Income Tax PGBP

INCOME FROM PROFITS AND GAINS OF

BUSINESS OR PROFESSION
Business Profession
The term “business” has been defined in section 2(13) to The term “profession” has not been defined in the
“include any trade, commerce or manufacture or any Act. It means an occupation requiring some degree of
adventure or concern in the nature of trade, commerce or learning. The term ‘profession’ includes vocation as
manufacture”. well [Section 2(36)]

• Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect and even an astrologer are
persons who can be said to be carrying on a profession but not business.
• However, it is not material whether a person is carrying on a ‘business’ or ‘profession’ or ‘vocation’ since for
purposes of assessment, profits from all these sources are treated andtaxed alike.
• Business necessarily means a continuous exercise of an activity; nevertheless, profit froma single venture in
the nature of trade may also be treated as business.

❖ Reconciliation Format:
Particulars Amount
Net Profit as per P&L A/c xxx
Add: Items debited to P&L A/c but not allowed as deduction in PGBP xxx
Add: Items not credited to P&L A/c but taxable under PGBP xxx
Less: Items credited to P&L A/c but not taxable under PGBP (xxx)
Less: Items not debited to P&L A/c but allowed as deduction under PGBP (xxx)
Income from PGBP xxx

❖ Steps in computing PGBP income given P&L A/c & adjustments :

Step 1: Segregation – Identify items on credit side of P&L that belong to
other heads further applying matching principle identify items on debit side
of P&L that pertain to other heads. All these items have to be deducted /
added in above format.

Step 2: Apply PGBP provisions – For remaining items (after Step 1) apply
PGBP provisions to determine, whether these items would be covered
under PGBP or not.

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Step 1: Segregation
P&L (as per PGBP provisions)
Profit & Loss A/c
Dr. For the year ended _______ Cr.
Particulars Amount Particulars Amount
(₹) (₹)
To Cost of Goods Sold [Sec 37] xxx By Sales A/c (Section 28) xxx
To Rent A/c (Section 30) xxx By Fees A/c (Section 28) xxx
To Rates A/c (Section 30) xxx By Charges A/c (Section 28) xxx
To Taxes A/c (Section 30) xxx By Freight A/c (Section 28) xxx
To Repairs A/c (Section 30) xxx By Commission A/c (Sec. 28) xxx
To Insurance A/c (Section 30) xxx By Rent A/c (Section 28) xxx
To Depreciation A/c (As per xxx By Bad Debts Recovered A/c [Section 41(4)] xxx
Income Tax Act, 1961) (Sec. 32)
To Expenditure on Scientific Research xxx By Customs Duty Refund A/c [Section 41(1)] xxx
A/c (Section 35)
To Investment Linked Expenses A/c xxx By Income Tax Refund A/c [Section 41(1)] xxx
(Section 35AD)
To Preliminary Expenses A/c (Sec 35D) xxx By LIC Matured xxx
To VRS Paid (Section 35DDA) xxx BY Interest/Dividends xxx
To Medical Insurance on Health of xxx BY Gift Received xxx
Employee [Sec 36(1)
To Interest A/c [Section 36(1)(iii)] xxx By Rent on HP Let out xxx
To CSR Exps xxx By Agriculture Income xxx
To Employer’s Contri to RPF / xxx By Profit on Sale of Invst/Assets xxx
Pension Fund Sec 36(1)(iv)/(iva)
To Loss on sale of Asset/Invst xxx By Salary xxx
To Bad Debts A/c [Section xxx By Net Loss (As per PGBP) xxx
36(1)(vii)]
To Family Planning Expenses A/c [Section xxx
36(1)(ix)]
To General Expenses A/c (Section 37) xxx
To Net Profit (As per xxx
PGBP)
Notes: 1] Stamp Value to be adopted, should exceed 110/120% of agreement value.
2] If date of booking and date of sale deed are different, stamp value as on the date of booking
shall be adopted if the payment is made by A/c Payee Cheque.

Step 2:- Apply PGBP provisions

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1. Provisions for credit side

- Sec. 28 / Sec. 41 / Sec. 43CA (refer P&L)

2. Provisions for debit side

[A] Golden Rules & Exceptions – Sec 30 - 37
[B] Restrictions & Disallowances – Sec 40(a) – 43B

[A] Golden Rules & Exceptions

1. Expenses should be related to the business under consideration:

Exceptions: - Certain expenses are allowed even if not related to the

business of the assessee.

i] Family Planning expenditure (only to company)[Sec.36(1)(ix)]

ii] Scientific Research Expenses - payment outside approved

scientific research association, college, university, organization,
national laboratory, etc. [NA for Default Regime] [Sec.35]

