Income Under the Head ‘Profits and Gains of Business or Profession’ and its Computation

Table of Contents

1. Significance of method of accounting
2. Specific deductions
3. Specific disallowances
4. Rent, rates, taxes, repairs and insurance for building [Sec. 30]
5. Repairs and insurance of machinery, plant and furniture [Sec. 31]
6. Depreciation [Sec. 32]
7. Expenditure on scientific research [Sec. 35]
8. Expenditure for obtaining right to use spectrum for telecommunication services [Sec. 35ABA]
9. Amortization of telecom license fees [Sec. 35ABB]
10. Investment linked tax incentive [Sec. 35AD]
11. Deduction for expenditure incurred on agricultural extension project [Sec. 35CCC]
12. Deduction for expenditure for skill development [Sec. 35CCD]
13. Amortization of preliminary expenses [Sec. 35D]
14. Amortization of expenditure in the case of amalgamation/demerger [Sec. 35DD]
15. Amortization of expenditure under voluntary retirement scheme [Sec. 35DDA]
16. Deduction under section 36
17. General deduction [Sec. 37(1)]
18. Disallowance under section 37(2B)
19. Disallowances under section 40
20. Disallowance under section 40A
21. Recovery against any deduction [Sec. 41(1)]
22. Sale consideration for transfer of immovable property [Sec. 43CA]
23. Compulsory audit of books of account [Sec. 44AB]
24. Presumptive taxation [Sec. 44AD]
25. Presumptive taxation [Sec. 44ADA]
26. Presumptive taxation [Sec. 44AE]

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Provisions in Brief

1. Significance of method of accounting

Income from a business or profession is calculated on the basis of method of accounting regularly employed by the assessee¹.

• If the assessee has adopted mercantile system of accounting, then income is calculated on accrual basis as well as admissible expenses are deducted on accrual basis.
• If the assessee has adopted cash system of accounting, income is calculated on receipt basis. Admissible expenses will be deducted only on payment basis.

2. Specific deductions

Sections 30 to 37 cover expenses, which are expressly allowed as deduction while computing business income

3. Specific disallowances

Sections 40, 40A and 43B cover expenses which are not deductible

4. Rent, rates, taxes, repairs and insurance for building [Sec. 30]

Deduction is allowed in respect of rent, rates, taxes, land revenue, repairs and insurance for premises used for the purpose of business or profession. Rent of building is not deductible if building is owned by the assessee. Capital expenditure on repair is not deductible.

5. Repairs and insurance of machinery, plant and furniture [Sec. 31]

The expenditure incurred on current repairs (not being capital expenditure) and insurance in respect of plant, machinery and furniture used for business purposes is allowable as deduction.

6. Depreciation [Sec. 32]

6.1 Conditions

A few conditions should be satisfied.

1. Asset must be owned by the assessee.
2. It must be used for the purpose of business or profession
3. It should be used during the relevant previous year.
4. Depreciation is available on tangible as well as intangible assets.

If the above conditions are satisfied, depreciation is available whether (or not) the assessee has claimed the deduction for depreciation in computing his total income.

6.2 Computation of normal depreciation

Written down value of the block of assets on the last day of the previous year x rate of depreciation

• Block of assets – A group of assets falling within a class of assets comprising —

a. tangible assets, being buildings, machinery, plant or furniture;

b. intangible assets, being know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature (not being goodwill of a business or profession), in respect of which the same percentage of depreciation is prescribed.

• Written down value of the block of assets – Written down value for the assessment year 2023-24 will be determined as under:

a. Find out the depreciated value of the block April 1, 2022.

b. To this value, add “actual cost³” of the asset (falling in the block) acquired during the previous year 2022-23.

c. 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 previous year 2022-23.

The resulting figure (if positive) is written down value of the block of assets on March 31, 2023.

• Rate of depreciation – There are 10 different blocks² of assets as given below –

Nature of asset (brief summary)	Rate
1. Buildings – Residential buildings	5%
2. Buildings – Office, factory, godowns or buildings which are not mainly used for residential purpose	10%
3. Buildings – Buildings for installing machinery and plant forming part of water supply project or water treatment system; and temporary erections such as wooden structures.	40%
4. Furniture – Any furniture/fittings including electrical fittings.	10%
5. Plant and machinery – Any plant or machinery [not covered by block 6, 7, 8 or 9] and motor cars (other than those used in a business of running them on hire)	15%
6. Plant and machinery- Ocean-going ships, vessels ordinarily operating	20%
7. Plant and machinery – Block includes the following – Buses, lorries and taxies used in the business of running them on hire Motor cars (other than those used in a business of running them on hire) acquired on or after August 23, 2019 but before April 1, 2020 and is put to use before April 1, 2020 Moulds used in rubber and plastic goods factories Machinery and plant, used in semi-conductor industry	30%
8. Plant and machinery – Aeroplanes, commercial vehicle (certain specified) and life saving medical equipment Containers made of glass or plastic used as refills, new commercial vehicle (certain specified) Computers including computer software and new commercial vehicle (certain specified) Energy saving devices; renewal energy devices; rollers in flour mills, sugar works and steel industry (however, it does not include windmills or any special device, which run on windmills installed after March 31, 2012 but before April 1, 2014) Air pollution control equipment; water pollution control equipment; solid waste control equipment, recycling and resource recovery systems, etc.	40%
9. Plant and machinery – Motor buses, motor lorries and motor taxis (used in a business of running them on hire) acquired on or after August 23,2019 but before the April 1, 2020 and is put to use before April 1, 2020	45% ®
10. Intangible assets (acquired after March 31, 1998) – Know-how, patents, copyrights, trademarks, licences, franchises and any other business or commercial rights of similar nature (not being goodwill of a business or profession).	25%

