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PGBP
Charging Section - 28

The profits and gains of any business or profession carried on by the assessee at any time during the previous
year shall be chargeable under the head PGBP (This is not the complete charging section. Complete charging
section is given at the end of the chapter)

Method of accounting – Section 145(1)

Income chargeable under this head shall be computed in accordance with the method of accounting regularly
employed by the assessee either cash or mercantile basis.

General Notes

● Under head PGBP we have to calculate the income/profit from business and profession.
● Profit/Income depends upon two variables, Revenue or Receipts and Expenses.
● The PGBP has its own law in regard to expenses and receipts.
● The basic principle of calculating profit is to say (Revenue – Expenses) will be the same but what has to
be taken as revenue and what expenses are to be allowed as deduction has to be checked as per the law
(Income-tax Act, 1961, PGBP Chapter).
● The Main focus is on Expenses.

General deduction Section 37

● It should have been incurred wholly and exclusively for business or profession.
● The expenditure should not be capital in nature
● It should have been incurred during the previous year.
● It should not be covered by section 30 to 36.
● Reserves/provisions for contingencies cannot be claimed as a deduction.

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Explanation 1 to Section 37

→ Any expenditure for any activity

→ which is an offence or which is prohibited under any law
→ Shall not be allowed as deduction.
→ Therefore, penalties paid under any Act shall not be allowed deduction.
→ But penalty for breach of contract shall be allowed deduction because that is not imposed under Act.

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

Any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to
in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee
for the purposes of the business or profession.

Advertisement expenditure in magazine etc published by political party - Not deductible Section
37(2B)

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

souvenir, brochure, tract, pamphlet or the like published by a political party.

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

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Revenue v. Capital Expenditure- HOMEWORK (For Knowledge

Purpose Only)

No definition is there in the Act. The distinction depends on the facts of each case. Following points are generally
kept in mind:-

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

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

Distinction between capital expenditure and revenue expenditure – Do it yourself

Capital expenditure Revenue expenditure

1. No deduction shall be allowed for capital Deduction shall be allowed for revenue
expenditure while computing taxable income, expenditure while computing the taxable income,
unless expressly specified in the law. unless specifically disallowed under the law.
2. Expenditure incurred on acquisition, extension or Expenditure incurred in the ordinary course of
improvement of fixed assets amounts to capital business amounts to revenue expenditure.
expenditure.
3. The benefits from capital expenditure extends to The benefits from revenue expenditure are
more than one year. normally consumed within a year.
4. Capital expenditure improves the earning capacity Revenue expenditure maintains the earning
of the business. capacity of the business.
5. Usually, capital expenditure is non-recurring. Revenue expenditure is recurring in nature.
The facts and circumstances of each case judge the nature of an expenditure, whether it is capital or
revenue, lump sum or periodic payment has no relevance.

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

If the premises are owned by the assessee himself, he will be allowed to debit the following amounts–

1. Current repairs (accumulated repairs relating to the earlier years are not allowed.)
2. Municipal tax or local tax or land revenue (but on payment basis as per section 43B)
3. Premium for insurance of building
4. If the building is owned by the assessee, he is not allowed to debit rent on notional basis (No
income shall be computed with regard to this house property under the head house property).
5. If the building has been taken on rent, the assessee shall be allowed to debit the following
expenses –
a. Rent for the premises
b. If he has undertaken to bear the cost of repairs, the amount of such repairs
c. Municipal tax or local tax or land revenue (but on payment basis as per section 43B), if
borne by the lessee.
d. Premium for insurance of house, if borne by the lessee.
e. If any capital expenditure has been incurred he can claim depreciation on the same.
6. Premises used partly for business and partly for other purposes: Where the premises are used
partly for business and partly for other purposes, only a proportionate part of the expenses
attributable to that part of the premises used for purposes of business will be allowed as a
deduction

Repairs and insurance of machinery, plant and furniture - Section

31

In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or
profession, the following deductions shall be allowed—
1. The amount paid on account of current repairs.
2. Any premium paid for insurance.

