UNIT 4.

1 PROFIT AND GAINS FROM BUSINESS OR PROFESSION

PART 1 Objectives
Reading this unit would enable you to understand
the provisions of Income Tax regarding computation of income under the
head ‘Profits and Gains from Business/Profession’

Content

4.1 Introduction and Incomes Chargeable under the Head as per Provisions of Section 28
4.2 Computation of Income under the Head “Profits and Gains from Business Profession” Section
29
4.3 Deductions under Sections 30 to 37
4.3.1 Rent, Rates Taxes, Repairs and Insurance for Building [Section 30]
4.3.2 Repairs and Insurance of Machinery, Plant and Furniture [Section 31]
4.3.3 Depreciation [Section 32]
4.3.4 Tea Development Account, Coffee Development Account and Rubber Development Account
[Section 33 AB]
4.3.5 Site Restoration Fund [Section 33ABA]
4.3.6 Expenditure on Scientific Research [Section 35]
4.3.7 Expenditure for obtaining License to Operate Telecommunication Service [Section 35ABB]
4.3.8 Expenses on Eligible Projects or Schemes [Section 35 AC]
4.3.9 Payment to Institutions for Carrying Out Rural Development Programmes [Section 35 CCA]
4.3.10 Amortisation of Preliminary Expenses [Section 35 D]
4.3.11 Deduction for Expenditure on Prospecting for Minerals [Section 35E]
4.3.12 Other Deductions under Section 36
4.3.13 General Deductions under Section 37
4.3.14 Examples of Expenditure not allowed as Deduction u/s 37(1)
4.3.15 Deduction for the Building Party used for Business and Partly Used as Dwelling House
[Section 38]
4.4 Expenses not deductible
4.5 Miscellaneous provisions
.Problems

Summary of the Part

Review Questions

Multiple choice Questions

Answers to MCQ s
4.1 INTRODUCTION AND INCOMES CHARGEABLE UNDER THIS HEAD AS PER
THE PROVISIONS OF SECTION 28
1. Income from business or profession is taxed under this head of income.
2. Business includes any trade, commerce, manufacturing unit or any adventure or concern
in the nature of trade, commerce or manufacture Section 2(13). The word ‘business’ normally
connotes some real, substantial and systematic or organised course of activity or conduct with a
set purpose. In taxing statutes, it is used in the sense of an occupation or profession, which
occupies the time, attention and labour of a person, normally with the object of making profit. To
regard an activity as business, there must be a course of dealings, either actually continued or
contemplated to be continued with a profit motive and not for sport or pleasure. A single
transaction also can constitute a business, depending upon the circumstances of the case.
Whether a person carries on business in a particular commodity normally depends upon the
volume, frequency, continuity and regularity of transactions of purchase and sale in a class of
goods and the transaction must ordinarily be entered into with a profit motive. Business is an
activity capable of producing a profit which can be taxed. The expression ‘business’ in ordinary
parlance means any trading activity accompanied by regularity of transactions intended for the
purpose of making profit. Generally speaking, business is an activity of a commercial nature and
means practically anything which is an occupation as distinguished from a pleasure. If the
transaction is a trading transaction or an adventure in the nature of trade, it will amount to
business, no matter whether it results in loss or profit. It also includes adventure in the nature of
trade.
3. Under this head, any income from the exercise of any profession is also taxed.
A profession as a specialised nature of business normally refers to those activities which
particularly involve greater degree of personal skill, such as occupations in the field of law,
medicine or engineering, accountancy, management etc., which require considerable training and
specialised study of the subject for exercising that occupation. According to Section 2(36),
profession includes ‘vocation’.
4. Income from an illegal business such as smuggling is also taxable under the Income Tax
Act, i.e., taxability of income has no connection to whether the income is legal or illegal. In CIT
vs. Piara Singh, the Supreme Court has held where income from an illegal business is assessed to
tax as such, the loss arising directly in the course of business is deductible as business
expenditure.
5. More particularly following are the incomes, which are chargeable under this head, as
per provisions of Section 28.
(a) Profits or gains from any business or profession carried on by the assessee at any
time during the previous year.
(b) Income derived from sale of an import license or any export incentive received,
such as cash compensatory support or drawback of duty or any other export
incentive.
Compensation or other payment due to or received by any person holding an
agency in India for any part of the activities relating to the business of any person
at or in connection with the termination or modifications of terms and conditions
 compensation or other payment due to be received by any person from or in
connection with the resting of the Government or in any corporation owned or
controlled by the Government under any law of the management of the presents or
any business, any sum, whether received or receivable in cash or in kind for not
carrying out any activity in relation to any business or not showing any know-how,
patent, copyright, trademark, license, franchise or any other business or
commercial rights etc., likely to assist in the manufacture or processing of goods or
provision for services. Exception if received on account of transfer of right to
manufacture etc. will be chargeable under the head of ‘capital gains’.
(c) Income derived by any trade association or professional association or any other
similar association from specific services rendered to its members. For example,
income earned by the Chambers of Industries from conference organised by them.
(d) Export incentives which include profit on sale of import licenses, duty drawbacks
of customs and central excise duties, cash assistance, any profit on the transfer of
the Duty Entitlement Pass Book Scheme and profit on the transfer of the Duty Free
Replenishment Certificate.
(e) Any income from speculative transactions like buying and selling of shares without
giving or taking actual physical delivery.
(f) The value of any benefit or perquisite, whether convertible into money or not,
arising from the business or from the profession such as gifts received in the course
of business.
(g) Any interest, salary, bonus, commission or remuneration received by a partner of a
partnership firm from the partnership firm.
(h) Any sum received under Keyman Life Insurance Policy including bonus on such
policy, if such sum is not to be taxed as salary income.
(i) Any amount received by a person who is in charge of the management of an affair
of an Indian Company or any other company for agreeing to the termination or
modification or relinquishment of his management powers or authority.
(j) Any sum, whether received or receivable, in cash or kind on account of any
capital asset (other than land or goodwill or financial instrument) being
demolished, destroyed, discarded or transferred, if the whole of the expenditure on
such capital asset has been allowed as a deduction under section 35AD.
(k) Any sum, whether received or receivable, in cash or kind under an agreement for
not carrying out activity in relation to any business or not sharing any know-how,
patent, copyright, trade mark, license, franchise or any other business or
commercial right of similar nature or information or technique likely to assist in the
manufacture or processing of goods or provision of services.
(l) Any sum, whether received or receivable in cash or in kind, on account of any
capital asset (other than land or goodwill or financial instrument) being
demolished, destroyed, discarded or transferred, if the whole of the expenditure on
such capital asset has been allowed as a deduction u/s 35AD
 (m) Income form speculative transaction.
6. Apart from the above-mentioned incomes, any income which is in the nature of business
income or professional income will be chargeable to tax under this head. Interest income is either
assessed as ‘Business Income’ or as ‘Income from other sources’ depending upon the activities
carried on by the assessee. If the investment yielding interest were part of the business of the
assessee, the same would be assessable as ‘Business Income’, but where the earning of the
interest income is incidental to and not the direct outcome of the business carried on by the
assessee, the same is assessable as ‘Income from other sources’. Business implies some real,
substantial and systematic or organised course of activity with a profit motive. Interest generated
from such an activity is considered as ‘Business Income’. Otherwise, it would be interest from
other sources.
7. For charging the income under the head ‘Profits and Gains of Business’, the following
conditions should be satisfied :
(a) There should be a business or profession.
(b) The business or profession should be carried on by the assessee.
(c) The business or profession should have been carried on by the assessee at any time
during the previous year.
(d) The charge is in respect of the profits and gains of the previous year of the business
or profession.
(e) The charge extends to any business or profession carried on.
Exceptions to the business to be carried on during the previous year
Certain receipts are taxable as ‘Income from business’ though no business is carried on by the
assessee in the year of receipt −
(i) Recovery against any loss, expenditure or trading liability earlier allowed as a
deduction. [Section 41(1)]
(ii) Balancing charge in case of electricity companies. [Section 41(2)]
(iii) Sale of capital asset used for scientific research. [Section 41(3)]
(iv) Recovery against bad debts. [Section 41(4)]
(v) Annual amount withdrawn from Special Reserve. [Section 41(4A)]
(vi) Receipt of discontinued business under cash system of accounting. [Section 176(3A),
(4)]
(vii) Sum received for restrictive covenant. [Section 28(va)] which is chargeable under the
head capital gains
4.2 COMPUTATION OF INCOME UNDER THE HEAD [SECTION 29]
Section 29 lays down that the income referred to in Section 28 shall be computed in
accordance with the provisions contained in Section 30 to Section 43D. It may be added that the
provisions of Sections 44 to 44D are also to be taken into account in this context as they make
certain special provisions regarding the computation of profits and deductions of expenditure in
certain cases.
 It is important to note that specific allowances and deductions stated in these sections are not
exhaustive. Besides these deductions, other deductions are also available on the general
commercial framework while computing ‘Profits and Gains of Business/Profession’. Following
general commercial principles, losses of a capital nature which are incidental to the trade and
arise expectedly in the regular course of business would be deductible, even though there may
not be a specific provision in the act for such deductions. Examples of such losses are
embezzlement of cash, theft of cash, robbery, destruction of assets, loss of stock in transit by fire
or ravages of white ants or by enemy action during war etc.
Further profits chargeable under the head ‘Profits and Gains of Business/Profession’ should
be computed in accordance with the method of accounting regularly employed by the assessee –
accrual basis or receipt basis or a mixture of the two.
1. The profit of a trade or business is the surplus by which the receipts from the trade or
business exceed the expenditure necessary for the purpose of earning those receipts. The
tax is upon income, profits or gains; it is not a tax on the gross receipts. From the
charging provisions of the act, it is discernible that the words ‘income’ or ‘profits and
gains’ should be understood as including losses also, so that, in one sense ‘profits and
gains’ represent ‘plus income’, whereas losses represent ‘minus income’. In other
words, loss is negative profit. Both positive and negative profits are of a revenue
character. Both must enter into computation, wherever it becomes material, in the same
mode of the taxable income of the assessee.
2. The general rule of determining taxable business or professional income is that, from the
gross income or gross receipts or gross sales, expenses incurred for earning that income
will be allowed as a deduction. The balance of profit remaining after claiming all the
allowable expenses as a deduction will be the taxable income from the business.
3. Expenses will be allowed as a deduction from gross receipts only if they have been
incurred in the relevant previous year. Expenses incurred before setting of the business
will not be allowed except where specifically provided by law.
4. Typical steps for computation of income under this head can be listed as below :
(a) Find out Profit as per the P and L A/c.
(b) Deduct those expenses, which are not claimed but are allowable as deductions
under Sections 30 to 37.
(c) Add those expenses that have been debited to the Profit and Loss A/c but are not
allowable as deduction u/s 40, 40A and 43B.
(d) Deduct those incomes which have been credited to the Profit and Loss A/c but
which are not chargeable to income tax.
(e) Add those incomes which have not been credited to the Profit and Loss A/c but
which are taxable as business income under Section 28 described above.
 5. As stated above Sections 30 to Section 37 deal with the various expenses which will be
allowed as a deduction in getting the amount of taxable business or professional income.
These are explained in the paragraphs as follows.
Method of Accounting [Section 145] :
The profits from business and profession and income under the head ‘Income from other
sources’ are to be computed in accordance with the method of accounting regularly employed by
the asssessee. There are three methods of accounting, i.e., (a) mercantile system; (b) cash system
and (iii) mixed or hybrid system. However, as per Section 145 of the Income Tax Act only one of
the two methods of accounting can be followed:
(a) Mercantile system
(b) Cash system.
If the assessee is carrying on more than one business he can follow the cash system of
accounting for one business and mercantile system of accounting for another business. Similarly,
if he has more than one source of income under the head from other sources, he can follow cash
system of accounting for one source and mercantile system of accounting for other sources.
Further, the profits from business and profession will have to be computed in accordance
with the accounting standards which may be prescribed by the Central Government from time to
time. The Central Government has since notified the following two accounting standards to be
followed by all assesses who are following mercantile system of accounting, w.e.f. 1-4-1996 :
(A) Accounting Standard 1 relating to the disclosure of accounting policies.
(B) Accounting Standard 2 relating to the disclosure of prior period and extraordinary items
and changes in accounting policies.
4.3. DEDUCTIONS UNDER SECTIONS 30 TO 37 (i)
4.3.1 Rent, Rates, Taxes, Repairs and Insurance for Building [Section 30]
If the assessee is the owner of the premises and uses the premises for his business purpose,
no notional rent would be allowed under this section. He can claim only the following expenses
under this section :
− Local rates, municipal taxes, land revenue etc. However these are allowable subject to
provisions of section 43B i.e. if these expenses are claimed on due basis, the payment of
the same must be made on or before the due date of furnishing the return of income.
− Insurance premium covering the risk of the damage or destruction of premises.
− Current repairs to the building [not including expenditure in the nature of capital
expenditure].
If assessee is a tenant, he can claim rent paid under this section. Besides this, he can claim all
expenses which he has undertaken to bear, for e.g. – the cost of repairs [not including
expenditure in the nature of capital expenditure], local rates, municipal taxes, land revenue,
insurance etc.
Important Points :
1. Where assessee is a firm and business premises belonging to a partner of the firm, the
rent payable to the partner would be an allowable deduction. On the other hand, the
 income from such a building would be computed under the head ‘Income from House
Property’ in the hands of the partner.
2. If the assessee has taken the building on rent for business purpose and sub-let a part of
it, in such a case the deduction allowable u/s 30 would be a sum equal to the difference
between the rent paid by the assessee and the rent collected from the sub-tenant.
3. If assessee occupies the premises otherwise than as tenant or owner, i.e., as a lessee,
licencee, mortgagee with possession then he is entitled to a deduction under this section
in respect of current repairs of the premises.
4. Where the premises are used partly for the business and partly for other purposes, only a
proportionate part of the expenses attributable to the part of the premises used for the
purposes of business will be allowed as a deduction (Section 38).
5. Where assessee pays ‘Salami’ in acquiring a lease of the business premises, it will not
be admissible as a charge because, it is a capital expenditure. Similarly, if the
expenditure on repairs is of a capital nature, no allowances can be made.
6. Where the assessee has paid rent for residential accommodation for temporary stay of
employees while on duty, the rent so paid and amount spent on repairs (if any) is
deductible u/s 30.
4.3.2 Repairs and Insurance of Machinery, Plant and Furniture [Section 31]
An assessee can claim the following deductions under this section:
(a) Insurance Premium paid (or payable by the assessee under mercantile system)
deduction for insurance of machinery, plant or furniture is allowable u/s 31 subject to the
following conditions:
(i) The assets must be used by the assessee for the purpose of his business/profession
during the accounting year.
(ii) Insurance must be against the risk of damage or destruction of the machinery, plant
or furniture.
Premium may take the form of contribution to a trade association which may undertake to
indemnify and insure its members against loss; such premium or contribution would be
deduction as an allowance under this section even if a part of it is returnable to the insured in
certain events.
(b) Repairs to Plant and Machinery are allowable subject to the following conditions :
(i) Plant, machinery, furniture must have been used by the assessee for the purpose of
his own business or profession. This deduction is available even if the assessee is
not the owner. What is essential is that the assets must have been used by the
assessee in his own business during the previous year though not continuously, i.e.,
even if an asset is used for a part of the accounting year, the assessee is entitled to
the deduction of the full amount of expenses on repairs and insurance charges and
not merely an amount proportionate to the period of this use.
 (ii) Under this section only current repairs are deductible. Current repairs refer to the
expenditure incurred with a view to preserve and maintain an existing asset and not
with a view to bringing a new asset into existence or obtaining any new or fresh
advantage. The term ‘repairs’ under this section does not mean petty repairs. It
includes renewal or renovation of an asset but not replacement or reconstruction.
Following points are noteworthy in this connection :
− This section is applicable to current repairs but not arrears of repairs for earlier
years [though arrears of repairs are deductible u/s 37 (1)].
− This section is not applicable to cost of replacing or reconstruction.
4.3.3 Depreciation [Section 32]
Depreciation is the diminution in the value of an asset due to normal wear and tear and due to
efflux of time or obsolescence. There are different methods for calculation of depreciation under
the financial accounting. The methods commonly used are:
a) Straight line method,
b) Written down value method
Deduction under this section is allowable subject to the following conditions :
(1) The following are the three kinds of depreciation allowances that are allowed under the
Income Tax Act :
(i) Normal depreciation for block of assets [Section 32(1)(ii)];
(ii) Additional/extra depreciation in case of any eligible new machinery or plant (other
than ship or aircraft) which has been acquired and installed after 31-3-2005 by an
assessee engaged in the business of manufacture or production of any article or
things [Section 32(1)(ii a)];
(iii) Normal asset-wise depreciation for an undertaking engaged in generation or
generation and distribution of power [Section 32(1)(i)].
(2) The depreciation is allowed on specified assets as given below :
(a) Buildings, machinery, plant and furniture being tangible assets; and
(b) Know-how patents, copyrights, trademarks, licenses, franchises or any other
business or commercial rights of similar nature being intangible assets.
o The expression building does not include land because the land does not
depreciate.
o The partition work and false ceiling in the building comes under the expression
furniture and fittings and not under building for the purpose of depreciation.
o As per section 43(3),Plant includes ships, vehicles, books, scientific apparatus
and surgical equipments used for the purpose of the business or profession but
does not include tea bushes, livestocks, buildings or furniture
Depreciation is not allowed in the following cases :
 (a) In respect of any machinery or plant if the actual cost thereof is allowed as a
deduction in one or more years under an agreement entered into by the Central
Government under Section 42 (this section relates to deduction in case of business
for prospecting for mineral oil).
(b) No depreciation on an imported car acquired after 28-2-1975 but before 1-4-2001
unless used for a specified purpose.
Building refers only to the superstructure but not the land on which it has been erected.
Obviously, depreciation cannot be claimed on the cost of the land. Building includes roads,
bridges, culverts, wells and tube-wells.
Plant as defined by Section 43 (3) included ships, vehicles, scientific apparatus, surgical
equipments, books (including technical know-how reports) used for the purpose of business or
profession but does not include tea bushes or livestock or buildings or furniture and fittings.
On the basis of cases decided by the courts, the following are also included under the term
‘Plant’:
(a) In the case of a hotel, pipe and sanitary fittings [C.I.T. vs. Taj Mahal Hotel (S.C)].
(b) In the case of an electric supply company; mains, service lines and switch gears.
(c) In the case of manufacture of oxygen, gas-cylinder for storing gas.
(d) Technical know-how (Scientific Engineering House (P) Ltd. vs. C.I.T).
(e) Drawings, designs, plans, processing data, books [Scientific Engineering House (P) Ltd
vs. C.I.T. (S.C)].
(f) Drawings and patterns acquired from a foreign collaborator [C.I.T. vs. Elecon
Engineering Co. Ltd. (S.C.)]
(g) Safe deposit vaults in banks [C.I.T. vs. Union Bank of India].
(h) Air-conditioning equipments, air-conditioners and plants installed in the office premises.
(i) Fencing around a refinery.
(j) Any installation facilitating production is a ‘plant’. Internal telephone system constitutes
a ‘plant’. However, plant does not include a harbour bed, human body or stock-in-trade.
Books : Each book by itself constitutes a ‘plant’. Where a book runs into more than one
volume all the volumes taken together constituted a book. Periodicals are also treated as books,
but in their case if they are arranged in parts of a volume and each volume is given a specific
number, each volume is treated as a separate book, for e.g., I.T.R. which is published weekly is
divided into parts of a volume in a year. Here the issues of one year will be treated as six books
or six plants (as per CBDT Instructions).
(3) Assessee must be the owner of the assets : In case of the buildings, the assessee must
own the super structure and not necessarily land. It is important to note that, depreciation would
also be allowable to the owner in respect of assets which are actually worked/utilised by another
person, for e.g., lessee or licensee; therefore, if the assessee has let out on hire his building,
machinery, plant or furniture and letting out of such asset is his business, he can claim
depreciation u/s 32. In other cases, where the letting out of such asset does not constitute the
business of the assessee, the deduction on account of depreciation can be claimed u/s 57 (ii).
Exception to the general rule that the assessee must be the owner :
(a) If the assessee carries the business in a rented or leasehold premises and if he incurs any
capital expenditure for the purpose of the business or profession, on construction of any
structure or renovation or improvement to the building then he can claim depreciation
on such capital expenditure as if the structure/work is a building owned by him
[Expl. I to Section 32 (i) (i)].
(b) Depreciation is allowed on the machinery acquired on hire purchase agreement as if the
assessee is the owner of such an asset.
(4) Assets must be used for business/profession carried on by the assessee during the
relevant previous year : If the asset is partly used for the business or profession and partly used
for some personal purpose, cost of the asset attributable to the business use, shall be taken as a
base for computation of depreciation.
(5) Depreciation on actual cost or written down value : In the case of any block of asset,
the depreciation is allowable at a prescribed percentage of written down value of the block as
defined in Section 43(6) as on the last day of the previous year. Due to the block concept, the
actual cost of the asset brought into use during the year will be added to the existing block, if
any. However, in case of power generating undertakings, it may be claimed at a certain
percentage of the actual cost.
(6) 50% depreciation only : If the asset is acquired during the year and used for the period
of less than 180 days, depreciation shall be allowed to the extent of 50%.
(7) No depreciation is allowed on land.
(8) No deduction under this section is allowable if :
1. The assessee is not the owner.
2. The assessee is not the user.
3. The asset is sold during the year.
4. The asset is an imported car which is purchased after 28/2/75 but before 1/4/2001.
However, if such an imported motorcar is used in a business of running it on hire
for tourists, the depreciation is allowable. Also if the imported motorcar is used
outside India in the business carried on by the assessee in another country,
depreciation will be allowed on the same.
5. The asset is used for scientific research.
6. The asset is used for exploration of mineral oil u/s 42.
Concept of Block of Assets :
‘Block of assets’ means a group of assets falling within a class of assets comprising of −
 (a) Tangible assets being buildings, machinery, plant or furniture;
(b) Intangible assets being know-how, patents, copyrights, trademarks, licenses; in respect
of which the same percentage of depreciation is prescribed.
Class of Assets :
Assets eligible for depreciation have been classified into five classes, i.e. :
(a) Building;
(b) Furniture;
(c) Plant and machinery;
(d) Ships;
(e) Intangible assets of the type discussed above.
Each class of assets other than intangible assets may have different blocks or groups on
which separate rates of depreciation are prescribed and for each such rate, a separate block will
be formed.
In the case of intangible assets there will be one block as only one rate, i.e., 25% has been
prescribed for all such intangible assets.
Table 6.1 : Blocks formed on the basis of the Class of Assets and their Rates of Depreciation
Buildings
Block 1 Buildings which are used for residential purposes except hotels 5%
and boarding houses.
Block 2 Buildings other than those used mainly for residential purposes 10%
and not covered by Blocks 1 and 3.
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Block 3 (i) Purely temporary erections such as wooden structure.
(ii) Buildings acquired for installing machinery and plant
forming part of water supply project or water treatment system 100%
and which is put to use for the purpose of business of providing
infrastructure facilities under Section 80-1A (4)(i).
Furniture and Fittings

Block 4 Furniture and fittings including electrical fitting. 10%

Machinery and Plant

Block 5 Plant and machinery-Any plant or machinery [not covered by

block 6, 7,8,9,10,11 or 12], motor cars (other than those used in
a business of running them on hire) acquired or put to use 15%

Block 6 Plant and machinery- Ships –

(i)Ocean going ships including dredgers, tugs, barges ,survey
launches and other ships used mainly for dredging purposes
and wishing vessels with wooden hull
20%
(ii) Vessels ordinarily operating on inland waters, not covered
by sub-item (iii ) below
 (iii) Vessels ordinarily operating on inland waters being speed
boats

Block7 Plant and machinery

(i) Motor buses, motor Lorries and motor taxis used in a
business of running them on hire.
(ii) Moulds used in rubber and plastic goods factories.
(iii)Machinery and plant, used in semi-conductor industry
30%
(iv) Life saving medical equipment.

Block 8 Plant and machinery

(i) Aeroplanes – Aero Engines. 40%
(ii) Specified life saving medical equipment.
(iii) New Commercial vehicles acquired after 30-9-1998
but before 1-4-1999 and put to use before 1-4-1999
(iv)Plant and machinery which satisfy conditions of rule 5(2)

Block 9 Plant and machinery

(i) Containers made of glass or plastic used as re-fills.
(iii) New Commercial vehicles acquired after 1-1-2009 and 50%
September 30, 2009 1-4-1999 and put to use before October
1, 2009 for the purpose of business or profession.
Block 10 Plant and machinery
(i) Computers including computer software.
(ii) Books (other than books, (a) being annual publications or
(b) books owned by assessees carrying on business in
running lending libraries). 60%

(iii) Gas-cylinders; plant used in field operations by

mineral oil concerns; direct fire glass melting furnaces.

Block 11 Plant and machinery

Rollers used in flour mills, rolling mill rolls used in iron and 80%
steel industry, rollers used in sugar works, Energy saving
devices, and Renewal energy devices

Block 12 Plant and machinery

(i) Machinery and plant acquired and installed on or after 1-
9-2002 in a water supply project or a water treatment
 system and which is put to use for the purpose of business
of providing infrastructure facility under section 80-1A(4)
(i).
(ii) Wooden parts used in artificial silk manufacturing
machinery.
(iii) Cinematograph films-bulbs of studio lights.
(iv) Match factories (wooden match frames).
(v) Tubs, winding ropes, haulage ropes and sand stowing
pipes and safety lamps used in mines and quarries.
100%
(vi) Salt works- Saltpans, reservoirs and condensers etc. made
of earthy, sandy or clayey material or any other similar
material.
(vii) Books owned by the assessees carrying on a profession,
being annual publications.
(viii)Books owned by the assessees carrying on business in
running lending libraries.
(ix) Air pollution control equipment, water pollution control
equipment, solid waste control equipments, solid waste
recycling and resource recovery systems.

Block 13 Intangible assets- Know-how, patents, copyrights, trademarks,

licenses, franchises or any other business or commercial
rights of a similar nature. 25%

Meaning of certain terms relevant for the computation of depreciation :

(1) Block of Assets : The term ‘block of assets’ has been defined under Section 2(11) to
mean a group of assets falling within a class of assets, being buildings, machinery, plant or
furniture in respect of which the same percentage of depreciation is prescribed. Thus, under each
of the five types of assets (viz., buildings, furniture and fittings, plant and machinery, ships and
intangible assets) several blocks of assets shall be formed on the basis of percentage of
depreciation.
(2) Written Down Value for charging depreciation Section 43(6) : Written down value of
a block of assets for the purpose of charging depreciation of the current year means :
(i) In the case of assets acquired before the previous year, the actual cost to the assessee of
all the assets falling within the block minus all the depreciation actually allowed to him;
(ii) In the case of assets acquired in the previous year, the actual cost to the assessee.
However, if any asset of the block is sold during the year, the written down value of a block
of assets shall be computed in the following steps :
 Step 1 - Aggregate of WDV of the block of assets at the beginning of the year.
Step 2 - Actual cost of any asset falling within the block acquired during the year.
Step 3 - From Step 1 + Step 2, deduct the money received/receivable in respect of that asset
(falling within a block of assets) which is sold, discarded, demolished or destroyed during the
year together with the amount of scrap, if any.
The resulting amount is the WDV of the block of assets at the end of the year for the purpose
of charging current year depreciation
WDV in case of Slump Sale :
Step 1 – Find out the depreciated value of the block on the first day of the previous year.
Step 2 – To this add, the actual cost of the asset acquired during the previous year.
Step 3 – From the resultant figure, deduct money received/receivable (together with scrap
value) in respect of that asset (falling within the block of assets) which is sold, discarded,
demolished or destroyed during the previous year.
Step 4 − In the case of a slump sale deduct the actual cost of the asset falling within that
block as reduced :
(i) By the amount of depreciation actually allowed to him in respect of any previous year
relevant to the A.Y.s, and
(ii) By the amount of depreciation that would have been allowable to the assessee for the
AY onwards as if that asset was the only asset in the relevant block of assets.
So, however, that the amount of such decrease does not exceed the written down value
(i.e., the amount computed as per Step I+ Step II - Step III).
Step 5 - The resultant figure, i.e., Step1 + StepII - Step III - Step IV shall be the WDV for
the purpose of charging the current year depreciation of the block left with the assessee after the
slump sale.
Illustration : Compute the WDV from the following information for the AY 2015-16.
Plant A, B and C 15% WDV as on 1.4.2014 ` 10, 40,000
Plant H 15% Purchased on 11.5.2014 ` 18,000
Plant B (Sold on Dec. 20, 2014) for ` 25, 10,900

Solution :
Plant and Machinery (rate of depreciation 15%)
Opening WDV as on 1.4.2014 10,40,000
Add : Plant H `18,000
Total 10,58,000
Less : Sale proceeds of Plant B (although sale proceeds
of plant B is more than ` 10, 58,000, amount to be
deducted is restricted to `10,58,000) ` 10,58,000
WDV as on 31.3.2015 NIL
Notional Written Down Value :
(i) Succession in business or profession : When in the case of succession, the assessment
is to be made on the successor, depreciation is to be calculated taking the WDV of the
block of assets as if there had been no change in the ownership at all.
(ii) Transfer between the holding and the subsidiary company : Where any block of
assets is transferred by a holding company to its wholly owned subsidiary company or
vice versa (transferee company being an Indian Company), then the actual cost of the
block of assets in the case of transferee company shall be WDV of the block of assets
of the transferor company for the immediately preceding previous year as reduced by
the depreciation actually allowed in relation to the said previous year.
(iii) Transfer in a scheme of amalgamation : In such a case, the actual cost of the block of
assets in the case of an amalgamated company shall be the WDV of the block of assets
as in the case of the amalgamating company for the immediately preceding previous
year as reduced by the amount of depreciation actually allowed in relation to the said
previous year.
(iv) WDV when assets are transferred in de-merger : In such a case, the WDV of the
block of assets of the de-merged company for the immediately preceding year shall be
reduced by the WDV of assets transferred to the resulting company in order to get WDV
in the hands of the de-merged company.
(v) WDV in the hands of the resulting company : In such a case, the WDV of the one
block of assets in case of the resulting company shall be the WDV of the transferred
assets appearing in the books of account of the de-merged company immediately before
the de-merger.
(vi) WDV in case of corporatisation of a recognised stock exchange in India : Where in
the previous year any asset forming part of a block of assets is transferred by a
recognised stock exchange in India to a company under a scheme for corporatisation,
the WDV of the block of assets in the case of such a company shall be the WDV of the
transferred assets immediately before such a transfer.
(3) Actual Cost [Section 43 (1)] : Actual cost means the actual cost of the assets to the assessee,
reduced by the portion of the cost of the asset, if any, as has been met directly or indirectly by
any other person or authority.
The actual cost of the assets would include all the expenses incurred in the acquisition of the
asset, like expenses on freight for bringing the asset, traveling expenses of the staff engaged in
purchasing the asset, installation expenses of the asset etc.; the provisions regarding the
treatment of interest, traveling expenses etc. for the purchase/construction of the asset have been
discussed separately.
If any part of the cost of the asset is met by any other person or authority then the cost is to
be reduced to that extent, for e.g., X purchases a generator set for ` 2, 00,000 and receives a
subsidy of 25% from the State Government. The cost of the asset to X would be taken at ` 1,
50,000.
 Notional Actual Cost [Explanations to Section 43 (1)] : In the following cases, the actual
cost for purposes of depreciation shall be a notional cost to the assessee.
(i) Assets used for scientific research [Explanation 1] : When an asset is used in the
business after it ceases to be used for scientific research, the actual cost of the asset to the
assessee will be the actual cost as reduced by the amount of any deduction allowed u/s 35, on
account of expenditure on scientific research, i.e., it will be nil because the entire cost is written
off u/s 35.
(ii) Assets acquired by way of gift or inheritance [Explanation 2] : Where an asset is
acquired by the assessee by way of gift or inheritance, the actual cost of the asset to the assessee
shall be the actual cost to the previous owner as reduced by :
(a) The amount of depreciation actually allowed on the asset in respect of any previous year
relevant to the assessment year commencing before April 1, 1988, i.e., depreciation
actually allowed up to assessment year 1987-88; and
(b) The amount of depreciation that would have been allowable to the assessee for any
assessment year commencing on or after April 1, 1988 as if the asset was the only asset
in the relevant block of assets.
(iii) Assets transferred to reduce the tax liability [Explanation 3] : Where, before the
date of acquisition by the assessee, the assets were at any time used by any other person for the
purposes of business or profession and the Assessing Officer is satisfied that the main purpose of
the transfer of such assets, directly or indirectly to the assessee, was the reduction of a tax
liability (by claiming excess depreciation with reference to an enhanced cost), the actual cost to
the assessee shall be such an amount as is determined by the assessing officer, with the previous
approval of the Joint Commissioner.
Example : An asset which has been used by R for several years was transferred to G, his
brother for ` 3,00,000 although the market value at the time of the transfer was ` 1,20,000. In this
case, the Assessing Officer is entitled to estimate the actual cost of the asset at ` 1,20,000 if he is
satisfied the main purpose of the transfer was the reduction of tax liability of G. However, in this
case, he has to take prior approval of the Joint Commissioner. However, R will have to pay
Capital Gain Tax on such a transfer and consideration price for this transfer shall remain at
` 3,00,000.
(iv) Assets which are re-acquired by the assessee [Explanation 4] : Where an asset which
had once belonged to the assessee and had been used by him for the purpose of his business or
profession and thereafter, ceased to be his property by reason of transfer or otherwise, is
reacquired by him, the actual cost to the assessee shall be :
(a) The actual cost to him when he first acquired the asset as reduced by :
i. The amount of depreciation actually allowed to him in respect of any previous year
relevant to the assessment year commencing before April 1, 1988, and
ii. The amount of depreciation that would have been allowable to the assessee for any
assessment year commencing on or after the first day of April 1988, as if the asset
was the only asset in the relevant block of assets (in other words, WDV at the time
when the asset is sold, considering it to be the only asset in the block).
 OR
(b) The actual price for which the asset is re-acquired by him, whichever is less.
(v) Sale and lease back transactions [Explanation 4A] : Where before the date of
acquisition by the assessee (hereinafter, referred to as the first mentioned person), the assets were
at any time used by any other person for the purpose of his business or profession and
depreciation allowance has been claimed in respect of such assets, in the case of the second
mentioned person and such person acquired on lease, hire or otherwise assets from the first
mentioned person, then notwithstanding anything contained in Explanation 3, the actual cost of
the transferred assets, in the case of first mentioned person (who is the legal owner), shall be the
same as the written down value of the said assets at the time of transfer thereof by the second
mentioned person, w.e.f. 01.10.1996.
Example : R has been using an asset for his business and its written down value as on
1.4.2013 was ` 2,00,000. He sold this asset to G for ` 4,00,000 and G leased back this asset to
‘R’, i.e., R reacquires that asset from G by way of lease, hire or otherwise. In this case, the cost
of this asset to ‘G’ (who is the legal owner) for the purpose of charging depreciation shall be `
2,00,000 i.e., the written down value of this asset at the time of transfer by R to G and not `
4,00,000 for which he acquired the asset.

