Profits & Gains From sion

INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION

S.28 Basis Of Charge Section 36 Other Deductions

1. The profit of any business or profession carried at any time during the Following expenses are allowed to be debited in profit & Loss Account
relevant PY. 1. Insurance Premium
2. Export incentives. (Cash assistance/ sale of import licence/ duty drawback) a) Stock (including live stock)
3. The value of any benefit or perquisite arising from business or Profession b) Medical Insurance of EE( provided not paid in cash)
(Gift received from customers/client) 2. BONUS OR COMMISSION PAID to the Employees [not payable as dividend]
4. Any interest, salary, bonus, commission or remuneration, received by a 3. Interest On Loan taken for business or profession. However if loan is taken
partner of a firm from such firm. from scheduled bank, Financial institution including NBFC, deduction is
5. Non - competing fees allowed subject to section 43B.
a) for not carrying out any activity in relation to any Business Note: loan taken for asset – Interest prior to the date asset is put to use is
b) not sharing any know-how, patent, copyright, trademark, licence, capitalized and depreciation is allowed.
franchise or any other business or commercial right 4. ER contribution to
6. Any sum received by ER under a Keyman insurance policy 1. Recognized Provident Fund Allowed subject to the
7. Income from speculative transaction 2. Approved superannuation fund provisions of Section
8. Amount received in connection with termination or modification of terms and 3. Approved gratuity fund 43B i.e. if paid upto
conditions of any Business contracts. 4. Notified Pension Scheme(Max 10% of Salary RFD
9. If any person has converted any inventory or stock in trade in to a capital 5. EE contribution deducted by the ER from his salary will be allowed, if ER
asset.( Business Income = FMV on Date of Conversion Deposited the amount in relevant account upto the due date in relevant Act.
Note: 6. Bad debts written off from the books of accounts – allowed
a) Capital Reciepts – Not considered as income. Provision for bad debts not allowed as deduction
Capital Expenditure – Not allowed as deduction. Bad Debts recovered – Income of recovery year.
b) The business commences as soon it is set up 7. Family planning Expenditure is allowed to company assessee as follows
c) S.29: The income referred to in section 28 shall be computed in Revenue Expenditure Full
accordance with the provisions contained in sections 30 to 43D Capital Expenditure In 5 Installments
If Sufficient profit is not available then expenditure(R/C) shall be deducted
Rent, Rates, Taxes, Repairs and Insurance for Buildings [Section 30] to the extent of profit available.
8. STT/CTT paid in relation to business shall be allowed.
Building Used As Expenses Allowed
Tennant Rent, Current Repairs, Municipal Taxes & Insurance S.37 General Deduction
Owner Current Repairs, Taxes, Insurance and also Dep (u/s 32) If expenditure is not covered u/s 30 to 36, such expenditure is allowed u/s 37
subject to following conditions:
Deduction relating to plant, machinery & furniture [Section 31] a) Nature of Expenditure – Revenue
b) Purpose – Wholly & Exclusively For Business.
Current Repairs and Insurance related to P/M & Furniture used in business is Note:
allowed u/s 31. Rent Paid for P/M & Furniture if taken on hire, shall also be allowed 1. Advertisement in Brochure, tact, pamphlet of political party – Not allowed.
but in S.37. 2. Penalty for infringement of law – Disallowed. However, Other Penalty- Allowed
3. Income Tax and wealth tax is not allowed as deduction. However, taxes paid in
relation to business shall be allowed like, GST, Excise Duty, Custom Duty etc.
• Rural Development Programmes S.35CCA – 100% deduction to all assesses. • Expenditure on skill development project S.35CCD - 100% deduction only To
• Expenditure on agricultural extension project S.35CCC - 100% deduction to all COMPANY.
assesses. • Expenditure under Voluntary Retirement Scheme S.35DDA – Allowed in 5
Equal Installments
 Scientific Research S. 35 S. 35 AD Deduction in case of Specified Businesses.