Payment to approved / specified company – 100%

Payment to social / statistical research – 100%

Payment to national laboratory – 150% 100%

Payment for approved scientific research programme – 150% 100%

Payment to any other approved scientific research etc. for

purposes other than those covered above – 150% 100%

iii] Donations – Treatment depends on nature of donation as

under:-

(a) Donations – disallowed

(b)Donations covered u/s 80G ,GGA,GGB,GGC :- If these are
debited to P&L, they are disallowed in PGBP but shall be
allowed under Chapter VI-A

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(c) Donations u/s 35 = allowed in PGBP

Following 2 donations are eligible for deduction @ 150% 100%

- Agricultural Extension
National Cause
- Skill development

2. Expenses should be revenue in nature

Exceptions:-

1] Family planning – Revenue allowed full, capital allowed 1/5th

over 5 years

2] Capital scientific research expenses on in-house scientific

research

3] Capital expenses incurred for business covered u/s 35AD.

3. Expenses should pertain to current year

Only current year expenses (and not prior period or future

expected) shall be allowed as deduction.

Exceptions :-

1] Future Expenses – Provision for gratuity subject to restriction

u/s 40A(7) shall be allowed.

2] Past Expenses –

(a) Family Planning – 1/5th Capital portion allowed till 5

years

(b) Preliminary Scientific Research Expenses – Entire

preliminary expenses pertaining to 3 years prior to

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commencement of business are allowed full in year of

commencement

(c) General Preliminary Expenses u/s 35D, expenses on

amalgamation & demerger u/s 35DD and VRS u/s
35DDA – allowed 1/5th over 5 years

(d) Preliminary Expenses for mining – 1/10th over 10 years

(e) Expenses pertaining to earlier years which were

disallowed u/s 40(a) shall be allowed in the current year
if the TDS has been deposited in the current year.

(f) Expenses covered u/s 43B pertaining to earlier years,

paid in the current year, shall be allowed as deduction in
the current year.

4. Expenses should not be for any purpose which is forbidden by law

or in the nature of an offence

Disallowed – Bribe, payment to don / underworld, penalties for

offences like smuggling, evasion of taxes.

Allowed – Penalties in normal course of business like penalty for

breach of contract, non-fulfillment of conditions levied by
government for availment of subsidies, non-fulfillment of export
performances………….

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[B] Restrictions and Disallowances

[Sec. 40 (a)]

A] Payment of direct taxes – payment of Income tax, payment of Income tax by the employer on
perquisite income of employee, payment of fees, charges, levies / royalty to state government
by organizations run / controlled by state government.

- Disallowed Always
B] Expenses on which TDS was applicable but has not been deducted or after deduction
has not been deposited.

1. The TDS should be deducted during previous year and paid upto due date of filing
returns u/s 139(1)

- Entities engaged in international transaction: 30th November of A.Y.

- Company / Tax Audit Assesses / Partners of Tax Audit Firms: 31st October of A.Y.

- For other Assesses: 31st July of A.Y.

2. If point (1) not complied with disallowance shall be

- For payment to a resident & in India: 30% of expenses
- For payment to a non-resident or any person outside India: 100% of expenses.

3. If assessee has not complied with point (1) by not deducting TDS however the payee
has paid tax on this income & submitted proof to the assessee. He shall be eligible
for deduction.

In this case firstly, this allowance shall be made while computing income of
the P.Y. (e.g. 2019-20) as per point (2) above. This amount shall be allowed as
deduction while computing income of next year (i.e. 2020-21).

4. If assessee fails to deposit TDS as required in point (1) however he deposits the
amount in any subsequent year. He shall be allowed of such past year expense in the
year of deposit of TDS.

Sec. 40A (2)

Any expenditure in respect of which payment is made to specified person (relatives /
associates); the deduction shall be limited to the extent of the expenditure = Fair Market Value
Hence any excess portion shall be disallowed.

Disallowed amount = Expenditure debited (-) FMV

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Sec. 40A (9)

Payment to unapproved / unrecognized employee welfare funds

- Disallowed
Sec. 40A (3)

Payment of any expense in a day against a single bill exceeding ₹ 10,000 shall be allowed only if it is by
way of account payee cheque / draft or any other approved electronic made. The prescribed electronic modes include
credit card, debit card, net banking, IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS
(Real Time GrossSettlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface forMoney)
Aadhar Pay [Notification No. 8/2020 dated 29.01.2020].

Payment for transport charges is covered under this section if the payment exceeds ₹ 35,000.

In case above conditions are not satisfied or the expenditure is not covered under Rule 6DD, the amount
disallowed = Entire Expense

Rule 6DD
Above section does not apply for payment below. Hence below payments irrespective of the amount
paid by any medium whether in cash / bearer cheque shall be allowed .
- Payment to Government (indirect taxes – GST, customs duty)
- Payment of interest to bank, LIC or other non-banking financial institutions
- Payment to be made on a day which is a public holiday or banks are on strike
- Payment for Natural produce (agricultural, forestry, animal husbandry…….) directly paid to the grower,
cultivator.