1. If Explanation 4A is applicable then Explanation 3 shall not be applicable. However,

where Explanation 4A is not applicable, Explanation 3 shall be applicable, for e.g., if the
asset acquired by G from R is not leased back to R, Explanation 4A shall not be applicable
but Explanation 3 shall be applicable, i.e., in this case, the actual cost shall be an amount
as determined by the Assessing Officer.
2. It is clarified that if there are one or more intermediate sale between the point of first sale
and its reacquisition by the assessee by way of lease/hire or otherwise, then the actual cost
shall be WDV at the time of first sale. Even if the asset forms part of a block of assets, the
individual written down value has to be worked out separately to give effect to this
provision.
(vi) Building brought into use for business purposes subsequent to its acquisition
[Explanation 5] : Where a building previously owned by the assesssee is brought into use for
the purpose of the business or profession, the actual cost to the assessee shall be the actual cost
of the building to the assessee, as reduced by an amount equal to the depreciation calculated at
the rate in force on that date which would have been allowable had the building been used for the
purpose of the business since the date of its acquisition.
Illustration : R purchased a building for ` 500, 000 on1.12.2011 which was used by him as a
dwelling place. w.e.f. 5-2-2014 he uses his building as an office of his profession, the actual cost
to R for the purpose of charging depreciation in the previous year 2013-2014 shall be computed
as under:

Actual cost of building on 1.12.2011 Rs.5,00,000

Depreciation for previous year2011-12@5% of 5,00,000 25,000
WDV as on 1.4.2012 4,75,000
Less Depreciation for previous year 2012-13 @ 10% 47,500
4,27,500
Actual cost to R for the purpose of charging depreciation Rs.4,27,500
(vii) Assets transferred by a holding company to its subsidiary company [Explanation
6] : Where an asset is transferred by a holding company to its 100% subsidiary company or vice
versa, then, if the transferee company is an Indian company, the actual cost of the transferred
capital asset to the transferee company shall be the same as it would have been if the transferor
company had continued to hold the capital asset for the purpose of its business.
Illustration : R Ltd., a holding company, transfers two assets to its 100% subsidiary
company G Ltd. for ` 3, 00,000 although the written down value to the holding company at the
beginning of the year was ` 1,40,000. In this case, the actual cost to G Ltd. shall be ` 1,40,000
(being the written down value to the holding company). If the assets are transferred for `
1,00,000, the actual cost to G Ltd. shall remain as ` 1,40,000.
(viii) Assets transferred under a scheme of amalgamation [Explanation 7] : Where,
in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to
the amalgamated company and the amalgamated company is an Indian company, the actual cost
of the transferred capital asset to the amalgamated company shall be taken to be the same as it
would have been if the amalgamating company had continued to hold the capital asset for the
purposes of its business.
(ix) Actual cost in case of demerger [Explanation 7 A] has been inserted to provide that, in
case of de-merger, the actual cost of the transferred capital asset to the resulting company shall
be taken to be the same as it would have been if the demerged company has continued to hold the
capital asset for the purpose of its own business.
(x) Interest [Explanation 8] : Any amount paid or payable as interest in connection with
the acquisition of an asset and relatable to a period after the asset is first put to use will not form
part of the actual cost of the asset.
(xi) Actual cost of cenvatable goods [Explanation 9] : Where an asset is or has been
acquired on or after 1.3.1994 by an assessee, the actual cost of the asset shall be reduced by the
amount of duty of excise or additional customs duty (also known as countervailing duty) leviable
under Section 3 of the Customs Tariff Act, 1975 in respect of which a claim of credit has been
made and allowed under the Central Excise Rules, 1944. In other words, if the assessee has taken
Modvat credit (Cenvat credit now) of Central Excise or countervailing duty of Customs paid on
such purchase of the asset under the Central Excise Rules, the actual cost of the asset shall be
reduced by the amount of such a Cenvat Credit.
Example : If an assessee has purchased a machine whose sale price (without excise duty)
was ` 1,00,000 and was charged 10.3% central excise duty and 2% C.S.T. The actual cost of the
asset in this case was, 1,00,000 + 10,300 + 2206 (2% CST on ` 1,10,300) = 1,12,506 but if he
takes Cenvat credit of excise of ` 10,300 on capital goods purchased by him, then the actual cost
for the purpose of depreciation shall be ` 1,12,506-10,300 (Cenvat credit taken) = ` 1,02,206.
(xii) Actual cost of Subsidised assets [Explanation 10] : Where a portion of the cost of an
asset acquired by the assessee has been met directly or indirectly by the Central or State
Government or any authority established under any law or by any other person, in the form of
subsidy or grant or reimbursement, then in a case where the subsidy is directly relatable to the
asset, such subsidy shall not be included in the actual cost of the asset. In a case where such
subsidy or grant or reimbursement is of such a nature that it cannot be directly relatable to any
particular asset, the amount so received shall be apportioned in a manner that such asset bears to
all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so
received and such subsidy shall not be included in the actual cost of the asset.
(xiii) Asset acquired by non-resident outside India [Explanation 11] : The actual cost
of the asset which was acquired by a non-resident outside India and is brought by him to India
and used for the purpose of his business and profession shall be the actual cost to the assessee
minus the depreciation that would have been allowed, had the asset been used in India from the
date of acquisition.
(xiv)Transfer in the case of Corporatisation of a Recognised Stock Exchange
[Explanation 12] : Where any capital asset is acquired by the assessee under a scheme of
corporatisation of recognised stock exchange in India the actual cost of the asset shall be deemed
to be the amount which would have been regarded as actual cost had there been no such
corporatisation.
(4) Additional Depreciation on new machinery or plant [Section 32(iia)] : With a view
to give boost to the manufacturing sector, an additional depreciation shall be allowed to an
industrial undertaking subject to the provisions given below. Such additional depreciation shall
be in addition to the normal depreciation which is being allowed to all assesses.
(A) Who can claim additional depreciation : An assessee engaged in the business of
manufacture or production of any article or thing can claim additional depreciation.
(B) Asset which qualifies for additional depreciation : Any plant and machinery, other
than ships and aircrafts, which has been acquired or installed after March 31, 2005 by an
assessee is qualified for additional depreciation.
(C) Assets which are expressly not eligible for additional depreciation :
(i) Plant and Machinery, which before its installation by the assessee was used either
within or outside India by any other person.
(ii) Plant and Machinery which is installed in any office premises or residential
accommodation, including guesthouse.
(iii) Office appliances or road transport vehicles.
(iv) Plant and Machinery, whole of the actual cost of which is allowed as a deduction
(whether by way of depreciation or otherwise), in computing the income
chargeable under the head ‘Profits and Gains of Business/Profession’ of any one
previous year.
(D) Rate of Additional Depreciation :
(i) If the asset is put to use for less than 180 days
in the year in which it is acquired 10% of Actual cost
 (ii) In any other case 20% of Actual cost
(E) Year in which additional depreciation is available : In case of a new industrial
undertaking, additional depreciation is available during the previous year in which it begins to
manufacture or produce any article on or after 31.3.2005.
(F) Certificate from a Chartered Accountant : Additional depreciation will not be
available unless the assessee furnished details of machinery and plant and increase in installed
capacity in a prescribed form along with the return of income and a report of a Chartered
Accountant certifying that the deduction has been correctly claimed.

Unabsorbed Depreciation [Section 32 (2)] :

Step 1 : Depreciation allowance of the previous year is first deductible from income under
the head ‘Profits and Gains of Business/Profession’.
Step 2 : If the depreciation allowance is not fully deductible under the head ‘Profit and Gain
of Business/Profession’ because of the absence or inadequacy of profits, it is deductible from the
income chargeable under another head of income for the same A.Y.
Step 3 : If the depreciation allowance is still unabsorbed it can be carried forward to the
subsequent Assessment Year by the same assessee (no time limit is fixed for carry forward).
Note :1. In the subsequent years, unabsorbed depreciation can be set off against any income
whether chargeable under the head ‘Profits and Gains of Business/Profession. Under any other
head in the following priority minus the current depreciation, B/f of business loss, unabsorbed
depreciation. 2. Continuity of business is not relevant for set off and carry forward.
Depreciation on Straight-line basis in the case of Power Units : An undertaking engaged
in generation or generation and distribution of power can claim depreciation (in respect of assets
acquired after March 31, 1997) according to any one of the following methods −
Straight-line basis : Depreciation can be claimed according to straight line basis in the case
of tangible assets at the percentage specified in Appendix IA to the Income-tax Rules on the
actual cost of the individual asset. The aggregate depreciation cannot exceed the ‘actual cost’.
Written down basis : Alternatively such undertaking can claim depreciation at its option
according to written down value method like any other assessee. The option for this purpose
shall be exercised before the due date of furnishing return of income. Once the option is
exercised it shall be final and shall apply to all the subsequent years.

Terminal Depreciation (i.e. Loss on transfer) or Balancing charge (in the case of gain) in
the case of power units : When a depreciable asset (on which depreciation is claimed on
Straight line basis) of a power generating unit is sold, discarded, demolished or destroyed in a
previous year, then terminal depreciation (in case of loss) is deductible on balancing charge (in
case of gain) is taxable.
Terminal depreciation is calculated as follows −
Step one : Find out the written down value of the depreciable asset on the first day of the
previous year in which such asset is sold, discarded, demolished or destroyed.
Step two : Find out the actual money (received or receivable in cash or by cheque or draft)
and it does not include nay other thing or benefit which can be converted in terms of money
 If the amount calculated under Step two is less than the amount of Step one, then the
deficiency is deductible as terminal depreciation. The following points should be noted −
1. When the asset is sold, discarded, etc. in the previous year in which it is first put to use,
any loss arising there from is not allowed as terminal depreciation but it is treated as
capital loss.
2. Terminal depreciation allowance cannot be claimed if the asset is not used for the
purpose of business or profession of the assessee at least for sometime during the
previous year in which the sale takes place.
3. Terminal depreciation is allowed only if it is actually written off in the books of the
assessee.
Balancing charge under section 41(2) and capital gain under section 50A. If the amount
calculated under Step two is more than the amount of Step 1 , the tax treatment of such surplus is
as follows :
1. So much of the surplus which is equal to the amount of depreciation already claimed, is
taxable as balancing charge under section 41(2) as business income.
2. The remaining surplus (if any) is taxable according to the provisions of section 45 under
the head “Capital Gains”.
Other points : The following points should be noted −
1. Where an asset is sold, discarded etc. in the previous year in which it is first put to use,
any profit arising there from will not be chargeable to tax as balancing charge but will
be treated as capital gains and chargeable to tax under section 45 under the head
“Capital Gains”.
2. Balancing charge is taxable under section 41(2) in the previous year in which sale price,
insurance, salvage or compensation money becoming due (whether the business is in
existence in that year or not). In case of compulsory acquisition, it is taxable in the year
of receipt of additional compensation.
Incentive for acquisition and installation of new plant or machinery by manufacturing
company [Section 32AC]
(A) Manufacturing company eligible for deduction @15% of actual cost of new asset being
eligible plant and machinery [Section 32AC(1)]
As per section 32AC(1) where the assessee, being a company-
(a) is engaged in the business of manufacturing of an article or thing, and
(b) acquires and installs new assets (eligible plant or machinery) during the period beginning
from 1.4.2013 and ending on 31.3.2015 and the aggregate amount of actual cost of such
new assets exceeds Rs.100 crores, then, such company shall be allowed-
(i)for the AY 2014-15, a deduction of 15% of aggregate amount of actual cost of new
assets acquired and installed during the financial year 2013-14,if the aggregate
amount of actual cost of such assets exceeds Rs.100 crore.
(ii)for the AY 2015-16, a deduction of 15% of aggregate amount of actual cost of new
assets acquired and installed during the period beginning on 1.4.2013 and ending on
31.3.2015 as reduced by the deduction allowed, if any, for the AY 2014-15
Amendment made w.e.f. 2015-16 [ section 32AC (1A)
Deduction shall also be allowed if the company on or after 1-4-2014 acquires and installs eligible
plant and machinery during the previous year, the aggregate amount of actual cost of which
exceeds Rs.25 crores.
Further, the assessee who is eligible to claim deduction under the existing combined threshold
limit of Rs.100 crore for investment made in previous years 2013-14 and 2014-15 shall continue
to be eligible to claim deduction under the existing provisions contained in section 32AC(1) even
if its investment in the previous year 2014-15 is below the new threshold limit of investment of
Rs.25 crore during the previous year.
However, no deduction u/s 32AC(1A) shall be allowed for any assessment year commencing on
or after 1-4-2018.
The other conditions of section 32AC shall also be applicable to the newly inserted section
32AC(1A)
(B) Meaning of new asset [section 32 AC(4)]
Net assets means any new plant or machinery (other than ship or aircraft) but does not include-
(i) any plant or machinery which before its installation by the assessee was used either within or
outside India by any other person.
(ii) any plant or machinery installed in any office premises or any residential accommodation
including accommodation in the nature of guest house.
(iii) Any office appliances including computers or computer software.
(iv)Any vehicle,
(v) Ship or aircraft, or
(vi)any plant or machinery, the whole of the actual cost of which is allowed as deduction
(whether by way of depreciation or otherwise) in computing the income chargeable under the
head “Profit and gains of business or profession” of any previous year
Notes
The above new asset acquired and installed should not to be sold or otherwise transferred within
a period of 5 years from the date of installation except in connection with amalgamation or de-
merger

(C ) Consequences if the new asset acquired or installed is transferred within a period of 5

years from the date of its installation [section 32AC(2)]
If any new asset acquired and installed by the assessee is sold or otherwise transferred within a
period of 5 years from the date of installation except in connection with amalgamation or de-
merger, the consequences shall be as under:
1.The amount of deduction allowed under section 32AC (1) in respect of such new asset shall be
deemed to be income chargeable under the head profit and gains of business or profession of the
previous year in which such new asset is sold or otherwise transferred.
2.In addition to above, if any capital gain arises u/s 50 on account of transfer of such new asset,
that too shall become taxable in that previous year

(D) Consequences if amalgamated company or resulting company transfers such assets

within 5 years from the date of installation by the amalgamated company or de-merged
company [section 32AC(3)]
If after amalgamation or de-merger, the amalgamated company or the resulting company, as the
case may be, sells or transfers any such asset within 5 years from the date of its installation by
the amalgamating company or the de-merged company, then the amalgamated company or
resulting company shall be taxed in the same manners as it would have been taxed in the hands
of the amalgamated or de-merged company, as the case may be.

4.3.4 Tea Development Account, Coffee Development Account and Rubber Development
Account [Section 33 AB]
An assessee carrying on business of growing and manufacturing tea or coffee in India is
entitled for deduction to the extent of least of the following :
(a) amount deposited in special A/c with NABARD maintained by the assessee with that
bank in accordance with and for the purpose specified in a scheme approved in this
behalf by the Tea Board or the Coffee Board or the Rubber Board within a period of
6 months from the end of the previous year or before due date of furnishing return of
income, whichever is earlier.
(b) 40% of profits of such business as computed before making deduction u/s 33 AB and
before adjusting brought forward business loss u/s 72.
How to compute profits from such business : If separate accounts are not maintained in
respect of business of growing and manufacturing tea or coffee or rubber in India, it shall be
profits from such business before claiming deduction under this section. In case separate
accounts are not maintained it will be calculated as under :

Profits of the business 

1. For claiming deduction u/s 33 AB, assessee must get accounts audited by a Chartered
Accountant and furnish the report of such audit in prescribed form along with his return
of income.
2. The amount standing to the credit of special account with NABARD is to be utilized as
per the specified scheme of Tea Board.
In no case, it shall be utilized for the purpose of the following :
(a) Any machinery / Plant installed in any office premises / residential accommodation
including guest house.
(b) Any office appliances (other than computer).
(c) Any machinery or plant entitled for 100% write off by way of depreciation or otherwise
(d) Any new machinery or plant installed for production of any low priority item specified
in the Eleventh Schedule.
3. Deduction allowed under this provision will be withdrawn if the asset acquired in
accordance with the scheme, is sold or otherwise transferred within 8 years from the end
of the previous year in which it was acquired. However, it shall not be withdrawn in the
following cases :
− Transfer to Government, Local Authority or Statutory Corporation or Government Co.
 − In case of Sale of business by partnership firm to a company, if Company has taken over
all assets and liabilities of the firm and all the shareholders of the company were
partners of the firm before such sale.
4. Assessee is however, allowed to withdraw any amount standing to his credit in special
account with NABARD in the following circumstances :
(a) Closure of business
(b) Dissolution of firm
(c) Death of an assessee
(d) Partition of a HUF
(e) Dissolution of a Company
Where the withdrawal is made in the circumstances stated above in (a) and (b), the amount
withdrawn such business shall be taxable as business profit of that Previous year, as if the
business had not been closed or the firm had not been dissolved.
4.3.5 Site Restoration Fund [Section 33ABA]
This section has been inserted to allow deduction to an assessee who is carrying on business
consisting of the prospecting for or extraction or production of petroleum or natural gases or both
in India.
Essential conditions:
1. This deduction will be allowed to any assessee who is carrying on business consisting of
prospecting for or extraction or production of petroleum or natural gas or both in India
and in relation to which the Central Government has entered into an agreement with
such assessee for such business.
2. The assessee has before the end of the previous year −
(a) Deposited with the State Bank of India any amount(s) in a special account
maintained by the assessee with that bank, in accordance with and for the purposes
specified in, a scheme approved in this behalf by the Ministry of Petroleum and
Natural Gas of the Government of India; or
(b) Deposited any amount in the Site restoration Account opened by the assessee in
accordance with, and for the purpose specified in a scheme framed by the aforesaid
Ministry. This scheme is known as Deposit Scheme.
3. The assessee must get its accounts audited by a Chartered Accountant and furnish the
report in the prescribed form (Form No.3AD) along with the return of income. In a case
where the assessee is required by or any other law to get its accounts audited, it shall be
sufficient compliance if such assessee gets the account of such business audited under
such law and furnishes the report of the audit as required under such other law and a
further report in the form prescribed.
Profits from business in this case is to be calculated in the same manner as is mentioned in
section 33AB.
Quantum of deduction – Quantum of deduction shall be :
(a) The amount deposited in the scheme referred to above; or
(b) 20% of the profit of such business computed under the head “profits and gains of
business or profession”, whichever is less
 The profits are to be computed before making any deduction under this section i.e. section
33ABA and before making adjustment for brought forward losses under section 72.
Restriction on utilization of the amount deposited : The amount standing to the credit of
the assessee, in the Special Account of State Bank of India or the Site Restoration Account, is to
be utilized for the business of the assessee in accordance with the scheme specified. However, no
deduction shall be allowed in respect of any amount utilized for the purchase of −
(a) Any machinery or plant to be installed in any office premises or residential
accommodation, including any accommodation in the nature of a guest house;
(b) Any office appliances (not being computers);
(c) Any machinery or plant, the whole of the actual cost of which is allowed as a deduction
(whether by way of depreciation or otherwise) in computing the income chargeable
under the head “Profits and gains of business or profession” of any one previous year;
(d) Any new machinery or plant to be installed in an industrial undertaking for purposes of
business of construction, manufacture or production of any article or thing specified in
the list in the Eleventh Schedule.
Consequence if new asset is transferred within 8 years : Same as in Section 33 AB.
Withdrawal of deposits : Any amount deposited in the special account maintained with
State Bank of India or the Site Restoration Account shall not be allowed to be withdrawn, except
for the purposes specified in the scheme, or as the case may be, in the deposit scheme.

Where any amount standing to the credit of the assessee in the special account or in the Site
Restoration Account is utilized by the assessee for the purpose of any expenditure in connection
with such business not in accordance with the scheme or the deposit scheme, such expenditure
shall not be allowed in computing the income chargeable under the head Profit and gains of
business or profession i.e. Double Deduction is not possible.
4.3.6 Expenditure on Scientific Research [Section 35]
The expression scientific research means, “activities for the extension of knowledge in the
fields of natural or applied science including agriculture, animal husbandry or fishery.”
Besides scientific research, donation for research in social sciences like human behaviour and
marketing research work are also covered under this section.
Scientific research may be carried on :
(a) by the aseessee, relating to his business; or
(b) by making payment to outside agencies engaged in scientific research work.
(A) Where the assessee carries Scientific Research relating to his business :
1. Before the commencement of Business : If the assessee incurs any expenditure within
three years immediately preceding the commencement of his business, on :
− Payment of salary to research personnel engaged in scientific research, and
 − Material inputs for such scientific research.
Such expenditure will be allowed as deduction in the year in which the business is
commenced. The deduction will be limited to the amount certified by the prescribed authority.
Similarly, Capital Expenditure (except, Acquisition of Land after 29/4/84) incurred during three
years immediately preceding the date of commencement of the business shall be deemed to be
the expenses of the previous year of the commencement of the business and allowed in that year.
2. After commencement of the Business : Any revenue as well as capital expenditure,
except for Acquisition of Land after 29.4.84, on scientific research relating to his business is
deductible in full.
Important Points :
(1) Carry forward of unabsorbed capital expenditure : Capital expenditure on scientific
research, which cannot be absorbed on account of insufficiency of profits in any
accounting year, can be carried forward for an indefinite period and can be set off
against income under the head ‘Profits and Gains of Business/Profession’ and under any
other head.
(2) Use of the asset for some other purposes : If the capital asset used for scientific
research purposes is used in the business for some other purposes, no further
depreciation can be allowed u/s 32.
(3) Sale of Asset : If any asset used for scientific research purpose, is sold, then the price
realised for the same shall be taxable u/s 41(3).
(4) Amalgamation : Where amalgamating company transfers to the amalgamated
company, (being an Indian company), any asset representing capital expenditure on
scientific research, provisions of Section 35, would apply to the amalgamated company
as if the amalgamating company had not transferred the asset.
Payment to outside agencies : Payment may be made for −
(1) Scientific research [Section 35(1)(ii) and (iia) : Any payment made to outside agencies
for scientific research whether related to the business of the assessee or not, is allowed as
weighted deduction @ 175% the amount so paid in the previous year in which payment is
made. The deduction is allowable if the payment is made to any of the following
agencies:
(a) a scientific research association which has the object of undertaking scientific
research;
(b) a university, college or other institutions to be used for scientific research.
(2) Research in social science or statistical research [Section 35(1)(iii)] : Payment made by
the assessee to a university, college or other institution to be used for research in social
sciences or statistical research shall also be eligible for deduction @ 125% of the amount
so paid whether such research is related to the business of the assessee or not
The deduction mentioned in clause (1) and (2) above shall be allowed only if the association,
university, college or other institution mentioned in clause (a) or (b) above −
(A) Is for the time being approved, in accordance with the guidelines, in the manner and
subject to such conditions as may be prescribed.
(B) Such association, university, college or other institution is specified as such by
notification in the Official Gazette, by the Central Government.
Weighted deduction on contribution to National Laboratory [Section 35 (2AA)] :
(i) The payment is made to National Laboratory, or, University; or Indian Institute of
Technology; or, specified person as approved by the prescribed authority.
(ii) The above payment is made under a specific direction that it should be used by the
aforesaid person for undertaking scientific research programme approved by the
prescribed authority.
If the aforesaid conditions are satisfied, the tax payer is eligible for weighted deduction
which is equal to 200 per cent
Weighted deduction on ‘in house’ research and development to a company assessee in
certain cases [Section 35 (2AB)] :
Weighted deduction of 200% will also be allowed to a company which −
(a) is engaged in any business of manufacture or production of any article or thing not
being an article or thing specified in the list of the Eleventh Schedule of the Act, and
(b) has incurred expenditure (except on land and building) on in-house scientific research
and development facility approved by the prescribed authority.
No company shall be entitled to this deduction unless it enters into an agreement with the
prescribed authority for cooperation in such research and development facility and for the audit
of the accounts maintained for that facility.
Notes :
(i) If expenditure is allowed under this section, it will not be allowed under any other provision
of the Act.
(ii) The expenditure incurred on the acquisition of building(excluding cost of land) shall be
allowed @100% under section 35(1)(iv) read with section 35(2)
(iii) The expenditure incurred on scientific research by any of the above company shall not
be eligible for weighted deduction after 31-3-2017
(iv)the deduction u/s 35(2AB) shall not be allowed to a company who has the main object the
scientific research and development

4.3.7 Expenditure for Obtaining License to Operate Telecommunication Service [Section

35ABB]
Where any capital expenditure is incurred by the assessee for acquiring any right to operate
telecommunication services either before the commencement of the business to operate a
telecommunication service or thereafter, any time during any previous year and for which
payment has actually been made to obtain a license, a deduction will be allowed in equal
instalments over the period for which the license remains in force, subject to the following :
(a) If the fee is paid for acquiring any right to operate telecommunication services before
the commencement of such business, the deduction shall be allowed for the previous
years beginning with the previous year in which such business commenced.
(b) If the fee is paid for acquiring such rights after the commencement of such business the
deduction shall be allowed for the previous years beginning with the previous year in
which the license fee is actually paid.
Sale of License :
(a) Where the entire license is transferred
(i) If the sale proceeds and the deductions already allowed are less than the cost of
acquisition, such deficiency shall be allowed as deduction in the year in which the
license is transferred.
(ii) If the sale proceeds and the deductions already allowed exceed the cost of
acquisition of the license, then the amount of such excess or the aggregate of the
deductions already allowed in the past, whichever is less, shall be taxable as
business income of the year in which the license is transferred.
(b) Where a part of the license is transferred
(i) Where a part of the license is transferred for a sum less then the written down value
of the total license, the balance amount not yet written off shall be allowed as
deduction in the balance number of equal instalments.
(ii) If part of the license is transferred for a sum exceeding the written down value of
the license, the sale proceeds minus the written down value of the full license shall
be the profit from such sale. Out of such profit, an amount equal to the amount
already written off in the earlier years shall be deemed to be the business income.
It may be mentioned that the license constitutes a capital asset and as such there will be
capital gain/loss on sale of the entire part of the license.
Notes :
1. In the case of amalgamation and de-merger, the amalgamated company or the resulting
company, as the case may be, shall be allowed to writ off the balance amount of license
which was not written off by the amalgamating company or de-merged company as the
case may be.
2. Where a deduction for any previous year under section 35ABB(1) is claimed and
allowed in respect of any expenditure referred to in that sub section, no deduction shall
be allowed on account of depreciation under section 32(1) for the same previous year or
any subsequent previous year.
4.3.8 Expenses on Eligible Projects or Schemes [Section 35 AC]
Under this section, deduction will be allowed in computing profits of business or profession
chargeable to tax, in respect of the expenditure incurred for an eligible project or scheme for
promoting social and economic welfare or uplift of the public as may be specified by the Central
Government on the recommendations of the National Committee.
The deduction will be allowed in cases where the qualifying expenditure is either incurred by
way of payment to the public sector company, a local authority or to and approved association or
institution for carrying out any eligible project or scheme. Companies will however, be allowed
the deduction also in cases where the expenditure is incurred by them directly on an eligible
project or scheme.
The claim for deduction should be supported by an audit certificate obtained from a public
sector company, local authority or approved association or institution or from a Chartered
Accountant in cases where the claim is in respect of expenditure directly incurred by a company
on an eligible project or scheme.
Deduction in respect of expenditure on specified business [Section 35AD]
The income tax act provides for profit linked exemption/deduction under various sections.
Some of the exemptions are provided in the following sections:
(1) Section 10AA
(2) Section 80-1A, 80-1AB, 80-1B, 80-1C, 80-1D, and 80-1E
However with effect from assessment year 2010-11, it has made a departure and now
onwards incentive linked tax incentive (instead of profit linked exemption/deduction, shall be
allowed to assessee carrying on certain specified business. In this regard Section 35AD has been
inserted for specified business.
1. To whom deduction shall be allowed : Deduction u/s 35AD shall be allowed to the
assessee which is carrying on any of the following specified business :
(i) setting up and operating a cold chain facility
(ii) setting up and operating a warehousing facility for storage of agricultural
produce
(iii) 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
(iv) the business of building and operating new hotel of two star or above category, as
classified by the Central Government, any where in India and
(v) building and operating anywhere in India, a hospital with at least 100 beds for
patients.
(vi) developing and building a housing project under a scheme for slum redevelopment
or rehabilitation framed by the central Government or a State Government as the
case may be, and notified by the Board in this behalf in accordance with the
guidelines as may be prescribed.
(vii) developing and building a housing project under a scheme for affordable housing
framed by the central Government or a State Government as the case may be, and
notified by the Board in this behalf in accordance with the guidelines as may be
prescribed.
(viii) production of fertilizer in India
(ix) Setting up and operating inland container depot or a container freight station notified
or approved under the Customs Act, 1962.
(x) bee-keeping and production of honey and bees wax, and.
(xi) setting up and operating a warehousing facility for storage of sugar
The following two businesses have been inserted w.e.f. AY 2015-16.
(xii) Setting up and operating a slurry pipeline for the transportation of iron ore,
 (xiii) Setting up and operating a semiconductor wafer fabrication manufacturing unit, if
such unit is notified by the Board in accordance with the prescribed guidelines

2. Nature and amount of deduction : 100% deduction shall be allowed on account of any
expenditure of capital nature incurred wholly and exclusively for the purpose of any specified
business, shall be allowed as deduction during the previous year in which he commences
operations of his specified business, if −
(a) the expenditure is incurred prior to the commencement of its operation; and
(b) the amount is capitalized in the books of account of the assessee on the date of
commencement of its operations.
Weighted deduction for certain specified business commencing operations on or after 1-4-
2012[Section 35AD(IA)]
The following specified business commencing operations on or after 1.4.2012 shall be allowed a
weighted deduction of 150% of the capital expenditure incurred under Section 35AD(IA) of the
Income-tax Act, namely:
(i) Setting and operating a cold chain facility
(ii) setting up and operating a warehousing facility for storage of agricultural produce
(iii) building and operating anywhere in India, a hospital with at least 100 beds for patients
(iv) developing and building a housing project under a scheme for affordable housing framed by
the central Government or a State Government as the case may be, and notified by the Board
in this behalf in accordance with the guidelines as may be prescribed, and
(v) production of fertilizer in India

Conditions to be satisfied:
(i) It is not formed by the splitting up or the reconstruction of a business already in
existence.
(ii) It is not formed by the transfer to new business of machinery or plant previously used
for any purpose.
(iii) Where the business is of laying and operating a cross country natural gas or crude or
petroleum oil pipeline network, etc. it satisfies the following conditions also:
(a) it is owned by a company formed and registered in India under the companies Act,
1956 or by a consortium of such companies or by an authority or board or a
corporation established or constituted under any Central or State Act.
(b) it has been approved by the Petroleum and Natural Gas Regulatory Board
established under sub-section (1) of section 3 of the Petroleum and Natural Gas
Regulatory Board Act, 2006 and notified by the Central Government in the Official
Gazette in this behalf;
(c) it has made not less than one-third [amended to “such proportion of its total
pipeline capacity as specified by regulations made by the Petroleum and Natural
Gas Regulatory Board established under sub section (1) of section 3 of the
Petroleum and Natural Gas Regulatory Board Act, 2006 [Finance Bill 2010, to take
effect retrospectively from 1.4.2010] of its total pipeline capacity available for use
 on common carrier basis by any person other than the assessee or an associated
person; and
(d) it fulfills any other conditions as may be prescribed.