In-house Research ( Research – Related To Business) 1. Specified Business

Assessee Expenditure Allowed 1. Cold chain facility 2. Warehouse for agricultural Produce and Sugar
All Assessees 100% of revenue as well as capital expenditure 3. Hotel ( 2 Star +) 4. Affordable Housing Project & Slum
incurred during the year. However In case of: Redevelopment Project
Exp on acquisition of land – No Deduction. 5. Slurry Pipeline 6. Bee-keeping & Production of Honey & Bee wax
Exp Incurred upto 3 years before the commencement 7. Cross country 8. Setting Semiconductor Wafer Fabrication
of business shall be allowed in the year of Pipeline Manufacture unit
commencement of business. 9. Developing/Maintaining/Operating new
infrastructure facility
Contribution To Outside Agency (Research – Business Relation not compulsory)
donation given to an approved scientific research association 100% 2. Deduction: 100% of capital expenditure except (Land, Goodwill and financial
donation is given to an Indian company approved for the purpose of 100% instrument). Also expenses incurred before commencement of business shall
scientific research or to any approved institution social science or be allowed if capitalized in books of accounts.
statistical research.
3. However, Any Expenditure for Acquisition of any Asset for which aggregate
Sale of assets used for scientific research Section 41(3) payment made to A Person in A Day, otherwise than by A/c Payee
Cheque/Draft or Electronic clearing system is more than Rs. 10,000 , then
• Asset Sold Without Being Put to use for business purpose: such payment Not Eligible for Deduction u/s 35AD

a) Sale Value ≤ Actual Cost, then sale value is Business Income 4. Conditions to claim Deduction u/s 35AD:
b) Sale Value > Actual Cost, then actual value is business income and
difference between sale value and actual cost shall be STCG/LTCG a) Business Not Formed by Splitting/Reconstruction of Existing Business
depending upon period of holding b) Not Formed by Transfer of Used P&M ( However, Used P&M is Allowed
upto 20%)
• Asset Sold After Being Put to use for business purpose: c) Asset must be used in business for 8 AY for which deduction Is claimed
Asset will be added to the respective block with NIL value and deducted from the u/s 35AD otherwise, in the year of sale or put to use in other business
block with sale value shall be business income which is equals to:
PGBP Income = Total Deduction Claimed – Deemed Depreciation.
Carried forward of unadjusted capital expenditure of scientific research
Amortisation of certain Preliminary Expenses S.35D
If profit before deducting capital expenditure on scientific research is less than
capital expenditure on scientific research, then excess capital expenditure is Indian Company
carried forward and allowed as deduction from any income except salary and
windfall gains Expense is allowed in 5 installments from year of commencement of business.
Expense allowed is higher of
1. 5% of cost of project
2. 5% of capital Employed.
subject to maximum actual Expenditure.
Other Resident

Expense is allowed in 5 installments from year of commencement of business.

Expense allowed is Lower Of
1. 5% of cost of project
2. Actual Expenditure
 Deductions Not Allowed As Deduction

Payments on Which TDS Provisions Apply Payment by non specified Mode S.40A(3)
• A Payment or Aggregate of Payments made to A Person in A Day for An
Disallowance will be attracted if any of the following conditions are satisfied: Expenditure exceeds Rs. 10,000 (Rs. 35,000 to Transporter for Goods
a) TDS not Deducted upto last day of Relavant PY Carriages],
b) TDS Not deposited with govt. upto return filing date u/s 139(1). • entire payment shall be disallowed
Disallowance shall be: • if it is made through any mode other than A/C payee cheque/Draft or an
Section Payment To Disallowance Electronic clearing system through bank A/C
40(a)(i) Payment to any person O/S India or in India to Non- 100%
resident Rule 6DD (exception to S.40A(3)) no disallowance for following payments:
40(a)(ia) Payment In India To Resident 30% 1. Payments made to Cultivator, Grower or Producer of agricultural
Disallowed amount shall be allowed in the year in which TDS is deposited with GOVT produce & related products etc
2. Payment made to Government, Banks, RBI, LIC
Disallowance in Case of Partnership Firm 3. Payment to person residing @ place which is not served by bank.
1. Interest paid to partners is allowed if mentioned in partnership deed subject to 4. Payment made on a day on which Banks were closed.
maximum 12%. 5. Payment to employee for retirement benefit not exceeding Rs.50,000
2. Remuneration by whatever name called shall be allowed only to working partner Note: .
and that to subject to maximum of following 1. If Expenditure has been allowed as deduction in any earlier PY on accrual
Book Profit(BP) Max. Remuneration basis (if assessee is following accrual basis) & payment for such
Upto Rs. 3,00,000 90% of BP or Rs. 1.5 Lakh, whichever is higher expenditure has been made in any subsequent PY exceeding Rs.
Beyond Rs. 3,00,000 60% of BP 10,000/35,000 in cash to a person in a day, then such payment shall be
Remember: Remuneration Paid by AOP/BOI to its Members [Sec 40(ba)] → Not deemed to be the income of PY in which payment is made
Deductible 2. Sec 40A(3) does not Apply for Repayment of Loans. But it applies to
Payment Made To Relatives S. 40A(2) interest payments since interest is a deductible expenditure.
If A.O is of the opinion that having regard to FMV, payment is excessive or
unreasonable, then such excessive or unreasonable payment shall be disallowed. Deductibility in respect of provision for Gratuity Fund Section 40A(7)
If provision(contribution) is made towards approved gratuity fund, then such
Employer’s contribution to various funds Section 40A(9) provision is allowed as per S.36 subject to S.43B. However If
ER contribution to various funds is allowed only if such funds are notified under any provision(contribution) is made towards unapproved gratuity fund, then such
Act. provision is disallowed under S.40A(7).