6.3 Exceptions

1. No depreciation is admissible where written down value has been reduced to zero, though the block of assets does not cease to exist on the last day of the previous year.
2. If a block of assets ceases to exist or if all assets of the block have been transferred and the block of assets is empty on the last day of the previous year, no depreciation is admissible in such case.
3. If an imported car was acquired during March 1, 1975 and March 31, 2001, depreciation is not admissible. If, however, such imported car is used in the business of running it on hire for tourist or for the purpose of business or profession outside India, then depreciation is admissible at the usual rate.
4. In the case of transfer of depreciable assets because of succession, amalgamation, business reorganization or demerger in the previous year, depreciation is first calculated as if there is no transfer of depreciable assets and the quantum of depreciation so calculated shall be apportioned between the predecessor and successor in the ratio of number of days for which the assets are used by them during the previous year.
5. If in the first year (in which an asset is acquired), it is put to use for less than 180 days, depreciation is available at half of the normal rate.

6.4 Additional depreciation

To claim additional depreciation, the following conditions should be satisfied —

1. The assessee must be engaged in manufacture/production of any article or thing or generation or generation and distribution of power.
2. New plant and machinery should be acquired and installed after March 31, 2005.
3. It should be an eligible plant and machinery. Additional depreciation is not available in the case of ships, aircrafts, second hand assets, assets installed in office/residence/guest house, office appliances, road transport vehicles and those assets which are qualified by 100 per cent deduction in the first year itself under any provision of the Act.

Amount of additional depreciation allowance – In case, the above three conditions are satisfied, additional depreciation shall be available @ 20 per cent of the actual cost⁶ of new plant and machinery. If, however, the asset is put to use for less than 180 days in the year in which it is acquired, the rate of additional depreciation will be 10 per cent (the remaining 10 per cent shall be allowed as deduction in the next year⁵).

6.5 Unabsorbed Depreciation

1. Depreciation allowance of the previous year is first deductible from the income chargeable under the head “Profits and gains of business or profession”.
2. If depreciation allowance is not fully deductible under the head “Profits and gains of business or profession” because of absence or inadequacy of profits, it is deductible from income chargeable under other heads of income [except income under the head “Salaries”] for the same assessment year.
3. If depreciation allowance is still unabsorbed, it can be carried forward to the subsequent assessment year(s) by the same assessee. No time-limit is fixed for the purpose of carrying forward of unabsorbed depreciation.

7. Expenditure on scientific research [Sec. 35]®

1. Revenue expenditure on scientific research is deductible in the year in which the expenditure is incurred, if such research relates to the business. Revenue expenses (other than expenditure on providing perquisites to employees) incurred before the commencement of business (but within three years immediately before commencement of business) on scientific research related to the business are deductible (to the extent it is certified by the prescribed authority) in the previous year in which the business is commenced.
2. Capital expenditure (not being cost of land) on scientific research related to the business of taxpayer is fully deductible in the year in which the expenditure is incurred. Capital expenses incurred before the commencement of business (but within three years immediately before commencement of business) on scientific research related to the business, are deductible in the previous year in which the business is commenced. In such case, depreciation is not deductible.
3. Contribution to approved research association, approved university/college/ other institutions is deductible at the rate of 100 per cent of actual contribution.
4. Contribution to an approved university, college or other institution for the purpose of research in social science or statistical research is deductible at the rate of 100 per cent of actual contribution.
5. Contribution to an approved national lab, university, IIT, specified person is deductible at the rate of 100 per cent of the contribution if such contribution is given for an approved research programme.
6. Expenditure on approved in-house research and development facilities of a company is qualified for deduction at the rate of 100 per cent of the expenditure if a few conditions are satisfied. One of the conditions is that the company should be engaged in business of bio-technology or in any business of manufacture or production of any article or thing except those specified in Eleventh Schedule. Moreover, no deduction is available in the case of cost of land and building. Cost of building can be claimed as deduction under point 2 given above.

8. Expenditure for obtaining right to use spectrum for telecommunication services [Sec. 35ABA]

Any capital expenditure incurred and “actually paid”⁸ by an assessee on the acquisition of any right to use spectrum for telecommunication services by paying spectrum fee is allowed as a deduction in equal instalments over the period for which the right to use spectrum remains in force. Deduction is available starting from the year in which actual payment is made (or the year of commencement of business, whichever is later) and ending with the year when spectrum comes to an end, irrespective of the previous year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee or payable in such manner as may be prescribed.

9. Amortization of telecom license fees [Sec. 35ABB]

The following conditions should be satisfied —

1. The expenditure is capital in nature.
2. It is incurred for acquiring any right to operate telecommunication services.
3. The expenditure is incurred either before the commencement of business or thereafter at any time during any previous year.
4. The payment for the above has been actually made to obtain licence.

Amount of deduction – The payment will be allowed as deduction in equal instalments over the period starting from the year in which such payment has been made and ending in the year in which the licence comes to an end. It may be noted that the deduction starts from the year in which actual payment of expenditure is made irrespective of the previous year in which the liability for the expenditure is incurred according to the method of accounting regularly employed by the assessee.

