
(i) Rent paid for premises if assessee has taken the premises on rent.
B. Where Assessee is a Tenant or Owner of the Business Premises:
(i) Repair charges incurred. However, not an expenditure in the nature of Capital Expenditure;
(ii) Any sums paid on account of land revenue, local taxes or Municipal Taxes;
(iii) Amount of any premium paid in respect of any insurance against risk of damage or destruction of
premises.
Note:
(i) If the assessee is a partnership firm and the business premises belongs to a partner of the firm, the rent
payable to the partner will be an allowable deduction.
(ii) If the assessee is a tenant of the premises and a part of the premises is used by him as dwelling house
and other part for his business, the amount of deduction shall be allowed proportionately what is used for
business purpose.

2. Repairs and Insurance of Machinery, Plant and Furniture being used for business purpose:
[Section 31]
(i) Current repairs of machinery, plant and furniture is allowed and not an expenditure of capital nature.
(ii) Premium paid in respect of insurance against risk of damage or destruction.

Depreciation Allowance [Section 32]

New Rules from A.Y. 1988 – 89
Reason for Allowance:

11
Explanation to S. 37 (1) – says “For the removal of doubts, it is hereby declared that any expenditure incurred by the assessee
for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of
business or profession and no deduction or allowance shall be made in respect of such expenditure”.

5
(i) General scheme of the Income Tax Act is that an income is chargeable to tax regardless of exhaustion
or diminution in value of capital.
(ii) Section 32 – an exception – grants allowance in respect of depreciation in value of certain capital
assets.
(iii) Value of assets used in business deteriorates due to wear and tear – for determining true profits or
gains such fall in value ….be taken into account. Hence Section 32.
Conditions: Three conditions:
(i) D.A. is confined to buildings, machinery, plant or furniture being tangible assets; or
Know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial
rights of similar nature, being intangible assets acquired on or after 1.4.1998 12.
(ii) The asset must be owned by the assessee either wholly or partly.
(iii) The asset must have been used for the purpose of business or profession in the accounting year.
Building:
(i) C.I.T. vs. Alps Theatre [1967] 65 ITR 377 (SC) – held cost of land should be excluded from total cost
of building.
(ii) Thus although no building without land – D.A. not allowable on cost of land on which building is
erected. Approach roads, drains, fences are part of building.
(iii) Previously different rates of D.A. in respect of factory and non – factory buildings, hence controversy
if office premises, godowns, canteen buildings were factory buildings.
(iv) Now building divided into (a) mainly used for residential purpose (5%), (b) Other buildings (10%) (c)
Buildings acquired after 31.08 2002 for installing machinery and plants forming part of water supply
project or water treatment system (100%) and (d) Purely temporary erections such as wooden structures
(100%).
Machinery and Plant:
(i) CIT vs. Mir Mohammad [1964]53 ITR 165 (SC) – both words bear the same meaning.
(ii) S. 43 (3) defines plant as including ships, vehicles, books, scientific apparatus and surgical
equipments but does not include tea bushes or live stocks (e.g. animals and human body).
(iii) Plant in its ordinary sense includes whatever apparatus is used by a businessman or Professional for
carrying on his business or profession not being his stock – in – trade.
(iv) Thus plant has been held to include knives, loose tools, bottles and shells used by the manufacturer of
soft drinks, gas cylinders, sanitary and pipeline fittings, electric fittings, ceiling and pedestal fans, internal
telephone system, air – conditioning equipments, wells, fencing around a refinery etc. – may be in
residential quarters or on premises of a business.
(v) Even buildings or rooms may be plant e.g. cold storage room in case of ice-cream manufacturer. In
deciding whether a structure is building or plant, functional test should be applied i.e. is it an apparatus
with which the business is carried on, or a part of the premises in which the business is carried on. Former
is a plant, latter is not.
In Commissioner of Income Tax vs. Anand Theatres 224 ITR 192 (SC) the question before the court
was whether a building that was used as a hotel or a cinema theatre could be given depreciation on the
basis that it was a “plant”. After considering a host of authorities of this country and England the court
came to the conclusion that a building which was used as a hotel or cinema theatre could not be given
depreciation on the basis that it was a plant 13.
Recently the Supreme Court in ACIT vs. Victory Aqua Farm Ltd. decided on Sept. 4, 2015 held that
functional test should be applied to determine whether an asset is “plant” or not. In this case the Supreme
Court held that even a pond designed for rearing prawns can be “plant”. Since the ponds were specially
designed for rearing/breeding of the prawns, they have to be treated as tools of the business of the
assessee and the depreciation was admissible on these ponds.
Asset must be owned by the Assessee:

12
Thus investment in acquisition of goodwill does not qualify for depreciation allowance.
13
Rate of Depreciation on plant was 15% whereas on building it was 5%.

6
(i) If asset has been taken on lease – lessee is not entitled.
(ii) Assessee should be owner of the building though he may be lessee of the land on which building is
situated.
(iii) If business is run in a hired building but expenditure of capital nature incurred for any alteration or
extension of building – Allowance for that can be claimed. [Explanation 1 to S. 32 (1) (ii)
(iv) Mysore Minerals Ltd. vs. CIT [1999] 239 ITR 775 (SC) – where ownership has been acquired under
the agreement, even though Registration not complete – legal title not transferred - still transferee is
owner for purpose of S. 32.
(v) Purchase of machinery on installments – title passes immediately – hence entitled.
(vi) In Hire Purchase agreement – title passes when last installment is paid – controversy of opinion
amongst H.Cs. on claim of Depreciation.
CIT vs. Nagpur Golden Transport Co. [1998] 233 ITR 389 (Del) – held entitled.
Atlas Cycle Industries Ltd. vs. C.I.T. [2004] 270 ITR 108 (Punjab & Haryana) – not entitled where
House was taken on Hire Purchase
User in Accounting Year:
(i) Not necessary to be used throughout the p.y. – at any time in p.y.
(ii) Trial production also amounts to use…even though commercial production not started.
(iii) Active and passive use (to keep as stand by for use in case of need) – Controversy of opinion
CIT vs. Pepsu Road Transport Corporation [2002] 253 ITR 303 (P&H) – Assessee, a transport
corporation owning a fleet of buses was allowed depreciation on engines kept in store for emergency
uses, so actual use of spare engine was immaterial. However, in –
Dinesh Kumar Gulab Chandra Agarwal vs. C.I.T. [2004] 267 ITR 768 (Bom) – Vehicle not actually
used in p.y. was not entitled for Depreciation.
Dy. CIT vs. Yellamma Dasappa Hospital [2007] 159 Taxman 58 (Kar) – held actual use is necessary not
simply ready to use. Machinery not actually used in p.y. though kept ready for use - not entitled for
Depreciation.
Interpretation of P&H High Court is more rational as a number of plants may not be in actual use in p.y.
but may be in passive use e.g. Arms of security staff, ambulance vehicles, Diesel engines, generators.
(iv) By virtue of second proviso to S. 32 if any asset acquired in any p.y. was put to use for business or
profession for less than 180 days in that p.y., depreciation admissible on such asset will be 50% of the
normal rate for that asset. This provision is applicable in both methods of depreciations i.e. Straight Line
Method or W.D.V. method.
Additional Depreciation Allowance on Plant or Machinery: [ S. 32 (1) (iia)]
(i) If Plant or Machinery has been acquired or installed after 31.03.2005 by an assessee engaged in
business of manufacture or production of any article or thing or generation and / or distribution of power,
additional depreciation shall be allowed @ 20% of the actual cost.
(ii) If assessee sets up an undertaking or enterprise after 31.03.2015 but before 1.4.2020 in notified
backward area of State of Andhra Pradesh, Bihar, Telengana or West Bengal, additional depreciation will
be allowed @ 35% of actual cost.
In the aforesaid cases if asset is put to use for less than 180 days in the previous year in which it is
acquired, additional depreciation will be 50% i.e. 10% or 17.5% as the case may be.
(v) S. 38 (2) provides that in cases where any asset is used for business as well as for some other purpose
(say personal use of the assessee) the depreciation shall be proportionally reduced.
Computation of Depreciation: Two methods:
(i) Straight Line Method: Applicable in case of assets used in generation or generation and distribution of
power w.e.f. 1.4.1998 (F.A. 1998) i.e. certain percentage of actual cost of asset as is prescribed depending
on nature of asset. However, assessee may opt for written down value method in such cases.
(ii) Written Down Value Method: In this method Depreciation is calculated as certain percentage of the
written down value of the block of the assets as is prescribed. There are 13 blocks of assets (Out of which
12 blocks are for tangible assets and one block is for intangible assets) and for each block different

