5.

Profit and Gains of Business or Profession

CHAPTER OUTLINE
Section

Particulars

28

Chargeable under the head business or profession

30

Rent, rates, taxes, repairs and insurance for buildings

31

Repairs and insurance of machinery, Plant and Furniture

32

Depreciation

32 (1)(iia)

Additional Depreciation

32 (2)

Set-off and Carry Forward of unabsorbed depreciation

33 AB

Tea Development Account

33 ABA

Site Restoration Fund Account

35

Expenditure on Scientific Research

35 A

Expenditure on acquisition of Patent Right

35 ABB

Expenditure for obtaining Telecommunication License

35 AC

Donation for eligible project

35 AD

Investment linked tax incentive for specified business

35 CCA

Donation for Rural Development

35 D

Preliminary Expenses

35 DD

Expenditure in case of amalgamation

35 DDA

Expenditure incurred under voluntary retirement scheme

35 E

Expenditure on prospecting for certain minerals

36 (1)

Other Deduction

37 (1)

General Deduction

40 (a)

Expenses not Deductible

40 (b)

Disallowance for partnership firm

40 A(2)

Payment to specified persons

40 A(3)

Cash Payment in respect of expenditure exceeding Rs. 20,000

43 B

Deduction based on actual payment

44 AA

Maintenance of accounts

Method of Computation: Net Profit as per profit and loss account

Add: - Items debited to P&L A/c but not deductible
Items chargeable as business/professional
Income but not credit to P&L A/c
Less: - Items credited to P&L A/c but not taxable
Under this head of income
Items not debited to P&L A/c but
Allowable as deduction

Taxable Income from Business/ Profession

Expenditure has to be of revenue nature, capital receipts are not chargeable to tax
Income arising on redemption of preference shares, forfeiture equity shares or cancellation debentures is capital
receipt and hence not chargeable to tax
Method of accounting: Any Accounting method ( Cash or mercantile) is valid to be followed
Profits earned before incorporation of the company shall be taxable in the hands of promoters
Income earned on winding up process shall be taxable in the hands of the companyl
Legal V/s illegal business taxable taxable
Real V/s notional income revaluation reserves not liable to tax
Expenditure has to be incurred for the business purposes
The burden of proof to justify that the expenditure is for business purposes lies
No deduction in respect of discontinued business

Admissible Deduction [Section 30 - 37 ]

Rent, rates, repairs and insurance for buildings Section 30: Repairs and insurance of machinery, Plant and Furniture Section 31: The expenditure incurred on current repairs (not being capital expenditure).

Depreciation Section 32: In respect of buildings, machinery, Plant or Furniture, being tangible assets and in respect of intangible assets such as
know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar
nature, depreciation shall be allowed.
(i)
Asset must be owned by the assesses.
(ii)
The assesses must use (Active or Passive) the asset for the purpose of carrying on the business or
profession.
(iii)
In case of personal and official use proportionate depreciation shall be allowed
(iv)
The asset must be used during the relevant previous year.
(v)
The asset in respect of which depreciation is claimed should fall within the eligible classification of assets.
(vi)
Depreciation shall be allowed on the written down value (WDV)(SLM only for power generation companies)
(vii)
Actual Cost of asset: Expenses relating to cost of asset, cost of putting the asset in present location
(i.e. transportation expenses, transit insurance, octroi, loading unloading expenses, etc) and the cost of
putting the asset in usable condition (i.e. installation expenses, erection, testing and commissioning, initial
repair, etc.) shall form part of cost even when such expenses are paid in subsequent years.
Note : Companies are required to maintain separate books of accounts for tax depreciation and accounting
depreciation

Block of Assets Section 2(11): It means a group of assets falling within class of assets comprising of
(i)
Tangible assets being buildings, plant & machinery or furniture.
(ii)
Intangible assets being know-how, patents, copyrights, trademarks, licenses, franchises or any other business
or commercial rights of similar nature like goodwill
In respect of which the same percentage of depreciation is prescribed.
It may be noted that the depreciation is not allowed on the following assets as they are not following within the
meaning of tangible and intangible asset:
- Land
- Livestock
- Intangibles acquired upto 31.03.1998