Where deduction is claimed and allowed under section 35ABB, no deduction will be available in respect of the same expenditure under section 32.

10. Investment linked tax incentive [Sec. 35AD]

Conditions – The following conditions⁹ should be satisfied —

• The taxpayer should be in the business of

1. 1. setting up and operating a cold chain facility,
   2. setting up and operating a warehousing facility for storage of agricultural produce
   3. approved 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
   4. building and operating, anywhere in India, a hotel of two star or above category as classified by the Central Government
   5. building and operating, anywhere in India, a hospital with at least 100 beds for patients
   6. developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Govern- ment/State Government and notified by the Board in accordance with prescribed guidelines
   7. developing and building a notified affordable housing project
   8. production of fertilizers in India
   9. setting up and operating an inland container depot or a container freight station
   10. bee-keeping and production of honey and beeswax
   11. setting up and operating a warehousing facility for storage of sugar
   12. laying and operating a slurry pipeline for the transportation of iron ore
   13. setting up and operating a semi-conductor wafer fabrication manufacturing unit
   14. Developing or maintaining and operating or developing, maintaining and operating a new infrastructure facility.

• The aforesaid activities should commence on or after April 1, 2009. However, this date is April 1, 2007 in the case of lying and operating a cross-country natural gas pipeline network for distribution or storage, April 1, 2010 in the case of hotel, hospital and housing project, April 1, 2011 in the case of housing project for affordable housing and production of fertilizer, April 1, 2012 if the specified business is of the nature referred to in Point Nos. (9), (10) and (11), April 1, 2014 if the specified business is of the nature referred to in Point Nos. (12) and (13) and April 1, 2017 if the specified business is of the nature referred to in Point No. (14).
• The aforesaid business should be a new business (i.e., not set up by splitting up, or reconstruction of, of an existing business).

Deduction – If the aforesaid conditions are satisfied, 100 per cent of the capital expenditure¹⁰ is deductible in the year in which the expenditure is incurred. However, expenditure incurred on the acquisition of any land or goodwill or financial instrument is not eligible for any deduction under section 35AD.

Expenditure incurred prior to the commencement of operation, wholly and exclusively, for the purpose of any specified business, shall be allowed as deduction during the previous year in which the assessee commences the operation of his specified business, if the amount is capitalized in the books of account of the assessee on the date of commencement of operation.

Where an assessee builds a two-star (or above category) hotel and, subsequently, while continuing to own the hotel, transfers the operation thereof to another person, the assessee shall be deemed to be carrying on the specified business of building and operating hotel for the purpose of section 35AD.

Double deduction not possible – If deduction is claimed and allowed under section 35AD, the assessee shall not be allowed any deduction in respect of the specified business under the provisions of Chapter VIA under section 80HH to 80RRB or under section 10AA for the same or any other assessment year.

Assets cannot be used for other purposes for 8 pears – An asset (in respect of which a deduction is claimed and allowed under section 35AD) shall be used only for the specified business for a period of 8 years beginning with the previous year in which such asset is acquired or constructed. If such asset is used for any purpose other than the specified business, the total deduction allowed under section 35AD (as reduced by the amount of depreciation allowable under section 32) shall be deemed to be business income of the assessee of the previous year in which the asset is so used. However, this provision will not apply to a sick industrial company.

11. Deduction for expenditure incurred on agricultural extension project [Sec. 35CCC]®

Where an assessee incurs any expenditure on notified agricultural extension project, then he will be eligible to claim a deduction of 100 per cent of such expenditure.

12. Deduction for expenditure for skill development [Sec. 35CCD]®

Where a company incurs any expenditure (not being expenditure in the nature of cost of any land or building) on any notified skill development project, then such company can claim a deduction of 100 per cent of such expenditure.

13. Amortization of preliminary expenses [Sec. 35D]

Certain preliminary expenses are deductible under section 35D. Deduction under section 35D is available in case of an Indian company or a resident non-corporate assessee. One-fifth of the qualifying expenditure is allowable as deduction in each of the five successive years beginning with the year in which the business commences, or as the case may be, the previous year in which extension of the undertaking is completed or the new unit commences production or operation.

14. Amortization of expenditure in the case of amalgamation/demerger [Sec. 35DD]

The expenditure is allowed as deduction in five successive years in five equal instalments. The first instalment is deductible in the previous year in which amalgamation or demerger takes place. No deduction shall be allowed in respect of the above expenditure under any other provision of the Act.

15. Amortization of expenditure under voluntary retirement scheme [Sec. 35DDA]

One fifth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deduced in equal instalments for each of the four immediately succeeding previous years. This rule is applicable even if the scheme of voluntary retirement has not been framed in accordance with guidelines prescribed under section 10(IOC).

16. Deduction under section 36

The following expenses are deductible under section 36 —

16.1 Insurance premium

Premium paid in respect of insurance against risk of damage or destruction of stocks or stores, used for the purposes of business or profession, is allowable as deduction.

16.2 Premia for insurance on health of employees

Premia paid by employer (by any mode other than cash) for insurance on the health of his employees in accordance with the scheme framed by the General Insurance Corporation and approved by the Central Government or any other insurer and approved by IRDA, is allowable as deduction.

16.3 Bonus or commission to employees

Allowable as deduction if not otherwise payable as profit or dividend. Deduction is available on payment basis. Where, however, payment is made after the end of the previous year but on or before the due date of furnishing return of income, deduction is available on accrual basis.