7
percentage has been prescribed as rate of depreciation. (e.g. 5%, 10%, 15%, 20%, 25%, 40%, 50%, 60%,
80%, and 100%)
Written Down Value: [S. 43 (6)
Written down value of a block of assets means the depreciated value of that block of assets on 1 st day of
the p.y. as increased by actual cost of any asset acquired in that block during the said p.y. and reduced by
the sale proceeds of any assets disposed of during the said p.y. of that block.
If the sale price of the assets exceeds the written down value of the block, the excess will be treated as a
short term capital gain u/s 50.
Block of Assets14:
1. Buildings [Blocks 1 to 3]
Block 1: Residential building other than hotels and boarding houses – Depreciation rate 5%.
Block 2: Office, Factory, godowns hotels (i.e. buildings for non – residential use) – Depreciation rate
10%
Block 3: Temporary structures e.g. wooden structures– Depreciation rate 100%.
2. Furniture [Block 3] – Any furniture/fittings including electrical fittings
3. Plant and Machinery [Blocks 5 to 12] Rate of Depreciation 15%, 20%, 30%, 40%, 50%, 60%, 80%,
100% respectively.
4. Intangible Assets [Block 13] (Acquired after March 31, 1998) - Depreciation rate 25%.
Actual Cost: [S. 43(1)] – means the actual cost of the assets 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. (e.g. cash
subsidy on machinery).
Chellapalli Sugar Mlls Ltd. vs. CIY (1975) 98 ITR 167 (SC) – held actual cost includes all expenditure
necessary to bring such assets into existence and to put them in working conditions. E.g. interest paid
before production started.
Similarly, Excise, Sales Tax, Octroi, railway freight, insurance, transport charge, preliminary expenses
e.g. stamp duty, registration fee, visit of employees to foreign country in respect to installation of plant or
machinery etc.
Cases in which Actual Cost is taken at a notional figures:
Various explanations to S. 43 –
1. Where asset is used in business after it ceases to be used for scientific research – as reduced by the
amount of any deduction allowed (e.g. u/s 135) [Explanation 1]
2. Where an asset is acquired by Gift or inheritance – Actual cost to assessee will be actual cost to the
previous owner as reduced by amount of depreciation deemed to have been allowed on such asset.
[Explanation 2]
3. Where before the date of acquisition by the assessee, the assets were used by any other person for the
purpose of his business or profession and the A. O. is satisfied that the main purpose of transfer of such
asset to the assessee is the reduction of tax liability, the actual cost of the assets will be such amount as
the A.O. may, with previous approval of Dy. Commr. determine having regard to all circumstances of the
case. [Explanation 3]
4. Where a business asset is transferred by the assessee to another person and is subsequently reacquired
by him, the actual cost would be the actual cost to the assessee when he first acquired it as reduced by the
amount of depreciation deemed to have been allowed in respect of such asset or actual cost at the time of
reacquisition whichever is less. [Explanation 4]
5. Where a building, previously the property of the assessee, is brought into use for the purpose of
business or profession, the actual cost of the asset to the assessee will be actual cost of the building to the
assessee as reduced by depreciation which would have been allowable had the building been used for
business or profession since the date of it acquisition by the assessee. [Explanation 5]

14
means group of assets falling within a class of assets.