If an expense is allowed on due basis in a particular year & in the subsequent year when the
expenditure is paid there is a default u/s 40A (3), the amount paid shall be treated as income of subsequent
years.

Section 40A(7) - Gratuity

(a) If employee has retired in current year: - gratuity paid, outstanding, provision - Always
Allowed
(b) Employee shall retire in future –

1] Only provision for gratuity – disallowed

2] Provision for gratuity (+) amount deposited in approved gratuity fund – allowed

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Section 43B
In case of mercantile assessees, following expenses are allowed only if the amount of expense is paid
upto the due date of filing returns u/s 139(1)

1] Payment to government (indirect taxes)

2] Interest on loan from bank, other financial institution, NBFC

3] Bonus, commission to employees

4] Leave salary

5] Employer’s contribution to various funds

6] Sum payable to Indian Railways for use of Railway’s assets

7] Sums payable to MSME, if paid beyond the time limit( Max 45 days if written agreement
otherwise 15 days) specified in Sec 15 MSME Dev Act, 2006. Deduction Not Allowed even if paid
upto due date u/s 139(1).

If these expenses pertaining to earlier years are paid in the current year, the amount disallowed
earlier shall now be allowed as deduction.

SPECIFIC DEDUCTIONS
1] Section 35AD [Not eligible as deduction under default regime u/s 115BAC (1A)]
1. All assessees engaged in eligible business.

• setting up and operating cold chain facilities for specified products

• setting up and operating warehousing facilities for storing agricultural produce

• laying and operating a cross country natural gas or crude or petroleum oil pipeline network for
distribution, including storage facilities being an integral part of such network

• building and operating a hotel of two star or above category, anywhere in India

• building and operating a hospital, anywhere in India with at least 100 beds for patient

• developing and building a housing project under a notified scheme for slum redevelopment or
rehabilitation framed by the Central Government or a state government

• production of fertilizer in India

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• setting up and operating a inland container depot or a container freight station notified or approved
under the custom act,1962

• beekeeping and production of honey and beewax

• setting up and operating a warehousing facilities for storing of sugar

2. Deduction = 100% of capital expenditure except land, goodwill, financial instruments.

Capital expenses incurred even prior to commencement are also eligible.

3. No depreciation allowable on the capital asset

4. The business is not formed by splitting up or reconstruction of existing business.

5. Plant & Machinery should be new. However, imported second hand plant & machinery is eligible upto
20% of second hand plant & machinery.

6. Payment of capital asset exceeding ₹ 10,000 should be as per section 40A (3)

7. Asset demolished, destroyed, discarded or transferred for which a deduction has been allowed

If any asset on which a deduction under section 35AD has been claimed and allowed, is demolished,
destroyed, discarded or transferred, the sum received or receivable for the same is chargeable to tax
under clause (vii) of section 28.

8. The asset in respect of which deduction has been claimed should be used in the specified business
for 8 years. If prior to 8 years it is used in any other business other than eligible business

PGBP income = Amount allowed as deduction (-) Notional depreciation for the
period the asset was used for eligible business

9. No deduction under section 10AA or Chapter VI-A under the heading “C.-Deductionsin respect of
certain incomes”. In other words, once the assessee has claimed the benefit of deduction under section 35AD for a
particular year in respect of a specified business, he cannot claim benefit under Chapter VI-A under the heading “C.-
Deductions in respect of certain incomes” or section 10AA, for the same or any other year and vice versa.

10. Where the assessee builds a hotel of two-star or above category & transfers the operation of the said
hotel to another person, the assessee shall be deemed to be carrying on the specified business of
building and operating a hotel. Therefore, he would be eligible to claim investment-linked tax deduction
under section 35AD.

11. Loss from eligible business can be set off against another eligible business (old / new). Unadjusted loss
can be carried forward u/s 73A. Such loss can, however, be carried forward indefinitely for set-off
against profits of the same or any other specified business but the assessee has to file return of income
on or before the due date of filling return of income under section 139 for carry forward of losses from
specified business

2. Depreciation - 32 read with rule 5

- Sec. 32(1)(i) depreciation for power units

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- Sec. 32(1)(ii) depreciation for other assessees

- Sec. 32(1)(ii a) additional depreciation for specified assessees
- Sec. 32(2) carry forward and set off of unabsorbed depreciation

Accounting Depreciation PGBP Depreciation

Depreciation calculated asset wise Depreciation calculated block wise Same
asset; same rate – 1 Block
On asset purchase the depreciation is calculated On the basis of date of put to use, depreciation is
proportionately allowed either full or half (if in the year of
purchase asset is put to use for less than 180 days)
In the year of sale depreciation is calculated upto No depreciation in the year of sale
the date of sale
Profit / Loss calculated for each asset sold Capital gain / loss calculated for entire block (in
the year in which either the block ceases to exist
or WDV becomes nil)