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

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

The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or
stores used for the purposes of the business or profession, shall be allowed to be debited.

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

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

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

Any sum paid to an employee as bonus or commission for services rendered, where such sum would not
have been payable to him as profits or dividend if it had not been paid as bonus or commission shall be
allowed.

ABC Pvt. Ltd. has paid a bonus of Rs. 1 lakh to each of its shareholders Mr. A, Mr. B and Mr. C and this bonus
would have been otherwise paid to them as dividend if it has not been distributed as bonus, in this case,
bonus is not allowed.

As per section 43B, payment of bonus or commission is allowed only on actual payment basis.

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

The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession
shall be allowed. Further assessee is allowed to borrow to any extent and also he can pay interest at any rate.

Loan can be taken either to incur revenue expenditure or to incur capital expenditure.

Loan for acquiring capital asset

→ Any amount of the interest paid,

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→ in respect of capital borrowed any tangible and intangible asset

→ for any period beginning from the date on which the capital was borrowed for acquisition of the asset
→ till the date on which such asset was first put to use,
→ shall not be allowed as deduction,
→ rather interest has to be capitalised
→ but interest subsequent to the date of putting the asset to use shall be allowed as deduction.

ABC Ltd. is an existing company and it has borrowed Rs. 20 lakhs @ 10% on 01.07.20XX for purchase of one
plant and machinery which was put to use on 01.01.20YY, in this case, interest for the period 01.07.20XX to
31.12.20XX shall be capitalized and any interest subsequent to 31.12.20YY shall be debited to the profit and loss
account.

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

Zero Coupon Bond means a bond
● Issued by any infrastructure capital company or infrastructure capital fund or public sector
company.
● In respect of which no payment and benefit is received or receivable before maturity or redemption
from infrastructure capital company or infrastructure capital fund or public sector company and
● Which the Central Government may, by notification in the Official Gazette, specify on this behalf.

The pro rata amount of discount on a zero coupon bond having regard to the period of life of
such bond calculated in the manner as may be prescribed shall be allowed to be debited.

(i) “Discount” means the difference between the amount received by the infrastructure capital company or infrastructure capital fund or
public sector company or scheduled bank issuing the bond and the amount payable by such company or fund or public sector company
or scheduled bank on maturity.

(ii) “Period of life of the bond” means the period commencing from the date of issue of the bond and ending on the date of the maturity.

The minimum period shall be 10 years and maximum period shall be 20 years.

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Contributions to provident and other funds

● Any sum paid by the assessee
● as an employer by way of contribution towards a
● recognized provident fund or an approved superannuation fund,
● subject to such limits as may be prescribed and
● subject to such conditions as the Board may think fit to specify

What is superannuation fund (Not for exams)

The Income-tax law prescribes that an employer should enter into a scheme of insurance and purchase an annuity (from the
superannuation fund pool) for ensuring regular pension payment to its retired employee. The employer may also give part of the
superannuation benefit in lump-sum up to a certain prescribed limit. So it’s a fund made for giving retirement benefits.

Employer’s contribution towards a Pension Scheme - Section 36(1)(iva) (To be studied with
deduction chapter)
● Any sum paid by the assessee as an employer by way of contribution towards
● a pension scheme, as referred to in section 80CCD,
● on account of an employee
● to the extent it does not exceed ten percent of the salary of the employee in the previous year.

In other words deduction shall be allowed of the amount deposited or 10% of the salary whichever is lower. -
"Salary" includes dearness allowance, if the terms of employment so provide, but excludes all other allowances
and perquisites.

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

Any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund
created by him for the exclusive benefit of his employees under an irrevocable trust

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

● If the employer has received contribution from the employee towards provident fund or Superannuation
Fund or Employees State Insurance or towards any other welfare scheme of employees,
● It will be considered to be income of the employer under the head business/profession
● But if the employer has credited the amount to the relevant account within the time allowed in the
relevant Act (Provident Fund Act etc),
● Employers can debit the amount to the profit and loss account otherwise expenditure is disallowed.