16.4 Interest on borrowed capital

Allowable as deduction subject to fulfilment of three conditions:

1. The assessee must have borrowed money.
2. The money so borrowed must have been used for the purpose of business.
3. Interest is paid or payable on such borrowing.

16.5 Discount on Zero coupon bonds

Discount is the difference between amount received and the amount payable on redemption/maturity by the issuing company. It is allowed as deduction on pro rata basis having regard to the period of life of such bond. “Period of life of the bond” means the period commencing from the date of issue of the bond and ending on the date of the maturity or redemption of such bond.

16.6 Employer’s contribution to recognized provident fund, approved superannuation fund and notified pension scheme

Allowable as deduction subject to the limits laid down for the purpose of recognized provident fund [RPF] or approving superannuation fund. Employer’s contribution towards notified pension scheme (NPS) is deductible (to the extent of 10 per cent of “salary” of employees). Meaning of “salary” for this purpose and for the purpose of calculating house rent allowance exemption is the same.

16.7 Contribution towards approved gratuity fund

Employer’s contribution towards an approved gratuity fund created by him exclusively for the benefit of his employees under an irrevocable trust is allowable as deduction.

16.8 Employees’ contribution towards staff welfare schemes

Any sum received by the taxpayer as contribution from his employees towards provident fund or any welfare fund of such employees, shall be allowed as deduction only if such sum is credited by the taxpayer to the employee’s account in the relevant fund on or before the due date. For this purpose, “due date” means the date by which the employer is required to credit such contribution to the employee’s account in the relevant fund under the provisions of any law or term of contract of service or otherwise. The provisions of section 43B does not apply in the case of employees’ contribution towards provident fund or any other welfare fund.

16.9 Bad debts

Bad debt written off¹² in the books of account is deductible. However, the following conditions should be satisfied —

1. Debt must be incidental to the business or profession of the assessee.
2. Debt must have been taken into account in computing assessable income.
3. Adjustment at the time of recovery – Where debt ultimately recovered is less than the difference between the amount of debt and bad debt allowed as deduction, such deficiency will be deductible in the previous year in which the ultimate recovery is made, provided such deficiencies is written off in the books of account. Conversely, where the debt ultimately recovered is more than the difference between the debt and the amount of bad debt deducted, such excess amount will be chargeable to tax in the year of recovery.

16.10 Provision for bad and doubtful debts relating to rural branches of scheduled commercial banks

Amount deductible in respect of provision for bad and doubtful debts

	Scheduled bank [other than a foreign bank], a non-scheduled bank and a cooperative bank	Public Financial institution, State financial corporation, State industrial investment corporation	Foreign bank or non-banking financial company
Total income (computed before this deduction and amount deductible under sections 80C to 80U)	8.5 per cent of such income	5 per cent of such income	5 per cent of such income
Aggregate average advances made by rural branches	10 per cent of such income	—	—

16.11 Family planning expenditure

Revenue expenditure is fully allowable as deduction. If, however, such expenditure is of capital nature, one-fifth of such expenditure is allowable as deduction for the previous year in which it was incurred and the balance is deductible in equal instalments in the next four years. Non-corporate assessee cannot claim this deduction [deduction may be claimed by a non-corporate assessee under sections 32 and 37(1) if the relevant conditions are satisfied]. Any family planning expenditure which is not allowed as deduction due to inadequacy of profit, shall be set off and carried forward as if it is unabsorbed depreciation.

16.12 Securities transaction tax

It is deductible only if the assessee is a dealer in securities.

16.13 Commodities transaction tax

Deductible if income is computed under the head “Profit and gains of business or profession”

16.14 Expenditure by cooperative society for purchase of sugarcane

Deductible if the co-operative society is engaged in the business of manufacture of sugar and amount deductible is purchase price of sugarcane or the price fixed or approved by the Government, whichever is lower.

16.15 Marked to market loss

Deduction in respect of any marked to market loss (or other expected loss) is allowed, if such loss is computed in accordance with notified Income Computation and Disclosure Standards (ICDS).

17. General deduction [Sec. 37(1)]

Conditions – Section 37(1) is a residuary section. To avail deduction, the following conditions should be satisfied –

1. The expenditure should not be of the nature described under sections 30 to 36.
2. It should not be in the nature of capital expenditure.
3. It should not be personal expenditure of the assessee.
4. It should have been incurred in the previous year.
5. It should be in respect of business carried on by the assessee.
6. It should have been expended wholly and exclusively for the purpose of such business.
7. It should not have been incurred for any purpose, which is an offence or is prohibited by any law.

Other points – Interest on delayed payments to micro, small and medium enterprise is not deductible. Any expenditure on activities relating to corporate social responsibility (CSR) is not deductible under section 37(1) [CSR expenditure may be claimed as deduction under any other section if the relevant conditions of that section are satisfied].

18. Disallowance under section 37(2B)

No deduction is available in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, etc., published by a political party.

19. Disallowances under section 40

19.1 Interest, royalty, fees for technical services payable outside India or payable to a non-resident [Sec. 40(a)(i)]

If the following three conditions are satisfied, the assessee (i.e., the payer) is supposed to deduct tax at source (TDS) —

1. The amount paid is interest, royalty, fees for technical services or other sum.
2. The aforesaid amount is chargeable to tax under the Act in the hands of the recipient.
3. The aforesaid amount is paid/payable to a non-resident.