Asset for which deduction has been claimed u/s 35AD to be used only for specified business
for a period of 8 years [Section 35AD(7A) and (7B)
Any asset in respect of which depreciation is claimed and allowed u/s 35AD,shall be used only
for the specified business for a period of eight years beginning with the previous year in which
such asset is acquired or constructed.
Further if the asset is used for any purpose other than the specified business during the period of
8 years specified in section 35AD(7A),otherwise then by way of a mode referred to in section
28(vii),the total amount of deduction so claimed and allowed in any previous year in respect of
such asset, as reduced by the amount of depreciation allowable in accordance with the provisions
of section 32 as if no deduction has been allowed u/s 35AD,shall be deemed to be the income of
the assessee chargeable under the head “Profits and Gains of business or profession” of the
previous year in which the asset is so used.

Notes: Section 28(vii) provides that if any asset on which deduction u/s 35AD has been
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
Notes :
The assessee shall not be allowed any deduction in respect of the specified business under the
provisions of Chapter VIA under the heading “C-Deductions in respect of certain incomes” in
relation to such specified business for the same or any other assessment year.

4.3.9 Payment to Institutions For Carrying Out Rural Development Programmes [Section
35 CCA]
Any assessee who wants to avail of this section will get a deduction only if he makes a
payment to the National Fund for Rural Development and National Urban Poverty Eradication
Fund which are the only funds which have been notified so far by the Central Government u/s 35
CCA (1).
Expenditure on agricultural extension project [Section 35 CCC]
Where an assessee incurs any expenditure on agricultural extension project notified by the Board
in this behalf in accordance with the guidelines as may be prescribed then, there shall be allowed
a deduction equal to one and one-half times of such expenditure.
Where a deduction under this section is claimed and allowed for any assessment year in respect
of any expenditure referred here deduction shall not be allowed in respect of such expenditure
under any other provisions of this Act
Expenditure on skill development project [Section 35 CCD]
Where a company incurs any expenditure (not being in the nature of cost of any land or building)
on any skill development project notified by the Board in this behalf in accordance with the
guidelines as may be prescribed then, there shall be allowed a deduction equal to one and one-
half times of such expenditure.
Where a deduction under this section is /claimed and allowed for any assessment year in respect
of any expenditure referred here deduction shall not be allowed in respect of such expenditure
under any other provisions of this Act
4.3.10 Amortisation of Preliminary Expenses [Section 35 D]
Where an (i) Indian Company or (ii) a resident non-corporate assessee in India incurs any
expenditure of the nature specified either :
− before the commencement of the business or
− after the commencement of the business, in connection with extension of his industrial
undertaking or setting up a new industrial unit, a deduction u/s 35 D is available.
Quantum of Deduction : Amount equal to 1/5 of the eligible expenditure is deductible over
a period of five years beginning with the previous year in which the extension of the industrial
undertaking is completed or a new industrial unit commences production or operation.
Eligible Expenditure :
(a) Expenditure in connection with :
(i) Preparation of a feasibility report;
(ii) Preparation of a project report;
(iii) Conducting a market survey or any other survey necessary for the business of the
assessee;
(iv) Engineering services relating to the business of the assessee.
(b) Legal charges for drafting any agreement between the assesee and any other person for
any purpose relating to the setting up or conduct of the business of the assessee.
(c) Where the assessee is a company, also expenditure :
(i) By way of legal charges for drafting the Memorandum and Articles of the
Association of the Company;
(ii) On printing of the Memorandum and Articles of the Association;
(iii) By way of fees for registering the company under the provisions of Companies Act,
1956;
(iv) In connection with the issue, for public subscription, of shares in or debentures of
the company, being underwriting commission, brokerage and charges for drafting,
printing and advertisement of the prospectus. Expenses incurred in connection with
refund of the amount over subscribed, are entitled to deduction u/s 35 D. [C.I.T. vs.
Shree Synthetics Ltd (1986)].
(d) Such other items of expenditure as may be prescribed.
Limit on eligible expenditure :
 In case of non corporate resident assessee – 5% of project cost,
In case of Indian Company – 5% of or project cost or 5% of capital employed (at the option
of the assessee).
Important Points :
1. Cost of the project is the cost of a fixed asset to an assessee as on the last day of the
previous year in which the business commences/extension is completed/the new
industrial unit commences production or operation.
2. Capital employed is the aggregate of the issued share capital, debentures, long-term
borrowing as on the last day of previous year in which the business commences/
extension is completed/the new unit commences production or operation.
3. In case of extension/new unit cost of the project/capital employed is considered in
connection with the extension or setting up of a new unit only.
4. In case of transfer of the undertaking, the transferee company (except in case of
amalgamation and de-merger) looses the benefit of any deduction for the years after
such transfer.
Amortisation of expenditure in the case of amalgamation/de-merger [Section 35 DD] :
Where an assessee, being an Indian Company incurs expenditure (on or after 01.04.1999)
wholly and exclusively for the purpose of amalgamation or demerger; the assessee shall be
allowed a deduction equal to one-fifth (1/5th) of such expenditure for 5 successive previous
years beginning with the previous year in which amalgamation or demerger takes place,
w.e.f. A.Y. 2000-01.
Amortisation of expenditure under voluntary retirement scheme [Section 35DDA] :
Where an assessee incurs any expenditure in any previous year by way of payment of any
sum to an employee at the time of his voluntary retirement under any scheme of voluntary
retirement 1/5th of the amount so paid shall be deducted in computing the profits and gains of
the business for that previous year and the balance in equal instalments for each of the four
immediately succeeding previous years.

4.3.11 Deduction for Expenditure on Prospecting for Minerals [Section 35E]

This section has been inserted with a view to encouraging investment in high risk areas,
especially in exploiting amortisation of expenditure incurred wholly and exclusively on any
operations relating to prospecting for certain specified minerals or groups of minerals or on
developing mines etc. Following points are to be noted :
1. Deduction is available only to an Indian resident or an Indian company but not to any
foreign citizen or foreign company.
2. 1/10th of the amount of expenditure would be allowed as a deduction for the 10 years
beginning with the years in which commercial production starts.
3. Expenses, to be amortised, will be expenses incurred under the specified heads during
the five years’ period ending with the year of commercial production.
4. If, in any year, income arising out of commercial exploitation of wasting asset is NIL or
insufficient to absorb, the allowance under this section the unabsorbed allowance is to
 be carried forward to the next year(s). However, this process of carry forward cannot be
continued beyond 10 years as reckoned from the year of commercial production.
5. Deduction in case of amalgamation/de-merger-Where in a scheme of amalgamation,
the
Indian company is transferred to another Indian company before the expiry of the said
period of 10 years, the provisions of this section shall, as far as may be, apply to the
amalgamated company as they would have applied to the amalgamating company if the
amalgamation had not taken place. Similarly where the undertaking of an Indian
company which is entitled to deduction under this section, before the expiry of the
period of 10 years to another company in a scheme of de-merger, no deduction shall be
admissible in this case to the de-merged company for the previous year in which the
de-merger takes place and the provision of this section, as far as may be, apply to the
resulting company, if the de-merger had not taken place.
4.3.12 Other Deductions under Section 36
There are various other expenses, which are allowed as deduction u/s 36 for obtaining the
taxable profits. They are briefly described below :
1. Insurance premium paid for risk or damage or destruction of stock or stores or other
inventories or assets used for the business or profession will be deductible
[Section 36(1)(i)].
2. Insurance of life of cattle – Insurance premium paid by a federal milk cooperative
society on the life of any cattle owned by any member of a primary milk cooperative
society affiliated to it will be allowed as a deduction [Section 36(1)(ia)].
3. Employees Health Insurance Premium paid by cheque by an employer–assessee to
effect or keep in force insurance of the health of his employees under an approved
scheme will be avowed as a deduction in computing his business income
[Section 36(1)(ib)]
4. Bonus and Commission paid to an employee for services rendered by him, will be
allowed as a deduction, subject to a primary condition that the amount has not been
distributed by way of profits or dividends and such bonus or commission has been paid
in the relevant previous year or on or before the due date of filing of the return of
income of the assessee [Section 36 (1)(ii)].
5. Interest on money borrowed – Interest paid in respect of money borrowed for the
purposes of business or profession is deductible u/s 36 (1)(iii), provided the following
conditions are satisfied. Pro rata discount on zero coupon bonds also gets allowed under
this category subject to certain conditions :
(a) Money must have been borrowed by the assessee.
(b) It must be borrowed for the purpose of business or profession.
(c) Interest is paid or is payable on such a borrowing.
6. Discount on issue of Zero Coupon Bonds to be allowed as deduction on pro rata basis
[(Section 36 (1)(iii a)] : The pro-rata amount of discount on a zero coupon bond having
regard to the period of life of such a bond calculated in the manner prescribed below.
Discount means the difference between the amount received or receivable by the
infrastructure capital company or infrastructure capital fund or public sector company
issuing the bond and the amount payable by such a company or fund or public sector
company on maturity or redemption of such a bond. Period of the life of the bond means
the period commencing from the date of issue of the bond and ending on the date of
maturity or redemption of such a bond. Infrastructure capital company and infrastructure
capital fund shall have the same meanings respectively assigned to them as provided in
Explanation I to Clause 23G of Section 10.
7. The employer’s contribution to a recognised provident fund or approved superannuation
fund is allowed as deduction, subject to the limit laid down for such payments and
provided these payments have been made on or before the due date of making such
payments by the employer [Section 36 (1)(iv)].
7a. Employer’s contribution towards a pension scheme referred to in section 80CCD [section
36(1)(iva)]
8. The employer’s contribution to an approved gratuity fund will be allowed as a
deduction, provided these payments have been made on or before the due date of
making such payments by the employer [Section 36(1)(v)].
9. The employee’s contribution to approved or statutory staff welfare schemes will be
allowed as a deduction from the income of the employer provided such amounts have
been paid on or before the due date of making such payments [Section 36(1)(va)].
10. Animals written off – In the case of animals used for the purpose of business/ profession
otherwise than a stock-in-trade, if such animals have died or have become permanently
useless for the purpose of such business or profession, the difference between their
actual cost and the amount realised on sale of those animals or their carcasses will be
allowed as a deduction [Section 36(1)(vi)].
11. Bad Debts [Section 36 (1)(vii)] : Bad debts, which are written off as irrecoverable, can
be deducted subject to the following conditions :
(a) The debt or loan should be in respect of a business, which was carried on during
the relevant previous year.
(b) The debt must have been taken into account in computing the income of the
assessee of the previous year in which such a debt is written off or of an earlier
previous year. [In the case of a banking company, such a debt should represent
money lent in the ordinary course of the business of banking or money lending.]
Recovery of bad debt in the subsequent year shall be added to the taxable income of
the previous year in which recovery is made u/s 41(4).
12. Provision for bad and doubtful debts by commercial banks (other than a cooperative
bank) [Section 36(1)(viia)].
(a) A scheduled or non-scheduled bank may provide for the provision for bad and
doubtful debts up to 7.5% of their total income (before making any deductions
 under Chapter VIA) plus an additional 10% of the aggregate average advances
made by the rural branches of these banks.
(b) Foreign banks may make such provision up to 5% of the total income (before
making deduction under Chapter VIA).
(c) Public financial institutions may make such provision up to 5% of the total income
(before making deductions under Chapter VIA).
Important Points :
1. A scheduled bank means the SBI, a subsidiary bank of SBI, a corresponding new bank
constituted u/s 3 of the Banking Companies (Acquisition and Transfer of Undertaking)
Act, 1970/1980 of a bank included in the second schedule to RBI, 1934, but doesn’t
include a cooperative bank.
2. Foreign bank refers to the bank incorporated in a foreign country.
3. A scheduled bank or non-scheduled bank at its option is allowed a further deduction in
excess of the limits specified, for an amount not exceeding the income derived from the
redemption of securities in accordance with a scheme framed by the Central
Government. No deduction, as aforesaid, shall be allowed unless such income has been
disclosed in the return of income under the head ‘Profits and Gains of
Business/Profession’).
13. Transfer to a special reserve [Section 36(1)(viii), w.e.f. A.Y.2008-09] : A public financial
corporation engaged in long-term finance for industrial or agricultural developments or
infrastructure development in India and a public company formed and registered in
India with the main object of providing long-term finance for industrial or agricultural
developments or infrastructure development in India and a public company formed and
registered in India with the main object of providing long-term finance for the
construction or purchase of residential housing in India are entitled for deduction of the
amount transferred by them to a special reserve account subject to a maximum of 20%
of profit from such business (computed before making any deductions under chapter VI
A). However, where the aggregate amounts carried to such reserves from time to time
exceeds twice the paid-up share capital and reserves, no allowance is further allowed.
14. Family Planning Expenditure [Section 36(1)(ix)] : Any expenditure bona-fide incurred
by the company for the purpose of promoting family planning among the employees is
allowed as a deduction. If such expenditure is of a revenue nature, the entire amount will
be allowed as a deduction if it is of a capital nature (such as, purchase of equipment or
construction of a clinic or dispensary). 1/5th of the expenditure will be allowed as a
deduction in each of the five years from the year in which such expenditure has been
incurred in equal instalments.
15. Revenue expenditure incurred by a corporation or body corporate for the objects and
purposes authorised [Section 36(1)(xii)].
Any expenditure (not being in the nature of capital expenditure) incurred by a
corporation or a body corporate by whatever name called, shall be allowed as deduction in
computing its income under Section 28 of the act, if the following conditions are satisfied :
(a) It is constituted or established by a Central, State or Provincial Act.
(b) Such corporation or body corporate, having regard to the objects and purposes of the act
referred to in sub-clause (a) is notified by the Central Government in the Official
Gazette for the purposes of this clause; and
 (c) The expenditure is incurred for the objects and purposes authorised by the act under
which it is constituted or established.
16. Contributions made by a financial institution to a notified credit guarantee fund trust for
small industries [Section 36(1)(xiv)] : Any sum paid by a public institution by way of a
contribution to such credit guarantee fund trust for small industries as the Central
Government may, by notification in the Official Gazette, specified in this behalf, shall
be allowed as deduction.
17. Securities Transaction Tax paid to be allowed as deduction [Section 36(1)(xv)].
18. Commodities Transaction Tax paid to be allowed as deduction [Section 36(1)(xvi)].

4.3.13 General Deductions under Section 37

1. General deductions are allowed for expenses which are not covered by any other section
will be allowed as a deduction under Section 37 provided the following conditions are
satisfied :
(a) Expenditure should not be covered specifically by any of the provisions of Section
30 to 36.
(b) Such expense should be in respect of a business carried out by the assessee and the
profits of which are to be computed and assessed and should be incurred after the
business set up.
(c) It should not be in the nature of personal expenses of the assessee.
(d) Such expenses should not be in the nature of capital expenditure.
(e) Such expenses should have been incurred only and exclusively for the purpose of
such business.
(f) Such expenses should not be incurred for any purpose which is an offence as
prohibited by law.
2. Under this section, therefore, expenses by the way of cost of raw materials, tools, spares
etc. cost of labour, salary and various expenses incurred by the assessee will be allowed
as a deduction.
3. Few items of business expenditure covered under Section 37 are as follows.
4. Salary/wages for training period : The salaries and wages paid to the employees for the
period of the training in the courses organised by the Central Board of Workers’
Education should be allowed as admissible deduction while computing the income of
the employers. Letter : F.No.27 (30)-IT/59, dated 6-7-1959.
5. Membership fees : The expenditure by the way of membership fee of the Indian Institute
of Foreign Trade can be said to be wholly and exclusively incurred for the purpose of
business of the members. Therefore, such expenditure may be allowed as admissible
deduction under Section 37(a) in the hands of the payers in computing their total income
from business. Letter : F.No.9/54/64-IT (A-1),dated 2-9-1964 and Letter : F.No.9/56/66-
IT (A-I), dated 17-1-1967.
6. The expenditure by way of membership fee of the Indian Institute of Packaging can be
said to be wholly and exclusively incurred for the purpose of business of the members.
Therefore, such expenditure may be allowed as admissible deduction, under Section
37(1), in the hands of the prayers in computing their total income from business.
Letter : F No. 9/23/67-IT (a-1) dated 26.08.1965.
7. Laga contribution – Where laga contribution is made at the customary rate prevalent in
the market, such contribution should be allowed in full in the assessment of the member-
contributors. Circular : No. 5-P (XIV-1) dated 28.09.1963.
8. Share listing expenses : Expenses incurred by a company on getting its shares listed in a
stock exchange should be considered as laid out wholly and exclusively for the purposes
of the business and therefore, admissible as business expenditure under Section 37(1).
Letter F. No. 10/67-65-IT (A-1) dated 26.08.1965.
9. Professional Tax : Professional tax paid by a person carrying on business or trade can be
allowed to him as a deduction under Section 37(1). Circular No. 16(F. No. 9/38/69-IT
(A-II)], dated 18.09.1969.
10. Payments under profit sharing scheme : Where the payments made under a profit
sharing scheme are bonafide and not merely a device to reduce tax liability and the sums
have actually been paid to the employees, the amounts may be treated to have been
expended wholly and exclusively for the purposes of the employer’s business. Circular
No. 64(XI-2) [F. No. 27(10)-IT-51], dated 27.10.1951.
11. Rebate/bonus to members by Consumer Cooperative stores : Rebate/bonus (which is in
the nature of deferred discount) passed on by the consumer cooperative stores to their
members on the value of the purchases made by them during a year should be allowed
as a deduction in computing the business income of such a society. Circular No. 117 [F.
No. 201/5/73-IT (A-II)], dated 22.08.1973.
12. Remuneration paid by a company to the Registrar : Reasonable remuneration paid by a
company to its Registrar for performing duties in connection with the company’s legal
obligations to be discharged under the company law should be regarded as revenue
expenditure, provided the company is not itself maintaining a separate organisation for
the performance of such duties. Letter [F. No. 10/25/63-IT (A-I)], dated 18.06.1964.
13. Expenses allowable to Indian authors/writers : In cases of Indian authors/writers where
the amount receivable from royalties/writings is less than ` 25,000 and where detailed
accounts regarding expenses incurred are not maintained, claims of expenses to the
extent of 25 percent of such amount or ` 5,000, whichever is less, may be allowed in the
year of publication of a book or other publication, including articles. The expenses to
the extent mentioned above will be allowable without calling for any evidence in
support of the claim. This circular will not, however, be available in cases of such
authors/writers who are included in the terms of film artistes being storywriters,
screenplay writers and dialogue writers if they are engaged in their professional capacity
in the production of cinematograph film.
Letter [F. No. 204/42/77-IT (A-II)], dated 28.09.1977
14. Royalty/dead rent : Royalty and dead rent paid under the Mineral Concession Rules,
1960 will have to be allowed as revenue deduction.
 Circular No. 1 D (IV-53), dated 20.01.1966.
15. Expenses on sales tax assessments/appeals : The expenses incurred in original
proceedings for assessment to sales tax as also in appeals arising from such proceedings
should be allowed as a deduction in income tax assessments.
Circular No. 2 [C. No. 27(8)-IT/46], dated 8.3.1946.
16. Maintenance expenses on tea garden : All expenditure on the maintenance of a tea
garden, including expenditure on the maintenance of an area that has not reached
maturity, is an item of revenue expenditure and as such is allowable as deduction for the
purposes of computing the income of a tea estate, under the Income Tax Act. Source :
Income Tax Circulars published by Directorate of Inspection (RS and P), 1968 Edition
p. 192.
17. Telephone/conveyance expenses of newspaper agencies : Expenditure on qua telephones
and conveyance laid out wholly and exclusively by small newspaper agencies for the
purposes of the business can be allowed as deduction, but any expenditure in the nature
of personal expenses of such assessees is not admissible as deduction
18. In determining the non-business part of such expenditure, the Assessing Officers need
not go into meticulous details regarding each item and the officers should adopt a
reasonable approach in this respect having regard to the circumstances of the newspaper
business. Letter F. No. 35/5/65-IT (A-I), dated 1.7.1965.
19. Initial installation of fluorescent lights : The initial expenditure on the first installation
of fluorescent lights, including the expenditure on wiring and fittings, should be treated
as capital expenditure as it creates an asset and all subsequent expenditure for
replacement of the tubes should be treated as of a revenue nature, allowable in lot.
Circular No. 69(XIX-3) [F. No. 27(31)-IT/51], dated 27.11.1951.
20. Expenditure on visits to foreign countries : The question of admissibility of expenditure
on visits to foreign countries should not be approached from the point of view as to
whether such visits result immediately in the earning of profits. All that the law requires
is that the expenditure should not be in the nature of capital expenditure or personal
expenditure of the assessee and should be wholly and exclusively laid out for the
purposes of the business. Circular No. 4 [C. No. 27(3)-IT/50], dated 19.06.1950
21. Maintenance expenses of Industrial Home Guard Units : Revenue expenses incurred by
the industrial undertakings in connection with the maintenance of the Industrial Home
Guard Units may be treated as deductible expenses under Section 37(1).
Letter F. No. 10/80/64-IT (A-1), dated 26.02.1965.
22. Interest payable on unpaid purchase price of plant and machinery : Expenditure on
interest payable on the unpaid purchase price of plant or machinery should be allowed
as revenue deduction under Section 37(1).
Letter F. No. 10/92/64-IT (A-I), dated 13.09.1965.
23. Labour welfare expenditure : Any expenditure on labour welfare work, not of a capital
nature – actually incurred during the previous year – should be allowed in entirety as
 deduction in income tax assessments, irrespective of the actual amount of profits for that
year available for meeting the expenditure.
Circular No. 3 [R. Disc No. 27(50)-IT/46], dated 26.3.1946.
24. Legal expenses for renewal of lease : Legal expenses incurred in connection with the
renewal of lease should be allowed as an admissible deduction for the purposes of
income tax, provided that the renewal of the lease is for a period of less than fifty years.
Expenditure incurred on the compulsory removal of business premise, i.e., in cases
where the removal has taken place under the directions of government should, as in the
case of air raid precautions expenditure, be allowed as a deduction for purposes of
income tax. Circular No. 22 [R. Disc. No. 27(53)- IT/43], dated 23.06.1943.
25. Managerial subsidy to the employees’ cooperative stores : Out of the financial assistance
to be given by the employers in connection with setting up of consumers’ cooperative
stores for industrial workers, the managerial subsidy to meet the establishment cost,
such as salaries and rent charges on a tapering basis for three years, may be treated as
being of the nature of expenditure for the welfare of the industrial workers of the
employer concerned and can be permitted to be deducted in computing the taxable
income of the employer. Letter F. No. 10/16/63-IT (A-1), dated 14.05.1963.
26. Contribution to a subsidised industrial housing scheme : The contributions to a fund set
up under a subsidised industrial housing scheme cannot be regarded as admissible
deduction under Section 37(1) of the Act.
Letter F. No. 10/8/63-IT (A-1) dated 14.10.1963.
27. Contribution by members to a ‘cycle export pool’ : The contributions made by members
to the ‘cycle export pool’ vide rule 5(c) of the scheme, will be admissible as a deduction
under Section 37(1) of the Act in their assessments. The subsidies received from the
pool by the members will be treated as taxable income in their hands.
Letter F. No. (24)-IT/59, dated 19.5.1959
28. Guarantee commission paid to banks : Commission payable to banks for furnishing
guarantees regarding deferred payments for the import of plant and machinery is in the
nature of a capital expenditure and cannot be allowed as deduction in computing the
total income under the Income Tax Act. The Board has, however, no objection to permit
such expenditure to be added to the cost of the plant and machinery and to allow
depreciation thereon at the usual prescribed rates.
Letter F. No. 7/33/62-IT (A-I), dated 28.8.1963.
29. Commitment charges on the unused portion of a loan : Commitment charge payable by a
party on the unused portion of the loan which has not been drawn, has to be taken as an
expenditure laid out wholly and exclusively for the purposes of the business and
therefore, permissible as a revenue deduction under Section 37(1).
Circular No. 2 – P (XI-6) [F. No. 10/67/65-IT (A-I)], dated 23.08.1965.
30. Expenses on Diwali and Mahurat : As the expenses incurred on the occasion of Diwali
and Mahurat are in the nature of business expenditure, it has been decided not to lay
down any monetary limits for the purpose of their allowance.
Letter F. No. 13A/20/68-IT (A-II), dated 03.10.1968.
31. Incidental expenses on raising loans on short-term basis : Incidental expenses incurred
for raising other short-term loans from financial institutions by way of temporary
accommodation or ordinary trading facilities can be allowed as deduction in computing
the income from business subject to the following conditions :
(a) The short-term loan is of a duration of not more than two years, and
(b) The total amount of incidental expenses does not normally exceed 1 percent of the
amount of the loan raised. Letter : F. No. 32/6/62-IT (A-1) dated 16.1.1963
32. Education cess : Education cess is allowable as a deduction. Source : Extracts from the
minutes of the 16th meeting of CDTAC held on 2.2.1972.
33. Amount paid under OYT Scheme for Telephone : It is open to the subscriber either to
claim the entire amount paid under the OYT scheme in the year in which the payment is
made or proportionately in the years for which an advance payment of the rent is made.
Where the installation of telephone is in the previous year subsequent to the previous
year in which the deposit is made, the deduction for the payment should be allowed in
the year of payment irrespective of the fact whether the telephone has been installed or
not. Instruction : No. 943 [F. No. 204/15/76-IT (A-II)], dated 2.4.1976.
34. Amount paid under ‘Tatkal Telephone Deposit Scheme’ : Amount paid by an assessee
for obtaining a new telephone connection under the ‘Tatkal Telephone Deposit Scheme’
can be allowed as revenue expenditure in the year of payment. The refund of said
amount, if any, will be taxed under Section 41(1). Circular No. 671, dated 27.10.1993.
35. Deposit paid for a telex connection : Since the deposit of ` 10,000 for a telex connection
does not earn any interest when the telex machine is installed, at that stage, this amount
may be treated as a revenue expenditure allowable as a deduction, if the assessee makes
such a claim. However, when the amount is returned by the postal authorities when the
telex connection is finally closed, the refund of ` 10,000 shall be treated as an income of
the assessee of the year in which the amount is refunded.
Circular No. 420 ([F. No. 204/10/83-IT (A-II)] dated 4.6.1985.
36. Expenses abroad on market promotion and similar export promotional activities : With
regard to the expenses incurred by members of a delegation going abroad for exploring
new markets for Indian products and similar export promotional activities, all
reasonable expenditure incurred by the members of the delegations should be allowed in
the assessment of the members concerned.
Circular No. 2(40)/6-EAC, dated 16/17.1.1967, issued by the Ministry of Commerce
37. Training of apprentices : In view of the statutory obligation cast on the employers under
the provisions of the Apprentices Act, 1961, recurring expenses incurred on imparting of
 the basic training to the apprentices under the said act will be allowable as a deduction
under Section 37(1).
38. As regards expenses for imparting of practical training under Practical Training Stipends
Scheme and Programme of Apprenticeship Training (PAT), these expenses will not be
covered within the meaning of Section 37(1), as no statutory obligation is cast on the
employer under these two training schemes. Circular No. 192 [F. No. 204/39/75-IT (A-
II)]; dated 10.3.1976
39. Additional price and year in which deductible : Additional price payable to the
cultivators is to be allowed as a deduction in the year in which the additional liability
arose and not in the year to which it relates as it was ascertained only on the date of the
order of the price fixation authority.
Instruction : No. 745 F. No. 228/28/74-IT (A-II), dated 30.8.1974.
[Source : 153rd Report (1974-75) of the Public Accounts Committee, p. 66].
40. Interest on delayed payment to SSI ancillary units : For the Assessment Year 1993-94
and later years, the interest on delayed payments to Small Scale Ancillary Industrial
Undertakings Act, 1993 shall be applicable and the Assessing Officers are entitled to
disallow the interest inadmissible under the said act in the assessment of buyers.
Circular No. 651, dated 11.6.1963
41. VRS ex gratia payments : Ex gratia amount paid by an assessee/employer for gaining
enduring benefit or advantage under the Voluntary Retirement Scheme is a capital
expenditure. Press release, dated 23.1.2001.
4.3.14 Examples of Expenditure not allowed as Deduction u/s 37(1)
1. Expenditure incurred by way of stamp paper, underwriting commission, registration
fees, lawyer’s fees etc. in connection with the issue of debentures is of a capital nature
and cannot in law be allowed as deduction.
2. Incidental expenses incurred for raising short-term loans from financial institutions by
way of temporary accommodation or ordinary trading facilities can be allowed as
deduction in computing the income from business subject to the following conditions :
(a) the short-term loan is of a duration of not more than two years and
(b) the total amount of incidental expenses does not normally exceed 1% of the
amount of the loan raised.
3. Commission payable to banks for furnishing guarantees regarding deferred payments for
import of plant and machinery is in the nature of a capital expenditure and cannot be
allowed as deduction in computing the total income under the Income Tax Act. The
Board has, however, no objection to permit such expenditure to be added to the cost of
the plant and machinery and to allow depreciation thereon at the usual prescribed rates.
(Letter F. No. 7/33/62-IT (A-I), dated 22.08.1963).
4. Fees paid to the Registrar of Companies for bringing about change in the Memorandum
and Article is a capital expenditure.
 5. The legal expenses incurred in connection with the amalgamation of the assessee
company with another company is capital expenditure.
6. Expenditure incurred by the assessee for getting vacant possession of land owned by it
is not revenue expenditure.
7. Bank guarantee commission for payment of taxes is capital expenditure.
8. Payment for obtaining tenancy rights is in the nature of premium, though the called
contribution is capital expenditure.
9. Penalty paid for violation or infringement of any law is not allowable.
10. Expenditure incurred by a company in connection with shifting of his registered office is
not allowable.
11. Expenditure incurred in dismantling of building in order to construct a hotel is not
allowed, as these are capital in nature.
12. Pension paid to the widow of the chairman of the board of directors, who was not an
employee of the company nor was there any agreement for such payment between the
company and the chairman is not deductible.
13. Assessee made payment to ward off competition of business to a rival. Held it was
capital expenditure.
14. Interest paid for non-payment, less payment, delayed payment, deferment of advance
tax cannot be allowed as business expenditure nor is it in the nature of payment of other
taxes like purchase tax expenditure.
15. Sales tax is a tax on the sale or purchase of goods and not on profits, hence, a deductible
expense. But taxes such as income tax, surcharge etc. are not expenditure laid for the
purposes but are paid after the profits are earned, hence, not deductible expenses.
Advertisement to political parties [section 37(2B)
No deduction shall be allowed in respect of expenditure incurred by an assessee on
advertisement in nay souvenir, brochure, tract, pamphlet or the like published by a political party
4.3.15 Deduction for the Building Partly Used for Business and Partly Used as Dwelling
House [Section 38]
Where the premises are used partly for the business and partly for other purposes, only a
proportionate part of the expenses attributable to the part of the premises used for the purposes of
business will be allowed as deduction.
4.4 EXPENSES NOT DEDUCTIBLE
Section 40 : Disallows certain amounts specifically while computing business/professional
income, in the following manner :
 Section 40 (a) : Disallowance in case of all assessees.
Section 40 (b) : Disallowance in case of Partnership firm.
Section 40 (ba) : Disallowance in case of AOP or BOI Provisions of above sections are
briefly explained as follows.
Table 6.2 : Disallowance in the case of AOP or BOI Provisions
Section No. and Disallowance under Section 40
Type of Assessee

All assesses 1. Wealth tax.