Format for Calculating Depreciation:

Opening WDV as on 1st April, 2020

(+) Actual cost of asset purchased during the P.Y.
Total
(-) Sales value of asset sold, demolished, discarded
WDV u/s 43(6) as on 31st March, 2021
(-) Normal Depreciation: - Half
Full
(-) Additional Depreciation: - Half
Full
st
Closing WDV as on 31 March, 2021

Conceptual Sums: - These are independent examples. M/s Pushpa, manufacturer, has provided details of its
blocks for the year 2024-25. Amounts Rs in Lakhs
P & M @15% P & M @15% P & M @15% P & M @15% P & M @15% Remarks
Particulars Case (a) Case (b) Case (b) Case (c) Case (d)
Opn WDV (3 Mch) 1000 1000 1000 1000 1000 Both Mchs X & Y
Purchase ( Mch X) 200 200 200 200 200 are purchased on
Purchase ( Mch Y) 600 600 600 600 600 15th May 2024. In
Case (a) both Mchs
2 Mchs sold (from Opn) 650 800 1250 1950
are put to use on
All Mchs sold 1450 same date. In other
cases Mch Y is put
to use on 15th Oct.

Important Points about Depreciation:

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1. Power units method of depreciation in optional – SLM [Rule 5(1A), Appendix IA] or WDV [Rule 5(1),
Appendix I]. This option has to be exercised at the time of filing return in the first year of commencement
of business. The option exercised cannot be changed.
2. For other assessees only WDV [Rule 5(1), Appendix I] block method is applicable.
3. Depreciation is allowable only on Tangible Assets (building, plant, machinery, furniture) and Intangible
Assets (patent, trademark…….). As per sec. 43(3) plant includes books, ships, vehicles, surgical
equipments, but does not include livestock, human body, and tree bushes.
4. The asset may be used actively or passively for the business during the relevant previous year. If
asset is used partly for the business, proportionate depreciation is allowed.
5. Half depreciation is allowed if in the year of purchase the asset is put to use for less than 180 days.
6. If assessee has acquired building on lease and he incurs capital expenditure for extension, renovation…….
As per explanation 1 to section 32, he is deemed to be owner of such structure & eligible for depreciation.
7. Depreciation claimed is mandatory as per explanation 5 to section 32.
8. Additional depreciation @ 20% on Cost [Sec 32(1)(iia) [Not eligible as deduction under default regime
u/s 115BAC (1A)]
(a) It shall be allowed to a manufacturer for new – plant & machinery _ used for production – except – 100%
(b) Where 50% additional depreciation is allowed the balance 50% shall be allowed in the immediately
succeeding A.Y. [As per 3rd proviso to section 32(1) (iia)
(c) Year in which additional depreciation is allowed - Only in the first year in which the new asset is acquired
& installed. The additional depreciation shall also be deducted while calculating closing WDV.
(d) Higher additional depreciation @35% (instead of 20%) in respect of the actual cost of new machinery or
plant (other than a ship and aircraft) acquired and installed during the period between 1st April, 2015 and
31st March, 2020 by a manufacturing undertaking or enterprise which is set up in the notified backward
areas of these specified States, namely, Andhra Pradesh, Telengana, West Bengal and Bihar. However, in
respect of new plant and machinery acquired and installed in such notified backward areas on or after
1.4.2020, additional depreciation is not allowable at the enhanced rate of 35%. Additional depreciation will
be allowable@20% (if put to use for more than 180 days in that P.Y.) and @10% (if put to use for less than
180 days in that P.Y.). However, in respect of new plant and machinery acquired and installed in such notified
backward areas in the P.Y.2019-20 and put to use for less than 180 days in that year, the balance additional
[email protected]% is allowable in the P.Y.2020-21
(e) However, in respect of new plant and machinery acquired and installed in such notified backward areas in
the P.Y.2019-20 and put to use for less than 180 days in that year, the balance additional
[email protected]% is allowable in the P.Y.2020-21 (i.e., A.Y.2021-22)

9. General Rates: - In case rates of depreciation not given in the sum, apply following rates:
Land & Building - 10%
Furniture - 10%
Plant & Machinery - 15%
Motor Car - 15%
Computer including Software - 40%
Books (annual / other than annual publication) - 40%
Intangible Assets - 25%
❖ Additional Depreciation Rates: - 20%

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❖ Special Points w.r.t. Actual Cost & WDV while computing depreciation:

1. Actual cost u/s 43(1) – General meaning in the block the Actual Cost of the Asset acquired means
the cost that is capitalized as per accounting principles i.e. purchase cost (+) expenses incurred till the
asset is put to use [freight, duties & tax of which credit is not allowed, installation expenses] (-)
that portion of cost which is met by some other person [government grants, subsidy].
However, the actual cost for some special cases has been listed by way of explanation to
section 43(1). Similarly, the WDV in such cases is listed by way of explanation to section 43(6).