If the above three conditions are satisfied, the assessee (the payer) is supposed to deduct tax at source and deposit the same with the Government.

When disallowance is applicable – Disallowance provisions are applicable in the following two cases when TDS default is committed by the payer and recipient is non-resident –

Case 1 – Tax is deductible but not deducted in the current year.

Case 2 – Tax is deductible (and is so deducted) during the current financial year but it is not deposited on or before the due date of submission of return of income under section 139(1).

Amount of disallowance – Entire expenditure in the above two cases will be disallowed in the current year.

Reversal of disallowance – The amount which is disallowed in the current year will be allowed as deduction in the year in which tax is deposited by the payer.

Relaxation when tax is paid by the recipient – The above provisions have been amended with effect from the assessment year 2020-21. Under the amended provisions, a relief is given in Case 1 (and not in Case 2), if the payer is not deemed to be an assessee-in-default under the first proviso to section 201(1). Under the first proviso to section 201(1), the payer is not deemed to be an assessee-in-default if-

a. the recipient has furnished his return of income under section 139;

b. the recipient has taken into account the above income in such return of income;

c. the recipient has paid the tax due on the income declared in such return of income, and

d. the payer uploads a certificate to this effect from a chartered accountant in Form No. 26A.

If the above conditions are satisfied, then for the purpose of section 40(a)(i) it shall be deemed that the payer has deducted and paid the tax on such amount on the date of the furnishing of return of income by the recipient.

19.2 Payment to a resident [Sec. 40(a)(ia)]

If recipient is resident in India, tax is deductible under sections 192 to 194LBA. Disallowance under section 40(a)(ia) now covers any payment (including salary) to a resident in India.

When disallowance is applicable – Disallowance provisions are applicable in the following two cases when TDS default is committed by the payer and recipient is resident –

Case 1 – Tax is deductible but not deducted in the current year.

Case 2 – Tax is deductible (and is so deducted) during the current financial year but it is not deposited on or before the due date of submission of return of income under section 139(1).

Amount of disallowance – 30 per cent of expenditure in the above two cases will be disallowed in the current year.

Reversal of disallowance – The amount which is disallowed in the current year will be allowed as deduction in the year in which tax is deposited by the payer.

Relaxation given by the Finance Act, 2012 – The above provisions have been amended by the Finance Act, 2012 with effect from the assessment year 2013-14. Under the amended provisions, a relief is given in Case 1 (and not in Case 2), if the payer is not deemed to be an assessee-in-default under the first proviso to section 201(1). Under the first proviso to section 201(1), the payer is not deemed to be an assessee-in-default if –

a. the recipient has furnished his return of income under section 139;

b. the recipient has taken into account the above income in such return of income;

c. the recipient has paid the tax due on the income declared in such return of income; and

d. the payer electronically furnishes a certificate to this effect from a chartered accountant in Form No. 26A.

If the above conditions are satisfied, then for the purpose of section 40(a)(ia) it shall be deemed that the payer has deducted and paid the tax on such amount on the date of the furnishing of return of income by the resident recipient.

19.3 Default pertaining to non-deduction/non-deposit of equalisation levy

When disallowance is applicable – Any consideration paid or payable (to a nonresident for a specified service on which equalisation levy is applicable) will be disallowed from the assessment year 2017-18 in the following cases —

1. Equalisation levy is deductible and such levy has not been deducted.
2. Equalisation levy is deductible (and it is so deducted) but it is not deposited [on or before the due date of submission of return of income under section 139(1)].

Reversal of disallowance – If equalisation levy is deducted/deposited in a subsequent year, the aforesaid consideration shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid.

19.4 Income-tax (including cess and surcharge on income tax), dividend tax, wealth tax or any other tax on income

These are not deductible. Any fine, interest, penalty, etc., in respect of these taxes are also not deductible.

19.5 Royalty, licence fee, service fee, privilege fee, service charge, etc.

The following are not deductible from the assessment year 2014-15 –

1. Any amount paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge (by whatever name called), which is levied exclusively on a State Government undertaking by the State Government.
2. Any amount which is appropriated (directly or indirectly) from a State Government Undertaking by the State Government.

19.6 Salary payable to a non-resident or payable outside India

It is not deductible if tax is not deducted at source and it is not paid to the government.

19.7 Tax on perquisite paid by the employer

The employer provides non-monetary perquisites to employees. Tax on nonmonetary perquisites is paid by the employer. The tax so paid by the employer is not taxable in the hands of employees by virtue of section 10( 10CC). While calculating income of the employer, the tax paid by the employer on non-monetary perquisites, is not deductible.

19.8 Salary and interest to partners

Salary and interest paid/payable by a firm to its partners are deductible only if conditions of sections 184 and 40(b) are satisfied. One of the conditions is that these payments should be permitted by the partnership deed. Rate of interest cannot be more than 12 per cent (excess interest will be disallowed in the hands of firm). Salary and remuneration to partners cannot exceed a specified percentage of book profit if the aggregate payment exceeds Rs. 1,50,000 (excess payment if any shall be disallowed). Maximum remuneration to partners which is deductible is as follows —

• On the first Rs. 3 lakh of book profit (or in the case of loss): Rs. 1,50,000 or 90 per cent of book profit whichever is more.
• On the balance of book profit: 60 per cent of book profit.

19.9 Salary and interest by an AOF/BOI to its members

Not deductible.