Section 40 (a)
2. Income tax.
3. Payments outside India : Interest, royalty, fees for technical
services or other sum chargeable outside India, on which tax
has not been deducted at source or after deduction it has not
been paid to the government shall not be allowed.
4. Payment in India to a Non-resident (not being a company) or to
a foreign company; interest, royalty, fees for technical services
on which tax has not been deducted or after deduction it has
not been paid to the government.
5. Any interest, commission or brokerage, fees for professional
services or fees for technical services payable to a resident or
any amount payable to a contractor/sub-contractor will not be
allowed as a deduction if the income tax has not been deducted
and paid.
6. Salary payable outside India or to a Non-resident in India
without deducting tax at source or after deducting it has not
been paid to the Government.
7. Payment to Provident Fund : or other fund established for the
benefit of the employees of the assessee, unless the assessee
has made proper arrangement to deduct tax at source on the
payments made from the fund which are chargeable to tax
under the head salaries.
Explanation : Any tax on business assets (other than wealth tax) is
deductible. Hence, tax paid on tea garden lands under U.P., Large
Land Holdings Tax Act 1937, is deductible
(Dehradun Tea Co. Ltd. Vs. CIT – S.C.).
8. Tax on perquisites paid by the employer on behalf of the
employee (which is exempt u/s 10 (10CC) in the hands of the
employee is not allowed as a deduction from business income
in the hands of the employer (assessee) via Section 40 (a) (v).
 9. Any sum paid on account of securities transaction – tax under
Chapter VII of Finance Act 2004.
10. Any sum paid on account of fringe benefit tax under
chapter XII.

Section 40 (b) in Deductions on account of interest and remuneration to the partners

case of can be claimed under section 36 or 37 as the case may be but it will
partnership be subject to the conditions prescribed as under :
firm 1. Payment of salary, bonus, commission, or remuneration by
whatever name called, to a non-working partner shall not be
allowed as deduction.
2. Payment of remuneration to working partners and interest to
any partner will be allowed as deduction only when it is
authorized by and is in accordance with partnership deed.
3. Payment of remuneration / interest, although authorized by the
partnership deed but which relates to a period prior to the date
of such partnership deed, shall not be allowed.
4. Interest payable to a partner, although authorized by the
partnership deed shall be allowed as a deduction subject to a
maximum of 12% simple interest p.a. or as provided by the
partnership deed, which ever is lower.
5. The remuneration to all working partners shall not exceed the
following limits (w.e.f.AY 2010-11) :
(a) In case of a firm carrying on business or profession :
On the first ` 3,00,000 of the book profit (or loss) `1, 50,000 or
@ 90% of the book profit, whichever is more
(b) On the balance of book profit ---> @ 60%
Explanation :
Such disallowance is not applicable where an individual is a
partner in the capacity of :
- Representative and payment is done in individual capacity.
OR
- Individual and payment is done in representative capacity
AOP/BOI Interest payment by AOP/BOI to a member as well as salary /
40(ba) bonus / commission, or remuneration paid by AOP / BOI will not
be allowed as a deduction :
Explanation :
1. If the AOP/BOI pays certain amount of interest to its members
and the member has also paid certain amount of interest to it,
only so much of the interest paid in excess of amount received
from the member shall be disallowed in computation of income
of AOP/BOI.
2. Where the individual is a member of AOP/BOI in a
 representative capacity, interest paid by AOP/BOI to such an
individual, otherwise than as a member in representative
capacity will not be disallowed.
3. Where an individual is a member of AOP/BOI, otherwise than
as a member in representative capacity, interest paid by
AOP/BOI to such individual will not be disallowed.
Expenses of payments not deductible where such payments are made to relatives
[Section 40A(2)] :
Where an assessee incurs any expenditure, in respect of which payment has been made or is
to be made to certain specified persons and the Assessing Officer is of the opinion that such
expenditure is excessive or unreasonable having regard to the fair market value of the goods,
services or facilities for which the payment is made or the legitimate needs of the business or
profession of the assessee or the benefits derived or accruing to him therefore, so much of the
expenditure, as is so considered by him to be excessive or unreasonable, shall not be allowed as a
deduction. Therefore, for an amount to be disallowed under this section, two conditions have to
be fulfilled :
(a) The payment is made to a specified person.
(b) The payment for the expenditure is considered excessive or unreasonable having regard
to fair market value of the goods, services or facilities.
Specified persons : The specified persons are, in case of an assessee who is an individual
where payment is made :
(i) any relative (i.e., spouse, any brother, sister, lineal ascendant or descendant) of such
individual;
(ii) any person (individual, company, firm AOP, HUF, etc.) having a substantial interest in
the business of the individual (i.e., being entitled to not less than 20% of the profit of the
business of the individual);
(iii) any person of which a director, partner or member has a substantial interest in the
business of the individual – any relative of any such person given under (ii) or (iii)
above.
Company : Where the payment is made to :
(i) any director of the company or his relative;
(ii) any person (individual firm, company, AOP, HUF etc.) having a substantial interest (i.e.,
owning at least 20% voting rights on holding of equity shares) in the company;
(iii) any person of which a director, partner or member has a substantial interest in the
company;
- any relative of person given as (ii) and (iii).
Firm : Where the payment is made to :
(i) any partner of the firm or his relative;
(ii) any partner of which a director, partner or member has a substantial interest in the
business of the firm;
(iii) any person of which a director, partner or member has a substantial interest in the
business of the firm;
- any relative of such person; gives in (ii) or (iii) above.
 AOP or HUF : Where the payment is made to :
(i) any member of the AOP or HUF, as the case may be; or his relative;
(ii) any person having substantial interest in the business of the AOP or HUF as the case
may be;
(iii) any person of which a directors, partner or member has a substantial interest in the
business of the AOP or HUF, as the case may be;
− any relative of person : given in (ii) or (iii) above.
Judicial Decisions :
1. Unless it is determined that the expenditure was excessive or unreasonable, this section
would not apply to case (Upper India Publishing House (P) Ltd., v. CIT (1979) 117 ITR
569 (SC).
2. The words goods, services and facilities, referred to in this section mean those which
have some market value and are commercial in character.
Disallowance out of cash expenditure exceeding `20, 000 Section 40A (3) : Where the
assessee incurs any expenditure, in respect of which payment is made, in a sum exceeding `
20,000 otherwise than by a crossed cheque drawn on a bank or a crossed bank draft, 100% of
such expenditure shall not be allowed as a deduction. However, there are certain exceptions
provided in Rule 6DD, under which expenditure, even exceeding ` 20, 000 shall be allowed as
deduction, even though the payment is not made by a crossed cheque/draft. These exceptions
are :
(a) Payments made to banks, including cooperative banks or land mortgage banks, Life
Insurance Corporation and financial institutions like IDBI, UTI, State Industrial
Development Corporations and State Financial Corporations, Primary Agricultural
Credit Societies.
(b) Payments made to the Government where such payment is required to be made in legal
tender, for e.g., payment of sales-tax, customs duty, excises duty etc.
(c) Payments made by way of Letter of Credit, telegraphic transfer, transfer from one bank
account to another or through a Bill of Exchange payable to a bank
(d) Where the 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.
(e) Payment for purchases of : (i) agricultural or forest produce, (ii) the produce of animal
husbandry (including hides and skins), dairy or poultry farming, (iii) fish cultivator,
grower or producer of such articles.
(f) Payments made for purchases of products manufactured without the aid of power in a
cottage industry, if the payment is made to the producer of such products.
(g) Where the payment is made in a village or town, which is not served by any bank, to
any person who ordinarily resides or is carrying on any business, profession or vacation
in any village or town.
(h) Payment by way of gratuity, retrenchment compensation or similar terminal benefits
made to an employee or his legal heirs, if the income under the head salary of the
employee does not exceed ` 50,000.
 (i) Payment made by way of salary to its employees after deducting the Income Tax from
the salary, when such an employee is temporarily posted for a continuous period of
fifteen days or more in a place other than his normal place of duty or on a ship and the
employee does not maintain any account in any bank at such place.
(j) Where the payment is required to be made on a date on which the banks were closed,
either on account of a holiday or strike.
(k) Payment made by any person to his agent who is required to make payments in cash for
goods or services on behalf of such a person.
(l) where the payment is made by an authorized dealer or a money changer against
purchase of foreign currency or travelers cheques in the normal course of business.
Scope of Disallowance and Cash Payments under Section 40 (A)(3)
Section 40 (A) (3) applies to all categories of expenditure involving payments for goods or
services, which is deductible in computing the taxable income. It does not apply to loan
transactions or to payments made by commission agents (arhatiyas) for goods received by them
for sale on commission or consignment basis. It does apply to payments made for goods
purchased on credit. Hundi transactions entered into in connection with the advancing of loans or
the repaying of loans are outside the scope of Section 40 (A) (3). Payments made to the grower
or producer of agricultural products are excluded from the operation of Section 40 (A) (3) even
where these have been subjected to some processing by him. Payments, made in towns having
banking facilities for purchase of goods from a villager whose village does not have banking
facilities, are not excluded from the requirement in Section 40(A)(3) [Press Note : Dated
2.5.1969, issued by the Ministry of Finance]. The word ‘expenditure’ in Section 40 (A) (3)
covers expenditure of all categories including that on purchase of goods and merchandise as also
payment for services. The payments made in advancing loans and returning the principal
amounts of borrowed moneys are not covered by these provisions of Section 40 (A) (3)
[Letter : F. No. 1(22)/69-TPL (Pt.), dated 18.4.1969].
Return of paid cheques by a bank to its constituents : Banks may now return the paid cheques
to their constituents after obtaining a formal undertaking from them to the effect that they shall
retain the returned paid cheques for a period of eight years and produce them before the ITO
whenever called upon to do so [Circular No. 33 F. No. 9/50/69-IT (A-II), dated 29.12.1969].
Payments made during suspension of clearing operations : Any payment for business
expenditure made during the period when the cheque clearing operations are suspended or other
similar circumstances exist, will not be covered by the provisions of Section 40 (A)(3).
[Circular No. 250 F. No. 206/1/79-IT (A-II), dated 11.01.1979].
The suspension of cheque clearing and banking operations consequential to the strike of bank
employees will constitute ‘exceptional or unavoidable circumstances’. Accordingly, payments
for business expenditure made during this period and until the clearance of cheques is resumed,
will be exempted from the operation of Section 40 (A) (3)*
[Letter F. No. 142(14)/70-TPL, dated 28.9.1970].
Illustrative situations of ‘exceptional circumstances’ : All the circumstances in which the
conditions laid down in rule 6 DD (j)* would be applicable cannot be spelt out. However, some
of them, which would seem to meet the requirements of the said rule, are :
(a) The purchaser is new to the seller; or
 (b) The transactions are made at place where either the purchaser or the seller does not have
a bank account; or
(c) The transactions and payments are made on a bank holiday or the seller is refusing to
accept the payment by way of crossed cheque/draft and the purchaser’s business interest
would suffer due to non availability of goods otherwise than from this particular seller;
or
(d) The seller, acting as a commission agent, is required to pay cash in turn to persons from
whom he has purchased the goods; or specific discount is given by the seller for
payment to be made by way of cash.
Circular No. 220 [F. No. 206/17/76-IT (A-II)] dated 31.05.1977.
Important Points :
1. The provisions of Section 40 (A) (3) are attracted only when a payment exceeding
` 20,000 at a time is made in cash. It is possible that a person may make different
payments at different times during the day to the same person and the aggregate of the
payments during the day to the same party may exceed ` 20,000. In this case, if each
payment is below ` 20,000 no disallowance can be made.
2. The provisions of the section do not cover payments for acquiring capital assets not for
resale.
Provision for Gratuity [Section 40 A (7)] :
Gratuity actually paid during the year is allowed as a deduction. Provision made for the
payment of gratuity to the employees on retirement or on termination of services will not be
allowed as a deduction in computing taxable profits of the business or profession. However, any
provision made by the assessee for the purpose of payment of a sum by way of any contribution
towards an approved gratuity fund or for the purpose of payment of any gratuity that has become
payable during the previous year, shall not be disallowed.
Contribution to Non-statutory Fund [Section 40 (A) (9)] :
No deduction shall be allowed in respect of any sum paid by the assessee as an employer
towards the setting up of any fund or as contribution to any funds or trust except where such sum
is paid to a recognised provident fund or an approved superannuation fund or approved gratuity
fund.
Table 6.3 : Certain Deductions to be made only on Actual Payments [Section 43B]
Expenses When payment should be made
to get the deduction
1. Any sum payable by way of tax, duty or fee During the previous year or on or
under any law. before due date for furnishing
2. Any sum payable by the aseessee as an return of income under Section
employer by way of contribution to any 139 (1).
provident fund or superannuation fund or
gratuity fund or any other fund for the welfare
of employees.
3. Any sum payable as bonus or commission to
 employees.
4. Interest on loans or advances or borrowings
from scheduled banks and public financial
institutions or State Financial Investment
Corporation or State Financial Corporation
like ICICI, IDBI, GIC, UTI, SFC, with the
terms and conditions governing such loan or
borrowing.
5.Any sum payable by the assessee as interest on
any loan or advance from a scheduled bank in As given above
accordance with the terms and conditions of
the agreement governing such loan
6. Contribution to provident fund, super As given above
annuation fund or any other fund for the
welfare of the employee.
7 Any sum payable by an employer in lieu of As given above
leave at the credit of his employee.
Special provision for full value of consideration for transfer of assets other than capital
assets in certain cases [Section 43 CA]
Currently, when a capital asset, being immovable property, is transferred for a consideration
which is less than the value adopted, assessed or assessable by any authority of a State
Government for the purpose of payment of stamp duty in respect of such transfer, then such
value(stamp duty value) is taken as full value of consideration under section 50C of the Income
tax Act. These provisions do not apply to transfer of immovable property, held by the transfer as
stock-in-trade.
(A) Stamp duty value to be deemed consideration in certain cases [Section 43CA(1)]
Where the consideration for transfer of an asset (other than capital asset),being land or building
or both ,is less than the stamp duty value, the value so adopted or assessed or assessable shall be
deemed to be the full value of the consideration for the purposes of computing income under the
head “Profits and Gains of business or profession”
(B) Provisions of section 50(C) and (3) made applicable to section 43CA[section 43CA(2)]
The provisions of sub section(2) and sub section(3) of section 50C shall, so far as may be, apply
in relation to determination of the value adopted or assessed or assessable under section 43CA(1)
(C) Stamp duty value on the date of agreement to be deemed consideration [section
43CA(2)]
Where the date of an agreement fixing the value of consideration for the transfer of the asset and
the date of registration of the transfer of the asset are not same, the stamp duty value may be
taken as on the date of agreement for transfer and not as on the date of registration for such
transfer.
However, this exception shall apply only in those cases where the amount of consideration or a
part thereof for the transfer has been received by any mode other than cash on or before the date
of the agreement. [Section 43CA(4)]
Special Provisions in case of Income of a Public Financial Institution, Public Companies
etc. [Section 43D] :
1. In the case of a public financial institution or a scheduled bank or a State Financial
Corporation or a State Industrial Investment corporation, the income by way of interest
in relation to such categories of bad or doubtful debts as may be prescribed having
regard to guidelines issued by the RBI.
2. In the case of a public company, the income by way of interest in relation to such
categories of bad or doubtful debts, as may be prescribed, having regard to guidelines
issued by the National Housing Bank in relation to such debts, shall be chargeable to tax
in the previous year in which it is credited to the respective profit and loss account or as
the case may be, the year in which it is actually received by the institution or bank or
corporation or company, whichever is earlier.
HOW TO COMPUTE THE INCOME FROM BUSINESS OR PROFESSION
Every businessman prepares a Profit and Loss Account, as per Financial Accounting System. A
company prepares a Profit and Loss Account in accordance with Schedule VI of the Companies
Act and financial accounting systems followed or law provided by other Acts. For the purposes
of computing profits ,for income tax purposes, under the head ‘Profits and gains of business or
profession’, we can take the net profit as per the profit and loss account as the starting point and
make adjustments, if necessary, after scrutinizing the debit and the credit side of the profit and
loss account.
Net profit as per Profit and Loss Account
Add Expenses debited to P& L A/c but not allowable
(i) Capital expenses
(ii) Personal expenses
(iii) Charities and Donations
(iv) Income-tax/Wealth-tax
(v) Expenses disallowable u/s 40
(vi) Expenses disallowable u/s 40A
(vii) Amounts transferred to Reserve A/c
(viii) Depreciation for separate consideration
(ix) Other expenses to be disallowed
(x) Expenses of income which is taxable under other
heads of income
(xi)Preliminary expenses in excess of permissible limits
Add Amounts to be treated as income though not
credited to P& L A/c
Less amount credited to P& L A/c but not included
under the head business income:
(i) Dividend income
(ii) Rental income (Taxable under the head House
property)
(iii) Bad debts recovered to the extent not allowed a
 deduction
(iv) Income-tax refund
(v) Capital gains(taxable under Capital Gains)
(vi) Gifts (not taxable being capital receipts)
(vii) Excise Duty/Customs Duty refund earlier not allowed
as deduction
Less
(i) Expenses which are allowable but have not been
debited to P& L A/c
(ii) Depreciation allowable as per Income-tax rules
Profit or Gains of business or profession as per Income
Tax

4.5 MISCELLANEOUS PROVISIONS

Profit Chargeable to Tax [Section 41] :
Recovery of any loss or expenditure [Section 41 (1)] : Where any allowance or deduction
has been made in the assessment of any year in respect of loss, expenditure or trading liability
and subsequently, during any previous year, any amount received by the assessee whether in cash
or in any other manner in respect of such loss or expenditure or some benefit for such trading
liability by way of remission or cessation thereof, the amount obtained by him or benefit
accruing to him is chargeable to tax as business income.
Important Points :
1. Recovery of loss or expenditure is taxable, irrespective of the fact that whether the
business or profession is in existence in that year or not.
2. Where the assessee to whom the trading liability may have been allowed hss succeeded
in his business, then the successor in business will be chargeable to tax on any amount
received in relation to which deduction or allowance has been made. Successor in
business means :
(a) In case of amalgamation, the amalgamated company;
(b) Where a firm is succeeded by another firm, the other firm;
(c) Where a person is succeeded by any other person, the other person;
(d) Where there has been a demerger, the resulting company.
Balancing Charge [Section 41 (2)] : Where any building, machinery, plant or furniture :
(a) which is owned by the assessee;
(b) in respect of which depreciation is claimed under Section 32(1) (i);
(c) which was or has been used for the purpose of business;
is sold, discarded, demolished or destroyed and the money is payable in respect of such building,
machinery, plant or furniture, as the case may be together with the amount of scrap value, if any,
exceeds the written down value, so much of the excess as does not exceed the difference between
the actual cost and the written down value shall be chargeable to Income Tax as the income of
the business of the previous year in which the money is payable for the building, machinery,
plant or furniture became due.
If the business is no longer in existence the provisions of Section 41 (2) shall apply as if the
business is in existence in that previous year.
Sale of Asset used for Scientific Research [Section 41(3)]: If a capital asset used for
scientific research is sold without having been used for other purposes and the sale proceeds
together with the deduction, allowed u/s 35 exceeds the amount of capital expenditure incurred
on it, such surplus or the amount of deduction allowed u/s 35, whichever is less, is chargeable to
tax as business income of the previous year in which the sale took place. If the deduction allowed
is less than the aforesaid surplus, the excess of surplus over the deduction allowed is chargeable
to tax as capital gain.
Bad Debts Recovered [Section 41(4)] : Where the deduction has been allowed in respect of
a bad debt or part of debt under Section 36(1) (vii) then if the amount subsequently recovered on
such debt (or part) is greater than the difference between the debt (or part of the debt) and the
amount of deduction so allowed, the excess shall be deemed to be profits and gains of business
or profession and chargeable to tax as the income of the previous year in which the debt is
recovered. For this purpose, it is immaterial whether the business of the assessee is in existence
during the P.Y. in which recovery is made.
Withdrawal of special reserve created by financial institutions [Section 41 (4A)] : Where
a deduction has been allowed under Section 36 (1) (viii) at the time of creation of Reserve,
withdrawal of the same will amount to income.
Set off Losses against Deemed Profits [Section 41 (5)] : Deemed profits from Business/
Profession u/s 41 can be used to set off business/profession losses, if the following conditions are
fulfilled :
1. Business/profession is ceased to exist.
2. Loss must pertain to the year in which the business/profession ceased to exist.
3. It is not possible to set off such loss against any other income of that year.
4. Loss is not from speculation business.
Recovery after discontinuance of business or profession [Section 176 (3A and (4)] :
Where any business or profession is discontinued in any year and any sum is recovered
thereafter, it will be deemed to be income of the recipient and charged to tax in the year of
receipt, provided that it had been chargeable to tax had it been received before the
discontinuance of the business.
Special deduction in case of business of exploiting mineral oil including of petroleum
and natural gas [Section 42]: Special allowance in this regard would be in relation to :
 1. expenditure incurred by way of exploration expenses prior to beginning of commercial
production;
2. expenditure incurred in respect of drilling or exploration activities after the beginning of
commercial production;
3. expenditure incurred in relation to the depletion of mineral oil.
Special provision consequential to changes in the rate of exchange of currency
[Section 43 A] : Where an assessee has acquired any asset in any the previous year from a
country outside India, for the purpose of his business or profession and in consequence of a
charge in the rate of exchange during any previous year after the acquisition of such asset, there
is an increase or reduction in the liability of the assessee as expressed in Indian currency (as
compared to the liability existing at the time of acquisition of the asset) at the time of making
payment :
(a) towards the whole or part of the cost of the asset or
(b) towards repayment of the whole or a part of the money’s borrowed by him from any
person, directly or indirectly in any foreign currency specifically for the purpose of
acquiring the asset along with interest, if any.
The amount by which the liability as aforesaid is so increased or reduced during such
previous year and which is taken into account at the time of making the payment, irrespective of
the method of accounting adopted by the assessee, shall be added to r as the case may be,
deducted for :
1. The actual cost of the asset as defined in 43 (1).
2. The amount of capital expenditure referred to in Section 35 (1) (iv) (Scientific
Research).
3. Expenditure in the nature of capital expenditure on acquisition of Patent Rights or
copyrights as provided in Section 35A.
4. The cost of acquisition of a capital asset (not being a capital asset referred to in section
50 – computation of capital gains in case of depreciable asset) for the purpose of mode
of computation of capital gains as mentioned in Section 48.
5. The amount of expenditure of a capital nature referred to in Section 36 (1) (ix), i.e.,
promoting family planning amongst its employees and the amount arrived at after such
addition or deduction shall be taken to be the actual cost of the asset or the amount of
capital expenditure as the case may be, the cost of acquisition of the capital asset.
Profits and Gains of Insurance Business [Section 44] : The profits and gains of any business
of insurance carried on by an insurance company or by a mutual insurance company or by a
cooperative society shall be computed in accordance with the rules contained in the First
Schedule and not in accordance with the provisions of this act.
In case of insurance business of a non-resident, the taxable income shall be computed in the
following manner :
 Global income x Premium income in India/ Total premium income of the company
= Total income in India
Maintenance of Accounts by certain persons carrying on profession or business [Section
44AA and Rule 6F] :
A. Person carrying on a specified profession : Every person, carrying on specified
profession, is compulsorily required to maintain prescribed books of accounts and documents if
his gross receipts in the profession exceed ` 1,50,000 in all the three years immediately preceding
the previous year or where the profession has been newly set up in the previous year, if his gross
receipts for that year are likely to exceed the said amount.
Specified profession : Specified profession include persons carrying on the following
professions :
(a) a person carrying on legal, medical, engineering or architectural profession or the
profession of accountancy or technical consultancy or interior decoration or any other
profession as is notified by the Board in the Official Gazette.
(b) authorised representatives, film artists and company secretaries have been notified for
this purpose.
Authorised representative means a person, who represents any other person, on payment of
any fee or remuneration, before any Tribunal or Authority constituted or appointed by or under
any law for the time being in force, but does not include an employee of the person so
represented or a person carrying on legal profession or a person carrying on the profession of
accountancy.
Film artist, for the aforesaid purpose, means any person engaged in his professional capacity
in the production of a cinematograph film, whether produced by him or by any other person as an
actor, a cameraman, a director, a music director, an art director, a dance director, an editor, a
singer, a lyricist, a story writer, a screen play writer, a dialogue writer and a dress designer.
The prescribed books and documents under Rule 6F are as follows :
(a) A cashbook,
(b) A journal, if the accounts are maintained according to the mercantile system of
accounting,
(c) A ledger,
(d) Carbon copies of machine numbered bills, exceeding ` 25, issued by the person,
(e) Original bills wherever issued to the person and receipts are not issued and the
expenditure incurred does not exceed fifty rupees payment vouchers prepared and
signed by the person.
A person carrying on the medical profession shall, in addition to the above books of accounts
and documents, keep and maintain the following also :
 (a) a daily case register in Form 3C;
(b) an inventory under broad heads as on the first and the last day of the previous year, of
the stock of drugs, medicines and other consumable accessories used for the purpose of
his profession.

Persons carrying on specified profession, but whose receipts from the profession do not
exceed the aforesaid amount, are also required to maintain books of accounts, but in their case,
no books have been prescribed. They should maintain such books of accounts and other
documents and other documents as may enable the Assessing Officer to compute their taxable
income under the Income Tax Act.
B. Person carrying on a non specified profession or carrying on business : Every other
person carrying on a business or non specified profession, whose total income from business or
profession exceeds ` 1,20,000 or his total sales or gross receipts from such business or profession
exceed ` 10,00,000 in any of the three years immediately preceding the relevant previous year is
required to maintain books of accounts. However, in the case of a newly set up business, the
assessee will be required to maintain accounts compulsorily if, during the relevant accounting
year, either his total income is likely to exceed ` 1,20,000 or the total sales or gross receipts are
likely to exceed ` 10,00,000.
Person falling under the above category is required to maintain such books of accounts and
other documents as may enable the assessing officer to compute their taxable income under the
Income Tax Act. No specified accounts books have been prescribed for this category of persons.
C. Assessees covered under Sections 44AE, 44BB or 44BBB : An assessee who is
carrying on a business and is covered under Sections 44AE (goods carriages),44 BB(business of
rxploration, etc of mineral oils in case of non-resident) and 44BBB (foreign companies engaged
in the business of civil construction etc in certain turnkey power projects) claims that his income
from the said business is lower than the deemed profits or gains computed under the above
relevant sections, he shall be required to keep and maintain such books of accounts and other
documents as may enable the Assessing Officer to compute his total income in accordance with
the provisions of Income Tax Act.
D Assessees covered under the section 44AD: An assessee who is carrying on a business and is
covered under Sections 44AD (any business except the business of plying, hiring or leasing
goods carriages and whose total turnover or gross receipts in the previous year does not exceed
Rs 1 crore ) and claims that his income from the said business is lower than 8% of the turnover
and his income exceeds the maximum amount which is not chargeable to income-tax in any
previous year shall be required to keep and maintain such books of account and other documents
as may enable the Assessing Officer to compute his total income in accordance with the
provisions of Income Tax Act.

When maintenance of books of accounts not necessary : There is no need to maintain any
books of accounts and documents if the following conditions are satisfied :
(i) Assessee is carrying on a business or non-specified profession;
(ii) The income or total sales or a gross receipt is less than the specified amount;
 (iii) If he is covered under Sections 44 AD, 44AE, 44BB or 44BBB, he should not declare
income lower than that which is prescribed under these relevant sections.
Compulsory Audit of Accounts [Section 44AB] :
1. Every person carrying on business shall, if his total sales, turnover or gross receipts in
business exceed ` 100,00,000 in any previous year, get his accounts of such previous
year audited by a Chartered Accountant before the specified date and furnish by that
date the report of such audit in the prescribed form, duly signed and verified, by such
accountant.
Specified date is November 30 of the relevant Assessment Year in the case of asssessee
who has undertaken international transaction as per section 92E or specified domestic
transaction as per newly inserted section 92BA and 30 th September of the relevant
assessment year in case of any other assessee.
2. In the case of person carrying on a profession, the provisions for compulsory audit are
applicable if his gross receipts in profession exceed ` 25,00,000 in any previous year.
3. In case of a person who is carrying on the business and covered under Sections 44AE,
44BB or 44BBB and claims that his income from the said business is lower than the
deemed profits and gains computed under the above relevant sections, he shall have to
get his accounts of such previous year audited by a Chartered Accountant on or before
the specified date
4. Similarly in case of a person who is carrying on the business and covered under
Sections 44AD and claims that his income from the said business is lower than 8% of
the turnover and his income exceeds the maximum amount which is not chargeable to
income tax in any previous year ; he shall get his accounts of the previous year audited
by a chartered Accountant on or before the specified date.

Report of Audit of Accounts (Rule 6G) : 1.