S. 43 B – Certain Payments Allowed On Payment Basis

Following Expenses are allowed in the previous year to which they belong, provided they are paid upto Return Filling date u/s 139(1), otherwise deduction shall be
allowed in the year of payment
1. Tax, Duty, Cess or Fee (by 2. Employer’s Contribution 3. Interest on any Loan or 4. Leave Salary, 5. Any Sum Payable to
whatever name called) to any PF/SF/Gratuity borrowing from any Bank, Bonus/Commission to Indian Railways for the
levied under any law Fund or any recognized Financial Institution employees use of Railways Assets.
fund including NBFC. (Not any
other person)
 Compulsory Maintenance Of Books Of Accounts S. 44AA Compulsory Audit Of Books Of Accounts S.44AB

Assessee engaged in Specified Professions Assessee Engaged Audit Requirement

Gross receipts exceeds INR 1.5 Lakh Gross receipts doesn’t exceeds INR In
in each of the last three PY 1.5 Lakh in each of the last three PY Business Turnover exceeds 1 Crore
Prescribed Books as per Rule 6f Necessary books to enable AO to Profession Gross Receipts exceeds 50 Lakh
assess the income. Persons covered If such person claims that his income is LOWER than
under S. 44AD, Income computed on Presumptive basis & his Income
Assessee engaged in other profession or Business 44ADA,44AE Exceeds Basic exemption limit.
Required to maintain such books of a/c which will enable ao to compute their
taxable income if any of the following conditions are satisfied in ANY ONE of the Proviso to Section 44AB(a) Inserted : NO AUDIT Upto 10 Crore Turnover
last 3 PY: a) If Turnover of assessee is more than 1 crore but upto 10 crore
Individual / HUF Other Assessee b) Aggregate of all Amounts received in cash is not more than 5% of total
1. Income exceeds INR 2.5 Lakh INR 1.20 Lakh Receipts during the PY, and
2. Turnover exceeds INR 25 Lakh INR 10 Lakh c) Aggregate of all Amounts paid in cash is not more than 5 % of total
payments during the year.

Presumptive Scheme Of Taxation

Conditions S. 44 AD S. 44ADA S. 44AE

Assessee • Resident Individual / HUF / Firm (NOT LLP) • Resident Individual or • Persons carrying on business of plying, hiring, &
• Engaged in any business other than specified Partnership excluding LLP leasing goods carriages
profession , or earning any • Engaged in Specified • Must Not own more than 10 goods vehicle @ anytime
commission/brokerage income. Profession as per S.44AA during PY.
• Turnover ≤ 2 Crore • Gross Reciept ≤ 50 Lakh

Income 8% of turnover or income declared by assessee, 50% or income declared by Heavy goods Rs 1000/ton per month or part
W.E.H. assessee, W.E.H Vehicle (HGV) thereof
However if assessee has received the payment by Other Vehicle Rs 7,500 per month or part thereof
Specified mode upto RFD, then on such amount Note: Only for the period during which vehicle is owned
deemed income shall be 6% or more by Assessee in PY.
Common Points

1. No Deduction u/s 30 - 38 shall be available. However, Salary & Interest paid 4. If Assessee claims income lower than presumptive income then assessee is
by firm to Partner shall be Deducted u/s 44AE only. required to maintain BOA u/s 44AA and also get them audited.
2. Audit u/s 44Ab is Not required.
3. Assessee is required to pay advance tax in single installment on 15 th March If an assessee has opted for presumptive income under section 44AD and in
of PY. However assessee covered u/s 44AE shall required to pay advance tax the subsequent 5 years he has rejected presumptive income, in that case he
normally will not be allowed to opt for presumptive income for next 5 years. If assessee
has rejected the presumptive income, he will be required to maintain any
books of accounts and also audit is required
 DEPRECIATION