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As per the Employees Provident Funds Scheme, 1952, the amounts under consideration in respect of wages of the employees for any
particular month shall be paid within 15 days of the close of every month.

EXAMPLE
Employee Contribution Towards Recognised Provident Fund - ₹ 1,00,000
Deposited by Due Date - ₹ 60,000
₹ 40,000 not deposited by the due date will be added in the income of the employer. Deduction will not be allowed for this
even if it is deposited later on.

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Amount of debt taken into account in computing the income of the assessee as per income tax to
be allowed as deduction in the previous year in which such debt or part thereof becomes
irrecoverable

The amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the
assessee for the previous year shall be allowed as deduction
● If any assessee has written off bad debts as irrecoverable in the books of accounts
● The debt has been taken into account as per income tax while computing the income of the assessee or
it should represent the money lent in the ordinary course of business of banking or money lending
carried on by the assessee.

Recovery of Bad-debts.
If any amount was debited as bad debts with regard to particular debt and subsequently some amount was
received in final settlement of the debt, in this case any deficiency shall be allowed as bad debt and any excess
shall be considered to be deemed income under section 41(4).

For more detailed information please see video

Example
During the previous year PK sold Goods worth ₹ 5,00,000 to Miss V. Amount received during the previous year = ₹ 50,000.
On 31st March of the previous year ₹ 1,60,000 was written off in books of accounts. In the next year PK recovers the
following amounts as full and final payments.
Case 1 - ₹ 75,000
Case 2 - ₹ 2,00,000
Case 3 - ₹ 3,50,000
Discuss the tax consequences in the previous year and the next year.

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

● Any expenditure incurred by a company for the purpose of promoting family planning among its
employees is allowable as deduction.
● If, however, such expenditure is of a capital nature, One –fifth of such expenditure is allowable as
deduction for the previous year in which it was incurred and the balance is deductible in equal
instalments in the next four years.
● Any family planning expenditure which is not allowed as deduction due to inadequacy of profit, shall be
carried forward and set off in the same manner as unabsorbed depreciation. i.e. expenditure can be set
off from any income under any head except casual income and carry forward is allowed for unlimited
periods. (This topic will be auto covered with unabsorbed depreciation.)
● If any capital asset has been purchased for the purpose of promotion of family planning norms among
the employees and subsequently the asset was sold, the sale proceeds shall be considered to be income
under the head business/profession as per section 41(3). but maximum to the extent of the amount
debited to the profit and loss account. If the business is not in existence at that time, even then it will
be considered to be income under the head business/profession.If subsequently there is any
amalgamation or demerger, the above provisions shall apply in case of amalgamated company or the
resulting company as they would have applied to the amalgamating company or the parent company.
(This topic will be auto covered with Sale of Scientific Research Asset)

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

If the assessee has paid securities transaction tax in connection with taxable securities transactions which are
part of his business, STT shall be allowed to be debited to the profit and loss account.

Deduction for commodities transaction tax paid in respect of taxable commodities transactions -
Section 36(1)(xvi)

● An amount
● equal to the CTT
● paid by the assessee in respect of the taxable commodities transactions
● entered into in the course of his business during the previous year shall be allowable as deduction,
● if the income arising from such taxable commodities transactions is included in the income computed
under the head "Profits and gains of business or profession".

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43B - Certain Deduction on payment basis

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

In section 43B of the Income-tax Act, following the following clause shall be inserted (in the list of expenses)

● any sum payable by the assessee as interest on any loan or borrowing from
○ deposit taking non-banking financial company or
○ systemically important non-deposit taking non banking financial company,
■ in accordance with the terms and conditions of the agreement governing such loan or
borrowing

New Explanation also added -

A deduction of any sum, being interest payable under new clause (as stated above), shall be allowed if such
interest has been actually paid and any interest referred to in that clause which has been converted into a loan
or borrowing shall not be deemed to have been actually paid.