Rates of depreciation for various blocks of assets: Types of Assets

Building :
Residential
(I)
Non Residential
Temporary Structure
(II)
Furniture & Fittings
(III)
Plant & Machinery :
General rate of Plant & machinery
Books owned by assesses carrying on a profession
(annual publication) and books owned by a library
Motor Car, buses, lorries etc. used for hire
Motor car used for Business & Profession
Computer
Ships
(IV)
Intangible Assets

Rate of Depreciation
5%
10 %
100 %
10 %
15 %
100 %
30 %
15 %
60 %
20 %
25 %

Period of use:
1. Asset Acquired during the previous year and used for a period of less than 180 days - depreciation allowed for
half the period
2. Asset Acquired during the previous year and used for a period of 180 days and more - depreciation shall be
allowed for complete year

Proportionate Depreciation: -

Where in any previous year, there is :

(i)
Succession of a proprietary concern / partnership firm by a company;
(ii)
Succession of any business e.g. transfer by HUF to member;
(iii)
Amalgamation / Demerger of a company;
(iv)
Conversion of private company / unlisted public company into limited liability partnership by satisfying
conditions of section 47 (xiiib) [w.e.f. A.Y. 2011-12]; and
(v)
Amalgamation or demerger of co-operative banks.
The deduction shall be apportioned between successor and predecessor shall not exceed the amount of depreciation
as if such succession / amalgamation / Demerger did not take place.

Exe. 2. : - Computation of Depreciation

(A) Anil is owner of two buildings which are used by him for his own business. The written down value of these
building is Rs. 5,00,000 on 1.4.2013 and the rate of depreciation allowable on this block is 10 %. He
purchased another building on 1.12.2013 for Rs. 2,50,000 and sold one of the two old building on 1.3.2014 for
Rs. 9,50,000

Compute the allowable depreciation for the assessment year 2014-15.

(B) What would have been the difference had the building been sold for Rs. 3,50,000?

Additional Depreciation Section 32(1)(iia): (1) Eligible Asset: a) Ships,

b) Aircraft
c) Any plant and machinery installed in office premises or residential accommodation or guest house
(2) Additional Depreciation: 20 % of actual cost of machinery or plant.
(3) Condition to be satisfied: (a) It is in addition to the normal depreciation
(b) It is allowed to all the assessees
(c) It is allowed in the year it is put to use

Expenditure on Scientific Research Section 35 : (1) In case of contribution to outsiders

Contribution to

Weighted deduction

An approved university, college or an approved

association which has as its object the undertaking of
research in social sciences or statistical science
related or unrelated to the business of assesses [sec.
35(1)(iii)]
An approved university, college or an approved
association which has as its object the undertaking of
research in sciences other than social sciences or
statistical science related or unrelated to the business
of assesses [sec. 35(1)(ii)]
Donation is given to an Indian company for scientific
research, which is registered in India, main objective is
scientific research and is approved by the authorities
[Sec. 35(1)(iia)]
Donation given to National Laboratory, Indian institute
of technology or an approved research association for
the purpose of conducting scientific research related
or unrelated to the business of assesses [Sec. 35(1)
(ii)].

125 %

175%

125 %

200 %

General Deduction
(2) Expenditure incurred by the assesses for his business: (A) In all cases of in-house research 100 % of the following expenses being
Any revenue expenditure and capital expenditure (other than cost of acquisition of any land) on
scientific research incurred during the year; and
Any expenditure incurred during the 3 years immediately preceding the date of commencement of
business, being salary to an employee; or purchase of materials used in such scientific research or
any capital expenditure (except cost of acquisitions of any land) shall be allowed as deduction and
the deduction can be claimed in the year of commencement of business.
(B) In case of companies in specified business (in house) Section 35(2AB)
This assessee is a company

