Mumbai University Business Profits Report

UNIVERSITY OF MUMBAI
PROJECT REPORT ON
PROFITS AND GAINS FROM
BUSINESS AND PROFESSION
BY
Mr. OJAS NITIN NARSALE
M.COM (Part-II) (SEM-III) (Roll No.28)
ACADEMIC YEAR 2016-2017
PROJECT GUIDE
CA PRASHANT KANVINDE
PARLE TILAK VIDYALAYA ASSOCIATION’S
M.L. DAHANUKAR COLLEGE OF COMMERCE
DIXIT ROAD, VILE PARLE ( E)
MUMBAI- 400057

DECLERATION
I, Mr. OJAS NITIN NARSALE of PARLE TILAK VIDYALAYA ASSOCIATION’S
M.L. DAHANUKAR COLLEGE OF COMMERCE of M.COM(Part-II) (SEM-III)
(Roll No.28) hereby declare that I have completed this project on
PROFITS AND GAINS FROM BUSINESS AND PROFESSION in the
ACADEMIC YEAR 2016-2017. This information submitted is true and
original to the best of my knowledge.
(Signature of Student)

ACKNOWLEDGEMENT
To list who all helped me is difficult because they are so numerous and
the depth is so enormous.
I would like to acknowledge the following as being idealistic channels
and fresh dimensions in the completion of this project.
I would firstly thank the University of Mumbai for giving me chance to
do this project.
I would like to thank my Principal, Dr. Madhavi Pethe for providing
the necessary facilities required for completion of this project.
I even will like to thank our co-ordinator, for the moral support that I
received.
I would like to thank our College Library, for providing various books
and magazines related to my project.
Finally I proudly thank my Parents and Friends for their support
throughout the Project.

INDEX
Sr No Topic Page
1 Introduction 5
2 Chargeability 6
3 Deductions under Sections 30 to 37 9
4 Amount expressly disallowed under the Act 19
5 Expenses deductible on actual payment
basis
21
6 Other provisions 22
7 Provisions applicable to Non-
Resident/Foreign Company
23
8 Accounts and Audit and Presumptive
Taxation
25
9 Some Important FAQs With Case Laws
From Income From Profits And Gains Of
Business Or Profession
26
10 ICDS 37
11 Depreciation 39
12 Bibliography 42

Introduction
Under the Income Tax Act, 'Profits and Gains of Business or Profession' are also subjected to
taxation. The term "business" includes any (a) trade, (b)commerce, (c)manufacture, or (d) any
adventure or concern in the nature of trade, commerce or manufacture. The term "profession"
implies professed attainments in special knowledge as distinguished from mere skill; "special
knowledge" which is "to be acquired only after patient study and application". The words 'profits
and gains' are defined as the surplus by which the receipts from the business or profession
exceed the expenditure necessary for the purpose of earning those receipts. These words should
be understood to include losses also, so that in one sense 'profit and gains' represent plus income
while 'losses' represent minus income.
The following types of income are chargeable to tax under the heads profits and gains of
business or profession:-
 Profits and gains of any business or profession
 Any compensation or other payments due to or received by any person specified in
section 28 of the Act
 Income derived by a trade, profession or similar association from specific services
performed for its members
 Profit on sale of import entitlement licences, incentives by way of cash compensatory
support and drawback of duty
 The value of any benefit or perquisite, whether converted into money or not, arising from
business
 Any interest, salary, bonus, commission, or remuneration received by a partner of a firm,
from such a firm
 Any sum whether received or receivable in cash or kind, under an agreement for not
carrying out any activity in relation to any business or not to share any know-how, patent,
copyright, franchise, or any other business or commercial right of similar nature or
technique likely to assist in the manufacture or processing of good
 Any sum received under a keyman insurance policy
 Income from speculative transactions.
In the following cases, income from trading or business is not taxable under the head "profits and
gains of business or profession":-
 Rent of house property is taxable under the head " Income from house property". Even if
the property constitutes stock in trade of recipient of rent or the recipient of rent is
engaged in the business of letting properties on rent.
 Deemed dividends on shares are taxable under the head "Income from other sources".
 Winnings from lotteries, races etc. are taxable under the head "Income from other
sources".