Certain terms explained by inserting explanation

● Deposit taking non-banking financial company

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

● Non-banking financial company"

○ shall have the meaning assigned to it in clause (f) of section 45-I of the Reserve Bank of India
Act, 1934 (2 of 1934);

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

○ means a non-banking financial company which is not accepting or holding public deposits
○ and having total assets of not less than five hundred crore rupees as per the last audited
balance sheet and is registered with the Reserve Bank of India under the provisions of the
Reserve Bank of India Act, 1934 (2 of 1934).'.

Amendment By Finance Act, 2021

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Explanation added - Provisions of this section shall not apply and shall be deemed never to have been applied to
a sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause
(24) of section 2 applies. (If the employer has received contribution from the employee towards provident fund
or Superannuation Fund or Employees State Insurance or towards any other welfare scheme of employees,
It will be considered to be income of the employer under the head business/profession)

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Amounts not deductible specific disallowances - Section 40

As per Section 40(a), notwithstanding anything to the contrary in Sections 30 - 38, the following amounts shall
not be deducted in computing the income chargeable under the head "Profits and gains of business or
profession" —

40(a)(i) - Payments outside India or to non-residents on which tax has not been deducted/paid:
(Not applicable on salary)

● Any interest, royalty, fees for technical services or other sum chargeable in the hands of recipient under
this Act and payable -
○ outside India; or
○ in India to a non-resident, not being a company or to a foreign company, (In Short NR)
● on which tax is deductible at source and such tax has not been deducted or, (जिस पर टै क्स DEDUCT होना था
और नहीं हुआ)
● after such deduction, has not been paid on or before the due date of furnishing return of income
specified under section 139(1). (Deduct तो हो गया पर 139(1) की Due Date से पहले Deposit नहीं हुआ )
● However, where in respect of any sum -
○ tax has been deducted in any subsequent year; or
○ has been deducted during the previous year but paid after the due date specified in section 139(1),
○ then, such sum shall be allowed as a deduction in computing the income of the subsequent
previous year in which the TDS has been so paid.
● Provided further that where an assessee fails to deduct the whole or any part of the tax on any such
sum
● but is not deemed to be an assessee in default under section 201,
● then, for the purposes of this sub-clause, it shall be deemed that the assessee has deducted and paid
the tax on such sum on the date of furnishing of return of income by the payee
■ When assessee is not deemed to be assessee in default
● ROI - The payee recipient has furnished his return of income.
● Taken in account - The payee recipient has taken into account the amount
received as income is his return of income
● Paid Tax - The payee recipient has paid the tax due on the income declared in such
return of income

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

accountant in form no. 26A

40(a)(ia) - Payments to residents on which tax has not been deducted/paid - 30% of such sum
shall not be allowed as a deduction. (Applicable to all payments on including salary)

Following amount will be disallowed

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

○ tax is deductible at source and such tax has not been deducted; or (Tax Deduct होना था, Deduct नहीं
हुआ)
○ after such deduction, has not been paid on or before the due date of furnishing return of income
specified under section 139(1). (Deduct होने के बाद 139(1) तक pay नहीं हुआ)
● However, where in respect of any sum -
○ tax has been deducted in any subsequent year; or
○ has been deducted during the previous year but paid after the due date specified in section 139(1),
○ then, 30% of such sum shall be allowed as a deduction in computing the income of the
subsequent previous year in which the TDS has been so paid.

■ For example: The tax amounting to ₹ 10,000 was deductible in YEAR 1 in respect of interest
of ₹ 1 lakh payable to a resident Such interest of ₹ 1,00,000 will be allowed as deduction
during the YEAR only if the TDS of ₹ 10,000 is deducted in YEAR 1 and is paid on or before
due date specified u/s 139(1).
■ However, if such TDS is deducted in YEAR 1 and is paid in YEAR 2 after due date specified
u/s 139(1), then, 30% of such interest (i.e. Rs. 30,000) will not be allowed as deduction in
YEAR 1 but the same will be allowed as deduction in YEAR 2.
■ Further, if the TDS relating to such interest payment is not deducted in YEAR 1, then, 30%
of such interest shall not be allowed only in the YEAR 1, even if the same is paid on or
before due date specified in section 139(1) for furnishing return of Income for YEAR 1.
■ Deduction of such an expenditure will be allowed in the year in which the amount is
deducted and paid.