❖ Special cases of Actual Cost / WDV:

[A] Where some benefit has been derived: – Actual Cost = Actual Cost (-) Benefit Derived

1. Asset acquired for scientific research now used for business

Actual Cost = nil [explanation 1 to section 43(1)]
2. Capital asset on which deduction allowable u/s 35AD: – Actual Cost = nil [explanation 13 to section
43(1)]
However, if the asset is transferred to any other business within 8 years, the amount treated
as income u/s 35AD shall be treated as actual cost i.e.
Actual Cost = Actual Cost - Depreciation allowable……. [Proviso to explanation 13]
3. Asset acquired outside India later on brought into India.
Actual Cost = Actual Cost – Depreciation Allowable [Explanation 11]
4. Building previously used by the assessee brought into business.
Actual Cost = Actual Cost – Depreciation Allowable [Explanation 5]
5. Exempt business now becomes taxable
Actual Cost = Actual Cost – Depreciation as per books [Explanation 6 to Section 43(6)]
6. Credit allowed of duties & taxes: – Actual Cost excluding such duties & taxes
[Explanation 9 to Section 43(1)]
7. Subsidy / Grant / Re-imbursement by whatever name called
Actual Cost = Actual Cost – Subsidy / Grant / Re-imbursement [Explanation 10]

[B] Tax Evasion Cases

1. Second hand asset acquired Actual Cost determined by assessing officer with previous approval
of joint commission [Explanation 3]
2. Asset sold and Re-acquired
Actual Cost = Lower of WDV at the time of sale & reacquisition price [Explanation 4]
3. Asset sold and reacquired by way of lease / hire/ otherwise
Actual Cost = WDV at the time of sale [Explanation 4A]
4. Payment of the cost of asset exceeding ₹ 10,000 to a person on a day shall be excluded if the
payment is not by way of A/c payee cheque / draft / prescribed electronic medium.

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[C] Where asset is acquired under such circumstances which is not treated as transfer in the hands of the
transferor under the head Capital Gains, the Actual Cost / WDV in the hands of the transferee = the
Actual Cost / WDV in the hands of transferor had he not transferred.

1. Asset acquired by way of gift, will, inheritance, [Explanation 2]

2. Asset transferred by 100% holding company to its subsidiary or vice-versa [Explanation 6]
[Explanation 2 to Section 43(6)]
3. Asset transferred by way of amalgamation [Explanation 7 / Explanation 2]
4. Asset acquired by way of demerger [Explanation 7 / Explanation 2A & 2B]
5. Asset acquired under corporatization of stock exchange [Explanation 12 / Explanation 5]
6. Transfer of asset in the course of conversion of company to LLP [Explanation 2C to Section
43(6)]
7. Succession of business [Explanation 1 to Section 43(6)]

❖ Note: - In above cases 3,4,5,6 & 7 the depreciation of the year in which such amalgamation, demerger or
succession takes place shall be apportioned between the predecessor and successor in the ratio of days for
which the asset was held by each of them. [Proviso 6 to Section 32(1) (ii)]

[Sec 32(2)] Unabsorbed Depreciation (applicable from A.Y. 02-03): -

The provisions in effect are as follows:
• Since the unabsorbed depreciation forms part of the current year’s depreciation, it can be set off against any
other head of income except “Salaries”.
• The unabsorbed depreciation can be carried forward for indefinite number of previous years.
• Set off will be allowed even if the same business to which it relates is no longer in existence in the year in
which the set off takes place

Order of Set-Off:
Current Depreciation, Capital Scientific Research Exps, Family planning exps
Brought Forward Business Loss
Brought Forward Depreciation, Capital Scientific Research Exps, Family planning exps
Current depreciation to be deducted first - The Supreme Court, in CIT v. Mother India Refrigeration (P.) Ltd. [1985] 23
Taxman 8, has categorically held that current depreciation must be deducted first before deducting the unabsorbed carried
forward business losses of the earlier years in giving set off while computing the total income of any particular year.

3] Section 30: Rent, rate, repairs,insurance of building:-

• Building is used for the purpose of business. If it is used partly for business and for other purpose
proportionate deduction as per sec.38(1).

• For owner only current repairs are allowed under this section. Accumulated would be allowed under
sec.37(1). For tenant both current and accumulated would be allowed under this section.

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However, as per explanation to sec. 30 capital repairs shall not be allowed as deduction.

• Deduction is allowed for active as well as passive use.