8
6. Where a parent company transfers any asset to its 100% subsidiary Indian Company or vice versa, the
actual cost of the asset to transferee company will be the same as it would have been in the hands of
transferor company. [Explanation 6]
7. Where an asset is transferred in a scheme of amalgamation to an Indian Company, the actual cost of
asset to the amalgamated company will be the same as it would have been to the amalgamating company
[Explanation 7]
8. Explanation 8 makes it clear that any interest paid or payable in connection with acquisition of an asset
which relates to a period after the asset is first put to use shall not form part of actual cost of the asset.
[Explanation 8]
Depreciation not available in respect of imported cars:
If an imported car was acquired during March 1, 1975 and March 31, 2001, depreciation is not admissible
unless it is used in the business or funning it on hire for tourist or for the purpose of business or
profession out side India. Any imported car (acquired after March 31, 2001) is eligible for depreciation
like any other car.
Set off and carry Forward of unabsorbed depreciation from Assessment Year 1997 -98: [S. 32 (2)]
(i) The unabsorbed depreciation has to be set off against the profits and gains (if any) of any business or
profession carried on by the assessee. If the amount yet remains unabsorbed, it can be set off against any
other income (except income under the head “Salaries”) of the taxpayer for the same year.
(ii) If the unabsorbed depreciation cannot be wholly set off, the amount of allowance not set off shall be
carried forward to the following assessment year. No time limit is fixed for the purpose of carrying
forward of unabsorbed depreciation. It can be carried forward for indefinite period, if necessary.
(iii) In the subsequent year(s), unabsorbed depreciation can be set off against any income whether
chargeable under the head “Profits and Gains of Business or Profession” or under any other head [Except
income under the head “Salaries”]. In the matter of set off, the following order of priority is followed in
the subsequent year(s).
(a) Current depreciation;
(b) Brought forward business loss;
(c) Unabsorbed depreciation.
(iv) Continuity of business is not relevant for the purpose of above set off and carry forward.

Expenditure on Scientific Research [S. 35]: Following deductions are allowed in respect of Scientific
Research:
(i) Revenue Expenditure incurred by the assessee himself if he carries on Scientific Research in relation
to his own business. 100% expenditure is deductible.
(ii) Contributors made to outsiders: Where assessee contributes any sum to a Research Association,
University, College or Institution approved for scientific research, a deduction of 175% of the amount so
paid will be allowed as deduction. It is immaterial whether the Scientific Research is related or not to the
assessee’s business.
(iii) Sums paid for Social or Statistical Research to a Research Association, University, College or
Institution approved for such research: Deduction will be allowed 125% of the sum paid whether the
research is related or not with the assessee’s business.
(iv) Capital Expenditure on scientific Research: incurred in the P.Y. by the assessee himself related to his
business is allowed in full as deduction except the expenditure for acquisition of any land. If the
expenditure could not be absorbed owing to insufficiency of profit, the unabsorbed part can be carried
forward as unabsorbed depreciation.
(v) Sums paid to a National Laboratory or a recognized University or an Indian Institute of Technology
for approved Scientific Research Programme: 200% of the sum so paid is allowed as deduction. National
Laboratory means scientific laboratory functioning at national level under Indian Council of Agricultural
Research or the Indian Council of Medical Research or the Council of Scientific and Industrial Research
and approved by prescribed authority as National Laboratory.