● Exception

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■ Where an assessee fails to deduct the whole or any part of the tax on any such sum but
is not deemed to be an assessee in default (i.e. payee has deposited self-assessment tax
directly), then,
■ it shall be deemed that the assessee has deducted and paid the tax on such sum on the
date of furnishing of return of income by the resident payee.
■ When assessee is not deemed to be assessee in default
● The payee recipient has furnished his return of income.
● The payee recipient has taken into account the amount received as income is his
return of income
● The payee recipient has paid the tax due on the income declared in such return of
income
● The payer furnishes a certificate to this effect from a chartered accountant in
form no. 26A

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40(a)(ii) - Income-tax
Any sum paid on account of tax or cess levied on profits on the basis of or in proportion to the profits and
gains of any business or profession.

40(a)(iib) - Certain fees, Royalty, service charges etc. payable by State Government undertaking
to the State Government
Any amount
○ paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or
charge, by whatever name called, which is levied exclusively on; or
○ which is appropriated, directly or indirectly, from, a State Government undertaking by the State
Government.

40(a)(iii) - Payment of Salaries outside India or to non-residents on which tax has not been
deducted and paid : Any payment which is chargeable under the head "Salaries", if it is payable
Any payment which is chargeable under the head "Salaries", if it is payable

● outside India; or
● to a non-resident,

and if the tax has not been paid thereon nor deducted there from under Chapter XVII-B.

Language not clear - The section provides that a disallowance will be made 'if the tax has not been paid thereon
nor deducted therefrom under Chapter XVII-B'. On a plain reading, a sum can be disallowed only if both the
conditions are fulfilled, that is, tax has not been paid nor deducted. In other words if one of the two conditions is
fulfilled, a disallowance cannot be made under section 40(a)(iii) of the Act. Thus, if tax has been paid without
deduction of tax at source, no disallowance can be made. Likewise, if tax has been deducted, then no
disallowance can be made even if the tax has not been paid. This interpretation is further supported by the fact
that unlike the amended section 40(a)(i), there is no provision under this section that provides for allowance in
respect of deduction or payment of tax in a subsequent year. If a view is taken that deduction is not allowed for
salaries in respect of which tax has been deducted but not paid in the same year, it would result in a complete
disallowance of all such year-end salaries whose payment is made in the subsequent year (e.g. tax on salaries for
March paid in April). Obviously, such an absurd interpretation cannot be upheld.

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

Any payment by the employer to provident fund or other fund established for the benefit of the employees of the
assessee, unless he has made effective arrangements to secure that tax shall be deducted at source from any payments
made from the fund which are taxable under the head "Salaries"

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

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

Miscellaneous

Particulars Income Tax GST

(Direct Taxes)

Interest for delayed payment NA A

Interest on loan taken for payment of tax liability NA A

Penalty NA NA

Refund Not Taxable Taxable

Interest on Refund Taxable u/h OS Taxable PGBP

Litigation expenses A A

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

etc)

Interest on delayed payment - Refunded NT Taxable

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

If the
● assessee incurs any expenditure in respect of which payment has been or is to be made to 'specified
persons'; and
● the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to-
○ the fair market value of goods, services or facilities for which the payment is made; or
○ the legitimate needs of the business or profession of the assessee; or
the benefit derived by or accruing to assessee there from;

then, so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable
shall not be allowed as deduction.

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

the assessee.