4] Section 32AD – Not Available from PY 2020-21

Deduction for Investment Allowance: -

a) Deduction available to all assessees engaged in manufacturing and has set up

industrial undertaking on or after 1st April, 2015 in notified backward areas of Andhra
Pradesh, Bihar and Telengana & West Bengal.
b) The assessee has acquired and installed eligible plant & machinery (same as additional
depreciation) on or after 1st April, 2015 upto 31st March, 2020
c) Deduction = 15% of actual cost
d) The assessee should not sale or transfer [except in case of amalgamation / demerger /
business reorganisation] off the eligible plant & machinery within a period of 5 years
from, the date of its installation. If he does so, the amount is allowed as deduction
under this section treated as PGBP income [Module 2 Pg No. 4.185]

5] Eligible donations under PGBP

a) Section 35CCA: - Contribution for rural development and urban poverty education.
b) Section 35CCC: - Notified agricultural extension project – 150% [Not eligible as deduction under default regime
u/s 115BAC (1A)]
c) Section 35CCD: - Expenditure by companies on notified skill development project – 150%

6] Section 35D: - Preliminary Expenses

Eligibility – Assessee is an Indian Company or Resident Non-Corporate Assessee
Expenditure is incurred before commencement of business or in connection with extension of existing
undertaking
Eligible Expenses

a) Expenses on preparation of feasibility / project report, conducting market survey or

engineering services. These expenses are eligible only if the work is carried out by the assessee
himself or by a concern approved by the Central Board of Direct Taxation.
b) Legal Expenses
c) Applicable for company assessee only
i) Legal charges for drafting/printing MOA/AOA
ii) Fees for registration of company
iii) Expenses in connection with issue of shares / debentures like underwriting commission,
brokerage, and charges for drafting, printing & advertisement of prospectus.

Maximum Limit

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a) For Company – Higher of 5% of cost of project or 5% of capital employed

b) Other assessees – 5% of cost of project.
➢ Cost of project means aggregate of long term asset land, building, plant & machinery, leasehold
property, furniture & fittings, railway slidings.
➢ Capital Employed means aggregate of long term liabilities i.e. share capital [issued debenture,
borrowing from ICICI, IFCI, repayable in a period of not less than 7 years.

Qualifying Amount: - Lower of maximum limit or eligible expenses

Deduction: - 1/5th of qualifying amount allowable from the year of commencement of business.

6] Section 35 – Scientific Research

For Payment made to outsider – (Payment may or may not be related to business of the
assessee): [Not eligible as deduction under default regime u/s 115BAC (1A)]
In- House Research - (Payment should be related to business of the assessee) [Allowed to
both category of Assessees]

100% of the
Expenditure on Scientific research

expenditure
incurred (other
than
expenditure
on land)

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In case Scientific Research expenditure remains unabsorbed: -

1] Unabsorbed capital scientific research expenditure: - Treated as unabsorbed depreciation

2] Unabsorbed revenue scientific research expenditure: - Treated as business loss

3] Asset used for scientific research after the research is over: -

a) Brought into business: - The asset is added to block at ₹ Nil. [Explanation to section 43CA]

b) Sold / transferred: - Amount realized to the extent of deduction allowed shall be treated as PGBP income
u/s 41(3). In case of excess limit realized the excess shall be considered under the head Capital Gains.

Deduction for Licence Fees / Spectrum Fees paid by Telecom & Co.

Treatment of asset of power unit under SLM depreciation option.

7] Section 35DDA
Amortisation of Expenses on amount of VRS Deduction = 1/5th of VRS paid

8] Section 36(1)
Other Deductions

1. Insurance premium on stock in trade.

2. Insurance premium on life of cattle.
3. Insurance premium on health of employee – Amount NOT PAID IN CASH
4. Interest on borrowed capital deduction is allowable irrespective of whether loan is taken from banks or private
sources. Even a high rate/abnormal rate of interest subject to section 40A (2).
5. Employer’s contribution to provident fund (Approved).
6. Employer’s contribution to pension fund u/s 80CCD – deduction upto 14% of salary [Salary = Basic + DA(FP) + %
Commission]
7. Employer’s contribution to welfare funds – deductions allowed provided amount deposited with due date of
relevant act.
8. Bad debts in respect of loan or debts considered as income as per relevant ICDS.
9. Allowance for dead animals. Deduction = Cost of Acquisition (-) amount realized on sale
10. In respect of ZCB: Deduction = Amortized portion of debuture
11. Family planning Expenses – only for companies. Revenue exp. – full & Capital – 1/5th over 5 yrs.
12. security transaction tax / commodities transaction tax in respect of trading which is part of PGBP.(Sec 36(1)(xv))

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13. Deduction for commodities transaction tax paid in respect of taxable commodities transaction[sec. 36(1)(xvi)]

9] Section 37

Residuary Deduction
This section allows deduction in respect of all those expenses that are not covered in section 30 to
section 36 and which satisfies our 4 golden rules. Hence all business related revenue expenses can be claimed as
deduction if they are not specifically covered under earlier sections.