The report of audit of the accounts of a person required under Section 44AB shall;
(a) In the case of a person who carries on business or profession and who is required
by or under any other law to get his accounts audited, be in Form No. 3CA; and 3
CD
(b) In the case of a person who carries on business or profession, but not being a
person referred to in clause (a), be in Form No. 3 CB.
2. The particulars which are required to be furnished under section 44AB shall be in
Form No. 3CD.
Estimated Income method for computing business income in certain cases
Special Provisions for computing profits and gains of any (excluding the business covered
under section 44AE.) [Section 44AD]
The broad features of the scheme are as under :
(a) The scheme shall be applicable to an individual, a HUF or partnership firm who is a
resident but not to a Limited Liability partnership firm. The scheme is not applicable to LLP ,a
company assessee or AOP/BOI etc.
 (b)This scheme shall not be applicable if the aforesaid gross receipts paid or payable exceeds
an amount of ` 100,00,000.
“Gross Receipts” are the amount paid / payable to the assessee by the clients for the contract and
will not include the value of the material supplied by the client.
(c)Presumptive taxation is not applicable to-a person carrying on profession as referred to in
section 44AA(1);a person carrying income in the nature of commission or brokerage income; or,
a person carrying on any agency business.
(d) a sum equal to 8% of the total turnover or gross receipts of the assessee in the previous
year on account of such business or as the case may be, a sum higher than the aforesaid sum
claimed to have been earned by the eligible assessee shall be deemed to be the profits and gains
of such business.
(e) Any deduction allowable under the provisions of Sections 30 to 38, shall, for the
purpose of above income, be deemed to have been already given full effect to and no further
deduction under those Sections shall be allowed. However, where the eligible assessee is a firm,
the salary and interest paid / payable to partners shall be allowed as deduction from the income
computed under this Section. Such deduction shall, however, be subject to the conditions and
limits specified u/s 40(b).
(f) The written down value of any asset used for the purpose of the business shall be
deemed to have been calculated as if the assessee had claimed and had been actually allowed the
deduction in respect of the depreciation for each of the relevant assessment years.
(g) an assessee opting for the above scheme shall be exempted from payment of advance tax
related to such business under the current provisions of the Income tax Act.
(h) an assessee opting for the above scheme shall be exempted from maintenance of books of
accounts related to such business as required u/s 44AA of the Income Tax Act
(i) An assessee with turnover below Rs.1 crore, who shows an income below the
presumptive rate prescribed under these provisions, will, in case his total income exceeds the
taxable limit, be required to maintain books of accounts as per section 44AA(2) and also get then
audited and furnish report of each such audit as required under section 44AB
Special Provisions for computing Profits and Gains of Business of Plying, Hiring or Leasing
Goods Carriages [Section 44AE] :
Notwithstanding any to the contrary contained in sections 28 to 43C, the scheme u/s 44AE
also provides for a system for estimating the income of an assessee engaged in the business of
plying, hiring, or leasing of goods carriages. The broad features of the scheme are:
(a) The scheme is applicable to an assessee who owns not more than 10 goods carriages at
any time during the previous year and who is engaged in the business of plying, hiring
or leasing of such goods carriages;
(b) The profits and gains of each goods carriage owned by the above assessee in the
previous year shall be estimated as under :
For heavy goods vehicle – ` 7,500 or actual amount earned whichever is higher for
every month or part of a month during which the heavy vehicle is owned by the
assessee in the previous year.
(A) consequences if presumptive income scheme is opted
(1) Any deduction allowable under the provisions of Sections 30 to 38 shall, for the purpose
of the above income, be deemed to have been already given full effect to and no further
 deduction under those Sections shall be allowed. Remuneration and interest paid /
payable to partners, shall be allowed as deduction from the income computed under this
Section. Such deduction shall, however, be subject to the conditions and limits specified
u/s 40 (b).
(2) The Written Down Value of any asset used for the purpose of the business shall be
deemed to have been calculated as if the assessee had claimed and had been actually
allowed the deduction in respect of the depreciation for each of the relevant assessment
years.
(3) The provisions of Sections 44AA and 44AB shall not apply in so far as they relate to
this business. And in computing the monetary limits under those Sections for other
business, the gross receipts or, as the case may be, the income from the said business
shall be excluded.
(B) Consequences if presumption income scheme is not opted
(f) The assessee may choose not to opt for the scheme and may declare an income lower
than the specified amount. In this case, the assessee shall have to maintain books of
accounts and get his accounts audited by a Chartered Accountant.
Special Notes
1. The expression ‘goods carriage’ and ‘heavy goods vehicle’ shall have the meanings
respectively assigned to them in Section 2 of the Motor Vehicles Act, 1988. According
to Section 2(14) of the Motor Vehicles Act, 1988 the expression ‘goods carriage’
means :
(a) any motor vehicle constructed or adapted for use solely for the carriage of goods,
or
(b) any motor vehicle not so constructed or adapted when used for the carriage of
goods and according to Section 2 (16) of the Act, the expression “heavy goods
vehicle” means
(i) any goods carriage the gross vehicle weight of which, or
(ii) a tractor the unladen weight of which, or
(iii) a road roller the unladen weight of which, exceeds 12,000 kilograms.
2. An assessee, who is in possession of a goods carriage, whether taken on hire purchase or
on instalments.
3. And for which the whole or part of the amount payable is still due, shall be deemed to
be the owner of such goods carriage.
4. The income estimated as per Section 44AE, shall be his income from the business of
plying, hiring, or leasing goods carriages. This income will be aggregated with the other
income of the assessee and deductions u/s 80C to 80U, if any, will be available to the
assessee, subject to fulfillment of conditions mentioned therein.
5. Income from vehicles is to be computed for every month or part of the month during
which these were owned by the assessee even though these are not actually used for
business.
6. Provision of section 44AE are not applicable in case the assessee owns more than 10
goods carriage or where he decides lower profits and gains than the profits and gains
specified in section 44AE.
Special provisions in the case of shipping business in the case of non-residents [Section 44
B]
Notwithstanding any thing to the contrary contained in section 28 to 43A in the case of an
assessee, who is a non-resident and is engaged in the business of operation of ships, a sum equal
to 7.5 percent of the aggregate of the following :
(a) The amounts paid or payable whether in or out of India to the assessee on account of
carriage of passengers, livestock, mail or goods shipped at any port in India, and,
(b) Any amount received or deemed to be received in India on account of carriage of
passengers, livestock, mail or goods shipped at any port outside India, shall be deemed
to be the profits of such business. The carriage amount will also include amount paid or
payable by way of demurrage charge or any other amount of similar nature.

Special provision for computing profits and gains in connection with the business of
exploration etc.of mineral oil [Section 44BB].
The provision of section 44BB are given below :
Condition :
(i) The assessee is non-resident.
(ii) The assessee is engaged in the business of providing services and facilities in
connection with or supplying plant and machinery on hire, used or to be used in the
prospecting for, or extraction or production of mineral oils in India and exploitation of
mineral oils.
Consequences if the above conditions are satisfied :
(i) The provisions of sections 28 to 41, 43 and 43A are not applicable.
(ii) Income is calculated at the rate of 10 per cent of the amounts given below.
(iii) The amount in respect of which the provisions apply are the amounts paid or payable to
the tax payer or to any person on this behalf whether in or out of India, on account of
the provision of aforesaid services or facilities or supplying plant and machinery for
the aforesaid purposes. The amount also includes the amounts received or deemed to
be received in India on account of such services or facilities or supply of plant and
machinery.
The assessee can declare income under section 44BB to be lower than 10% if the following
two conditions are satisfied :
a) the assessee keeps and maintains such books of accounts as required.
b) The assessee gets the accounts audited and furnishes a report of such audit.
However,in this case, the Assessing Officer shall proceed to make assessment of the total
income/loss only under scrutiny assessment as per section 143(3)

Special provisions for computing profits and gains of business of operations of aircraft in
the case of non-residents [Section 44BBA]: Notwithstanding anything to the contrary
contained in Sections 28 to 43A, the income of a non-resident engaged in the business of
operation of an aircraft shall be completed at flat rate of 5% of :
 (a) the amount paid or payable whether in India or out of India to the assessee or to any
person on his behalf on account of carriage of passengers, livestock, mail or goods from
any place in India and
(b) The amount received or deemed to be received in India, on account of carriage of such
items from a place outside India.
Special provisions for computing profits and gains of foreign companies engaged in the
business of civil construction etc. in certain turnkey power projects [Section 44BBB] :
Notwithstanding anything to the contrary contained in Section 28 to 44AA in the case of an
assessee, being a foreign company, engaged in the business of civil construction or the business
of erection of plant or machinery or testing or commissioning thereof, in connection with a
turnkey power project approved by the Central Government in this behalf and financed under
international aid programme, a sum equal to 10% of the amount paid or payable (whether in or
out of India) to the said assessee or to any person on his behalf on account of such civil
construction, erection, testing or commissioning shall be deemed to be profits and gains of such
business chargeable to tax under the head ‘Profits and Gains of Business/Profession’.
Method of Accounting :
1. Mercantile system of accounting is compulsory for business, whereas cash system is
permitted for professionals. Accrual principle is followed in mercantile system which refers to
the assumption that revenues and costs are accrued, that is, recognised as they are earned or
incurred (and not as money is received or paid) and recorded in the financial statements of the
periods to which they relate.
2. The following accounting standards are notified, to be followed by all the assessees
following mercantile system of accounting, namely :
3. Accounting Standard I relating to disclosure of accounting policies :
I. All significant accounting policies adopted in the preparation and presentation of
financial statements shall be disclosed.
II. The disclosure of the significant accounting policies shall form part of the financial
statements and the significant accounting policies shall normally be disclosed in one
place.
III. Any change in an accounting policy which has a material effect in the previous year or
in the years subsequent to the previous years shall be disclosed. The impact of and the
adjustments resulting, from, such change, if material, shall be shown in the financial
statements of the period in which such change is made to reflect the effect of such
change. Where the effect of such a change is not ascertainable, wholly or in part, the fact
shall be indicated. If a change is made in the accounting policies which has no material
effect on the financial statements for the previous year but which is reasonably expected
to have a material effect in any year subsequent to previous year, the fact of such change
shall be appropriately disclosed in the previous year in which the change is adopted.
IV. Accounting policies adopted by an assessee should be such so as to represent a true and
fair view of the state of affairs of the business, profession or vocation in the financial
 statements prepared and presented on the basis of such accounting policies. For this
purpose, the major considerations governing the selection and application of accounting
policies are following namely :
(a) Prudence : Provisions should be made for all known liabilities and losses even
though the amount cannot be determined with certainty and represents only a best
estimate in the light of available information.
(b) Substance over form : The accounting treatment and presentation in financial
statements of transactions and events should be governed by their substance and
not merely by the legal form.
(c) Materiality : Financial statements should disclose all material items, the
knowledge of which might influence the decisions of the user of the financial
statements.
4. If the fundamental accounting assumptions relating to Going Concern, Consistency and
Accrual are followed in financial statements, specific disclosure in respect of such assumptions is
not required. If a fundamental accounting assumption is not followed, such fact shall be
disclosed. ‘Consistency’ refers to the assumption that accounting policies are consistent from one
period to another. ‘Financial Statements’ means any statement to provide information about the
financial position, performance and changes in the financial position of an assessee and includes
balance sheet, profit and loss account and other statements and explanatory notes forming part
thereof. ‘Going Concern’ refers to the assumption that the assessee has neither the intention nor
the necessity of liquidation or of curtailing materially the scale of the business, profession or
vocation and intends to continue his business, profession or vocation for the foreseeable future.
5. Accounting Standard II relating to disclosure of prior period and extraordinary items
and changes in accounting policies.
Prior period items shall be separately disclosed in the profit and loss account as part of
taxable income. The nature and amount of each such item shall be separately disclosed in a
manner so that their relative significance and effect on the operating results of the previous year
can be perceived.
A change in an accounting policy shall be made only if the adoption of a different accounting
policy is required by statute or if it is considered that the change would result in a more
appropriate preparation or presentation of the financial statements by an assessee.
Any change in an accounting policy, which has a material effect, shall be disclosed. The
impact of and the adjustments resulting from such change, if material shall be shown in the
financial statements of the period in which such change is made to reflect the effect of such
change. Where the effect of such change is not ascertainable, wholly or in part, the fact shall be
indicated. If a change is made in the accounting policies which has no material effect on the
financial statements for the previous year but which is reasonably expected to have a material
effect in years subsequent to the previous years, the fact of such change shall be appropriately
disclosed in the previous year in which the change is adopted.
A change in an accounting estimate that has a material effect in previous year shall be
disclosed and quantified. Any change in an accounting estimate which is reasonably expected to
have a material effect in years subsequent to previous year shall also be disclosed.
Deduction of Head-office Expenditure in the case of Non-residents [Section 44C] :
Notwithstanding anything to the contrary contained in Sections 28 to 43A, in the case of an
assessee, being a non-resident no allowance shall be made in computing the income changeable
under the head ‘Profits and Gains of Business/Profession’, in respect of so much of the
expenditure in the nature of head office expenditure as is in excess of the amount computed as
hereunder normally :
(a) an amount equal to five percent of the adjusted total income or
(b) the amount of expenditure in the nature of head office expenditure incurred by the
assessee as is attributable to the business or profession of the assessee in India,
whichever is the least.
Provided that, in a case where the adjusted total income of the assessee is a loss, the amount
under clause (a) shall be computed at the rate of five percent of the average adjusted total income
of the assessee during the last three years so that loss of that particular year need not be
accounted for computing average adjusted total income. H.O. expenses means executive and
general administration expenditure incurred by the assessee outside India including rent, rates,
taxes, repairs or insurance of any premises outside India used for the purpose of business. Salary,
wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in
addition to salary of any office outside India, travelling by an employee or other persons
employed in or managing the affairs of any office situated outside India, and such other matters
connected with executive and general administration as may be prescribed.
Special provisions in the case of royalty income of foreign companies [Section 44D].
The provisions are given below :
Agreement made before April 1, 1976 : Where such income is received under an agreement
before April 1, 1976, the deduction in respect of expenses incurred for earning such income is
subject to a ceiling limit of 20 per cent of the gross amount of such income, as reduced by the
amount, if any, of so much of the royalty income as consists of lump sum consideration for the
transfer outside India of, or the imparting of information outside India in respect of, any data,
documentation, drawing or specification relating to any patent, invention, model, design, secret
formula or process or trade mark or similar property.
Agreement made after April 1, 1976 not being covered by Section 44D
Royalties and technical service fees received under an agreement made after 31-3-1976 but
before 1-6-1997 not being covered by Section 44DA are chargeable to tax @ 30 per cent
(+SC+EC); under an agreement made after 31-5-1997 but before 1-6-2005 @ 20%; and in
pursuance of an agreement made after 31-5-2005 @10%; by virtue of section 115A in the
following four cases-
(a) Where such agreement is with the Government of India; or
(b) Where such agreement is with an Indian concern, the agreement is approved by the
Central Government ; or
(c) Where such agreement relates to a matter included in the industrial policy, for the time
being in force, of the Government of India, the agreement is in accordance with that
policy; or
 (d) Where such royalty is in consideration for the transfer of all or any rights (including the
granting of a license) in respect of copyright in any book on a subject referred to in
proviso to subsection (IA) of section 115A to the Indian concern or in respect of
computer software referred to the second proviso to section 115A(IA) to a person
resident in India
Special provision for computing income by way of royalties etc. in the case of non-residents
in pursuance of an agreement entered into after 31-3-2003 - Section 44 DA :
The income by way of royalty or fees for technical services received from govt. or an Indian
concern in pursuance of an agreement made by a non resident (not being a company) or a foreign
company with govt. of the Indian concern after 31st day of March 2003, where such non-resident
(not being a company) or a foreign company carries on business in India through a permanent
establishment situated therein, or perform professional services from a fixed place of profession
situated therein and the right property or contract in respect of which the royalties or fees for
technical services are paid is effectively connected with such permanent establishment or fixed
place of profession, as the case may be, shall be computed under the head “Profits and gains of
business or profession” in accordance with the provisions of this Act.
Provided that no deduction shall be allowed :
1. In respect of any expenditure or allowance which is not wholly and exclusively incurred
for the business of such permanent establishment or fixed place of professions in India
or
2. In respect of amounts, if any, paid (otherwise than towards reimbursement of actual
expenses), by the permanent establishments to its head office or to any of its other
offices.
It may be noted that every non-resident (not being a company) or a foreign company shall
keep and maintain books of accounts and other documents in accordance with the provisions
contained in Section 44 AA and get his accounts audited by an accountant as defined in Section
288 (2) and furnish along with the return of income, the report of such audit in the “prescribed
form” duly signed and verified.
Note : In order to remove the doubts and clarify the distinct scheme of taxation of income by
way of technical services, it is proposed (by Finance Bill 2010) to amend the proviso to section
44BB so as to exclude the applicability of section 44BB to the income which is covered under
section 44DA. Similarly section 44DA is also proposed to be amended to provide that provisions
of section 44BB shall not apply to the income covered under section 44DA

PROBLEMS ON COMPUTATION OF INCOME FROM BUSINESS/PROFESSION

Problem 1 : Dr J. L. Gupta is a renowned medical practitioner who maintains books on cash
basis. The following is the balance sheet of the receipts and payments a/c for the financial year
2014-15 `.
Balance brought forward 44,000 Rent of clinic
Consultation fees 2014-15 24,800
 2013-14 5,000 2015-16 1.200
2014-15 1,35,000 Water & Electricity Bills 2,000
Visiting fees 30,000 Purchase of professional 40,000
books
Loan from bank 1,25,000 47,800
Household expenses
Sale of medicines 60,000
Collection charges for
Gifts from patients 5,000 dividend income 100
Royalties for articles published Motor car purchased 1,30,000
in various journals
6,000 Surgical equipment purchased 24,800
Dividend
10,000 Income-tax 7,000
Interest on Government
Banking cash transaction tax 3,000
Securities
7,000 Salary to staff 15,000

Life insurance premium 15,000

Gift to son 5,000

Interest on loan 11,000

Car expenses 15,000

Purchase of medicines 40,000

Balance c/d 45,300

4,27,000 4,27,000

Compute his income from profession for the A.Y. 2015-16 after taking into account the
following information :
1. Books worth ` 25, 000 were purchased on 15-5-2014, which were annual publication
and the balance on 5-2-2015 which were books other than annual publications.
2. Car was purchased on 1-1-2015 and the surgical equipment on 4-9-2014.
3. It is estimated that 1/3 of the use of car is for his personal use.
4. Gifts and presents include ` 2,000 from patients in appreciation of his medical service
and ` 3,000 received as birthday gifts.
5. Opening and closing stock of medicines amounted to ` 10,000 and ` 6,000 respectively.
Solution :
Gross receipts

Consultation fees
 2013-14 5,000
2014-15 1,35,000
Visiting fees 30,000
Sale of medicines 60,000
Gifts from patients 2,000

2,32,000
Less Expenses

Rent of the clinic

2014-15 24,800
2015-16 1,200
Water & Electricity Bills 2,000
Depreciation books
On 25000-100% 25,000
On 15,000-30% 4,500
Depreciation on car

15%  1/2  130,000  2/3 6,500

Depreciation on surgical equipment

15% on 24,800 3,720

Banking cash transaction tax 3,000

Salary to staff 15,000

Interest on loan 11,000

Car expenses 2/3  15000 10,000

Medicines consumed
40,000 + 10000 − 6000 44,000
1,50,720

Income from profession 81,280

Royalty for articles is taxable under the head ‘Income from other sources’.
 Books which are annual publications are eligible for depreciation @ 100% whereas books
other than annual publication are eligible for depreciation @ 60%.since the books which are not
annual publication were purchased on 5-2-2015,depreciation should be charged @ 50% of 60%
i.e. 30%.
Problem 2 : R carries on his own business. The Trading and profit and Loss account for the
year ending 31-3-2015 is as under : Rs Rs
Opening stock 2,20,000 Sales 1,62,89,000
Purchases 1,36,09,000 Closing Stock 2,52,000
Salaries 2,56,000 Interest on Jay Co Ltd Debentures 2,000
Rent 5,61,000 Dividend from UTI 2,000
Bonus 3,000 Discount received 12,000
Printing, Postage and Stationery 4,000 Race Winning (Gross) 12,000`
Miscellaneous expenses 4,000
Advertisement expenses 22,000
Drawings 12,000
LIC premium 5,000
Car expenses-
Driver’s salary 6,000
Petrol and repairs 12,000
Property tax 4,000
Cost of NSC (VII series) 6,000
Net profit 18,45,000

1,65,69,000 1,65,69,000
Some additional information is given below :
1. Advertisement expenses included cost of 20 gift packs of Rs.1,100 each presented to
leading esteemed customers on occasion of Diwali
2. The car was used both for business and personal purposes .Assume 2/3 rd for business
purposes
3. The property tax of Rs.4,000 was in respect of self occupied house whose rental value is
Rs.18,000
4. Rent paid includes Rs.4,00,000 from which tax was deducted at source on 31-3-2015
but the same was deposited on 16-10-2015
Compute the Gross total income and Total Income of Mr Rajesh for the A.Y.2015-16 showing
the incomes under various heads
Solution :
Computation of Total Income of Mr Rajesh for the Assessment year 2015-16
Rs Rs
Net profit as per P and L A/c 18,45,000
 Add : Expenses/Payments not admissible

(a) Drawings 12,000

(b) LIC premium 5,000

(c) Car expenses-driver’s salary (1/3) 2,000

(d) Car expenses-petrol (1/3) 4,000

(e) Property tax 4,000

(f)Cost of NSC 6,000

(g) 30% of rent of Rs.4,00,000,TDS on account of which was deposited after 1,20,000 1,53,000
due date of return u/s 139(1)
19,98,000
Less Incomes which are not taxable under this head
(i) Interest on debenture 2,000
(ii) Dividend from UTI 2,000
(iii) Horse race income 12,000 16,000
Income from business or profession 19,82,000

Income from other sources

Interest 2,000
Dividend from UTI Exempt
Horse race income 12,000 14,000
Gross Total Income 19,96,000

Less Deductions under chapter VIA

U/s 80C LIC 5,000 +NSC 6000 11,000

19,85,000
Taxable income

Problem 3 : A submits to you following profit and loss A/c for the year ending 31-3-2015.
The date of furnishing the return of income in his case is 30-9-2015.
Profit and Loss Account for the year ending 31.3.2015 `

Salary 1,50,000 Gross profit 9,08,000

Bonus 25% 37,500 Rent of 50% house property given 24,000

on rent
Repairs of house property 15,000
Bad debt recovered, earlier
Municipal taxes of house property 20,000 allowed as deduction 10,000

Repairs of machine 30,000 Excise duty recovered, earlier not

allowed as deduction
Expenditure on scientific research 20,000 5,000
Receipts from guests using guest
Depreciation @25% on machine house 12,000
purchased for scientific research for 6 months 12,500 Gift from father 10,000

Donation to National lab for scientific 10,000 Profit on machine sold 15,000
research
14,000
Patents and copyrights (1/10)
5,000
Amortisation of prel. Exp. (2/5)
5,000
Bad debts
10,000
Prov. for bad and doubtful debts

Exp. on family planning amongst

12,000
employees

Donation to approved institution

8,000
for family planning

Premia for insurance on health of

20,000
employees
50,000
Interest on borrowed capital
−
Contribution to RPF @14% of
18,000
employees’ salary
6,000
Contribution to ESI
20,000
Entertainment exp.
50,000
Advertisement exp.
60,000
Travelling expenses

Exp. on guest house

5,000
(a) repair of guest house
12,000
(b) salary to employees
8,000
(c) other expenses
10,000
Loss due to theft of stocks
5,000
Life insurance premium of A
15,000
Loss of stock due to fire
60,000
Sales-tax
10,000
Sales-tax penalty

Interest for late payment of sales tax

6,000
Diwali expenses 10,000

Lump sum for technical know-how acquired 30,000

on 1-1-2015
30,000
Income-tax paid
20,000
Wealth-tax due
15,000
Depr. on machine sold @ 20% for 9 mos
24,000
Depr. on machine purch. @ 20% for 9months
6,000
Depr. on machine purch. @ 20% for 3
months 25,000

Depr. on machine @ 20% for full yr

Net Profit 1,20,000

9,84,000 9,84,000

Additional information :
1. Salary includes ` 10,000 paid to employees as entertainment allowance;
2. Bonus was due on 31-3-2015which was paid as under :
25-7-2015 ` 30,000
30-11-2015 ` 7,500
3. Municipal taxes were due on 31-3-2015. ` 15000 were paid on 29-7-2015. The balance
is still outstanding. The due date as per municipal laws was 15-4-2015 50% of the house
property is used for own business and the balance 50% has been let out to others for
business.

4. ` 5,000 paid towards insurance on health of employees was paid in cash.

5. Interest includes the following :
(a) Interest on money borrowed for purchase of machine during the year put to use
immediately ` 20,000. The loan was taken from a financial institution. The interest
was due on 31-3-2015 but was paid on 31-12-2015
(b) Interest on money borrowed for purchase of house property ` 30, 000.
6. ` 1000 as contribution to ESI by employer, already included in P & L A/c was due on
31-3-2015 but was paid on 20-11-2015.
 7. ` 2000 was recovered as contribution by workers on account of P.F. for the month of
March 2015. It was supposed to be deposited by 15-4-2015 but was deposited on
30-4-2015.
8. Entertainment includes :
(a) ` 13,000 spent on providing food and beverages to employees at place of work;
(b) ` 6000 spent on providing food and beverages to customers at office.
9. Advertisement expenses include ` 40,000 being cost of 20 brief cases given to
customers. It also includes ` 5,000 for advertisement given to a political party.
10. Travelling expenses were paid to employees @ ` 2,000 per day.
11. Sales tax includes a sum of ` 20,000 due on 31-3-2015. The same was paid on 31-5-
2015. The due date under the sales tax law was 15-5-2015.Further it also includes `
25,000 deposited in cash with the State Bank of India.
12. Diwali expenses include ` 2000 gifts given to wife of A on her visit to office on Diwali
day.
13. Wealth-tax was due on 31-3-2015 but the same was paid on 30-6-2015
14. Rate of depreciation for machinery as per income tax is 15%.
15. Patents were acquired on 5-6-2014 for `1, 40,000.
16. Preliminary expenses were incurred in the previous year 2011-12.
17. WDV of machine as on 1.4.2014 was `2, 25,000.Machinery worth `1, 60,000.was
acquired on 1.7.2014 and put to use on the same day. Machinery worth `1, 20,000 on 1.8.2014
but put to use on 1.2.2015.Machinery whose WDV as on 1.4.2014 was `85,000.was sold for `1,
00,000.
Compute Gross total Income of A for the assessment year 2015-16 assuming it is an
industrial undertaking.
Solution :
Computation of Gross Total Income of A for the assessment year 2015-16
Net profit as per P and L A/c ` 1,20,000

Less : Income credited to P/L A/c but either taxable under other
heads or not taxable
24,000
(a) Rent from house property
5,000
(b) Excise duty recovered
10,000
(c) Gifts from father
(d) Profit on machine sold to be considered under-depreciation 15,000 54,000

Add. expenses inadmissible 66,000

1. Bonus as paid after due date of return 7,500

2. Municipal tax 50% on let out portion 10,000

3. Balance 50% municipal taxes of business, but not paid till the due date
of return of income (` 10,000 − ` 7,500 paid till due date of
2,500
return)

4. 50% repair of house property, balance allowed under house

7,500
property
12,500
5. Depreciation on machine for scientific research to be considered

separately.
14,000
6. Patents and copyrights.
2,500
7. Preliminary exp in excess of 1/5th
10,000
8. Provision for bad and doubtful debts

9. Expenditure on family planning (allowed only to company

12,000
assesses)

10. Donation to approved institution for family planning (deduction

8,000
allowable from GTI)

11. Premia for insurance of health of employees (allowed only if

5,000
paid by cheque)
20,000
12. Interest on financial institution (paid after due date of return)

13. Interest on purchase of house property 50% (allowed under

15,000
house property)

14. Contribution to ESI(deposited after due date of furnishing the

return of income deduction will be allowed in next year as paid

1,000
on 20-11-2013.
5,000
15. Advertisement to political party
5,000
16. LIP of A
10,000
17. Sales-tax penalty
2,000
 18. Out of Diwali expenses-gift to wife 30,000

19. Lump sum payment for technical know-how 20,000

20. Wealth-tax 30,000

21. Income-tax 70,000

22. Depreciation on machine for separate consideration 2,99,500

(` 15,000 + 24,000 + 6000 + 25,000)

3,65,500
Less amount allowable :
(1) 100% cost of machine for scientific research 1,00,000
(2) Extra 25% deduction for donation to national Lab 2,500
(3) Depreciation on machine as per Income Tax Act (as per note), 51,750
(4) Depreciation on intangible assets (as per note). 38,750 1,93,000
1,72,500
AddContributions by employees to PF not deposited by due
date by the employer 2,000
Profits and gains of business or profession 1,74,500
Income from house property

Gross Annual Value 24,000

Less Municipal taxes (not allowed as outstanding even though paid by

due date of return )
NIL
Net Annual value
24,000
Less deductions u/s 24(1)

Statutory deduction @ 30% 7,200

Interest - 50% 15,000

22,200

1,800
Gross Total Income
1,76,300

Working Notes :
1. Entertainment expenditure will now be allowed in full.

(a) WDV of 15% block of machine at the beginning of the year will be :
WDV of machine sold (15,000  100/20  12/9) 1,00,000
WDV of machine on which depreciation is charged for full year 1,25,000
WDV at the beginning of the year 2,25,000
(b) Asset purchased during the year
(1) Used for 180 days or more
Cost of asset purchased on which 9 months depreciation is
 Charged (24,000  100/20  12/9) 1,60,000
(2) Used for less than 180 days
Cost of asset purchased on which 3 months depreciation is
Charged (6,000  100/20  12/3) 1,20,000
(c) Sale price of machine sold during the year
WDV at the beginning of the year 1,00,000
Less : Depreciation charged 15,000
85,000
Profit on sale 15,000
1,00,000
(d) Depreciation will be charge as under :
WDV of the block at the beginning of the year 2,25,000
Additions 1,60,000 + 1,20,000 2,80,000
Less : Sold during the year 1,00,000
4,05,000
Depreciation at 15%  50% on 1,20,000 9,000
Depreciation at 15% 2,85,000 42,750
51,750
Additional depreciation on eligible machinery
Acquired and put to use for 180 days or more Rs.160,000 @20% 32,000
Put to use for less than 180 days –Rs.120,000 @ 10% 12,000 44,000
Total 95,750
3. Guesthouse expenses will now be allowed in full.
4. Municipal taxes of house property used for business will be allowed on due basis if the
payment of the same is made on or before due date of furnishing the return of income.
However, the municipal taxes due on account of house property, will not be allowed as
deduction on due basis if the payment is made on or before the due date of furnishing
the return of income.
5. Cost of assets purchased for scientific research is allowed in full. It does not form part of
depreciable assets.
6. Donation to approved institute for family planning will be allowed as deduction from
GTI u/s 80G.
7. Depreciation on intangible assets
WDV as on 1-4-2012 Nil
Patents 1,40,000
Technical know how 30,000
1,70,000
Less sold during the year NIL
WDV as on 31-3-2013 1,70,000
Less Depreciation
 ` 140,000 @ 25% 35,000
` 30,000 @ 12.5% used for less than 180 days 3,750
38,750
WDV as on 1-4-2015 1,31,250

Summary of the part of the unit

The unit deals with the Profits and Gains from Business/Profession as provided in the tax
statute. The expression in the ordinary parlance means an activity of a commercial nature
capable of producing profit. The chapter summarises the income that are to be included under
the head ‘Profits and Gains of Business/Profession’ as distinguished from income from other
sources. It also provides for computation of income, deductions that can be claimed as
deductible, income that are not chargeable to tax and expenses though charged to profit and
loss in arriving at the net income but expressly not allowed as per Income Tax Statute.
Depreciation allowable as per the Income Tax Statute are to be separately computed as the
assessee has been allowed flexibility to provide depreciation in the books as per broad
framework provided in Companies Act. It also deals with maintenance of accounts by certain
persons carrying on business or profession and audit therein. It also covers method of
accounting to be followed including compulsory adopting of Accounting Policy.