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Specified Person

Assessee Specified Person

Individual ● Any relative of the individual assessee

● Any person who carries on a business or profession, if
○ the individual assessee has a substantial interest in the business of that
person or
○ any relative of the individual assessee has a substantial interest in the
business of that person

Company, Firm, ● Any director of the company, partner of the firm or member of the family or
HUF or AOP association or any relative of such director, partner or member.
● Any person who carries on a business or profession, in which the Company/ Firm/
HUF/ AOP or director of the company, partner of the firm or member of the family
or association or any relative of such director, partner or member has substantial
interest in the business of that person

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● In case of a company assessee, any individual who has substantial interest in the
business or profession of the company or any relative of such individual.

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All Assessee

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Relative
"Relative" in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or
descendant of that individual.

Substantial interest
A person is deemed to have substantial interest in the business or profession, if such person is the beneficial
owner of at least 20 percent of equity capital (in the case of a company) or if such person is entitled to 20 per
cent profits of a concern (in any other case) at any time during the previous year.

NOTE - A lineal descendant, in legal usage, is a blood relative in the direct line of descent - the children, grandchildren,
great-grandchildren, etc. of a person.

Consider the following cases -

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

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

otherwise than by account payee cheque or account payee bank draft
Section 40A(3)

Where –

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

● the payment or aggregate of payments made to a person in a day in respect of such expenditure,
otherwise than by an account payee cheque drawn on a bank or account payee bank draft or electronic
clearing system or through such other electronic mode as may be prescribed, exceeds Rs. 10,000;

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

Enhanced limit to Rs. 35,000 in case of goods transport agencies: In the case of payment made for plying, hiring
or leasing goods carriages, the aforesaid limit shall be Rs. 35,000 instead of Rs. 10,000.

CBDT has, vide this notification, inserted Rule 6ABBA to prescribe the following electronic modes through
which payment can be made or money can be received, for the purposes of above sections.

a. Credit Card;
b. Debit Card;
c. Net Banking;
d. IMPS (Immediate Payment Service);
e. UPI (Unified Payment Interface);
f. RTGS (Real Time Gross Settlement);
g. NEFT (National Electronic Funds Transfer), and
h. BHIM (Bharat Interface for Money) Aadhar Pay.

Examples
1. 3 Payments of Rs. 10,000 made in a single day for a single expenditure in cash. No deduction will be
allowed. Entire Rs. 30,000 will be disallowed.

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2. 3 Payments of Rs. 10,000 made in a single day for3 different expenses of Rs. 10,000 each. Rs. 30,000 will
be allowed as deduction.
3. Expenditure Rs. 30,000 - Rs. 20,000 Paid in cash on Day 1 and Rs. 10,000 paid in cash on Day 2. - Rs.
20,000 paid on day 1 will be disallowed.

Dis-allowance to be made in the year of payment for expenditure incurred in earlier years Section
40A(3A)

Where-

● an allowance has been made in the assessment for any year in respect of any liability incurred by the
assessee for any expenditure; and (Assessee was following mercantile system of accounting)
● subsequently, during any subsequent year, the assessee makes payment in respect thereof, otherwise
than by an account payee cheque drawn on a bank or account payee bank draft or electronic clearing
system or through such other electronic mode as may be prescribed; and
● the payment or aggregate of payments so made to a person in a day exceeds Rs. 10,000;

then, the payment made shall be deemed to be the profits and gains of business or profession and accordingly
chargeable to income-tax as income of the subsequent year.

Cases where disallowances would not be attracted

Loan transactions: It does not apply to loan transactions because advancing of loans or repayments of the
principal amount of loan does not constitute an expenditure deductible in computing the taxable income.
Interest disallowance will be applicable as discussed above.

Payment made by commission agents for goods received by them for sale on commission or consignment
basis because such a payment is not an expenditure deductible in computing the taxable income of the
commission agent.