Profits and gains of any other business are taxable, unless such profits are subjected to
exemption. General principals governing the computation of taxable income under the head
"profits and gains of business or profession:-
 Business or profession should be carried on by the assessee. It is not the ownership of
business which is important , but it is the person carrying on a business or profession,
who is chargeable to tax.
 Income from business or profession is chargeable to tax under this head only if the
business or profession is carried on by the assessee at any time during the previous year.
This income is taxable during the following assessment year.
 Profits and gains of different business or profession carried on by the assessee are not
separately chargeable to tax i.e. tax incidence arises on aggregate income from all
businesses or professions carried on by the assessee. But, profits and loss of a speculative
business are kept separately.
 It is not only the legal ownership but also the beneficial ownership that has to be
considered.
 Profits made by an assessee in winding up of a business or profession are not taxable, as
no business is carried on in that case. However, such profits may be taxable as capital
gains or as business income, if the process of winding up is such as to involve the
carrying on of a trade.
 Taxable profit is the profit accrued or arising in the accounting year. Anticipated or
potential profits or losses, which may occur in future, are not considered for arriving at
taxable income. Also, the profits, which are taxable, are the real profits and not notional
profits. Real profits from the commercial point of view, mean a gain to the person
carrying on the business and not profits from narrow, technical or legalistic point of view.
 The yield of income by a commercial asset is the profit of the business irrespective of the
manner in which that asset is exploited by the owner of the business.
 Any sum recovered by the assessee during the previous year, in respect of an amount or
expenditure which was earlier allowed as deduction, is taxable as business income of the
year in which it is recovered.
 Modes of book entries are generally not determinative of the question whether the
assessee has earned any profit or loss.
 The Income tax act is not concerned with the legality or illegality of business or
profession. Hence, income of illegal business or profession is not exempt from tax.
Chargeability
The following incomes are chargeable to tax under the head Profit and Gains from Business or
Profession:
 28(i) - Profit and gains from any business or profession carried on by the assessee at any
time during the previous year

 28(ii) - Any compensation or other payment due to or received by any specified person
 28(iii) - Income derived by a trade, professional or similar association from specific
services performed for its members
 28(iiia) - Profit on sale of a license granted under the Imports (Control) Order 1955, made
under the Import Export Control Act, 1947
 28(iiib) - Cash assistance (by whatever name called) received or receivable by any person
against exports under any scheme of Government of India
 28(iiic) - Any duty of Customs or Excise repaid or repayable as drawback to any person
against exports under the Customs and Central Excise Duties Drawback Rules, 1971.
 28(iiid) - Profit on transfer of Duty Entitlement Pass Book Scheme, under Section 5 of
Foreign Trade (Development and Regulation) Act, 1992
 28(iiie) - Profit on transfer of Duty Free Replenishment Certificate, under Section 5 of
Foreign Trade (Development and Regulation) Act 1992
 28(iv) - Value of any benefits or perquisites arising from a business or the exercise of a
profession.
 28(v) - Interest, salary, bonus, commission or remuneration due to or received by a
partner from partnership firm
 28(va) - a) Any sum received or receivable for not carrying out any activity in relation to
any business or profession; or
b) Any sum received or receivable for not sharing any know-how, patent,
copyright, trademark, licence, franchise, or any other business or commercial right or
information or technique likely to assist in the manufacture of goods or provision of
services.
 28(vi) - Any sum received under a Key man Insurance policy including the sum of bonus
on such policy
 28(vii) - Any sum received ( or receivable) in cash or in kind, on account of any capital
assets (other than land or goodwill or financial instrument) being demolished, destroyed,
discarded or transferred, if the whole of the expenditure on such capital assets has been
allowed as a deduction under section 35AD ,Income from speculative transactions.
However, it shall be deemed to be distinct and separate from any other business.
 41(1) –
o Remission or cessation of liability in respect of any loss, expenditure or trading
liability incurred by the taxpayers
o Recovery of trading liability by successor which was allowed to the predecessor
shall be chargeable to tax in the hands of successor. Succession could be due to
amalgamation or demerger or succession of a firm succeeded by another firm or
company, etc.
o Any liability which is unilaterally written off by the taxpayer from the books of
accounts shall be deemed as remission or cessation of such liability and shall be
chargeable to tax.