Review Questions
1. Discuss the provisions of Section 28 (iv) regarding tax incidence in respect of benefits
or perquisites arising from a business or exercise of a profession.
2. What tests would you apply to determine whether a transaction is an adventure in the
nature of trade ?
3. A non-resident is engaged in shipping business. The company also operates its shop in
India. Explain how the income from the company’s business operation in India is
computed.
4. What are the tax consequences in the following situations :
(i) A firm of three partners is dissolved. It held stocks valued at ` 4,80,000 on the date
of dissolution, the basis of valuation being cost for settlement of accounts between
the partner on dissolution, they have adopted ` 4,80,000 as the value of stocks.
(ii) The Director of a company was accompanied by his wife on a foreign tour
undertaken by him for business purposes. It was claimed that her presence fulfilled
a social purpose and facilitated transaction of business.
(iii) Expenditure incurred in connection with increase of the authorised capital of a
company and issue of bonus shares by it is capital in nature.
5. Discuss the following :
(i) Compensation is normally a capital receipt but there are certain receipts by way of
compensation which are taxable as income from business.
(ii) State the situation under which WDV of a ‘block of assets’ will be reduced to Nil.
 (iii) Describe the provisions of Income Tax Act that deal with the computation of
business income on a presumptive basis in certain cases, in the cases of resident
assessees.
(iv) The provisions that relate to amortisation of expenses for obtaining a license to
operate telecommunication services.
(v) The concession available under the Income Tax Act to profits derived from
infrastructure business.
6. (i) What are the receipts to be excluded for computing “actual loss of an asset under
Income Tax Act” ?
(ii) Discuss Block of Assets concept under the Income Tax Act.
(iii) While computing income from business or profession certain deduction will be
allowed only on actual payments. Discuss.
7. (i) State the cases when payment exceeding ` 20,000 made otherwise than by a
crossed cheque or by a crossed demand bank draft will not be disallowed ?
(ii) Income from business or profession is chargeable to tax, only if it is carried on
during the previous year by an assessee. Give five examples of cases where the
income is taxable even if the business or profession is not in existence during any
previous year.
8. Discuss the provisions of tax audit as contained in Section 44AB of the Income Tax Act,

9. (i) State the conditions to be satisfied for claiming deductions u/s 37 (1) of the Act.
(ii) What is meant by Speculation Business ? What are the transactions not deemed to
be speculative transactions ?
(iii) Enumerate the classes of receipts deemed to be profits and gains of business or
profession under Section 41.
10. (i) From the following figures, you are required to ascertain the depreciation
admissible and other liabilities if any, in respect of the previous year relevant to the
A.Y. 2015-16.
Plant and Building
Machinery
WDV at the beginning of the year 2,50,000.00 10,00,000.00
Additions during the year 3,00,000.00 NIL
Sales during the year 6,00,000.00 2,00,000.00
(ii) Calculate the deduction admissible u/s 37(2) in respect of entertainment
expenditure for A.Y. 2015– 2016, from the following data :
Expenditure incurred on food provided to employees ` 25,000.00
Entertainment allowance paid to Directors ` 10,000.00
Other items of entertainment ` 50,000.00
(iii) From he following find out the admissible deduction u/s 37(3) and the rules there
under in respect of expenditure incurred on advertisement in a souvenir :
Expenditure on advertisement in a souvenir ` 50,000
Issued by a political party
Expenditure on presentation articles :
Value per article – less than ` 1,000 ` 20,000
Value per article – exceeding ` 1,000 ` 10,000
 Expenditure incurred in cash ` 12,000
11. (a) Atmaram and Co. borrowed ` 20,000 in Hundi by an account payee cheque on
1.1.2014. The amount was repaid in cash on 1.10.2014 along with interest of `
3,000. What is the effect of the transaction in the assessment of Atmaram and Co. ?
(b) A manufacturer of goods which are liable to excise duty maintains a separate
account for excise duty collected and paid by him. The balance remaining in this
account is carried to the balance sheet. The levy of Central Excise was disputed by
the assessee and being successful, he received a refund of excise duty to the tune of
` 10 lakhs which was credited to the Central Excise Collection Account. The
Assessing Officer taking the view that the provisions of Section 41(1) are attracted
brought the sum of ` 10 lakhs to tax. The assessee disputes this levy on the ground
that he had not claimed the payment of Central Excise as a deduction in arriving at
his income and therefore the provisions of Section 41(1) are not attracted. Discuss
the comparative merits of the two view prints.
12. Jardenes Ltd. is an existing Indian company, which sets up a new industrial unit. It
incurs the following expenditure in connection with the new unit :
Preparation of project report ` 4,00,000
Market survey ` 5,00,000
Legal and other charges for issue of additional
Capital required for the new unit ` 2,00,000
Total ` 11,00,000
The following further data is given :
Cost of project ` 30,00,000
Capital employed in the new unit ` 40,00,000
What is the deduction admissible to the company u/s 35D ?

13. From the following data, calculate the depreciation admissible to an individual carrying
on business for the A.Y. 2015-16
(1) Factory Building WDV (10% Depr.) ` 5,00,000
(2) Plant and machinery WDV (25% Depr.) ` 8,00,000
Additions 30.6.2014 (15% Depr.) ` 1,00,000
31.12.2014 (15% Depr.) ` 1,00,000
Sales 01.12.2014 (25% Depr.) ` 6,00,000
(3) Computer (60% Depr.)
Addition 1.1.2015 ` 60,000
(4) Furniture and Fixtures WDV (15% Depr.) ` 1,00,000
(5) Motor Car WDV (20% Depr.) ` 60,000
14. Discuss the tax implications of the following transactions in the case of a doctor running
a nursing home :
(i) Amount paid to a scientific research association approved by the Central Govt. and
run by a drug manufacturing company ` 20,000.
(ii) Amount received from the employees as contribution towards PF for the month of
March 2015, paid to PF commissioner on 25.04.2015 ` 25,000.
(iii) Payment made in cash towards purchases of medicines ` 50,000.
(iv) Repayment of loan taken from bank for doing a post graduate course in medicine
Instalment ` 50,000
 Interest ` 10,000
15. The following is the Profit and Loss Account for the year ended 31.3.2015. Compute his
taxable income from business for that year :
` `
Opening Stock 15,000 Sales 80,000
Purchases 40,000 Closing Stock 20,000
Wages 20,000 Gift from father 10,000
Rent 6,000 Sale of car 17,000
Repairs of car 3,000 Income tax refund 3,000
Wealth tax paid 2,000
Medical expenses 3,000
General expenses 10,000
Depreciation of car 4,000
Advance income tax paid 1,000
Profit for the year 26,000
1,30,000 1,30,000
Following further information is given :
1. R carries on his business from rented premises half of which is used as his
residence.
2. R bought a car during the year for ` 20,000. He charged 20% on the value of the
car. The car was sold during the year for ` 17,000. The use of the car was 3/4th for
the business and 1/4th for personal purposes.
3. Medical expenses were incurred during sickness of R for his treatment.
4. Wages include ` 2500 on account of R’s driver.
16. Shri Batra is the owner of a small manufacturing unit. He gives you the following
details from his books of accounts for the financial year 2014–15 :
1. Computed net profit, after charging the following items : ` 27,500
2. Provisions and reserves debited to Profit and Loss Account -
(i) Provision for doubtful debts ` 15,000
(ii) Depreciation reserve ` 20,000
3. Household expenses ` 30,000
4. Donations to Prime Minister National Relief Fund ` 10,000; Other Charitable
Donations ` 20,000
5. Cheques issued for purchases ` 60,000
6. OY Telephone Deposit ` 5,000
7. Advertisement expenses ` 5,000 spent on Neon Sign given to a customer.
Advertisement gifts to 50 customers at a cost of ` 100 each.
8. Audit fee charged ` 20,000, expenses on income tax assessment ` 15,000
9. Patent purchased for ` 70,000 during the previous year
10. Market survey expenses ` 8,000, feasibility report expenses ` 12,000 on a new
project of ` 10,00,000 started this year.
11. Incomes credited to Profit and Loss Account were :
(i) Bank interest on FD – ` 5,000
(ii) Interest on Post Office Savings Bank A/c – ` 3,000
(iii) Interest on UTI Units − ` 2,000
 12. Opening stock is valued at cost plus 10% basis, whereas closing stock was valued
at cost minus 10% basis. Opening stock valued was ` 66,000; closing stock valued
was ` 72,000. Compute the Net Business Income for the A.Y. 2015-16
17. Find out the gross total income of Sri Syam Lal on the basis of the following
particulars :
Profit and Loss A/c for the year ended 31.03.2015
` `
Interest 1,800 Gross Profit b/d 1,22,700
Repairs & renewal 2,200 Interest on debentures of an 10,000
institution (Gross)
Insurance 4,200 Rent from house property 36,000
Depreciation 5,600
Compensation to employee 10,200
Law charges 5,100
Labour welfare expenses 3,800
Subscriptions 5,800
Net Profit 1,30,000
1,68,700 1,68,700
Further information provided :
(a) (i) Interest include ` 200 on loan taken for purchasing debentures of a company
and ` 300 on loan taken for reconstruction of house property let out.
(ii) The expenses relating to house property let out are 40% of the repairs and
renewals expenses.
(iii) Depreciation includes ` 1,200 on house property let out.
(iv) Compensation was paid to an employee whose dismissal was in business
interest.
(v) Insurance includes 30% for fire insurance of the house property let out, 30%
for workers accident insurance and balance for life insurance.
(vi) Law charges includes ` 2,000 relation to a petition filed against breach of
contract and the balance regarding sales tax appeal.
(vii) Subscriptions include ` 2,000 given for election purposes to political parties.
(b) The amounts not debited to profit and loss A/c are as follows :
(i) Expenses incurred on the occasion of Dipawali - ` 500.
(ii) Theft of cash from iron safe - ` 1,500.
(iii) Expenses for new telephone connection in the business - ` 2,000.
Multiple choice Questions
1.Choose the most appropriate answers from the given options in respect of the following
(i) the benefits of amortization of preliminary expenses under section 35D has been extended
to-
a) Manufacturing companies, b)Post commencement preliminary expenses of service sector
units, c) Non- resident companies, or d) Non-resident individuals.
(ii) No disallowance under section 40(a)(ia) shall be made in case of a deductor in respect of
expenditure incurred in the month of March if the TDS on such expenditure has been
paid before- a)31st December, b)30th September, c) due date for filling the return, or d)30
days from the date of deduction
 (iii) Depreciation on new plant acquired and kept as standby in anticipation of an order for
supply of goods is- a)An allowable expenditure on an asset kept as standby, b)Not
allowable as asset acquired but put to use, c) partly allowable, or d)None of the above
2.Fill in the blanks:
(i) Expenditure incurred by a company after its incorporation and after his business has been set
up, on development of website for conducting its business partly through website could
be considered as---- expenditure.
(ii) interest on borrowed funds utilized for acquisition of an asset as part of extension of business
could be capitalized till the asset----.
(iii) Subsidy received by a company operating a sugar mill which could be utilized only for
repayment of term loans taken by it for setting up new units and extension of existing
units would be treated as----
A Multiple Choice Questions
1. Rate of depreciation chargeable on fully temporary wooden structure for the assessment year
2016-17 is –
(a) 5%
(b) 10%
(c) 100%
(d) None of the above.
2. Under the Income-tax Act, 1961, depreciation on machinery is charged on –
(a) Purchase price of the machinery
(b) Market price of the machinery
(c) Written down value of the machinery
(d) All of the above.
3. Depreciation allowance is charged @_________ percent of written down value on intangible
assets e.g.Know-how, patents, copyrights etc.
(a) 15
(b) 25
(c) 20
(d) 30
4. B contributed a sum of ` 30,000 to an approved institution for research in social science, which
is not related to his business. The amount of deduction eligible under section 35 would be:
(a) ` 30,000
(b) ` 45,000
(c) ` 37,500
(d) No deduction as it is unrelated to his business

Added MCQs

Multiple Choice Questions

5.(A)If any expenditure is incurred by an Indian company wholly and exclusively for the purpose
of amalgamation or demerger, the said expenditure is —
(a) Not allowable as a deduction in computing profits and gains of business or profession.
(b) Fully deductible as revenue expenditure in the year in which it is incurred.
(c) Not deductible but is eligible to be treated as an intangible asset in respect of which
depreciation can be claimed.
(d) Allowed as a deduction spread over five successive previous year beginning with the
previous year in which the amalgamation or demerger takes place.

.6. (B) Deduction for bad debts is allowed to an assessee carrying on business —
(a) In the year in which the debt is written off as bad.
(b) In the year in which the debt first arose.
(c) In the year in which provisions was made in respect of the bad debt.
(d) In the year in which the debt becomes irrecoverable by operation of law.

7.(C) Under Section 41(4) of the Income-tax Act, 1961, where a bad debt allowed as a deduction
under Section 36(1)(vii) in an earlier year is subsequently recovered —
(a) It is taxable to the extent of 50% of recovery, in the year of receipt, as business income.
(b) It is taxable as business income in the year of recovery.
(c) It is added back to the income of the year when it was written off and taxed as business
income.
(d)It is taxable as income from other sources in the year of receipt.

8.(D) Payment of interest to partners of partnership firm assessed as firm is allowable as

deduction under Section 40(b) of the Income Tax Act, 1961.
(a) If the rate of interest does not exceed 8% p.a.
(b) If the interest is paid on the minimum balance of capital account between 10th and the end of
every month.
(c) If it is calculated on quarterly balance.
(d) If it is authorized by and in accordance with the partnership deed, pertains to a period after
the deed and does not exceed 12 percent simple interest per annum.

9.(E) The following is not 'plant' u/s 43(3) of the Income-Tax Act, 1961 —
(a) Books
(b) Know-how
(c) Road in the factory building
(d) Electrical fittings

10.(F) Mr. L Singh used it in his business. This is the only asset in the block. 20% of the usage is
for personal purposes. The WDV of the block as on 31.3.2011 is —
(a) Rs. 2,70,000;
(b) Rs. 2,55,000;
(c) Rs. 2,10,000;
(d) None of the above.

Fill in the Blanks

A. In case of an existing industrial undertaking, to be eligible for additional depreciation,
increase in installed capacity as compared to the installed capacity as on 31.3.2002 is ------
[Note: As criteria of increment in installed capacity for allowing additional depreciation is now
omitted]
B. The due date for filling return of net wealth by an individual who is a non-working partner in
a firm whose accounts are audited under Section 44AB of the Income-tax Act. 1961 is ------
C. A person owns 4 heavy goods vehicles. His estimated annual income U/S. 44AE is -----------
(16,800, 1,51,000, 1,92v000, 2,40,000).
D. According to Section 44AB, every person, carrying on business shall, if his total sales,
turnover or gross receipts, as the case may be, in business exceed or exceeds Rs. ------- in any
previous year, inter alia, get his accounts of such previous year audited by a Chartered
Accountant.
E. Additional depreciation of 20% of the actual cost of any new machinery or plant which has
been acquired or installed 31.03.2005 is available to an assessee engaged in the business
of----------------.
F. According to Section 40A(3), where the assessee incurs any expenditure in respect of which
payment is made in a sum exceeding Rs. ---------otherwise than by a crossed cheque or crossed
bank draft. -----------of such expenditure shall not be allowed as a deduction.
G. The additional or accelerated depreciation, for an eligible assessee, for machinery installed
and used after 31.03.2005 is -------of actual cost of the machinery.
H. Where an Indian company incurs any expenditure in connection with amalgamation or
demerger, the same is allowable as deduction, spread over--- successive previous years beginning
with the in which amalgamation or demerger taken place.
I. 44BBB(i) of the Income-tax Act, 1961, the presumptive income is taken as ----- of the eligible
receipts in the hands of eligible assessee.
J. The deduction for amortization of preliminary expenses under section 35D is allowable at ---
of the qualifying expenditure in each of the -- successive years beginning with the year in which
business commences.
K. ----- ----- is a non-recurring expenditure whereas revenue expenses is normally a recurring
one.
L. ------- defines various income which are chargeable to tax under the head "Profits and gains of
business or profession".
M. Expenditure incurred towards demerger is deductible in --- equal annual installments under
Section 35DD of the Income-tax Act, 1961.

Answers to MCQs
(1) i) b), ii) c, iii) a)
(2) (i) Revenue, ii) Put to use, iii) Capital receipt
(A) 1(c); 2(c); 3(b); 4(c)
Answers to Added MCQs
Multiple Choice Questions
A (d) Allowed as a deduction spread over five successive previous year beginning with the
previous year in which the amalgamation or demerger takes place
B. (a) In the year in which the debt is written off as bad.
C (b) It is taxable as business income in the year of recovery.
D. (d) If it is authorized by and in accordance with the partnership deed, pertains to a period after
the deed and does not exceed 12 percent simple interest per annum. –
E (c) Road in the factory building.
F (d) None of the above.

Fill in the Blanks

A 10per cent.
B 31st July.
C Rs.240,000
D Rs.60 lakhs
E manufacture or production of an article of things
F 20,000, 100 percent
G 20%,
H 5
I 10%
J 20%,5
K Capital Expenditure
L sec 28
M 5

PART 2 Income from other person included in Assessee’s Total Income-(section 60 to 65)

4.1 Income from Other Persons included in the Assessees Total Income
4.1.1 Transfer of Incomes [Section 60]
41.2 Revocable Transfer of Assets [Section 61]
4.1.3 Transfer Irrevocable for a Specified Period [Section 62]
4.1.4 Income of an Individual to include Income of Spouse etc.
[Section 64]
4.1.5 Liability of a person in respect of Income included in the Income of Another
Person [Section 65]
4.1.6 Other Points
Summary
Review Questions
Multiple Choice Questions
Answers to MCQs

4.1 INTRODUCTION
There is a tendency amongst the tax payers in high tax brackets to divert a part of their
income to the hands of their relatives, in order to reduce the burden of tax. In order to curb such
practices of tax avoidance, provisions have been incorporated in the Income-tax Act under which
the income arising to certain persons to be included in the income of another person, for the
purposes of computation of his tax liability. These provisions are of two types and are contained
in Sections 60 to 64 of the Income tax Act :
(a) Income of other persons included in the assessee’s total income [Sections 60 to 63] or
(b) Income of other person included only in the individual’s total income [Section 64]

4.1.1 Transfer of Incomes [Section 60]

All incomes arising to any person by the virtue of a transfer of income without the transfer of
assets from which the income arises shall be chargeable to Income Tax as the income of the
transferor and shall be included in his total income. It will not make any difference whether the
transfer is a revocable transfer or an irrevocable transfer. Transfer for this purpose under
Clause (b) includes any settlement, trust, covenant, agreement or arrangement. The section when
analysed gives the following :
(a) There are some assets, which yield income.
(b) Such income is transferred to someone by the owner of the assets.
(c) Ownership of the assets is kept intact by the transferor himself.
(d) The income so transferred shall be chargeable to tax in the hands of the transferor and
therefore, be included in the total income.
(e) The transfer may be revocable or irrevocable.
(f) Date of such transfer is immaterial, it can be after or before 1.4.1962, the date when the
Income Tax Act, 1961 came into force.
Judicially speaking, such transfer of income is supposed to be the application of income and
therefore, the transferor is taxable in respect of such amounts.
Illustrations :
1. Husband assessee making a settlement for a period of eight years for a part of his share
of profit in a firm on his wife and two daughters without transferring them the interest in
the partnership assets.
It is a case of Application of Income [Section 60] (A.R. Rangachari vs. CIT).
2. Shares continued with the husband, registered in his name whereas, he settled dividend
income to be received in future on his wife by a deed, though not registered. Held
dividend first accrued to the husband and then applied. It was taxable in his hands.
[Provat Kumar Mittar vs. CIT (Cal.)].

4.1..2 Revocable Transfer of Assets [Section 61]

All the income arising to any person by virtue of a revocable transfer of assets shall be
chargeable to Income Tax as the income of the transferor and shall be included in his total
income.
Transfer Deemed to be Revocable [Section 63(a)] : In the following cases, a transfer will
be deemed to be revocable :
1. If it contains any provision for the re-transfer directly or indirectly of the whole or any
part of the income or assets to the transferor.
2. If it gives in any way the transferor a right to re-assume power directly or indirectly over
the whole or any part of the income or assets.
4.1.3 Transfer Irrevocable for a Specified Period [Section 62]
This section is an exception to the general rule laid down in Section 61 that in case of
revocable transfer of assets, the income from such assets is taxed in the hands of the transferor.
Here it is provided that the income from such assets shall not form a part of the total income of
the transferor, provided the following conditions are fulfilled :
(a) in the case of transfer by way of trust, the transfer is not revocable during the life time
of the beneficiary;
(b) in the case of any other transfer, the transfer is not revocable during the life time of the
transferee;
(c) where the transfer was made before April 1, 1961 it was not revocable for a period
exceeding six years.
 The above exceptions are applicable when the transferor derives no direct or indirect benefit
from such income.
In the cases discussed above, all income arising to any person by the virtue of such a transfer
shall be chargeable to Income Tax of the transferor as and when the power to revoke the transfer
arises and shall then be included in his total income.
Where the settler had retained all the power of investments in his own hands under the trust
deed and could even lend to himself without security it was held that the settler derived an
indirect benefit in the income of the space trust and the income was assessable in his hands.
Transfer [Section 63(b)] : Transfer for the purposes of Sections 60, 61 and 62 include any
settlement, trust, covenant agreement or arrangement.
Where the assessee instructed his bankers to transfer his deposits in the name of a third
person, it was held in S.P. Jaiswal vs. CIT that the transaction involving this arrangement
amounted to a ‘transfer’. But throwing of individual property into the HUF common hotchpots
does not involve a transfer (CIT vs. Rajendra P Bhow).
It was held in D. R. Shahpure vs. CIT, that the husband in this case derived no indirect
benefit within the meaning of the proviso to Section 62(1) merely because he was under a legal
obligation to maintain his wife.
In Chunilal Mulji Motain vs. CIT (Cal.), the assessee while settling a house property for
public charitable purposes, reserved a right to himself to reside in two of the flats of the property
free of rent and to receive certain amount annually from the trust. The trust was held to be
revocable in this case.
4.1.4 Income of an Individual to include Income of Spouse etc. [Section 64]
Commission, salary etc. of the Spouse [Section 64(1)(ii)] : Any payment by way of salary,
commission, fees or any other form of remuneration whether in cash or in kind received by the
spouse from a concern in which such an individual has a substantial interest will be added to the
total income of such an individual. The proviso to Section 64(1)(ii) lays down that this rule will
not apply to any income derived by such spouse, if it is attributable to the application of technical
or professional qualifications possessed by the spouse. In applying Section 64(1) (ii) we have to
consider the following facts :
(a) The spouse derives income by way of salary, commission, fees or any other form of
remuneration.
(b) Such remuneration etc. is derived from a concern in which the husband and/or wife has
a substantial interest.
(c) Such remuneration is not derived from the exercise of technical or professional
qualifications.
Following points are noteworthy :
1. Substantial interest : Explanation 2 to Section 64 (1) (ii) defines substantial interest in
a concern. In case of a company shares carrying not less than 20% of the voting power
must have been held by the person at any time during the previous year. Shares carrying
a fixed rate of dividend are not considered in this clause. Similarly, such shares may
either be held by such individual wholly or partly by him and partly by one or more of
his relatives. In case of non-corporate entities, such person along with his relatives must
 be entitled in the aggregate at any time during the previous year to not less than 20% of
the profits of such concern.
2. Relative : Under Section 2 (41), the term ‘relative’ in relation to an individual means
the husband, wife, brother or sister or any legal ascendant or descendant of that
individual.
3. Technical/Professional Qualifications : The reference to ‘technical’ or ‘professional’
qualifications does not mean any degree issued by a recognised body. It simply means
that the person possesses technical or professional knowledge and experience and the
income derived is attributable to such knowledge and experience (CIT vs. Madhubala
Shrenik Kumar).
4. In whose hands to be clubbed : For the purpose of Clause II the individual in
computing whose total income referred to in that clause is to be included, shall be the
husband or wife whose total income (excluding the income referred to in that clause) is
greater.
Income to Spouse from the Assets transferred [Section 64(1)(iv)] : Any income arising to
the spouse from the assets transferred directly or indirectly by such an individual otherwise than
for adequate consideration or in connection with an agreement to live apart will be included in
the total income of the individual. To illustrate, a person settles a sum of ` 1,00,000 on his wife
with absolute right to enjoy income arising from the investment of this sum, the consideration
being mere love and affection. Despite the transfer of this sum, any income derived from the
investment will be taxed in the hands of the husband.
For the purpose of Section 64, it is not necessary that the same assets belonging to the
husband should have reached the wife. The assets might in the course of being transferred be
changed deliberately into assets of a like value of another person. If two transfers were inter-
connected and were parts of the same transaction as a device made to get over the implication of
Section 64, the case would fall within the aggregates to more than one wasn’t consideration for
the other in the technical sense [CIT vs. CM Kothari (SC)].
It is to be noted clearly that for the purpose of this section, the relationship of husband and
wife must be in existence not only when the income accrues but also when the assets are
transferred. Transfer, which is effected before the marriage cannot be said to have been made to
the spouse and hence, is outside the ambit of this clause (Phillip Thomas vs. CIT).
Assets transferred to son’s wife [Section 64(1)(vi)] : Under this clause, the income from
the assets transferred otherwise than for adequate consideration to the son’s wife will be the
subject matter of tax in the hands of the transferor. However, only the transfers effected after
31.5.1973 will be material for this purpose. This section does not mention grandson and
therefore, gifts to him will be outside the mischief of this clause.
Income to a person from the assets transferred [Section 64(1) (vii)] : Income accruing to
any person or association of persons from assets transferred directly or indirectly otherwise than
for adequate consideration to the person or association of persons by such individual to the
extent to which the income from such assets is for the immediate or deferred benefit of his or her
spouse.
The provision evidently covers transfers to the trustees for the benefit of the spouse. The
word ‘person’ used in the Income Tax Act is wide enough to cover all juristic entities capable of
holding property. God almighty is, therefore, a ‘person’ within the meaning of this Section and so
also is the wife of the assessee.
 Income from assets transferred to a person for the benefit of son’s wife [Section 64(1)
(viii)] : Any income arising directly or indirectly to any person or association of persons from
assets transferred directly or indirectly on or after 31.5.1973 to the person or association of
persons shall be included in the income of the individual. Other conditions necessary for
clubbing under this clause are as follows :
(a) the transfer to such a person or association of persons shall be otherwise than for
adequate consideration;
(b) it will be clubbed only when and to the extent to which the income from such assets is
for the immediate or deferred benefit of his son’s wife.
Income of the minor is to be clubbed [Section 64(1A)] : In computation, the total income
of any individual there shall be included all such income as arises or accrues to his minor child,
except :
(a) manual work done by him;
(b) activity application of his skill, talent or specialised knowledge and experience;
(c) income of a minor child (from all sources) suffering from any disability as specified
u/s 80U.
Important Points :
1. Where the marriage of his parents subsists, income of the minor shall be included in the
income of that parent whose total income (excluding the income under this subsection)
is greater.
2. Where however the marriage does not subsist, it shall be included in the income of the
parent, who maintains the minor child in the previous year.
3. Where any such income is once included in the total income of either parent, any such
income arising in any succeeding year shall not be included in the total income of other
parent unless opportunity of being heard is given.
4. Since the income includes loss, the loss of a minor child will be clubbed in the hands of
the parents and can be claimed by him.
5. After inclusion of a minor child’s income, the assessee will be entitled to exemption
from his total income to the extent of the income so included subject to a maximum of
` 1,500 per minor child u/s 10(32).
When the child attains majority : The provision of Section 64 shall not apply when the
child has attained majority. If the son attains majority in the course of the accounting year and he
elects to become a partner before the end of that year and where the profit of the firm can be
ascertained only at the accounting year, no part of the son’s share of profits of the year would be
includable in the father’s total income.
From Assessment Year 1995-96, the income of a physically or mentally handicapped minor
child shall be computed separately. Clubbing provisions are not applicable.
Transfer of an individual’s property of HUF [Section 64(2)] :
(a) The income derived from the converted property or any part thereof, shall be deemed to
arise to the individual and not to the family.
(b) Where the converted property has been the subject matter of a partition (whether partial
or total) amongst the members of the family, the income derived from such converted
property as is received by the spouse on partition shall be deemed to arise to her/him
 from assets transferred by the individual to the spouse and the provisions of Section
64(1) shall apply.
Important Points :
1. It must be noted that the income so included in the total income of the individual shall
be from the total income of the family or the spouse.
2. Property in this section includes any interest in property, movable or immovable, the
proceeds of sale thereof and any money on investments for the time being representing
the proceeds of sale thereof and any money on investments for the time being
representing the proceedings of sale thereof.
3. Section 64(2) will also be applicable in case where any member of the HUF makes a gift
of his HUF. In other words, the income from such gifted property will be included in his
total income.
Explanation 2 : Section 64(2) will not govern a situation where the assets are transferred by
the father to the HUF of his son, of which he (father) is not a member. In such cases, since the
son is a major, clubbing provisions will not apply.
4.1.5 Liability of a person in respect of Income included in the Income of another Person
[Section 65]
Section 27 (i) and 60 to 64 provide for charge on an assessee in certain cases in respect of
income which legally and beneficially belongs to another person. This section provides that in
such cases, the real recipient of the income would be liable, on service of a notice of demand, to
pay the tax assessed and levied on another person but attributable to such income. In other
words, this section provides for recovery of tax from the person to whom the income really
belongs without an assessment being made on him, the tax being levied in all cases at the rate
applicable to the rate applicable to the assessee who is vicariously liable. The section leaves it to
the discretion of the Assessing Officer to recover the person assessed in respect of another’s
income or from such other person to whom the income really belongs.
A notice of demand by the Assessing Officer will be enough to start the proceedings of
collection and recovery. But where any such asset is held jointly by more than one person, they
shall be jointly and severally liable to pay the tax which is attributable to the income from the
assets so included.
4.1.6 Other Points
Income from accretion of Property Transferred or Accumulated Income of such
property, whether included in the hands of the Transferor : Income arising to the transferee
from the property transferred is taxable in the hands of transferor. Income arising to the
transferee from the accretion of such property or from accumulated income of such property is
however, not includable in the total income of the transferor.
Can negative income be clubbed ?
Under Section 64, the income of the specified person is liable to be included in the total
income of the individual in the circumstances explained above. For the purposes of including the
income of the specified persons in the income of the individual, the word income ‘includes a
loss’.
Heads of income under which clubbed income will be included
The following steps should be followed :
 Step One : First compute the income in the hands of the actual recipient under the relevant
head of income as if the actual recipient of income is liable to pay tax.
Step Two : After computing the income under the relevant head of income in the hands of an
actual recipient, it will be clubbed under the same head of income in the hands of other person.
Step Three : Gross Total Income of the person in whose hands the income is clubbed shall
be calculated as if it is his own income. Provisions of set off and carry forward of losses are
applicable as are applicable in any other case.
Step Four : Deductions u/s 80C to 80U will be given to the person in whose hands income is
clubbed within the overall ceiling provided in the sections. No separate deduction is available to
the actual recipient of income.