Important Points
1. Expenditure incurred on Keyman insurance policy: CBDT Circular no. 762/1998 dated 18.02.1998 clarifies that the
premium paid on the Keyman Insurance Policy is allowable as business expenditure.
2. As per explanation 1 to section 37(1) any expenditure in the nature of an offense / prohibited by law is
disallowed. W.r.t. this circular no. 5 / 2012 disallows expenses incurred by pharmaceutical companies for
providing freebees to medical practitioners.
3. As per explanation 2 to section 37(1) expenses on CSR activities is not allowed, even though laid out as per
Companies Act compulsorily shall be disallowed u/s 37(1). However, any CSR expenditure covered u/s 30 to 36
shall be allowed under the respective section.
4. Expenses in the nature of advertisement representing contribution to political parties in the form of
advertisement in any sovereign / broachers / pamphlet shall be disallowed section 37(2B).

10] Section 43A

Changes in Rate of Exchange

If any asset is acquired from foreign country by availing loan in foreign currency, any fluctuation in the
foreign exchange rates at the time of repayment of such loan or part thereof, the increase / decrease in the
liability owing to such foreign exchange fluctuation shall be adjusted in the cost of the asset u/s 43(1) [for calculating
depreciation], section 35(1)(iv) [capital expenditure on scientific research], section 36(1)(ix) [capital expenditure on
family planning] and cost of non-depreciable capital asset falling u/s 48.

11] Section 40(b)

Deduction for Interest & Remuneration Allowable to a Firm / LLP

1. Interest / Remuneration shall be allowable if such payment is authorized in partnership deed, from the date it is
authorized.
2. Interest is allowable upto maximum 12% p.a. on any amount due to the partner [capital, loan, advance……….]
3. Remuneration – Working partners only upto
• Upto ₹ 6,00,000 of Book Profit ₹ 3,00,000 or 90% Book Profits
• On remaining book profit 60% of such amount

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➢ Book profit means PGBP income before remuneration after allowing interest & unabsorbed depreciation.
4. As per explanations to section 40(b) w.r.t. interest
Kisko diya ye mat dekho
Kiske liya ye dekho

12] Section 40(ba)

Disallowance for AoP / BoI

No deduction is allowable in respect of interest / remuneration payable by AoP / BoI to its members. In
case AoP /BoI pays as well as receives interest the net shall be disallowed.
As per explanation ‘interest’
Kisko diya ye mat dekho
Kiske liya ye dekho

13] Section 41

Deemed Profits

Refund / Recovery / Reimbursement of any expenditure / loss earlier allowed as deduction shall be
treated as income under PGBP in the year of receipt.

Section 41(1) General Rule

Section 41(2) Balancing charge in case of power units – SLM method
Section 41(3) Sale of asset acquired for scientific research [same principle applies for family
planning]
Section 41(4) Recovery of bad debts
Section 41(5) As per this sub-section loss from business pertaining to year of discontinuance
can be set off even after 8 years against income u/s 41

14] Section 44AA

Maintenance of Books

A] Specified person

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- All 3 years - specified books - Yehich

- 1 or 2 years

B] Other Business / Non – Specific Profession Koibhich

- Assessees covered Such books as would

u/s 44AD, ADA, AE, B, BB…….. enable the assessing officer

- 1 or 2 years compute (incomplete records)

- 3 years - No Books Nahich

Books to be maintained at principal place of business upto minimum 6 years from the end of relevant
A.Y.

Tax Audit & Presumptive Income under PGBP – Refer Module

Some Other points about PGBP income:

• In general no distinction is required between business and profession , since major provision under law
(except a few) are common for both. However, there is conceptual difference between business and
profession. Profession is an activity which requires application of personal skills acquired through
education or training.

• PGBP income may be in cash or in kind and form legal or even illegal sources.

• Generally, Contractual receipt form part of PGBP income; however if there are voluntary receipt or
perquisites or benefits arising in the course of business or profession it shall also be taxable.

• Business would cover any activity which requires planning, risk taking, and application of physical/ mental
efforts. It may be a regular series of transaction or even a single transaction/ activity.

• Profit motive is not necessary.

Method of Accounting (Section 145)

Section 145 of the Income-tax Act, 1961 provides for the method of accounting. Section 145(1) requires income
chargeable under the head “Profits and gains of business or profession” or “Income from other sources” to be computed
in accordance with either the cash or mercantile system of accounting regularly employed by the assessee , subject to
the provisions of section 145(2).