20. Disallowance under section 40A

20.1 Amounts paid or payable to a relative/inter-connected concern

Any expenditure incurred by an assessee in respect of which payment has been made to specified persons (e.g., relatives, inter-connected concerns) is liable to be disallowed in computing business profit to the extent such expenditure is considered to be excessive or unreasonable, having regard to the fair market value of goods or services or facilities, etc. For the assessment year 2013-14 to 2016-17, this disallowance shall not be made if the aggregate value of such transactions is more than Rs. 5 crore and these transactions at arm’s length price [as defined in section 92F( ii)].

20.2 Expenditure exceeding Rs. 10,000 paid by a mode other than account payee cheque/draft [Sec. 40A(3)/(3A)]

If the following conditions are satisfied, payment is not deductible —

1. The assessee incurs any expenditure, which is otherwise deductible under the other provisions of the Act for computing business/profession income (e.g., expenditure for purchase of raw material, trading goods, expenditure on salary, etc.). The amount of expenditure exceeds Rs. 10,000¹³.
2. A payment (or aggregate of payments made to a person in a day) in respect of the above expenditure exceeds Rs. 10,000¹³.
3. The payment mentioned above is made otherwise than by an account payee cheque or an account payee demand draft or use of electronic clearing system through a bank account (or through prescribed electronic mode¹⁴)].

If all the above conditions are satisfied, 100 per cent of such payment will be disallowed.

If an outstanding liability was allowed as deduction in any of the earlier years and during the current year payment in respect of such liability is made otherwise than by an account payee cheque or draft and if such payment to a person in a day exceeds Rs. 10,000¹³, the payment so made shall be chargeable to tax as business income in the year of payment.

Not deductible.

20.3 Contribution towards unapproved gratuity fund Employer’s contribution towards non-statutory funds

Employer’s contribution towards non-statutory fund (like unrecognized provident fund) is not deductible.

20.4 Marked to market loss

If such loss is not computed in accordance with notified Income Computation and Disclosure Standards (ICDS), deduction is not available.

20.5 Amount not deductible in respect of certain unpaid liabilities [Sec. 43B]

Disallowance under section 43B is applicable only if the taxpayer maintains books of account on the basis of mercantile system of accounting.

The provisions of section 43B are given below —

General rule – Certain expenses are deductible on payment basis – The following expenses (which are otherwise deductible under the other provisions of the Income-tax Act) are deductible on payment basis —

• any sum payable by way of tax, duty, cess or fee (by whatever name called under any law for the time being in force);
• any sum payable by an employer¹⁵ by way of contribution to provident fund or superannuation fund or any other fund for the welfare of employees;
• any sum payable as bonus or commission to employees for service rendered;
• any sum payable as interest on any loan or borrowing from a public financial institution (i.e., ICICI, IFCl, IDBl, LlC and UTl) or a state financial corporation or a state industrial investment corporation;
• any sum payable as interest on any loan or borrowing from

(a) a deposit-taking non-banking finance company (NBFC) and systematically important non deposit-taking NBFC (applicable for the assessment years 2020-21 to 2023-24) or

(b) such class of non-banking financial companies as may be notified by the Central Government (applicable from the assessment year 2024-25);

• interest on any loan or advance taken from a scheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank];
• any sum payable by an employer in lieu of leave at the credit of his employee;
• any sum payable to the Indian Railways for the use of railway assets; and
• (with effect from assessment year 2024-25) any sum payable by the assessee to a micro or small enterprise^15a’ beyond the time-limit^15b specified in section 15 of the Micro, Small and Medium Enterprises Development Act.

The above expenses are deductible in the year in which payment is actually made. There is, however, one exception, which is given below:

Exception – When deductible on accrual basis – The above payments are deductible on accrual basis if payment is actually made on or before the due date of submission of return of income.

In the case covered by the aforesaid exception, if the assessee maintains books of account on mercantile basis, then the expenditure is deductible on “accrual” basis in the year in which the liability is incurred.

The above exception is, however, not applicable in the case of payment made to a micro or small enterprise before the expiry of time-limit^15b specified in section 15 of the Micro, Small and Medium Enterprises Development Act. In such a case, expenditure is deductible on accrual basis (if the payer maintains books of account on mercantile basis).

21. Recovery against any deduction [Sec. 41(1)]

1. In any of the earlier years a deduction was allowed to the taxpayer in respect of loss, expenditure (revenue or capital expenditure) or trading liability incurred by the assessee.
2. During the current previous year, the taxpayer—

a. has obtained a refund of such trading liability (it may be in cash or any other manner); or

b. has obtained some benefit in respect of such trading liability by way of remission or cessation thereof (“remission or cessation” for this purpose includes unilateral act of the assessee by way of writing-off of such liability in his books of account).

If the above two conditions are satisfied, the amount obtained by such person (or the value of benefit accruing to the taxpayer) shall be deemed to be profits and gains of business or profession and, accordingly, chargeable to tax as the income of that previous year.

22. Sale consideration for transfer of immovable property [Sec. 43CA]

If stamp duty value (of land/building) is more than 110 per cent of the consideration received (or accruing as a result of the transfer), stamp duty value shall be deemed to be the full value of the consideration.