Companies engaged in the business of bio-technology; or any business of manufacture or production

of any article or thing, not being an article or things specified in the list of the Eleventh Schedule can
claim weighted deduction under this section.
200 % of any (Revenue and Capital) expenditure (other than expenditure on cost of land building);
To claim this deduction assessee is also required to fulfill the necessary conditions as are prescribed
from time to time by the government

Exe. 5. :- Expenditure on Scientific Research [Section 35]

The following are the details of Vicks India Ltd. engaged in the business of pharmaceuticals products for the year ending
31.03.2014 :
Rs. In Lakhs
a. Sales for the year
500
b. Manufacturing & Administration Expenses (including depreciation
on research equipments Rs. 5 L)
105
c. Charges paid for acquiring know-how- 10.04.2014
25
d. Research & Development for in-house training
(i)
Research Equipments acquired during the year
60
(ii)
Remuneration to Scientists
10
(iii)
Expenses for research and development
30
e. Contribution to approved scientific research institution
10
Compute the taxable income of the company for the Assessment Year 2014-15.
Sale of Scientific research asset [Section 41(3)]: Refer additional sums provided with the notes

Expenditure for obtaining Telecommunication License Section 35ABB: (1) Condition for allow ability: (a) Expenditure should be capital in nature.
(b) It should be incurred for the purpose of acquiring any right to operate telecommunication services.
(c) Payment should have been actually made to obtain a license.
(d) It may be incurred either before commencement of business or any time during the previous year.
(2) Amount of Deduction =

Amount Paid
.
Remaining period of license

Refer additional sums provided with the notes

Preliminary Expenses Section 35D: (1) Applicability: - The assesses should be an Indian company or a Non-Corporate Resident assesses.
(2) Purpose of Preliminary expenses: -

Time of Incurring Expenses

Before commencement of business
After commencement of business

Purpose of Expenses
For setting up of any undertaking or business
In connection with extension of an undertaking or in
connection with setting up a new unit.

(3) List of specified expenditure [Section 35D(2)] Expenditure incurred in connection with: (a) Preparation of feasibility repost, project report or for conducting market survey or any other survey or
engineering services relating to the business of the assesses.
(b) Legal charges for drafting any agreement for setting up or for conduct of any business.
(c) Where the assesses is a company, the expenses incurred for :
Legal charges for drafting and printing Memorandum and Articles of Association;
Fees for registering the company under the Companies Act, 1956;
Issue of shares or debentures of the company, underwriting commission, brokerage and charges
for drafting, typing, printing and advertisement of the prospectus.

(4) Maximum permissible expenditure : [Section 35D(3)]

(a) In case of company, 5% of cost of project or 5% of capital employed, (whichever is higher).
(b) In case of any other assessee, 5% of the cost of project.
(5) Amount of deduction: - The maximum permissible expenditure or actual expenditure (whichever is lower)
will be allowed as a deduction in 5 equal installments.
(6) Capital employed = Issued share capital + debentures + long term borrowings.
(7) Cost of the project means actual cost of fixed assets like land, buildings, leaseholds, plant and machinery,
furniture and fittings and railway sidings as shown in the books of the assesses on the last day of the previous
year in which the assesses commences business.
(8) Audit Report: - In case of non-corporate assesses, the assesses is required to furnish the audit report along
with the return of income for the first year.

Expenditure incurred under voluntary retirement scheme Section 35DDA: Any assesses incurs expenditure for payment of sum under voluntary retirement scheme.
Deduction shall be allowed of such expenditure in five equal annual installments starting from the P/Y in which
amount paid.