 41(2) - Depreciable asset in case of power generating units, is sold, discarded,
demolished or destroyed, the amount by which sale consideration and/ or insurance
compensation together with scrap value exceeds its WDV shall be chargeable to tax.
 41(3) - Where any capital asset used in scientific research is sold without having been
used for other purposes and the sale proceeds together with the amount of deduction
allowed under section 35 exceed the amount of the capital expenditure, such surplus or
the amount of deduction allowed, whichever is less, is chargeable to tax as business
income in the year in which the sale took place.
 41(4) - Where bad debts have been allowed as deduction under Section 36(1)(vii) in
earlier years, any recovery of same shall be chargeable to tax.
 41(4A) - Amount withdrawn from special reserves created and maintained under Section
36(1)(viii) shall be chargeable as income in the previous year in which the amount is
withdrawn.
 41(5) - Loss of a discontinued business or profession could be adjusted from the deemed
business income as referred to in section 41(1), 41(3), (4) or (4A) without any time limit.
 43CA - Where consideration for transfer of land or building or both as stock-in-trade is
less than the stamp duty value, the value so adopted shall be deemed to be the full value
of consideration for the purpose of computing income under this head.
 43D - As per RBI Guidelines, Interest on bad and doubtful debts of Public Financial
Institution or Scheduled Bank or State Financial Corporation or State Industrial
Investment Corporation, shall be chargeable to tax in the year in which it is credited to
Profit and Loss A/c or year in which it is actually received, whichever happens earlier.
 43D - Similarly as per NHB Guidelines, Interest on bad and doubtful debts of housing
finance company, shall be chargeable to tax, in the year it is credited to P & L A/c or year
in which it is actually received by them, whichever is earlier.
 Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver
or concession or reimbursement (by whatever name called) by the Central Govt. or State
Govt. or any authority or body or agency to the assessee would be included in definition
of income as referred to in Section 2(24). However, in the following cases subsidy or
grant shall not be treated as income:
i) The subsidy or grant or reimbursement which is taken into account for determination of the
actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of
Section 43;
ii) The subsidy or grant by the Central Government for the purpose of the corpus of a trust or
institution established by the Central Government or a State Government, as the case may be.

Section Nature of expenditure Quantum of deduction Assessee
30
Rent, rates, taxes, repairs (excluding capital
expenditure) and insurance for premises
Actual expenditure incurred excluding
capital expenditure
All assessee
31
Repairs (excluding capital expenditure) and
insurance of machinery, plant and furniture
Actual expenditure incurred excluding
capital expenditure
All assessee
32(1)(i)
Depreciation on
i) buildings, machinery, plant or furniture,
being tangible assets;
ii) know-how, patents, copyrights, trademarks,
licenses, franchises, or any other business or
commercial rights of similar nature, being
intangible assets
Allowed at prescribed percentage on Straight
Line Method for each asset
Provided that where an asset is acquired by
the assessee during the previous year and is
put to use for a period of less than one
hundred and eighty days in that previous
year, the deduction in respect of such asset
shall be restricted to fifty per cent of the
amount calculated at the percentage
prescribed for an asset.
Assessees engaged in
business of
generation or
generation and
distribution of power
Note:
Taxpayers engaged in the business of
generation or generation and distribution of
power shall have the option to claim
depreciation either on basis of straight line
basis method or written down value method on
each block of asset.
32(1)(ii)
Depreciation on
i) buildings, machinery, plant or furniture,
being tangible assets;
ii) know-how, patents, copyrights, trademarks,
licenses, franchises, or any other business or
commercial rights of similar nature, being
intangible assets.
Allowed at prescribed percentage on WDV
method for each block of asset
Provided that where an asset is acquired by
the assessee during the previous year and is
put to use for a period of less than one
hundred and eighty days in that previous
year, the deduction in respect of such asset
shall be restricted to fifty per cent of the
amount calculated at the percentage
prescribed for an asset.
All assessees
32(1)(iia)
Additional depreciation on new plant and
machinery (other than ships, aircraft, office
appliances, second hand plant or machinery,
etc.).
(subject to certain conditions)
Additional depreciation shall be available
@20 % of the actual cost of new plant and
machinery.
in
– manufacture or
production of any
article or thing; or
– generation,
transmission or
distribution of power
(if taxpayer is not
claiming depreciation
on basis of straight
line method)
Provided that where an asset is acquired by the assessee during the previous year and is put to use for a period of less than
one hundred and eighty days in that previous year, then deduction of additional depreciation would be restricted to 50% in
the year of acquisition and balance 50% would be allowed in the next year
Proviso to Section 32(1)(iia)
Additional depreciation on new plant and machinery (other than ships, aircraft,office appliances, second hand plant or
machinery, etc.))
(Subject to certain conditions)
Additional depreciation shall be available @35 % of the actual cost of new plant and machinery.
Provided that where an asset is acquired by the assessee during the previous year and is put to use for a period of less than
one hundred and eighty days in that previous year, then deduction of additional depreciation would be restricted to 50% of
actual cost in the year of acquisition and balance 50% would be allowed in the next year
Deductions under Sections 30 to 37
Amount deductible, while computing, Profits and Gains of Business or Profession are:-