23. Compulsory audit of books of account [Sec. 44AB]

Dijferent taxpayers	When they are covered by the provisions cf compulsory audit under section 44AB (audit report should be obtained on or before the due date of submission of return of income)
A person carrying on business16	If the total sales, turnover or gross receipt in business for the previous year(s) relevant to the assessment year exceed or exceeds Rs. 1 crore.
A person carrying on business (if 2 conditions given in the next column are satisfied)16	If the following 2 conditions are satisfied, compulsory audit is required only if total sales, turnover or gross receipts in business exceeds Rs. 10 crore — Aggregate of all receipts in cash during the previous year does not exceed 5 per cent of such receipt. Aggregate of all payments in cash during the previous year does not exceed 5 per cent of such payment. For this purposes, payment/receipt by a cheque/draft, which is not account payee, shall be deemed to be payment/receipt in cash.
A person carrying on profession16	If his gross receipts in profession for the previous year(s) relevant to the assessment year exceeds Rs. 50 lakh.
A person covered under section 44AE, 44BB or 44BBB	If such person claims that the profits and gains from the business are lower than the profits and gains computed under these sections (irrespective of his turnover).
A person covered under section 44AD(4)	If a person carrying on business is covered by the provisions of section 44AD(4) and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year.
A person covered under section 44ADA	If such person claims that the profits and gains from the business/profession are lower than the profit and gains computed under these sections and if his income exceeds the maximum amount which is not chargeable to tax

24. Presumptive taxation [Sec. 44AD]^16a

Section 44AD is applicable if the taxpayer is a resident individual, resident Hindu undivided family partnership firm (not being a limited liability partnership). The taxpayer is engaged in any business [but not (a) carriers on profession as referred to in section 44AA(1), (b) earn income in the nature of age, (c) carries on any agency business, or (d) one who is in , hiring or leasing goods carriages]. Turnover should not exceed the limit given below. Income is computed on estimated basis at the rate of 8 per cent¹⁷ of turnover. The rate of 8 per cent¹⁷ is comprehensive [i.e., no further deduction is allowed under any other section, even remuneration/interest to partners is not deductible]

24.1 Turnover

Total turnover/gross receipt in the previous year of the busines should not exceed the limit given below –

Up to the assessment year 2023-24 – Rs. 2 crore

From the assessment year 2024-25:

• If the amount (or aggregate of amounts) received during the previous year in cash or bearer/crossed cheque/draft does not exceed 5 per cent of the total turnover/gross receipts of the previous year – Rs. 3 crore
• In any other case – Rs. 2 crore

25. Presumptive taxation [Sec. 44ADA]¹⁹

Section 44ADA is applicable if a resident individual or resident firm (other than LLP) is engaged in a profession referred to in section 44AA(1) (i.e., such as 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) and gross receipts from the profession has not exceed Rs. 50 lakh. [increased to Rs. 75 lakh from the assessment year 2024-25 in the case of an assessee where the amount (or aggregate of amounts) received during the previous year in cash/bearer or crossed cheque/draft does not exceed 5 per cent of the gross receipts of the previous year]. In such case, income is computed on estimated basis at the rate of 50 per cent of total gross receipt. The rate of 50 per cent is comprehensive (no further deduction is available).

26. Presumptive taxation [Sec. 44AE]¹⁹

Section 44AE is applicable, if the taxpayer is engaged in the business of plying, hiring and leasing goods carriages and he/it does not own more than 10 goods carriages at time during the previous year. In such a case, income would be calculated on estimated basis at the rate given below. No further deduction is allowed under any other section except remuneration and interest to partners.

Heavy goods vehicle – For a heavy goods vehicle, the profits and gains shall be an amount equal to Rs. 1,000 per ton of gross vehicle weight (or unladen weight) for every month (or part of a month) during which the heavy goods vehicle is owned by the assessee in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher.

Other than heavy goods vehicle – In the case of a goods carriage other than heavy vehicle, the profits and gains shall be an amount equal to Rs. 7,500 for every month (or part of a month) during which the goods carriage is owned by the assessee in the previous year or an amount claimed to have been actually earned from such goods carriage, whichever is higher.

For this purpose, “heavy goods vehicle” means any goods carriage the gross vehicle weight of which exceeds 12,000 kilograms.