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However, as per section 145B, certain income would be taxable in the following manner:
(i) interest received by an assessee on compensation or on enhanced compensation, shall be deemed to be the
income of the year in which it is received. [Such income is taxable under the head “Income from other sources”]
(ii) the claim for escalation of price in a contract or export incentives shall be deemed to be the income of the
previous year in which reasonable certainty of its realisation is achieved.
(iii) income referred to in section 2(24)(xviii) i.e., assistance in the form of a subsidy or grant or cash incentive or
duty drawback or waiver or concession or reimbursement, by whatever name called, by the Central Government
or a State Government or any authority or body or agency in cash or kind to the assessee shall be deemed to
be the income of the previous year in which it is received, if not charged to income tax for any earlier previous
year.

Under section 145(2), the Central Government is empowered to notify in the Official Gazette from time to time, income
computation and disclosure standards (ICDSs) to be followed by any class of assessees or in respect of any class of
income.
Accordingly, the Central Government has, vide Notification No. S.O.3079(E) dated 29.9.2016, notified ten ICDSs to be
applicable from A.Y.2017-18.

Section 145A provides that for the purpose of determining the income chargeable under the head “Profits and gains
of business or profession:
(a) the valuation of inventory shall be made at lower of actual cost or net realizable value computed in accordance
with notified ICDS i.e., ICDS II “Valuation of inventories”.
(b) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount
of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to the
place of its location and condition as on the date of valuation.
(c) inventory being securities not listed or listed but not quoted on a recognised stock exchange with regularity from
time to time shall be valued at actual cost initially recognised in accordance with the notified ICDS i.e., ICDS
VIII: Securities.
(d) inventory being listed and quoted securities, shall be valued at lower of actual cost or net realisable value in
accordance with notified ICDS i.e., ICDS VIII: Securities. Such comparison of actual cost and net realisable value
shall be done category-wise.

• Some special income chargeable under the head PGBP:-

a) Income from business or profession – General rule
b) Compensation due or received by a person managing the affair of company or a person holding
agency or a person carrying on business: - In connection with termination of such management/
agency/ contract of his business or modification of its terms and conditions. – Further compensation
received in connection with vesting in the govt. the rights of management of any property or
business.
c) Income from specific service performed for its members by a trade, profession or business .

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d) Export incentives- profit on sale of import license, cash assistance against export, drawback of
customs duty (duty drawback) profit on sale of DEPB( Duty Entitlement Paas Book).
e) Sum received by its partner from the firm on account of salary, bonus, commission, remuneration or
interest [ subject to the limit u/s 40(b) ]. However, share in profit received by a partner from its firm is
exempt u/s 10(2A).
f) Non compete fees – any sum received or receivable under an agreement or not carrying out any
activity in relation to business or profession or not sharing any business related rights.
g) Sum received under key man insurance policy.
h) Conversation of Stock in trade into capital asset. For this purpose FMV of SIT on the date of
conversation shall be treated as PGBP income.
i) Sum received on sale of capital asset on which deduction has been claim u/s 35AD.

Meaning of Speculative Transaction:

“Speculative transaction” means a transaction in which a contract for the purchase or sales 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 [Section 43(5)].
Where any part of the business of a company consists in the purchase and sale of the shares of other companies,
such a company shall be deemed to be carrying on speculation business to the extent to which the business consists
of the purchase and sale of such shares.
However, this deeming provision does not apply to the following companies –
(i) A company whose gross total income consists of mainly income chargeable under the heads “Interest on
securities”, “Income from house property”, “Capital gains” and “Income from other sources”;
(ii) A company, the principal business of which is –
(a) the business of trading in shares; or
(b) the business of banking; or
(c) the granting of loans and advances.
Accordingly, if these companies as mentioned above carry on the business of purchase and sale of shares of other
companies, they would not be deemed to be carrying on speculation business. [Explanation to section 73]

Transaction not deemed to be speculative transaction:

The following forms of transactions shall not be deemed to be speculative transaction:
(i) Hedging contract in respect of raw materials or merchandise: A contract in respect of raw materials or merchandise
entered into by a person in the course of his manufacturing or merchandising business to guard against loss through
future price fluctuations in respect of his contracts for the actual delivery of goods manufactured by him or merchandise
sold by him; or
(ii) Hedging contract in respect of stocks and shares: A contract in respect of stocks and shares entered into by a dealer or
investor therein to guard against loss in his holdings of stocks and shares through price fluctuation; or

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(iii) Forward contract: A contract entered into by a member of a forward market or stock exchange in the course of any
transaction in the nature of jobbing or arbitrage to guard against any loss which may arise in the ordinary course of his
business as a member; or
(iv) Trading in derivatives: An eligible transaction carried out in respect of trading in derivatives in a recognized stock
exchange.
(v) Trading in commodity derivatives: An eligible transaction in respect of trading in commodity derivatives carried out in a
recognised association recognised stock exchange, which is chargeable to commodities transaction tax under Chapter
VII of the Finance Act, 2013.
However, the requirement of chargeability of commodities transaction tax is not applicable in respect of trading in
agricultural commodity derivatives.

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