Rule 6DD Payments

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

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

○ the Life Insurance Corporation of India;
● Where the payment is made to the Government and under the rules framed by it.
● Where the payment is made through any bank, including foreign bank, by any of these modes -
○ any letter of credit arrangements;
○ a mail or telegraphic transfer;
○ a bill of exchange made payable only to a bank;
○ Electronic clearing system;
○ a credit card;
○ a debit card;
● Where payment is made by way of adjustment against the amount of any liability incurred by the
payee for any goods supplied or services rendered by the assessee to such payee; (simply speaking payee
was liable to pay an amount the payer and the payment was adjusted against that amount)
● Where payment is made to the cultivator, grower or producer of the following for purchase thereof
○ agricultural or forest produce;
○ or produce of animal husbandry (including livestock, meat, hides and skins) or
○ dairy or poultry farming;
○ fish or fish products;
○ Products of horticulture etc.

The expression ‘fish or fish products’ above would include ‘other marine products such as shrimp, prawn,
cuttlefish, squid, crab, lobster etc.’.

The 'producers' of fish or fish products for the purpose of Rule 6DD(e) would include, besides the
fishermen, any headman of fishermen, who sorts the catch of fish brought by fishermen from the sea,
at the sea shore itself and then sells the fish or fish products to traders, exporters etc.

However, the above exception will not be available on the payment for the purchase of fish or fish
products from a person who is not proved to be a 'producer' of these goods and is only a trader, broker
or any other middleman, by whatever name called.
● Where the payment is made for the purchase of the products manufactured or processed without the
aid of power in a cottage industry, to the producer of such products;
● Where the payment is made in a village or town, which on the date of such payment is not served by
any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in
any such village or town;

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● Where any payment is made to on employee of assessee or the heir of any such employee, on or in
connection with the retirement, retrenchment, resignation, discharge or death of such employee, on
account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such
sums payable to employee or his heir does not exceed Rs. 50,000;
● Where the payment is made by an assessee by way of salary to his employee after deducting the
income-tax at source, when such employee is temporarily posted for a continuous period of 15 days or
more in a place other than his normal place of duty or on a ship, and does not maintain any account in
any bank at such place or ship;
● Where the payment is made by any person to his agent who is required to make payment in cash for
goods or services on behalf of such person;
● Where the payment is made by an authorized dealer or money changer against purchase of foreign
currency or travelers cheques in the normal course of his business.

40A(4)

● Notwithstanding anything contained in any other law for the time being in force or in any contract,
● where any payment in respect of any expenditure has to be made by an account payee cheque drawn on
a bank or account payee bank draft or through such other electronic mode as may be prescribed in order
that such expenditure may not be disallowed as a deduction under sub-section (3),
● then the payment may be made by cheque or draft or through such other electronic mode as may be
prescribed; and where the payment is made or tendered, no person shall be allowed to raise, in any suit
or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or
in any other manner.

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Provision made for Gratuity Section 40A(7)

No deduction shall be allowed in respect of any provision made by the assessee for the payment of gratuity to
his employees on their retirement or on termination of their employment for any reason.

However, any provision made by the assessee for the purpose of contribution towards an approved gratuity
fund, or for the purpose of payment of any gratuity, that has become payable during the previous year, shall be
allowed as a deduction.

Also keep in mind 40(a)(iv) – Payment towards any fund for the benefit of the employee shall not be allowed
unless there are effective arrangements for deducting Tax therefrom.

Payment of gratuity to retiring employee – Allowable

● Where any provision, made by the assessee for the payment of gratuity to his employees on their
retirement or termination of their employment,
● has been allowed as a deduction in computing the income of the assessee for any assessment year,
● then any sum paid out of such provision by way of contribution towards an approved gratuity fund or
by way of gratuity to any employee,
● shall not be allowed as a deduction in computing the income of the assessee of the previous year in
which the sum is so paid.

Note: The deduction allowed shall be subject to the provisions of Section 43B.

Payment made to Non-Statutory Funds - Not deductible Section

40A(9)

No deduction shall be allowed in respect of any sum paid by an employer towards the setting up or formation
of, or as a contribution to any fund, trust, company, association of persons, body of individuals, registered
society, or other institution for any purpose.

However, deduction shall be allowed in case such sum is paid as per provisions under section 36(1) (iv)/(iva)/(v)
or under any other law for the time being in force. (Funds etc. must be approved)

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