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1. However, interest received by an assessee on compensation (or on enhanced compensation), shall he deemed to he the income of the year in which it is received and it is chargeable to tax under the head “Income from other sources” (50 per cent of such interest is deductible and effectively 50 per cent is chargeable to tax).
2. It may be noted that “block of assets” means assets of all units of the assessee having the same rate of depreciation and not assets of only one unit.
3. Where an assessee incurs any expenditure for acquisition of a depreciable asset in respect of which a payment (or aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft or use of electronic clearing system through a bank account (or through prescribed electronic mode’), exceeds Rs. 10,000, such payment shall not be eligible for depreciation.
4. As per rule 6ABBA, prescribed modes of electronic payment are: (a) credit card, (b) debit card, (c) net banking, (d) IMPS (Immediate Payment Service), (e) UPI (Unified Payment Interface), (/) RTGS (Real Time Gross Settlement), (g) NEFT (National Electronic Funds Transfer) and (h) BHIM (Bharat Interface for Money) Aadhaar Pay.
5. The Finance Act, 2015 has amended section 32 for this purpose from the assessment year 2016-17. For earlier assessment years, one can take the shelter of the judicial rulings given in Apollo Tyres Ltd. v. ACIT [2014] 45 taxmann.com 337 (Cochin.).
6. Where an assessee incurs any expenditure for acquisition of a depreciable asset in respect of which a payment (or aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft or use of electronic clearing system through a bank account (or through prescribed electronic mode’), exceeds Rs. 10,000, such payment shall not be eligible for depreciation.
7. As per rule 6ABBA, prescribed modes of electronic payment are : (a) credit card, (L) debit card, (c) net banking, (d) IMPS (Immediate Payment Service), (e) UPI (Unified Payment Interface), (f) RTGS (Real Time Gross Settlement), (g) NEFT (National Electronic Funds Transfer) and (h) BHIM (Bharat Interface for Money) Aadhaar Pay.
   ® Normal depreciation rate cannot be more than 40 per cent under the alternative tax regime. Moreover, additional depreciation is not applicable in the case of an assessee who pays tax under the alternative tax regime.
8. For this purpose, rule 6A has been inserted. It provides that where an assessee has opted for and has been allowed by the Department of Telecommunications, Government of India (DOT) to make deferred payment, the amount which would have been payable by the assessee had he opted for full upfront payment of spectrum fee, will be considered as amount “actually paid”.
   ® Deduction under section 35(1)(ii)/(iia)/(Hi) and section 35(2AA)/(2AB) is not available under the alternative tax regime.
9. From the assessment year 2020-21, the benefit under section 35AD is available at the option of the assessee.
   ® Deduction under section 35AD is not available, under the alternative tax regime
10. Where an assessee incurs any expenditure for acquisition of a depreciable asset in respect of which a payment (or aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft or use of electronic clearing system through a bank account (or through prescribed electronic mode”), exceeds Rs. 10,000, such payment shall not be eligible for depreciation.
11. As per rule 6ABBA, prescribed modes of electronic payment are: (a) credit card, (b) debit card, (c) net banking, (d) IMPS (Immediate Payment Service), (e) UPI (Unified Payment Interface), (/) RTGS (Real Time Gross Settlement), (g) NEFT (National Electronic Funds Transfer) and (h) BHIM (Bharat Interface for Money) Aadhaar Pay.
    a Deduction under section 35CCC/35CCD is not available, under the alternative tax regime.
12. If a debt becomes irrecoverable on the basis of Income Computation and Disclosure Standards without recording the same in the accounts, it shall be allowed as deduction in the previous year in which such debt becomes irrecoverable and it shall be deemed that such debt has been written off as irrecoverable in the accounts for the purposes of section 36(1)(Hi).
13. Rs. 35,000 if an assessee makes payment for plying, hiring or leasing goods carriages.
14. As per rule 6ABBA, prescribed modes of electronic payment are: (a) credit card, (b) debit card, (c) net banking, (d) IMPS (Immediate Payment Service), (e) UPI (Unified Payment Interface), (f) RTGS (Real Time Gross Settlement), (g) NEFT (National Electronic Funds Transfer) and (h) BHIM (Bharat Interface for Money) Aadhaar Pay.
15. Section 43B does not cover contribution by an employee to provident fund, superannuation fund or any other welfare fund. Explanation 5 has been inserted by the Finance Act, 2021 in section 43B to clarify this proposition.

15a. Micro enterprise: Investment in (a) plant and machinery does not exceed Rs. 25 lakh (in the case of industrial undertaking) or (b) equipment does not exceed Rs. 10 lakh (in the case of enterprise engaged in providing services).
Small enterprise: Investment in (a) plant and machinery exceeds Rs. 25 lakh hut does not exceed Rs. 5 crore (in the case of industrial undertaking) or (b) equipment exceeds Rs. 10 lakh hut does not exceed Rs. 2 crore (in the case of enterprise engaged in providing services).
Vide Notification No. S.0.1702(E), dated June 1, 2020, these limits have heen revised as follows –
-Micro enterprise – Investment in plant and machinery/equipment does not exceed Rs. 1 crore and turnover does not exceed Rs. 5 crore.
-Small enterprise – Investment in plant and machinery/equipment does not exceed Rs. 10 crore and turnover does not exceed Rs. 50 crore.
It is, however, douhtful whether the ahove notification is applicahle for the purpose of section 43B(h).
In calculating the aforesaid investment ceilings, the cost of pollution control, research and development, industrial safety devices and such other items as may he specified, shall he excluded.
15 b. Where any person purchases goods/services from a micro/small enterprise, the payment shall he made hefore the date agreed upon hetween him and supplier in writing. In no case the period agreed upon hetween the supplier and the huyer in writing shall exceed 45 days. If there is no such agreement, the payment shall he made within 15 days of acceptance/deemed acceptance of goods/services.

16. Tax audit provisions of section 44AB are not applicable in the case of a person, who declares profits and gains for the previous year in accordance with the provisions of section 44AD(1) or section 44ADA(1).
17. 6 per cent in respect of total turnover or gross receipts received by an account payee cheque/draft or use of electronic clearing system through a bank account (or through prescribed electronic mode’’) during the previous year or before the due date of submission of return of income under section 139(1).
18. As per rule 6ABBA, prescribed modes of electronic payment are: (a) credit card, (6) debit card, (c) net banking, (d) IMPS (Immediate Payment Service), (e) UPI (Unified Payment Interface), (/) RTGS (Real Time Gross Settlement), (g) NEFT (National Electronic Funds Transfer) and (h) BHIM (Bharat Interface for Money) Aadhaar Pay.
19. A resident/individual/Hindu undivided family/firm, opting from the above scheme, can submit return of income in ITR-4 (ITR-4 is a simplified form as compared to other forms).