Expenditure in case of amalgamation or Demerger Section 35DD: Indian company shall be allowed deduction of such expenses in five installments for five years starting from the
year in which amalgamation takes place

Other Deduction Section 36(1): Nature of Expenditure: (1) Insurance premium on risk of damage or destruction of stocks / Stores used in business.
Deduction allowable only in the year of payment.
(2) Insurance premium on life of cattle owned by a member of a primary co-operative society.
Deduction will be allowed only in the year of payment.
(3) Insurance premium paid on health of employees.
Premium can be paid by any mode other than cash under in approved scheme of General insurance
Corporation of India or IRDA.
(4) Bonus or commission paid to employees
Allowable as deduction only if such sum is not payable as profit or dividend.
Payment shall be made on or before due date of filing return. [Section 43B].
(5) Interest paid on borrowed capital
Money should be borrowed for purpose of business. Interest on proprietor capital is not allowed.
(6) Employers contribution to recognized PF or Approved Superannuation Fund
The payment shall be made on or before due date of filing return. [Section 43B]
(7) Contribution to approved gratuity fund created under irrevocable trust for the benefit of the employee
The payment should be made on or before the due date of filing return of income.
(8) Contribution from employees towards welfare fund accounts (like contribution towards PF, ESIC, etc)
The remittances must be made on or before the due date under the relevant Act for the relevant fund.
(9) Allowance is respect of dead or permanently useless animals which were used for the purpose of business.
The animals shall not be held as stock-in-trade.
Amount of deduction = Actual cost of animal Amount realized on sale-of the animal or their carcasses.
(10)Bad debts (excluding provision for bad debts)
The debt must be incidental to the business.
Such debt should be revenue in nature.
It must have been taken into account in computing the income of the assesses.
The bad debt must have been written off in the books of the assesses.
The business in which such debt is incurred should be continued during the previous year.
(11)Promoting family planning amongst employees. (only for company assesses)
Revenue expenditure is fully allowed as deduction.
Capital expenditure incurred will be allowed in 5 years in equal installments commencing from the previous
year in which it was incurred.

General Deduction Section 37: -

(i)
(ii)
(iii)
(iv)
(v)

The expenditure should have been incurred wholly or exclusively for the purpose of the business or
profession.
The expenditure not being in the nature of personal expenditure of the assesses.
Expenditure should not be of Capital Nature.
The expenditure should have been incurred during the P/Y.
It should not be covered by Section 30 to 36.

Note: (1) Any expenditure incurred by an assesses for any purpose, which is an offence, or which is prohibited by law
shall not be deemed to have been incurred for the purpose of business or profession and no deduction shall
be allowed in respect of such expenditure.
(2) Penalty for infraction of any law not deductible.
Example: - Penalty under Sales Tax Act, Excise Act etc. are also not allowable as deduction.
(3) Penalty in nature of compensation Allowable as deduction.
Example: - Penalty for Breach of Contract Allowable as deduction since there is no infraction of law.
(4) Interest paid under Income-tax act and Wealth tax act Not allowable.
(5) Interest paid under any other law allowable as a deduction if interest is compensatory in nature. If interest is in
nature of penalty then no deduction is allowable.
Examples: - Penal interest paid to bank is allowable as deduction since penal interest is payable as per the
agreement between banker and borrower. There is no infraction of law.
(6) Interest on loan taken to pay the income tax is not allowable as deduction.

Note: as per Section 38: If any building, machinery, plant or furniture (or other expenditure) is not exclusively used for business or
profession, the deductions shall be restricted to such proportion as determined by assessing officer.

Expenses not Deductible Section 40(a)(i):

Nature of expenditure
Any sum chargeable under this act other than salary is payable to any person outside India or a foreign company
(FC) or a non resident non corporate in India
1. Amount paid has to be taxable in the hands of the payee in India, only than this section shall be applicable
2. Three situations to understand

Tax deducted for the period April to Feb and

st
deposited till 31 March
TDS due for March paid till 30

th

April

All other situations

Deduction allowed in
the previous year ended
on 31st March
Deduction allowed in
the previous year ended
on 31st March
Allowed in the year of
payment

Deductions not allowed as per Section 40(a)(ia)

Payments made to residents (other than

salary)
Tax deducted from April to march and paid till
return filling date

Deduction
allowed in the
previous year
ended on 31st
March

Any other situation

Deduction
allowed in year
of payment

Deductions not allowed under Section 40(a)(iii)

Salary if payable to any person outside India or to a non-resident non-corporate in India
This section of disallowances get attracted only if TDS on salary is not deducted and not paid to government by
the due date (Limited scope)

Expenses not allowed as deductions under Section 40(a)

Income tax
Wealth Tax
Tax on non monetary perquisites

Payment to specified Persons Section 40A(2).