Conditions to be satisfied for claiming depreciation Actual cost

a) Asset must be owned by the assessee, wholly or partly. It means,
b) Asset must be used for the purpose of business or profession.
c) Asset must be used during the previous year. a) Actual cost of the asset to assessee, and
If any of the above condition is not satisfied, depreciation shall not be allowed b)
It should not include any portion of cost which has been incurred directly or
indirectly by anyother person or authority.
Section 2(11): Block of Assets Important points to remember
It means a group of assets falling within a class of assets comprising:
a) Tangible assets, being building, plant and machinery or furniture 1. If assessee makes a payment or aggregate of payment more than INR
b) Intangible assets, being know how, patents, copyrights, trademarks etc. 10,000 to a person in a day, by mode other than an A/c payee cheque, A/c
in respect of which same rate of depreciation is charged. payee bank draft or electronic clearing system through bank account,
such payment shall be ignored for the purpose of determination of actual
a) Building
cost.
• Residential Purpose Building other than Hotel 5%
• Non Residential Purpose Building including Hotel 10% 2. Interest paid before commencement of production on amounts borrowed
• Temporary erections 40% for acquisition and installation of machinery forms the part of actual cost.
b) Furniture and Fittings 10% Depreciation @ Half Rate
c) Machinery and Plant Depreciation will be restricted to 50% of the normal depreciation , if the
• Motor cars other than used in a business of running them on hire 15% following conditions are satisfied:
• Machinery and Plant (General) 1. Asset is purchased and put to use in the same Year.
• Ships 20% 2. Period of put to use < 180 days.
• Motor Vehicles used in business of running them on hire 30%
• Aeroplanes 40% When No Depreciation Shall Be Allowed
• Computers including computer software 40% All the assets of the block are transferred:
• Books 40% In case all the assets in any block are transferred during the previous year
d) Intangible Assets other than Goodwill 25% then the block shall ceases to exist and no depreciation will be allowed. It
can happen in the following two cases:
WDV For Charging The Depreciation
Opening WDV xxx a) Sale price > ( Op. WDV + Assets purchased during the year ),
Add: Assets Put to Use During the previous year xxx b) Sale price < ( Op. WDV+ Assets purchased during the year then)
Less: Consideration received from Selling or discarding any (xxx) Such excess or deficit shall be treated as short-term capital gain or short –
asset during the previous year term capital loss as the case may be u/s 50.
Closing WDV Before Depreciation xxx
On closing WDV before depreciation, compute the depreciation at the rates Part of block is sold and the sale consideration of assets exceed block Value
prescribed for each block
• Sale price > ( Op. WDV + Assets purchased during the year )
• Although certain assets exist in block, but the WDV of the
block shall be reduced to NIL and no Depreciation shall be
allowed.
• Excess shall be treated as short-term capital gain.
 Section 32(1)(iia): Additional depreciation on new machinery or plant Depreciation On SLM Basis
Condition:
(i) An assessee is engaged in the business of manufacture or Assessee Engaged in Generation, transmission, Distribution of Power
production of any article or thing. Time to Before RFD u/s 139(1) of PY in which they begin to generate
Exercise power. The option once exercised shall not be reversed.
(ii) An assessee who is in the business of generation transmission or
distribution of power. Note: Option of SLM is For Tangible Assets only; For Intangible Assets only WDV
Assets for which additional depreciation is allowed: is applicable. Depreciation can be charged on tangible assets individually; i.e
SLM/WDV whichever is more beneficial.
Any new machinery or plant which has been acquired and installed. However ,
additional depreciation shall not allowed for: Sale of Asset By Assessee Engaged In Power Generation
(i) Ships and aircraft;
(ii) Se cond Hand Plant/Machinery ;or Case 1: Sale Value < Book Value
(iii) Any machiner y or plant inst alled office or residential Terminal Depreciation (Dr. to P/L) = Book Value – Sale Value
accommod at ion or o ffice appliances or road transport
vehicles; Case 2: Sale Value > Book Value But ≤ Actual Cost
(iv) Any machinery or plant , the whole of the actual cost of which is allowed Balancing Charge( Cr. To P/L) = Sale Value – Book Value
as a deduction ( whether by way of depreciation or otherwise)
Case 3: Sale Value > Actual Cost
Rate of additional depreciation • Balancing Charge( Cr. To P/L) = Actual Cost – Book Value
Put To Use ≥ 180 days Put To Use < 180 da ys • LTCG/STCG Depending on Period of Holding = Sale Value – Actual Cost
20% 10%
Depreciation provisions shall apply, whether or not the assessee has
claimed the deduction in respect of depreciation in computing his total
Section 32(2) : Carry forward and set off of unabsorbed depreciation income
If Depreciation claim is more than profits before depreciation, then excess
depreciation shall be deducted to the extent profits available and excess shall be
c/f as unabsorbed depreciation.
After C/F Following shall be the order of setoff
(i) PY Depreciation
(ii) B/f Business Loss
(iii) C/F Unabsorbed Depreciation