1. From the following information find out the net income of X, Mrs. X and their minor
child Z for the A.Y. 2015-2016.
(a) X owns three houses :
House No. 1 : It is let out on monthly rent of ` 10,000. It is transferred for an
adequate consideration to Mrs. X on Dec. 1, 2014.
House No. 2 : It is let out on monthly rent of ` 15,000. X gifts this house to Mrs. X
on June 30, 2014.
House No. 3 : It is self-occupied X gifts this house to Mrs. X on Jan. 1, 2015 The
house was constructed out of money borrowed in July 1, 2000 and the interest
liability for the previous year 2012–2013 is ` 34,000.
(b) On January 1, 1996, X transfers 1000 14% debentures of ` 100 each of A Ltd.
without any consideration to Mrs. X (interest is annually payable on Dec. 31. Out
of the accumulated debenture interest, Mrs. X gives a loan to a friend and during
2014-15; she gets a sum of ` 5600 as interest.
(c) On January 10, 2015 1000 debentures of A Ltd. are transferred by Mrs. X (Capital
Gain ` 40,000 which is used for purchasing kitchen appliances) and the sale
proceeds (i.e., ` 1,00,000) are invested in Government Bonds. (Term : 2 years) and
during the period ending 31.03.2015 she gets interest of ` 16,000.
(d) Mrs. X holds 25 percent equity shares in B Ltd. On May 31, 2014 she gets ` 40,000
as dividend.
(e) X is employed by B Ltd. without any technical/professional qualification on salary
of ` 17,000 per month.

(f) X and Mrs. X are partners in a firm X Mrs. X Z

(other partners being C, D, E), Z is
admitted to the benefits of the firm.
During 2014-15, the following
payments are received from the firm :
 Share of profit ` 60,000 ` 90,000 ` 20,000

Interest on capital (Mrs. X has invested ` 70,000 ` 80,000 ` 26,000

half of her capital out of gifts made by X)

Salary of working partner 15,000 20,000 -

(g) During 2010-11, Mrs. X transfers a sum of ` 2 lakh to a trust subject to the
condition that the trust will annually pay ` 5,000 to X and ` 6,000 to her father-in-
law.
(h) X holds 20 percent of preference share capital in D Ltd. (dividend of ` 80,000 is
received on Jan. 16, 2015) where Mrs. X is employed (salary being ` 10,000 per
month). Mrs. X doesn’t have any professional qualification.
(i) Z, the minor son holds debentures of Tata Sons which were purchased out of
monetary gift made by his grandfather. During the year 2014-15, Z gets ` 20,000
as interest on debentures.
(j) Z, the minor son is a professional singer. His income from the profession of singing
is ` 45, 000 for the previous year 2014–15.
(k) Out of accumulated income from singing, Z makes a fixed deposit with a
Government company and interest of Rs.10,000 is received during 2014-15.
Solution :
1. House No. I : As House No. I is transferred for adequate consideration, X is the owner
of the house upto Dec. 1, 2014 and Mrs. X after that. Income from house property will be
determined as under :
X Mrs. X
Annual Value ` 80,000 ` 40,000
Less : Standard Deduction @ 30% ` 24,000 ` 12,000
` 56,000 ` 28,000
House No. II : As the house is transferred by X to Mrs. X without any consideration, by
virtue of Section 27(1), X will be the deemed owner and the rental income will be taxed in the
hands of X :
Annual Value : 15,000 x 12 ` 1,80,000
Less : Standard deduction @ 30% ` 54,000
` 1,26,000
House No. III :
By virtue of section 27(1), X will be deemed owner
Annual value – since self occupied NIL
And hence standard deduction also NIL
Less : Interest on borrowed capital since it is self-occupied
hence restricted to ` 30,000 30,000
Income from house property 30,000
 2. Annual interest on debentures ` 14,000 shall be included in the income of X as
debentures were transferred by X to Mrs. X without consideration. ` 5600 being interest earned
by Mrs. X on accumulated debenture interest is however taxable in the hands of Mrs. X.
3. Capital gain of ` 40,000 on transfer of debentures of Mrs. X is taxable in the hands of X.
Likewise interest of ` 16,000 on govt. Bonds will be taxable as income of X.
4. Dividend income of Mrs. X is exempt from tax.
5. X is employed by B Ltd. in which Mrs. X has a substantial interest salary income of X
(i.e. ` 17,000  12) i.e., ` 2,04,000 is taxable as income of Mrs. X.
6. Share of profit from a firm is exempt. One half of the interest of ` 80,000 received by
Mrs. X will be included as the income of X. Interest received by Z, the minor son, shall
be included in the income of X or Mrs. X whosoever has higher income/incomes.
7. ` 5,000 received by X will be included in the income of Mrs X. However, ` 6000 will
be the income of her father-in-law.
8. Dividend income of ` 80,000 of X is exempt from tax. As X holds preference share
capital (not equity share capital) he does not have substantial interest in D Ltd. Thus,
salary income of Mrs. X is not taxable as income of Mr. X.
9. . ` 20,000 being interest on debentures of Tata Sons along will be included in the income
of X or Mrs. X where other income is higher.
10 ` 45,000 being professional income of Z is taxable as his own income.
11 Interest received on accumulated professional earning is taxable as income of X or Mrs.
X who has higher income. The source of income is bank deposit and not his professional
skill of singing.
Summary of the Part
In order to curb the practices of diverting the income into different hands and thus paying less
tax, provisions have been incorporated in the Income Tax Act under which income arising to
certain person is to be included in the income of another person for purposes of computing tax
liability. The unit deals with Sections 60 to 64 of the Income Tax Act
Review Questions
1. Under Section 61, income arising by virtue of a revocable transfer of asset is taxable in the
hands of the transferor. Is there any exception to this rule ?
2. Find out who will pay tax in the following cases :
(a) X transfers an asset to a trust. Under the trust, X has power to revoke the trust at
any time after April 1, 2005. The power is yet to be exercised.
(b) Y and Mrs. Y create a trust for the benefit of public by transferring a few assets.
The trust provides that Y can revoke the deed with consistent of Mrs. Y and one of
the members of Parliament from Kerala.
3. Explain the term ‘technical or professional qualification’ relevant for clubbing under
Section 64(1) (11)
4. Answer the following :
 (a) Who is liable to pay tax in respect of income of other persons included in taxable
income ?
(b) Clubbing of income of minor children in the hands of parent.
(c) X transfers an asset without consideration to Y in which he holds 20 percent equity
share capital (annual income from the asset being ` 5 lakhs). Is it possible to
recover income tax on ` 5 lakhs from X and/or his family members.
5. Mr. Singh is a trader. Particulars of his income and those of the members of his family
are given below. These incomes relate to the previous year that ended on March 31,
2015.
(i) Income from business : Mrs. Singh ` 90,000
(ii) Salary derived from an educational inst. by
Mrs. Singh. She is the Principal of the institution ` 50,000
(iii) Interest on company deposits derived by Master Deep Singh (minor son). These
deposits were made in the name of Deep Singh by his grandfather about 6 years
ago ` 12,000
(iv) Receipts from sale of paintings and drawings made by Minor Dipali Singh (minor
daughter of Mr. and Mrs. Singh and a noted child artiste) ` 60,000
(v) Income by way of lottery earnings by Master Dipander Singh (minor son of
Mr. Singh) ` 6,000
Discuss whether the above will form part of the assessed income of any individual and
also compute the assessable income of Mr. Singh.
6. Balu is the karta of a HUF, where members derive income as given below :
(i) Income from Balu’s own business ` 50,000
(ii) Mrs. Balu a dermatologist draws salary ` 80,000
(iii) Minor son Deepak (carrying interest on fixed deposits with ABC Ltd., which were
gifted to him by his grandfather) ` 15,000
(iv) Minor daughter Priya gave a dance performance
and received remuneration ` 1, 00,000
(v) Deepak got winnings from lottery (gross) ` 2,00,000
Explain how the above will be taxed.
7. Mrs. Satya Jadav received the following amounts during financial year 2014-2015
Gross salary ` 5,50,000
 Family pension ` 1000  12
` 12,000
Children pension @ ` 400 for two minors ` 9,600
Accumulated balance in PF of her husband after death ` 1,00,000
Gratuity received after death of her husband ` 1,00,000
Calculate the taxable income of Mrs. Satya Jadav for the A.Y. 2015-16.
Summary
In order to curb the practices of diverting the income into different hands and thus paying less
tax, provisions have been incorporated in the Income Tax Act under which income arising to
certain person is to be included in the income of another person for purposes of computing tax
liability. The unit deals with Sections 60 to 65 of the Income Tax Act
Review Questions

1. Discuss the tax treatment to transactions which result in (a) transfer of income without transfer
of the assets yielding the income; and (b) gift of the assets by an individual to his/her spouse,
minor children, major sons and married daughters.
2. Distinguish between revocable and irrevocable transfer of assets and state what is meant by “a
revocable transfer” for purposes of income-tax. Discuss also the tax implications arising out of
revocable and irrevocable transfer of assets.
3. Discuss the tax effects of creation of a trust by an individual for the benefit of (i) himself, (ii)
his/her spouse, (iii) his/her minor children, (iv) his married daughter, (v) his daughter-in-law and
sisters.
4. Explain the income-tax implications of converting self-acquired assets into property of a
H.U.F. Illustrate.
5. Outline the circumstances under which and the conditions subject to which the total income of
an individual should be taken to include the share of income of his/her spouse from a concern in
which such individual has substantial interest

Multiple choice Questions

1. Under which of the following circumstances transfers of income is revocable?
(a) If there is a sale with a condition of re-purchase
(b) If the transferor has power to change beneficiary or trustees.
(c) Both (a) and (b)
(d) Neither (a) nor (b)
2. All income which arises to the minor child shall be clubbed in the income of his/her
(a) Parents
(b) Siblings
(c) Friends
(d) Neighbors
Added MCQs
3. Transfer of income without transfer of asset would be taxable in the hands of:
a) Transferor only
b) Transferee only
c) Either transferor or transferee
d) Both transferor and transferee
4. Income from asset transferred to spouse will be taxable in the hands of transferor if:
a) asset has been transferred in pursuance of an agreement to live apart;
b) asset was transferred for an adequate consideration;
c) asset was transferred before marriage;
d) asset was transferred for inadequate consideration
Short Questions
State in whose income the following incomes will be included
(1)M transferred Rs.50,000 to his daughter-in-law in 2009 without any consideration. She
received Rs.12,000 as interest on this amount during the year.
(2)R transferred his self acquired property to the HUF, of which he is a member HUF earned an
income of Rs.42,000 from the property during the year.
(3) R transferred debentures worth Rs.5,00,000 to his wife on 1.4.2009.The debenture carry an
interest of 12% per annum. Mrs. R accumulates the interest of Rs.60,000 per annum, which she
receives on the debentures. The accumulated amount of interest of Rs.1,80,000 is invested in a
fixed deposit with a bank and Mrs. R receives interest amounting to Rs.15,000 on this FDR.

Answers to MCQ s
1. (c); 2. (a);
Answers to Added MCQs
3. a
4. d
Short Questions
(1) M
(2) R
(3)R Rs 60,000,Mrs.R Rs.15,000

PART 3 SET 0FF AND CARRY FORWARD OF LOSSES

Content
4.1 Introduction
4.1.1 Set-off of Loss from one source against income from another source under the same
Head of Income [Section 70]
4.1.2 Inter-head Adjustment [Section 71]
4.1.3 Carry Forward and Set-off of Losses
4.1.4 Carry Forward and Set-off of Loss from House Property [Section 71B]
4.1.5 Carry Forward and Set-off of Business Losses [Section 72]
4.1.6 Carry Forward and Set-off of Speculation Loss (Section 73
4.1.7 Set off and carry forward and set off of loss of a specified business referred to in
section 35AD [Section 73A]
4.1.8 Carry Forward of Losses under the head ‘Capital Gains’ [Section 74]
4.1.9 Carry Forward of loss from the activity of Owning and Maintaining Race Horses
[Section 74 A]
4.1.10Brought forward losses must be set off in the immediately succeeding year/years
 4.1.11Carry Forward and Set-off of the accumulated losses and unabsorbed depreciation
allowance in Amalgamation or De-merger etc. [Section 72A]
4.1.12 Carry forward and Set-off of Losses on Merger of Cooperative Societies
4.1.13 Set-off of losses of a Banking Company against the profit of a Banking Institution
under a Scheme of Amalgamation [Section 72AA] :
4.1.14 Provisions relating to Carry Forward and Set-off of Accumulated Losses and
Unabsorbed Depreciation Allowance in Business Reorganisation of Cooperative Banks
[Section 72AB]
4.1.15 Carry Forward and Set-off of losses in case of change in Constitution of a Firm
[Section 78(1)]
4.1.16 Carry Forward and Set-off of Losses on Succession of any Person [Section 78(1)]
4.1.17 Carry Forward and Set-off of Losses in case of certain Companies [Section 79]
4.1.18 Summarised Provisions
4.1.19Problems on Set-off and Carry Forward of Losses :
.Problems
Summary of the Part
Review Questions
Multiple choice Questions
Answers to MCQ s

4.1.Introduction
Income tax is a composite tax on the total income of a person earned during a period of one
previous year. There might be cases where an assessee has different sources of income under the
same head of income. Similarly he may have income under different heads of income. It might
happen that the net result from a particular source/head may be a loss. This loss can be set off
against other source/head in a particular manner. For example, where a person carries on two
business and one business gives him a loss and other profit, then the income under the head
‘profits and gains of business or profession’ will be the net income i.e. after adjustment of the
loss. Similarly, if there is a loss under one head of income, it should normally be adjusted against
the income from another head of income while computing Gross Total Income.
The provisions for set off or carry forward and set off losses are contained in sections 70 to
80 of Income Tax Act.

4.1..1 Set-off of Loss from one source against income from another source under the same
Head of Income [Section 70]
During any assessment, if the net result in respect of any source under any head of income is
a loss, the assessee is entitled to have the amount of such a loss set-off against his income from
any other source under the same head of income. This rule is however subject to the following
exceptions :
(i) Loss in a speculation business can be set-off only against the profit in a speculation
business.
(ii) Loss incurred in a business of owning and maintaining race horses cannot be set-off
against income from other sources, except income from such business.
 Through speculation, losses and losses from the activity of owning and maintaining
racehorses cannot be set-off against other incomes, the vice versa is not applicable. It implies
that, losses from a non-speculation business can be set-off against income from a speculation
business.
(iii) Winnings in lottery, horse races, crossword puzzles etc. are not available for adjustment
of losses under any head.
(iv) Long-term Capital Loss can be set-off against Long-term Capital Gain only.
(v) Loss from a source which is exempt and loss from a source, income from which exempt
cannot be set-off against income from a taxable source [CIT vs. Thyagarajan]. However,
short-term capital loss can be set-off from any capital gain (long-term and short-term).
(vi) Capital Losses : Short term capital losses can be set off from any capital gain (long-term
or short term) but long-term capital loss can now be set off only against long-term
capital gain.
(vii) Loss arising from the purchase and sale of securities not to be allowed in certain cases
[Section 94(7)] : Where −
(a) any person buys or acquires any securities or unit within a period of three months
prior to the record date; and
(b) such person sells or transfers such securities within a period of three months after
such date or transfers such units within a period of 9 months after such record date;
and
(c) the dividend or income on such securities or unit received or receivable by such
person is exempted, then, the loss, if any, arising to him on account of such purchase
and sale of securities or unit, to the extent such loss does not exceed the amount of
dividend or income received or receivable on such securities or unit, shall be
ignored for the purposes of computing his income chargeable to tax.
(viii) Bonus stripping [Section 94(8)] : Where −
(a) a person buys or acquires any units within a period of three months prior to the
record date; and
(b) such person is allotted or is entitled to additional units on the basis of such units
without making any payment; and
(c) he sells, all or any of such units while continuing to hold all or any of the
additional units within a period of 9 months after such date. Then, the loss, if any,
arising to him on account of such purchase and sale of units, shall be ignored for
the purposes of computing his income chargeable to tax.
(ix) Loss from specified business-any loss computed in respect of any specified business
referred to in section 35AD shall not be set off except against profits and gains, if any,
of any other specified business (applicable from the AY 2010-11 onwards).
4.1..2 Inter-head Adjustment [Section 71]
When the net result of the computation made from any Assessment Year in respect of any
head of income is loss, the same can be set-off against the income from other heads. However,
following are the exceptions :
1. loss in a speculation business;
2. loss incurred in a business of owning and maintaining race horses,
 3. winning in lottery, horse races, crossword puzzles etc. are not available for the
adjustment of losses under any head;
4. loss under the head ‘Capital Gains’;
5. business loss cannot be set-off against salary income.
6. Loss in a specified business under section 35AD - Loss computed in respect of any
specified business referred to in section 35AD cannot be set off except against any other
income.
Loss under the head ‘Capital Gains’ : A long-term capital loss can be set-off against a
long-term capital gain in the same Assessment Year. However, a short-term capital loss can be
set-off against a short-term capital gain or a long-term capital gain (if there is no short-term
capital gain) in the same Assessment Year. But where the net result of computation under the
head ‘Capital Gains’ is a loss, whether short-term or long-term, such loss is not allowed to be set-
off against income under any other head even in the same Assessment Year.
4.1.3 Carry Forward and Set-off of Losses
If the losses could not be set-off under the same head or under different heads in the same
Assessment Year, such losses are allowed to be carried forward to be claimed as set-off from the
income of the subsequent Assessment Years. All losses are not allowed to be carried forward.
The following losses are only allowed to be carried forward and set-off in the subsequent
Assessment Years :
(a) House Property Loss [Sec. 71B];
(b) Business Loss [Sec. 72];
(c) Speculation Loss [Sec. 73];
(d) Capital Loss [Sec. 74];
(e) Loss on account of owning and maintaining race horses [Sec. 74A].
Compulsory Filing of Loss Returns (Section 80) : Although the above losses are allowed to
be carried forward, but the carry forward is allowed only when the assessee has submitted a
return of loss on or before the due date of filing of the returns prescribed under Section 139(1)
and such a loss has been assessed.
Losses cannot be carried forward, if no return of the loss is furnished or it is furnished after
the due date prescribed under Section 139(1).
1. Although submission of the return of loss, on or before the due date mentioned under
Section 139(1) is compulsory for carry forward of losses mentioned in Clause (b) to (e)
above, but this provision is not applicable for carry forward of unabsorbed depreciation
which is covered under Section 32(2).
2. There are two conditions, which are to satisfy before loss is allowed to be carried
forward. Firstly, the return of loss must be submitted on or before the date and secondly,
such loss has been determined by the Assessing Officer.
4.1.4 Carry Forward and Set-off of Loss from House Property [Section 71B]
Loss from house property, if could not be set-off in the same Assessment Year from other
heads of income, will be allowed to be carried forward for eight Assessment Years to claim it as a
set-off in the subsequent years under the head ‘Income from House Property’. Therefore, if the
loss of house property of the previous year 2008-09 which could not be set-off because of the
absence or inadequacy of the income of previous year 2008-09, it may be carried forward for
eight Assessment Years succeeding the Assessment Year 2009–2010 to be set-off from income
under the head House Property.
4.1.5 Carry Forward and Set-off of Business Losses [Section 72]
Where the loss under the head ‘Profits and Gains of Business/Profession’ other than loss
from speculation business, could not be set-off in the same Assessment Year because either the
assessee had not income under any other head or the income was less than the loss, such loss
which could not be set-off in the same against the profits and gains of business or profession
subject to the following conditions :
(I) Business losses can be adjusted only against business income : The loss can be
carried forward to the subsequent Assessment Year and set-off only against business income of
the subsequent year.
It may be observed that in the Assessment Year, loss from a business can be adjusted against
income from any other head of income. However, when the loss is to be carried forward to the
subsequent year, it can be adjusted only against the business income. Business income may be
from the same business in which the loss was incurred or may be from any other business.

Certain income, though taxable under other heads, constitutes business income for set-
off of brought forward business loss : The carried forward business loss is to be adjusted
against income from any business activity. Such an income may generally be taxed under the
head, ‘Profits and Gains of Business/Profession’. However, in some cases, income from a
business activity may be taxed under other heads also. For example, if an assessee, carrying on
the business of letting out of house properties received rent from such house properties, it would
be an income from business activity though the rent would be taxable under the head ‘Income
from House Property’. Therefore, a business loss of an earlier year can be set-off against the
rental income of house property, although the rental income falls under the head ‘Income from
House Property’.

Dividend may be treated as business income : Though the dividend income is assessable
under the head ‘Other Sources’, it may be well treated as business income for the purposes of
set-off of past business losses against such income, if the relevant shares were held as stock in
trade and not as investment.
(II) Business in respect of which a loss is incurred need not be continued : The business
or profession, for which the loss was incurred, need not be continued to be carried on by him in
the previous year in which such loss is sought to be set-off.
(III) Losses can be set-off only by the assessee who has incurred loss [Section 78(2)] :
The brought forward business losses can be set-off only by the same assessee. The assessee, who
has suffered the loss and in whose hands the loss has been assessed, is the person who can carry
forward the loss and set-off the same against his business income of the subsequent year. The
following are exceptions :
(a) Where a business carried on by one person, is acquired by another person through
inheritance. For example, X is carrying on a business and there are losses to the extent
of ` 5,00,000 which can be carried forward and set-off against the income of the
subsequent years. X dies and his son S inherits his business. The losses inherited by
 X can be set-off by his son against the income from a business activity carried by S.
However such loss can be carried forward by the son for the balance number of years
for which the father could have carried forward the losses.
(b) Business losses of an amalgamating company can be set-off against the income
of the amalgamated company if the amalgamation is within the meaning of
Section 72A/72AA of the Income Tax Act.
(c) Where there has been reorganisation of business, whereby a proprietary concern or a
firm is succeeded by a company and certain conditions are fulfilled, the accumulated
business loss and the unabsorbed depreciation of the predecessor firm/proprietary
concern shall be deemed to be the loss or allowance for depreciation of the successor
company for the previous year in which the business reorganisation was effected and
carry forward provisions shall be applicable to the successor company.
(d) De-merger : Loss of the de-merged company can be carried forward by the resulting
company subject to fulfilment of certain conditions which the Central Government may
for this purpose notify, to ensure that the de-merger is for genuine business purposes.
Similarly, certain losses of the de-merged cooperative bank can be carried forward by
the resulting cooperative bank in certain cases.
(IV) Period of Carry Forward :
Each year’s loss is a separate loss and no loss shall be carried forward for more than eight
assessment years immediately succeeding the Assessment Year for which the loss was first
computed. Therefore, a loss of previous year 2008-09, i.e., Assessment Year 2009-10 can be
carried forward till Assessment Year 2016–2017. However, loss of a ‘specified business’ under
section 35AD can be carried forward without any limit. Besides the above, the following can
also be carried forward for unlimited period :
1. unabsorbed depreciation;
2. unabsorbed scientific research expenditure;
3. unabsorbed expenditure on family planning.
(V) Order of Set-off :
Unabsorbed depreciation, unabsorbed capital expenditure on scientific research and family
planning are not a part of business losses and they can also be carried forward. However, as per
Section 72(2) the business loss should be set-off before setting-off unabsorbed depreciation etc.
Such carried forward loss will be set-off against a business head only after the current year’s
depreciation; current capital expenditure on scientific research and capital expenditure on family
planning have been claimed. Therefore, the order of set-off will be as under :
(i) current year depreciation [Section 32(1)];
(ii) current year capital expenditure on scientific research and capital expenditure on family
planning to the extent allowed;
(iii) carried forward business or profession losses [Section 72(1)];
(iv) unabsorbed depreciation [Section 32(2)];
(v) unabsorbed capital expenditure on scientific research [Section 35(4)];
(vi) unabsorbed expenditure on family planning [Section 36(1) (ix)].
Rehabilitation of business discontinued due to natural calamities etc. [Proviso to Section
72(1)]
According to this proviso, if there is any loss of a business which is discontinued in the
circumstances specified in Section 33B and it is re-established, reconstructed or revived by the
assessee at any time before the expiry of a period of three years from the end of the previous year
in which it was discontinued, then the loss of the previous year in which such business is
discontinued including the brought forward loss :
(a) shall be allowed to be set-off against the profits and gains, if any, of that business or any
other business carried on by him and assessable for that assessment year, and
(b) if the loss cannot be wholly set-off, the amount of balance loss be carried to the
following Assessment Year and so on for seven Assessment Years immediately
succeeding, provided such re-established business is continued to be carried by the
assessee.
4.1.6 Carry Forward and Set-off of Speculation Loss (Section 73)
If a speculation loss could not be set-off from the income of another speculation business in
the same Assessment Year, it is allowed to be carried forward to be claimed as a set-off in the
subsequent year, but only against the income of any speculation business. Such loss is also
allowed to be carried forward for four Assessment Years immediately succeeding the Assessment
Year for which the loss was first computed. It may be observed that it is not necessary that the
same speculation business must continue in the Assessment Year in which the loss is set-off. As
already discussed, filing of return before the due date is necessary to carry forward such a loss.
1. Where a loss arises from illegal speculative business, it cannot be carried forward to the
subsequent years for set-off against the profits of another speculative business.
[CIT vs. Kurji Jinabhai Kotecha (1977) 107 ITR 101 (SC)].
2. The loss in speculation may also include the loss on account of bad debts, irrecoverable
profits and interest on borrowings.
3. In respect of unabsorbed depreciation or unabsorbed capital expenditure on scientific
research, the effect shall be first given to the provisions of Section 73, i.e., carried
forward of speculation loss shall be first set-off.
4. Loss from derivative trading shall be treated as loss from non-speculative business, if
transaction of derivatives is done through NSE or BSE.

Companies carrying on business of buying and selling of shares [Explanation to Section 73]

Where any part of the business of the company (whether private or public) consists of the
purchase and sale of shares of other companies, such company shall be deemed to be carrying on
a speculation business to the extent to which the business consists of the purchase and sale of
such shares. This explanation shall not apply to the following companies :
(a) Investment companies i.e. a company whose gross total income consists mainly of
income chargeable under the heads ‘income from House property’, ’Capital Gains’ and
‘Income from other sources’.
(b) A company whose principal business is of banking or granting of loans/advances.
Notes :
 1. The explanation applies only to a company, it does not apply to individual, HUF, Firm,
AOP etc.
2. Explanation does not cover debentures, units of Unit Trust of India or units of Mutual
funds.
4.1.7 Set off and Carry Forward and Set Off of Loss of a Specified Business referred to in
Section 35AD[Section 73A]
The loss of a specified business referred to in section 36AD of any assessment year is
allowed to be set off only against profit and gains, if any, of any other specified business. But if
such loss of specified business has not been wholly set off, so much of as is not so set off or the
whole loss where the assessee has no income from any other specified business, shall, subject to
the other provisions of this chapter, be carried forward to the following assessment year, and −
(i) it shall be set off against the profits and gains, if any, of any specified business carried
on by him assessable for the assessment year; and
(ii) if the loss cannot be set off the amount of loss not set off shall be carried forward to the
following assessment year and so on.
In other words loss of a specified business can be carried forward indefinitely till it is set off.
4.1.8 Carry Forward of Losses under the head ‘Capital Gains’ [Section 74] :
Where in respect of any assessment year, the net result of the computation under the head
‘Capital Gains’ is a loss to the assessee, whether short-term or long-term, such a loss shall be
carried forward to the following assessment years and set-off against the income under the head
‘Capital Gains’ of the subsequent years. Such capital losses can also be carried forward to a
maximum of eight Assessment Years, immediately succeeding the Assessment Year for which the
loss was first computed.
4.1.9 Carry Forward of loss from the activity of Owning and Maintaining Race
Horses[Section 74A]
Any loss from the activity of owning and maintaining racehorses is included in this section.
Such a set-off is, however, permitted only if the activity of owning and maintaining racehorses is
carried on by the assessee in the previous year relevant to the Assessment Year in which the loss
is sought to be adjusted.
The loss can be carried forward for a maximum of four Assessment Years, immediately
succeeding the Assessment Year for which the loss was first computed. Filing of returns before
the due date prescribed u/s 139(1) is necessary to carry forward the loss. The brought forward
losses must be set-off in the intermediate succeeding year/years.
4.1.10 Brought Forward Losses must be Set off in the Immediately Succeeding Year/Years
The losses which are eligible to be carried forward must be set-off against the income/profit
of the immediately succeeding year and if there is any balance still to be set-off it should be set-
off in the immediately next succeeding year or years within the time allowed.
Where the losses incurred are not set-off against the income/profit of the immediately
succeeding year/years, as the case may be, they cannot be set-off at a later date [Tyresoles (India)
vs. CIT (1963) 49 ITR 525 (Mad.)].
4.1.11 Carry Forward and Set-off of the accumulated losses and unabsorbed depreciation
allowance in Amalgamation or De-merger etc. [Section 72A]
Section 72A allows carry forward and set-off of accumulated loss and unabsorbed
depreciation allowance in case of :
 (i) Amalgamation [Section 72A (1), (2) and (3)], or
(ii) De-merger [Section 72A (4) and (5)], or
(iii) Re-organisation of Business [Section 72A (6)].
Carry forward and set-off of accumulated loss and unabsorbed depreciation in case of
amalgamation [Section 72A (1), (2) and (3)] : As per Section 72A(1) where there has been an
amalgamation of a company, the accumulated loss and the unabsorbed depreciation of the
amalgamating company shall be deemed to be loss or as the case may be, allowance for
depreciation of the amalgamated company for the previous year in which the amalgamation is
effected and the other provisions of this act relating to set-off and carry forward of loss and
allowance for depreciation shall apply accordingly, if the following conditions are satisfied :
(a) there is an amalgamation of the company owning an industrial undertaking or a ship or a
hotel with another company; or
(b) an amalgamation of a banking company with a specified bank; or
(c) one or more public sector company or companies engaged in the business of operation
of aircraft with one or more public sector company or companies engaged in similar
business.
And the following conditions laid down under Section 72A(2) are satisfied :
(i) The amalgamating company has been engaged in the business for at least three years
during which the accumulated loss has occurred or the unabsorbed depreciation has
accumulated.
(ii) The amalgamating company has held continuously as on the date of the amalgamation
at least three fourths of the book value of the fixed assets held by it two years prior to
the date of amalgamation.

(iii) The amalgamated company holds continuously for a minimum period of five years from
the date of amalgamation at least 75% in the book value of assets of the amalgamating
company acquired in the scheme of amalgamation.
(iv) The amalgamated company continues the business of the amalgamating company for a
period of five years from the date of amalgamation.
(v) The amalgamated company fulfils such other conditions as may be prescribed to ensure
the revival of the business of the amalgamating company or to ensure that the
amalgamation is for genuine business purposes laid down by Section 72A(2).
Consequences if the above conditions are not satisfied [Section 72A (3)] : In a case where
the conditions laid down under clause (b) above are not complied with, the set-off of loss or
allowance of depreciation made in any previous year in the hands of the amalgamated company
shall be deemed to be the income of the amalgamated company chargeable to tax for the year in
which such conditions are not complied with. Further, the balance accumulated loss and
unabsorbed depreciation not yet set-off, shall not be allowed to be carried forward and set-off.
 The carry forward and set-off of loss and unabsorbed depreciation as per the above
provisions shall be allowed only when amalgamation is as per the provisions of Section 2(1B)
of the Income Tax Act, 1961.
Carry forward and set-off of accumulated losses and unabsorbed depreciation in case of
de-merger [Sections 72(A)(4) and (5)] : Notwithstanding anything contained in any other
provisions of this Act, in the case of de-merger the accumulated loss and the allowance for
absorbed depreciation of the d-emerged company shall :
(a) where such a loss or unabsorbed depreciation is directly relatable to the undertaking
transferred to the resulting company, be allowed to be carried forward and set-off in the
hands of the resulting company;
(b) where such a loss or unabsorbed depreciation is not directly relatable to the
undertakings transferred to the resulting company, be apportioned between the de-
merged company and the resulting company in the same proportion in which the assets
of the undertakings have been retained by the de-merged company and transferred to the
resulting company, land be allowed to be carried forward and set-off in the hands of the
de-merged company or the resulting company, as the case may be.
The Central Government may, for the purpose of this act, by notification in the Official
Gazette, specify such conditions, as it considers necessary to ensure that the de-merger is for
genuine business purpose.