If payment of expenditure has been made to specified persons.
AO may disallow so much expenditure as he consider excessive or unreasonable.
Having regard to fair market value of goods, service, facility for which payment made and legitimate needs of
income.

Key Notes: (i)

Specified Persons for this section
Individual: - (i) Relative; (ii) Person in whose business the individual or his relative has substantial
interest.
(ii)
Company: - (i) Director; (ii) Relative of Director; (iii) Person in whose business the company, director or
any relative of such director has substantial interest.
(iii)
Meaning of Relative: - Spouse, Any Brother, Sister, lineal ascendant or descendant of such individual.

Cash Payments in respect of expenditure exceeding Rs. 20,000 Section 40A(3): Where an assesses incurs any expenditure in respect of which payment in excess of Rs. 20,000 is made.
Otherwise than by Account payee cheque or Account payee Demand draft;
100% of such expenditure shall not be allowed as a deduction.
If the aggregate payment (otherwise than by an account payee cheque / draft) to the same person
during a day exceeds Rs. 20,000, the provisions of section 40A(3) will apply and the entire amount of
such payment will be disallowed..
Enhancement of limit for disallowance of expenditure made otherwise than by an account payee cheque
or account payee bank draft for plying, hiring or leasing goods carriages in the case of transporters to Rs.
35,000 from the existing limit of Rs.20,000.

Exceptions to Section 40A(3): Rule 6DD: (i)

Payment made to bank and financial institutions e.g. IDBI, UTI etc.
(ii)
Payment made to Government e.g. Sales Tax, Custom Duty etc.
(iii)
Payment made on a banking holiday.
(iv)
Where any payment is made to an employee of assesses 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.

(v)
(vi)
(vii)
(viii)

Payment made in a town or village not served by any bank.

Payment by book adjustment against liability.
Payment to cultivator or producer of agriculture, forest, animal husband, dairy, Poultry forming or fish
products.
Payment for purchase of products manufactured by producer without aid of power in a cottage industry.

Ex. Deduction based on actual payment [Section 43B]

An analysis of the profit and loss account and the balance sheet of X as at 31.03.2014 reveals that the following expenses
which were due, were through debited to the profit and loss account but have been paid after 31.03.2014.
Rs.
(i)

Sales-tax

55,000

(ii)

Excise-duty

(iii)

Bonus to Staff

60,000

(iv)

Employers contribution to PF

55,000

1,30,000

Rs.

Compute P.Y. in which

expenditure is deductible
25,000 paid on 14.07.2014
30,000 paid on 01.10.2014
50,000 paid on 14.07.2014
40,000 paid on 01.10.2014
40,000 paid on 01.11.2014
58,000 paid on 10.07.2014
2,000 paid on 15.12.2014
25,000 paid on 15.07.2014
10,000 paid on 31.07.2014
20,000 paid on 15.01.2015

The due date of filing of return is 31.07.2014. In which previous years can the above payments be claimed as a
deduction?

Deduction based on actual payment Section 43B: Certain deductions are made only on actual payment: (i)
Any tax, duty, case or fee under any law in force.
(ii)
Interest on loans and advance form a scheduled bank.
(iii)
Interest on loan from any public financial institution or state financial corporation.
(iv)
Any bonus or commission to employees.
(v)
Payment of leave encashment to employee.
(vi)
Any sum payable by an employer by way of contribution of PF or superannuation fund or gratuity
fund or other fund for the welfare of the employees.
Key Notes: (i)
Rule of extension
If such sum is actually paid by assesses.
On or before the due date of return u/s 139(1).
In respect of the P/Y in which liability to pay such sum was incurred.
And evidence of such payment is furnished along with return of income.
(ii)
Employer contribution to PF, ESI shall be made on or before the due date of filling return but employees
contribution recovered by employer shall be paid before the due date under the respective Act.