32AC
actual cost of new plant and machinery
acquired and installed by a manufacturing
company during the previous year exceeds Rs.
25/100 Crores, as the case may be.(Subject to
certain conditions)
15% of actual cost of new asset
Company engaged in
business or
manufacturing or
production of any
article or thing
32AD
Investment allowance for investment in new
plant and machinery if manufacturing unit is
set-up in the notified backward area in the state
of Andhra Pradesh, Bihar, Telangana or West
Bengal(Subject to certain conditions)
Investment allowance shall be available
@15 % of the actual cost of new plant and
machinery in the year of installation of new
asset.
33AB
Amount deposited in Tea/Coffee/Rubber
Development Account by assessee engaged in
business of growing and manufacturing
tea/Coffee/Rubber in India
National Bank for Agricultural and Rural
Development (NABARD) or in Deposit
Account of Tea Board, Coffee Board or
Rubber Board in accordance with approved
scheme; or
b) 40% of profits from such business before
making any deduction under section 33AB
and before adjusting any brought forward
loss.
All assessee engaged
in business of
growing and
manufacturing
tea/Coffee/Rubber
33ABA
Amount deposited in Special Account with
SBI/Site Restoration Account by assessee
carrying on business of prospecting for, or
extraction or production of, petroleum or
natural gas or both in India
a) Amount deposited in Special Account
with SBI/Site Restoration Account; or
b) 20% of profits from such business before
making any deduction under section
33ABA and before adjusting any brought
forward loss.
All assessee engaged
in business of
prospecting for, or
extraction or
production of,
petroleum or natural
gas or both in India
Note:
1. Manufacturing unit should be set-up on or after 1st day of April, 2015.
2. New plant and machinery acquired and installed during the period beginning on the 1st day of April, 2015 and ending
before the 1st day of April, 2020
All assessees- where an assessee sets up an undertaking or enterprise for production or manufacture of any article or thing in
any notified backward area in state of the state of Andhra Pradesh, Bihar, Telangana or West Bengal.
Note:-
1) New asset should be acquired and installed during the period beginning on the 1st day of April, 2015 and ending before
the 1st day of April, 2020.
2) Manufacturing unit should be set-up on or after 1st day of April, 2015.
3) Deduction shall be allowed under Section 32AD in addition to deduction available under Section 32AC if assessee fulfils
the specified conditions
All assessee who acquired new plant and machinery for the purpose of setting-up manufacturing unit in the notified
backward area in the state of Andhra Pradesh, Bihar, Telangana or West Bengal

35(1)(i)
Revenue expenditure on scientific research
pertaining to business of assessee is allowed as
deduction (Subject to certain conditions).
research is allowed as deduction.
Expenditure on scientific research within 3
years before commencement of business (in
the nature of purchase of materials and
salary of employees other than perquisite) is
allowed as deduction in the year of
commencement of business to the extent
certified by prescribed authority.
All assessee
35(1)(ii)
Contribution to approved research association,
university, college or other institution to be
used for scientific research shall be allowed as
deduction (Subject to certain conditions)
university, college, or other institution is
allowed as deduction.
150% of sum paid to such association,
university, college or other institution is
allowed as deduction (applicable from AY
2018-19)
Note:- From the AY beginning on or after
the 1st day of April, 2021, the deduction
shall be equal to the sum so paid.
All assessee
35(1)(iia)
Contribution to an approved company
registered in India to be used for the purpose of
scientific research is allowed as deduction
125% of sum paid to the company is
allowed as deduction Entire sum paid to the
company is allowed as deduction
(applicable from AY 2018-19)
All assessee
35(1)(iii)
Contribution to approved research association,
university, college or other institution with
objects of undertaking statistical research or
research in social sciences shall be allowed as
125% of sum paid to such association,
university, college, or other institution is
allowed as deduction
Entire sum paid to such association,
university, college or other institution is
2018-19)
All assessee
35(1)(iv)
read with
35(2)
Capital expenditure incurred during the year on
scientific research relating to the business
carried on by the assessee is allowed as
Entire capital expenditure incurred on
scientific research is allowed as deduction.
Capital expenditure incurred within 3 years
before commencement of business is
allowed as deduction in the year of
commencement of business.
Note:
i. Capital expenditure excludes land and any
interest in land;
ii. No depreciation shall be allowed on such
assets.
All assessee
35(2AA)
Payment to a National Laboratory or University
or an Indian Institute of Technology or a
specified person is allowed as deduction.
The payment should be made with the
specified direction that the sum shall be used in
a scientific research undertaken under an
approved programme.
200% of payment is allowed as deduction
(Subject to certain conditions).
150% of payment is allowed as deduction
(applicable from AY 2018-19)
Note:-
From the A.Y. beginning on or after the 1st
day of April, 2021, the deduction shall be
equal to the sum so paid.
All assessee