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(vi) Expenditure on in-house Research: This deduction is available only to a company equal to 200% of
expenditure incurred provided that expenditure is not incurred on land or building. This deduction shall
not be allowed for expenditures incurred after 31.03.2017.
(vii) Sums paid for Scientific Research to a Company registered in India and its main object is Scientific
Research and Development: 125% of the sum paid is allowed as deduction.
Capital Expenditure to obtain Licence to operate Telecommunication Services: [S. 35ABB]
Any capital expenditure incurred on the acquisition of any right to operate telecommunication services
either before the commencement of the business or thereafter is allowed as deduction in equal
installments over the period starting from the year in which such payment has been actually made and
ending in the year in which licence comes to an end. If the licence fee is actually paid before
commencement of the business, amount is deductible from the P.Y. in which the business is commenced.
Expenditure on eligible Project or Scheme: [S. 35AC]
100% deduction is allowed.
Deduction in respect of Expenditure on Specified Business: [S.35D]
Whole of any expenditure of capital nature excluding expenditure incurred on acquisition of land or good
will is allowed to be deducted in the P.Y. in which the expenditure is incurred. For example, setting up
and operating warehousing facility for storage of agricultural produce, Developing and building a housing
project, Production of fertilizer in India etc.
Payment in Rural Development Fund: [S. 35CCA] 100% deduction.
Amortization of certain preliminary expenses: [S. 35D]
For example, expenditure in connection with –
(i) Preparation of Project Report;
(ii) Conducting market survey
(iii) Legal charges for drafting of any agreement, Memorandum of Association; Articles of Association
etc.
Other Deductions: [S. 36] – Examples ;
(i) Insurance Premium paid:
(a) against destruction or damage to stock or stores used for purposes of business;
(b) for cattle by a Federal Milk Cooperative Society
(c) for health of employees;
(ii) Bonus or commission paid to employee
(iii) Interest on borrowed capital
(iv) Contribution to P.F. of the employee by the employer
(v) Bad debts subject to certain conditions;
(vi) Expenditure on Family Planning

General Deduction [S.37]

S.37(1) Any expenditure (not being expenditure of the nature described in Ss. 30 to 36 and not being in
the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and
exclusively for the purposes of the business or profession shall be allowed in computing the income
chargeable under the head “Profits and Gains of Business or Profession”.
Further Conditions:
(i) Should have been incurred in the P.Y.
(ii) should be in respect of business or profession carried on by the assessee.
1. Not of the nature described in Ss. 30 to 36:
(i) Rationale behind the condition …if covered…not under residuary section
(ii) allowance is granted under specific sections subject to certain express or implied condition….cannot
be nullified
2. Not be in the nature of Capital Expenditure:
(i) Expenditure incurred by assessee may be….

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(ii) distinction vital – capital expenditure even if incurred for purpose of earning income – not deductible
unless law expressly so provides. Revenue Expenditure – deductible…unless law expressly disallows…
wholly or partly.
(iii) Act does not define…One has to depend upon natural meaning and decided cases.
Points of Distinctions:
(i) Acquisition of fixed assets vs. routine expenditure:
Capital expenditure is acquiring, extending or improving a fixed asset…revenue….incurred in the normal
course of business as a routine business expenditure.
(ii) Several previous years vs. one previous year:
Capital expenditure produces benefits for several previous years whereas revenue expenditure is
consumed within a p.y.
(iii) Improvements vs. Maintenance:
Capita expenditure makes improvements in earning capacity of a business. Revenue expenditure
maintains the profit making capacity of a business.
(iv) Non – recurring vs. Recurring:
Usually capital expenditure is a non – recurring outlay, whereas revenue expenditure is normally a
recurring outlay.
Expenses Expressly Disallowed
(i) Expenditure on advertisement in any souvenir etc. published by a political party [S. 37 (2B)]
(ii) Section 40 expressly disallows many expenses. For example –
(a) Payment outside India of any salary, interest, royalty, fee for technical services etc. on which tax has
not been deducted at source;
(b) Payments to residents if tax is not deducted at source – 30% of such sum shall be disallowed u/s 40A.
(c) Excessive payments [S. 40A] – Payments to relatives or to an associate concern if A.O. considers it to
be excessive or unreasonable.
(d) Payment in cash: in a day made to a person over Rs. 20,000/- otherwise than by an account payee
cheques or account payee bank draft subject to certain exceptions e.g., payment made to a person living in
rural area where no banking facility is available; payments made to cultivator , grower of agricultural
produce, forest produce or produce of animal husbandry on purchase of products from them; Payments to
Bank or LIC etc.

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