Maintenance of accounts by Persons carrying on Profession or Business Section 44AA : Section 44A Maintenance of Books of accounts:
All are required to maintain books of accounts
Preservation of books for 6 years from the end of the relevant assessment year
Audit required when
1. In Business when Sales turnover or gross receipts of the previous year had exceeded Rs. 1 crore
2. In Profession when gross receipts of the previous year had exceeded 25 lakhs

Audit is required to be done by the due date of return and the applicability of section 44A has to be
revisited every year

Additional Questions:
(discussed in class)
1. From the P&L Account of X (resident) individual (age31),ascertain his total income and tax liability

1.
2.
3.
4.

General expenses

13,400

Gross profits

3,15,500

Bad debts

22,000

Commission

8,600

Advance tax

2,000

Brokerage

37,000

Insurance

600

Sundry receipts

2,500

Salary to staff

26,000

Bad debts recovery

(earlier allowed as
deduction)

11,000

Salary to X

51,000

Interest on debentures
(TDS 2,500, Net amount
received was 22,500

25,000

Interest on overdraft

4,000

Interest on deposit (Net

interest received is
11,700 and TDS was
1,300)

13,000

Interest on loan to Mrs.

X

42,000

Interest on capital of X

23,000

Depreciation

48,000

Advertisement
expenditure

7,000

Contribution to
recognized fund

13,000

Net profit

1,60,600

Other information:
Depreciation as per income tax is 37,300. It includes depreciation of sign board
Advertisement expenditure include Rs 3,000 being the cost of permanent sign board
LIC premium on own life 6,000
General expenses include (a) 500 given to Mrs. X for arranging a party in honour of a friend (b) 1,000
contribution to political party

5. Loan was taken from Mrs. X for payment of arrear of income tax

2. From the P&L Account of Mrs X (resident) individual (age35),ascertain his total income and tax liability
Profit and Loss for the year ended 31 st March 2013-2014
Salary to staff

34,000

Gross profit

6,86,000

General expenses

48,000

Commission and
discount

2,17,200

Bad debts written off

15,000

Sundry receipts

43,000

Reserves for losses

2,000

Short term profit on sale

of investment

31,000

Fire insurance premium

4200

Advertisement expenses 2,400

Add outstanding

1,600

4,000

Interest on Xs capital

3,500

Interest on bank loan

14,500

Expenditure on acquisition of a patent

acquired in June 13

17,000

Bought Know-how in March 14

60,000

Depreciation on plant and machinery

28,000

Outstanding sales tax and excise duty

13,000

Net profit

7,34,000

Other Information:
1. Advertisement expenses includes Rs 3,400 being cost of 2 diaries (cost of each being Rs. 1700 presented
to customers)
2. Depreciation on plant and machinery according to income tax provision is Rs 29,700

3. Salary to staff includes payment of Rs. 8,000 to a relative which is unreasonable to the extent of Rs 3,000
4. General expenses include (a) expenditure of Rs. 4,800 incurred by X on training of his employees, (b)
commission of Rs. 10,000 for securing a business order ( C) Compensation of Rs. 6000 paid to an
employee on his termination
5. Out standing sales tax and excise duty, Rs 3,000 is paid on July 10, 2014 and Rs 8,000 is paid on October
3, 2014. The balance is not yet paid. Due date for filing of return is July 31, 2014
6. Insurance paid to LIC on 3rd April 2014 for his own life 24,000
7. Interest on Self occupied hose paid during the year 1,65,000 and principal paid is 35,000
8. Amount of municipal tax paid is 3,500
9. Expenditure done for a dependent parent for severe blindness worth 23,000 and bought a medical
insurance for himself & spouse 25,000
10. Made donation to IIT worth 25,000 during the previous year