1. The carry forward and set-off of the accumulated loss and unabsorbed depreciation as
per the above provisions shall be allowed only when de-merger as per the provisions of
Section 2 (19AA) of the Income Tax Act.
2. Accumulated loss means so much of the loss of the de-merged company under the
head ‘Profit and Gains of Business/Profession’ (not being a loss sustained in a
speculation business) which such de-merged company would have been entitled to
carry forward and set-off under the provisions of Section 72 if the de-merger had not
taken place.
Carry forward and set-off of accumulated losses and unabsorbed depreciation in case of
reorganisation of business [Section 72 A (6)] : Where there has been a reorganisation of
business, whereby, a firm is succeeded by a company fulfilling the conditions laid down in
Clause (xiii) of Section 47 or a proprietary concern is succeeded by a company fulfilling the
conditions laid down in Clause (xiv) of Section 47, notwithstanding anything contained in any
other provisions of this act, the accumulated loss and the unabsorbed depreciation of the
predecessor firm or the proprietary concern, as the case may be, shall be deemed to be the loss or
allowance for depreciation of the successor company for the purpose of the previous year in
which business reorganisation was effected and other provisions of this act, relating to set-off
and carry forward of loss and allowance for depreciation shall apply accordingly.
Consequences if the conditions laid down under Sections 47 (xiii) and (xiv) are not complied
with [Proviso to Section 72A(6)] : If any of the conditions laid down under Sections 47 (xiii) and
(xiv) are not complied with, the set-off of loss or allowance of depreciation made in any previous
year in the hands of the successor company, shall be deemed to be the income of the company
chargeable to tax in the year in which such conditions are not complied with.
 1. Accumulated loss means so much of the loss of the predecessor firm or the proprietary
concern or the amalgamating company or the de-merged company, as the case may be,
under the head ‘Profits and Gains of Business/Profession’ (not being a loss sustained in
a speculation business) which such predecessor firm or the proprietary concern or
amalgamating company or de-merged company, would have been entitled to carry
forward and set-off under the provisions of Section 72 if the re-organisation of business
or amalgamation or de-merger had not taken place.
2. Unabsorbed depreciation means so much of the allowance for depreciation of the
predecessor firm or the proprietary concern or the amalgamating company or the
de-merged company, as the case may be, which remains to be allowed and which
would have been allowed to the predecessor firm or the proprietary concern or
amalgamating company or de-merged company, as the case may be, under the
provision of this Act, if the reorganization of business or amalgamation or de-merger
had not taken place.
Carry forward of loss/depreciation in the case of conversion of a company into LLP
[Sec. 72A(6A)] : In the case of succession of business, whereby a company (i.e. .a private
limited company or unlisted public limited company) is succeeded by a limited liability
partnership fulfilling the conditions laid down in section 47 (xiiib), the accumulated loss and the
unabsorbed depreciation(including unadjusted capital expenditure on scientific research) of the
predecessor company, shall be deemed to be the loss or as the case may be, allowance for
depreciation of the successor limited liability partnership for the previous year in which business
re-organisation was effected and the other provisions of the Act relating to set off and carry
forward and allowance for depreciation shall apply accordingly.
When conditions of section 47(xiii) are not complied, the amount of loss for depreciation
adjusted by the limited liability partnership shall be deemed to be the income of the limited
liability partnership chargeable to tax in the year in which conditions are not complied with.
4.1.12 Carry forward and Set-off of losses on Merger of Cooperative Societies
Where there is a merger of two cooperative societies, the carried forward loss of the merging
society cannot be set-off against profit of the merged society, because Section 72A, which
permits such set-off for merger between two companies will have no application for merger of
two cooperative societies.
4.1.13 Set-off of Losses of a Banking Company against the profit of a Banking Institution
under a Scheme of Amalgamation [Section 72AA]
Notwithstanding anything contained in Sub-clauses (1) to (iii) of Clause (IB) of Section 2 or
Section 72 A, where there has been an amalgamation of a banking company with any other
banking institution under a scheme sanctioned and brought into force by the Central Government
under Sub-section (7) of Section 45 of Banking Regulation Act, 1949, the accumulated loss and
the unabsorbed depreciation of such banking company shall be deemed to be the loss or as the
case may be, allowance for depreciation of such a banking institution for the previous year in
which the scheme of amalgamation was brought into force and other provisions of this act,
relating to set-off and carry forward of loss and allowance for depreciation shall apply
accordingly
Accumulated loss means so much of the loss of the amalgamating banking company under
the head ‘Profits and Gains of Business/Profession’ (not being a loss sustained in a speculative
business) which such amalgamating banking company would have been entitled to carry forward
and set-off under the Provisions of Section 72 if the amalgamation had not taken place.
Unabsorbed depreciation means so much of the allowance for depreciation of the
amalgamating banking company, which remains to be allowed and which would have been
allowed to such a banking company if amalgamation had not taken place.
4.1.14 Provisions relating to carry forward and set-off of accumulated losses and
unabsorbed depreciation allowance in Business Re-organisation of Cooperative Banks
[Section 72AB]
Section 72AB allows carry forward of business loss and unabsorbed depreciation in case of :
(i) Amalgamation of Cooperative Banks, and (ii) De-merger of a Cooperative Bank.
The extent of carry forward of business loss and unabsorbed depreciation is as under
provided certain conditions are fulfilled.
(a) Where the whole of the amount of such The whole of such loss or unabsorbed
loss or unabsorbed depreciation is depreciation.
directly relatable to the undertaking
transferred to the resulting cooperative
bank.
(b) Where the whole of the amount of such Accumulated loss or unabsorbed
loss or unabsorbed depreciation is not depreciation of the de-merged
directly relatable to the undertaking cooperative bank before merger X (assets
transferred to the resulting cooperative of the undertaking transferred to
bank. resulting cooperative bank)/(assets of the
de-merged cooperative bank before de-
merger).
4.1.15 Carry Forward and Set-off of losses in case of change in Constitution of a Firm
[Section 78(1)]
Where a change has occurred in the constitution of a firm, the firm shall not be entitled to
carry forward and set-off so much of the loss proportionate to the share of a retired or deceased
partner as exceeds his share of profits, if any, in the firm in respect of the previous year.
4.1.16 Carry Forward and Set-off of Losses on Succession of any Person [Section 78(1)]
Where any person carrying on any business or profession has been succeeded in such a
capacity by another person other than the person incurring the loss to have it carried forward and
set-off against his income. However, if there is a succession of a firm or proprietary concern by a
company as per Sections 47(xiii) and (xiv), the carry forward of loss shall be as per the provision
of Section 72A(6).
4.1.17 Carry Forward and Set-off of losses in case of certain companies [Section 79]
In case of closely held companies, where a change in shareholding has taken place in a
previous year, then no loss incurred in any year prior to the previous year shall be carried
forward and set-off against the income of the previous year unless on the last day of that previous
year and on the last day of the previous year in which the loss was incurred, the shares of the
company carrying not less than 51% of the voting powers were beneficially held by the same
persons.
This provision shall not apply to a change in the voting power consequent upon :
 (a) the death of a shareholder, or
(b) on account of transfer of shares by way of gifts to any relative of the shareholder
making such gift.
Further, nothing contained in this section shall apply to any change in the shareholding of an
Indian company which is a subsidiary of a foreign company arising as a result of amalgamation
or de-merger of a foreign company subject to the condition that 51 percent of the shareholders of
the amalgamating or de-merged foreign company, continue to remain the shareholders of the
amalgamated or the resulting foreign company.
Section 79 applies to all losses, including losses under the head Capital Gains. However,
overriding provisions of Section 79 do not effect the set-off of unabsorbed depreciation which
is governed by Section 32(2) [CIT vs. Concord Industries Ltd. (1979) 119 ITR 458 (Mad.)].
4.1.18.Summarised Provisions

The provisions relating to set-off and carry forward of losses can be analysed in the following manner
:
Set-off
Section 70 : Inter-source
adjustment allowed.
Exceptions :
1. Speculation loss
2. Loss from activity of
owning and maintaining
racehorses.
3. No loss can be set-off
against winning from
lotteries, crossword
puzzles, card games etc.
Section 71 : Inter-head
adjustment allowed.
Exceptions :
1. Speculation loss.
2. Loss from activity of
owning and maintaining
racehorses.
3. No loss can be set-off
against winnings from
lotteries, crossword
puzzles, card games, etc.
4. Loss under ‘Capital
Gains’.
Carry Forward of losses and Special Provisions
Set-off allowed only from
respective heads of income
Section 71B : Loss from Section 78 : Change
House Property and set-off in constitution and
allowed in eight years. succession loss.
Section 72 : Loss from
business/ profession and set-
off allowed in eighth years.
Section 79 : Closely
Section 72AA : Loss of held company.
amalgamating company Loss : No carry
including banking company forward unless 51%
set-off allowed in fresh eight shareholders are
years. same.
Section 74 : Loss under
‘Capital Gains’ and set-off Section 80 : Filing
allowed in eight years. of loss returns within
due date is
Section 74A : Loss from mandatory.
activity owning and
maintaining racehorses and
set-off allowed in 4 years.
Problems on Set-off and Carry Forward of Losses
1. X an individual submits the following information for the A.Y. 2015-16 :
Profit Loss
` `
Salary Income computed 142,000
Income from House Property
House A 115,000
House B 117,000
House C 121,000
Profits and Gains of Business/Profession
Business A 108,000
Business B 118,000
Business C (Speculative) 111,000
Business D (Speculative) 123,000
Capital Gains
Short term capital gains 106,000
Short term capital loss 128,000
Long-term capital gains on sale of building 12,500
Income from other sources
Income from card games 108,000
Loss from card games 107,010
Loss on maintenance of race horses 106,000
Interest on securities 104,000
Determine the net income of X for the A.Y. 2015-16
Solution :
Step 1 : Same head adjustment `
Income from salary 1,42,000
Income from house property
House A 1,15,000
House B (−)1,17,000
House C (−) 1,21,000
(−) 1,23,000

Profits and Gains of Business/Profession

Non speculative 1,08,000 – 1,18,000 = (−) 10,000
Speculative :
Business C (+) 1, 11,000
Business D (−) 1,23,000
To be carried forward to next year (−) 12,000
 Capital gains :
Short-term gains 1,06,000
Short-term loss (−) 1,28,000
(−) 22,000
Long-term 12,500
It will be carried forward to next year (−) 9,500
Income from other sources : `
Income from card games (+) 1,08,000
(Loss from card game cannot be deducted by virtue of Section 58)
Interest on securities (+) 1,04,000
212,000
Loss on maintenance of race horses (−) 1,06,000
Loss on maintenance of racehorses can be set-off only against income from the business of
owning and maintaining race horses. In the absence of such income, it cannot be set-off.
However, it can be carried forward to next year for claiming set-off against income from such
business.
Step 2 : Inter-head adjustment :
Salary 1,42,000
Income for other sources 2,12,000
Income from house property (−) 1,23,000
Profits and Gains of Business
Non-speculative (−) 10,000
Net income 2,21,000

Loss which cannot be set-off against other income but which can be carried forward :
Profits and Gains of Business/Profession
Speculative Business (−) 12,000
Capital Gains
Income from Other Sources (−) 9,500
Loss on maintenance of race horses (−) 1,06,000
(−)1,27,500
Loss which cannot be set-off against other income cannot be carried forward.
Loss of maintenance of race horses (−) 1,07,010
2. From the following details compute the gross total income of A for the Assessment Year
2015–2016. `
Taxable income from salary 80,000
Income from house property House A let out (−) 95,000
 House B – self occupied (−) 9,000
Short-term Capital Gain 12,000
Loss from Long-term Assets (−) 25,000
Interest on Securities 10,000

Solution : `
Taxable income from salary 80,000
Income from house property (-) 95,000 – 9,000 (−) 1,04,000
Income from capital gains – short-term 12,000
Income from other sources – int. on securities 10,000
Gross total income NIL
Important Points :
1. Loss under the head ‘Income from House Property’ amounting to ` 2,000 which could
not be set-off against income under other heads of income can be carried forward to the
subsequent A.Y. to be set-off under the head, ‘Income from House Property’.
2. Loss from long-term capital assets cannot be set-off against short-term capital gain or
income under other heads of income. Such a loss can be carried forward to the
subsequent A.Y.
Summary of the part 3 of the unit
The process of setting off losses and carry forward are covered in the following steps:
Step 1 Inter-source adjustment under the same head of income.
Step 2 Inter head adjustment under the same assessment year, step2 is applied only if a loss
cannot be set off under step1
Step3 carry forward of a loss, Step3 is applied only if a loss cannot be set off under Step1&2
Includes provisions relating to set off and carry forward of losses to subsequent years

Review Questions

1. (a) What is meant by inter-source adjustment under the Income Tax Act while computing
the total income of an assessee ?
(b) Briefly discuss the provision relating to the losses for Speculation Business.
2. (a) State the provisions relating to carry forward and set-off losses from the activity of
owning and maintaining race horses.
 (b) Discuss about set-off and carry forward of losses under the head ‘Capital Gains’.
3. Write short notes on the following :
(i) Set-off and carry forward of unabsorbed depreciation
(ii) Losses under the head ‘Income from House Property’
(iii) Set-off of gambling losses.
4. Discuss whether the following are speculative losses :
(i) A sells goods to Y, which are to be imported by X. Due to change in import policy
of the Government, the goods could not be imported and finally X agrees to pay Y
damages of ` 5 lakhs for non-fulfilment of the contract.
(ii) On April 1, 2012, A agrees to supply 1000 ton of rice to B at the rate of ` 30,000
per ton, which will be delivered on November 4, 2012. At the time of entering the
contract A does not have rice on his stock, nor does he take any step to procure the
same from the market. The bank balance and overdraft limits of B do not permit
payment of ` 3 crore to A at the time of delivery. The market rate of rice on Nov. 4,
2012 is ` 32,000 per ton. A pays ` 20 lakhs (i.e., difference in price) to B to settle
the contract.
[Ans. (i) No (ii) Yes]
5. Mr. Yeshwant submits the following information for the financial year ending on March
31, 2013. He desires that you should : (a) compute the Gross Total Income and
(b) ascertain the amount of losses that can be carried forward; on the basis of the
information given below.
(i) He has two houses :
(a) House No. I – After all statutory deductions net annual value ` 36,000
(b) House No. II – Current year loss ` 10,000
(c) Brought forward loss of Assessment Year 2010–11 of the second
house representing unadjusted interest on borrowed capital ` 30,000
(ii) He has three proprietary businesses :
(a) Textile Business
(i) Discontinued from October 31, 2011- Current Year Loss ` 25,000
(ii) Brought forward business loss of the year 2010 – 11 ` 80,000
(b) Chemical Business
(i) Discontinued from March 1, 2009- hence, no profit/loss NIL
(ii) Bad debts allowed in earlier year recovered during this year ` 30,000
(iii) Carried forward business loss for the A.Y. 2007-08 ` 20,000
(c) Leather Business
(i) Profit for the Current Year ` 70,000
III (i) Short-term capital gains ` 20,000
 (ii) Long-term capital loss ` 15,000
6. For the A.Y. 2013-14, X a resident individual furnishes the following particulars of his
income :
Income from house property ` 18,000
Loss from being (−) 2,000
Business income ` 6,000
Income from speculative business ` 3,000
Short-term Capital Gains ` 15,000
Long-term Capital Gains ` 88,000
Winning from betting ` 13,000
Winning from horse races ` 23,000
Besides, X wants to set-off the following allowances/losses of the earlier years :
Business loss for the A.Y. 2008-2009 ` 14,000
Unabsorbed depreciation allowance of A.Y. 2001-02 ` 2,000
Short-term capital loss of the A.Y. 2010-11 ` 74,000
Long-term capital loss for the A.Y. 2008-2009 ` 8,000
Loss for betting of the A.Y. 2011-12 ` 26,000
Loss from the business of owning and maintaining
Racehorses of the A.Y. 2009-10 ` 38,000
Determine the net income of X for the A.Y. 2013-14.
Multiple Choice Questions
Q1.If income from a particular source is exempt from tax, then loss from such source
cannot be set off against any other income which is chargeable to tax.
(a) True (b) False
Q2.The process of adjustment of loss from a source under a particular head of income
against income from other source under the same head of income is called __________.
(a) Inter-head adjustment (b) Intra-head adjustment
(c) Carry forward of loss (d) Clubbing of income
Q3.While making intra-head adjustment of loss, short-term capital loss cannot be set off
against long-term capital gain.
(a)True (b) False
Q4.While making intra-head adjustment,loss from the business of owning and
maintaining race horses can be set off against ____________ only.
(a) Income from winnings from lotteries
(b) Income from crossword puzzles
(c) Income from business of owning and maintaining race horses
(d) Income from card game
Q5.While making inter-head adjustment of loss, loss from business and profession cannot
be set off against income chargeable to tax under the head “Salaries”.
(a) True (b) False
Q6.Loss under the head “Profits and gains of business or profession” can be carried
forward even if the return of income/loss of the year in which loss is incurred is not
furnished on or before the due date of furnishing the return, as prescribed under section
139(1).
(a) True (b)False
Q7.If loss under the head “Income from house property” cannot be fully adjusted in the
year in which such loss is incurred, then unadjusted loss can be carried forward for
___________ years immediately succeeding the year in which the loss is incurred.
(a) 2 (b) 5
(c) 8 (d) 10
Q8.Restriction of section 78 is applicable only in case of loss and is not applicable in
case of adjustment of unabsorbed depreciation, unabsorbed capital expenditure on
scientific research or family planning expenditure.
(a) True (b) False
Q9.In case of a closely held company, if the person beneficially holding ________ of the
voting power as on the last day (i.e. 31st March) of the year in which the loss was
incurred and on the last day (i.e. 31st March) of the year in which the company wants to
set off the brought forward loss are different, then the company cannot set off such
brought forward loss.
(a) 20% (b) 25%
(c) 50% (d) 51%
Q 10.To be eligible to carry forward and set off of business losses and unabsorbed depreciation
of de-merged company, the resulting company should continue the original business for-
(a)A minimum period of 5 years,(b) 7 years, (c) 2 years , (d) No specified period

2.Short answer type question

Subsequent to demise of Mrs X, her son constituted a firm and ran the same business. Can the
firm claim set-off of unabsorbed business loss of late Mrs.X.
Added MCQ’s
Q.11. Long term capital loss can be set off from which of the following:
a) Short term capital gain only
b) Long term capital gain only
c) Income from business or profession
d) Income from salary
Q.12. Loss from house property can be carried forward and set off in the subsequent 8
Assessment years:
a) Only if return of loss is filed within due date
b) Even if return of loss is filed after due date
c) It does not matter when return is filed
d) Carry forward of loss from house property is not allowed at all.
Q.13. Business loss of an amalgamating company shall be:
a) carried forward and set off in the hands of amalgamated company unconditionally
b) carried forward and set off in the hands of amalgamated company subject to certain
conditions
c) not be carried forward
d) allowed to be carried forward only by amalgamating company

Answers to MCQ
1. Correct answer : (a)
2 Correct answer : (b)
3. Correct answer : (b)
4. Correct answer : (c)
5. Correct answer : (a)
6 Correct answer : (b)
7 Correct answer : (c)
8 Correct answer : (a)
9 Correct answer : (d)
10 Correct answer : (d)

2.Answer The firm can claim set off unabsorbed business loss of late Mrs X
Answers to Added MCQ’s
11. b
12. b
13. b

Part 4 Agriculture Income and its Tax Treatment [section 2(IA) to Sec 10(1)]
Content
4.1.Introduction
4.2.Definition of Agricultural Income [section 2(IA)]
4.3.Income which is partially agricultural and partially from business
4.4 Tax on non-agricultural Income if the assessee also earns Agricultural Income
Summary of the unit
Review Questions
Multiple Choice Questions
Answers to MCQs

4.1.Introduction to Agriculture Income and its Tax Treatment

Agriculture income is exempt under the Indian Income Tax Act. This means that income earned
from agricultural operations is not taxed. The reason for exemption of agriculture income from
Central Taxation is that the Constitution gives exclusive power to make laws with respect to
taxes on agricultural income to the State Legislature. However while computing tax on non-
agricultural income agricultural income is also taken into consideration
4.2Definition of Agricultural Income [section 2(IA)]

Agricultural Income include the following

(i) Any rent or revenue derived from land

(ii) Any income derived from such land by agriculture or from processing of
agricultural produce
(iii) Any income from farm building

The above three types of income shall be treated as agricultural only when the following
conditions are satisfied:

(i) Any income derived from such land by agricultural operations including processing of
agricultural produce, raised or received as rent in kind so as to render it fit for the market, or sale
of such produce

(ii) Any rent received from land which is used for agricultural purpose: Assessees do not
have to pay tax on rent or revenue from agricultural land. Such land should, of course, be
assessed to land revenue in the country or be subject to a local rate. Further, there must be a
direct link between the agricultural land and the receipt of income by way of rent or other
revenue (for instance, a landlord could receive revenue from a tenant).

(iii) Income attributable to a farm house subject to the condition that building is situated on
or in the immediate vicinity of the land and is used as a dwelling house, store house etc. Income
from such farm houses is considered agricultural income. The definition of `farm houses’ covers
buildings owned and occupied by both cultivators of agricultural land and assessees who receive
rent or revenue from agricultural land. The sole purpose of such farmhouses should be for use as
dwellings for the cultivators or use as store houses. Normally, the annual value of a building is
taxable as `income from house property’. However, in the case of a farm house, the annual value
would be deemed agricultural income and would, thus, be exempt from tax.

(iv) Income earned from carrying nursery operations is also considered as agricultural income
and hence exempt from income tax.

In order to consider an income as agricultural income certain points have to be kept in

mind:

(i) There must me a land.

(ii) The land is being used for agricultural operations:- Agricultural operation means that
efforts have been induced for the crop to sprout out of the land. The ambit of agricultural income
also covers income from agricultural operations, which includes processing of agricultural
produce to make it fit for sale. Like the people who receive passive agricultural income in the
form of rent or revenue, the people who actually carry out agricultural operations are also
eligible for tax-free agricultural income.

(iii) Land cultivation is must:- Some measure of cultivation is necessary for land to have been
used for agricultural purposes. The ambit of agriculture covers all land produce like grain, fruits,
tea, coffee, spices, commercial crops, plantations, groves, and grasslands. However, the breeding
of livestock, aqua culture, dairy farming, and poultry farming on agricultural land cannot be
construed as agricultural operations.

(iv) If any rent is being received from the land then in order to assess that rental income as
agricultural income there must be agricultural activities on the land.

(v) In order to assess income of farm house as agricultural income the farm house building must
be situated on the land itself only and is used as a store house/dwelling house.

(vi) Ownership is not essential. In the case of rent or revenue, it is essential that the Assessee
have an interest in the land (as an owner or mortgagee) to be eligible for tax-free income.
However, in the case of agricultural operations it isn’t necessary that the person conducting the
operations be the owner of the land. He could be just a tenant or a sub-tenant. In other words, all
tillers of land are agriculturists and enjoy exemption from tax. In some cases, further processes
may be necessary to make a marketable commodity out of agricultural produce. The sales
proceeds in such cases are considered agricultural income even though the producer’s final
objective is to sell his products.

Certain income which is treated as Agriculture Income;

(a) Income from sale of replanted trees.
(b) Rent received for agricultural land.
(c) Income from growing flowers and creepers.
(d) Share of profit of a partner from a firm engaged in agricultural operations.
(e) Interest on capital received by a partner from a firm engaged in agricultural operations.
(f) Income derived from sale of seeds.

Certain income which is not treated as Agricultural Income;

(a) Income from poultry farming.
(b) Income from bee hiving.
(c) Income from sale of spontaneously grown trees.
(d) Income from dairy farming.
(e) Purchase of standing crop.
(f) Dividend paid by a company out of its agriculture income.
(g) Income of salt produced by flooding the land with sea water.
(h) Royalty income from mines.
(i) Income from butter and cheese making.
(j) Receipts from TV serial shooting in farm house is not agriculture income.
(k) Income from Plantation companies:- Many plantation companies have launched schemes
that offer tax-free agricultural income. These schemes are of various types: while some give
investors leasehold rights to the land, some give rights to trees a certain level above the ground,
even as others offer rent. If the scheme gives rise to ownership or leasehold interest in the land,
then the income is considered to be rent or revenue in the hands of the investor. In the absence
of ownership or leasehold rights, income from plantation companies is either considered
interest or non-agricultural income chargeable to tax. Expln 4

4.3.Income which is partially agricultural and partially from business

(A)Income from growing and manufacturing of produce other than tea [Rule 7]
An assessee may have composite business income which is partially agricultural and partially
non-agricultural, for example ABC Ltd grows potatoes and further processes its produce to sell
them as wafers. In this case company has composite income i.e..from agriculture and from
business. The composite income needs to be bifurcated and in computing business income the
market value of agricultural produce raised by the assessee or received by him as rent in kind and
utilized as raw material in his business is deducted. No further deduction is allowed in respect of
any expenditure incurred as a cultivator or receiver of rent in kind. For computing agricultural
income the market value of such produce will be the total agricultural receipt on account of
potatoes. Cultivation expenses etc in connection with such receipt will be deducted and the
balance is agricultural income which is exempt.

(B) Income from growing and manufacturing of rubber [Rule 7A]

Income derived from the sale of centrifuged latex or cenex or latex based crepes or technically
specified block rubbers manufactured or processed from field latex or coagulum obtained from
rubber plants grown by the seller in India shall be computed as if it were income derived from
business, and 35% of such income shall be deemed to be income liable to tax.
In computing such income, an allowance shall be made in respect of cost of planting rubber
plants in replacement of plants that have died or become permanently useless in an area already
planted, if such area has not previously been abandoned and for the purpose of determining such
cost, no deduction shall me made in respect of the amount of any subsidy which under the
provisions of section 10(31) is not includible in the total income.

(C) Income from growing and manufacturing of coffee [Rule 7B]

(a) Income derived from the sale of coffee grown and cured by the seller in India, shall be
computed as if it were income derived from business and 25% of such income shall be deemed
to be income liable to tax.
(b) Income derived from the sale of coffee grown ,cured ,roasted and grounded by the seller in
India, with or without maxing chicory or other flavouring ingredients shall be computed as if it
were income derived from business and 40% of such income shall be deemed to be income liable
to tax.
(D) Income from growing and manufacturing of tea [Rule8]]
Where the assessee has a business of growing tea leaves and then processing it.the procedure
adopted to segregate is as under:
Step 1, Compute the income of growing as well as manufacturing tea under the head ‘Profits and
Gains of business or Profession’ after claiming deductions available under the head.
Step 2 , 60% of income computed in Step1 will be treated as net agricultural income and 40% of
such income, so arrived at, is treated as business income.
4.4.Tax on non-agricultural Income if the assessee also earns Agricultural Income
Agricultural Income is exempt from Income Tax u/s 10(1), but if the assessee has also non-
agricultural income, such agricultural Income is included in his Total Income for the purposes of
computation of Income tax on non-agricultural is included in his total income for the purpose of
computation of income tax on non agricultural income. This is known as partial integration of
agricultural income with non-agricultural income. Such partial integration is done only in case of
Individuals, HUF, AOP & BOI, Artificial juridical person and not applicable to Firms,
Companies, Co-operative society and local authority.
Partial integration is done to compute tax on non-agricultural income only when the following
two conditions are satisfied:
1. Minimum Total Income: The Total Income under IT Act should exceed the maximum
amount not chargeable to tax.
2. Minimum Agricultural Income: It is applicable to Assessees whose Agricultural Income
exceeds ` 5,000
3. Procedure applicable in computation of tax –
Step Description
1 Compute Agricultural Income + Total Income
2 Compute Tax on Step 1
3 Compute Agricultural Income + Maximum Amount not chargeable to tax (Basic Exemption)
4 Rebate for Agricultural Income (Tax on Step 3)
5 Compute Net Tax Payable (Step 2 – Step 4)
6 Compute Education Cess and SHEC at 3% on Total Tax Payable as per Step 5
7.Compute Net Tax Payable (Step 5 + Step 6

Problem

Gross total income of S aged 50 years as computed under income Tax Act, for the assessment
year 2105-16 is Rs.3,00,000 .He deposits Rs.20,000 in PPF account. Compute the tax payable by
S assuming that he has agricultural income of (a) Nil, (b) Rs.5000, (c) Rs.3,50,000.

Solution: In case of (a) and (b) since the agricultural is either Nil or does not exceed
Rs.5000,there will be no partial integration and the income tax will be calculated on Rs2,80,000 (
Rs.300,000-20,000 PPF) and the tax will be Rs.3000-2000 (rebate u/s 87A)= 1000+30=1030.

(c) Step 1

Aggregate of agricultural and non-agricultural income 350,000+ 280,000 Rs 6,30,000

Tax on Rs.6,30,000 51,000
Step 2

Add Rs 2,50,000(maximum exemption limit) to agricultural income of Rs 6,00,000

Rs3,50,000 45,000
Tax on Rs.6,00,000
Step 3

Deduct tax under Step 2 from Tax under Step 1 (46,000-40,000) Rs 6000
Therefore tax on non-agricultural income 6000
Less rebate u/s 87A 2000
4,000
Add Education cess & SHEC @ 3% 120
Therefore total tax payable 4,120
Summary of the unit
Agriculture income is exempt under the Indian Income Tax Act
Agricultural Income as per section 2(IA) include the following
(i)Any rent or revenue derived from land
(ii)Any income derived from such land by agriculture or from processing of agricultural produce
(iii)Any income from farm building
The unit covers step wise action plan for computing tax on non-agricultural Income if the
assessee also earns Agricultural Income

Step wise Description

1 Compute Agricultural Income + Total Income
2 Compute Tax on Step 1
3 Compute Agricultural Income + Maximum Amount not chargeable to tax (Basic Exemption)
4 Rebate for Agricultural Income (Tax on Step 3)
5 Compute Net Tax Payable (Step 2 – Step 4)
6 Compute Education Cess and SHEC at 3% on Total Tax Payable as per Step 5
7.Compute Net Tax Payable (Step 5 + Step 6

Review Questions
1.What is agricultural income and how is it treated for income tax purposes?
2.Discuss whether the following items of income constitute ‘agricultural income’ for the purpose
of the Income tax Act
a) Income derived from rubber plantation in Singapore.
b) Rent received from a tenant to whom land in India has been let out and who uses it for
cultivating wheat.
c) Dividend received by a shareholder from an Indian company the whole of whose is
agricultural income.
d) Income derived fro sale of timbers of spontaneous growth on the Indian soil.
3. Explain the meaning and importance of ‘Agricultural Income’ and ‘Partly Agricultural
Income’ under the Income tax Act,1961. Give examples of the incomes which are not
agricultural incomes though connected with land.
4. Explain the scheme of partial integration of agricultural income with the total income for
computing tax liability.
5. X is the manager of an agricultural farm in Bihar, cultivating paddy and jute. The income of
the firm is agricultural income within the meaning of the Income tax Act,1961.X claims that as
hois services are connected entirely with agricultural production, his salary for acting as the
manager is also agricultural income. State giving reasons whether his claim is tenable.

Multiple Choice Questions

1.A a resident in India aged 60 years, earned agricultural income of Rs.5,00,00 during the year
2014-15.Compute his tax liability assuming that he has non-agricultural income of a)
Rs.2,70,000,b)3,00,000.

2. R is the owner of the flour mill and some agricultural land near the mill. During the year 2014-
15, he has shown a profit of Rs.36lacs from the business of flour mill. Scrutiny of accounts
reveals that he has used 5,000 quintals of wheat produced in his own farms and the cost of this
wheat has not been debited to P&L account. The market price of same during the season was
Rs.600 per quintal. Compute his agricultural and business income

Answers to MCQs
1.a) Nil,Nil
2.Agricutural income Rs.12,00,000; Business income Rs.600,000