35(2AB)
Any expenditure incurred by a company on
scientific research (including capital
expenditure other than on land and building)
on in-house scientific research and
development facilities as approved by the
prescribed authorities shall be allowed as
deduction (Subject to certain conditions).
Expenditure on scientific research in relation to
Drug and Pharmaceuticals shall include
expenses incurred on clinical trials, obtaining
approvals from authorities and for filing an
application for patent.
150% of expenditure so incurred shall be
2018-19)
Note:
i. Company should enter into an agreement
with the prescribed authority for co-
operation in such research and development
and fulfils conditions with regard to
maintenance of accounts and audit thereof
and furnishing of reports in such manner as
may be prescribed.
ii. From the A.Y. beginning on or after the
1st day of April, 2021, the deduction shall
be equal to the expend the so incurred.
Company engaged in
business of bio-
technology or in any
business of
manufacturing or
production of eligible
articles or things
35ABA
Capital expenditure incurred and actually paid
for acquiring any right to use spectrum for
telecommunication services shall be allowed as
deduction over the useful life of the spectrum.
Deduction will be available in equal
installments starting from the year in which
actual payment is made and ending in the
year in which spectrum comes to an end.
Note:
If spectrum fee is actually paid before the
commencement of business, the deduction
will be available from the year in which
business is commenced.
All Assessee
engaged in
telecommunication
services
35ABB
Capital expenditure incurred for acquiring any
license or right to operate telecommunication
services shall be allowed as deduction over the
term of the license.
Deduction would be allowed in equal
installments starting from the year in which
such payment has been made and ending in
the year in which license comes to an end.
All Assessee
engaged in
telecommunication
services
35AC
Expenditure by way of payment of any sum to
a public sector company/local
authority/approved association or institution
for carrying out any eligible scheme or project
Actual payment made to prescribed entities.
However, a company can also claim
deduction for expenditure incurred by it
directly on eligible projects.
Note:-
No deduction in any A.Y. commencing on
or after the 1st day of April, 2018
All assessee.
However, deduction
for direct expenditure
is allowed only to a
company
35AD
Deduction in respect of `expenditure on
specified businesses, as under:
a) Setting up and operating a cold chain facility
b) Setting up and operating a warehousing
facility for storage of agricultural produce
c) Building and operating, anywhere in India, a
hospital with at least 100 beds for patients
d) Developing and building a housing project
under a notified scheme for affordable housing
e) Production of fertilizer in India
deduction provided the specified business
has commenced its operation on or after 01-
04-2012.
100% of capital expenditure will be allowed
to be deducted from the assessment year
2018-19 onwards
Note: If such specified businesses
commence operations on or before 31-03-
2012 but after prescribed dates, deduction
shall be limited to 100% of capital
expenditure.
All assessee

35AD
specified businesses, as under:
a) 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;
b) Building and operating, anywhere in India, a
hotel of two-star or above category;
c) Developing and building a housing project
under a scheme for slum redevelopment or
rehabilitation
d) Setting up and operating an inland container
depot or a container freight station
e) Bee-keeping and production of honey and
beeswax
f) Setting up and operating a warehousing
facility for storage of sugar
g) Laying and operating a slurry pipeline for
the transportation of iron ore
h) Setting up and operating a semi-conductor
wafer fabrication manufacturing unit
i) Developing or maintaining and operating,
or developing, maintaining and operating a
new infrastructure facility
100% of capital expenditure incurred for
the purpose of business is allowed as
deduction provided specified businesses
commence operations on or after the
prescribed dates.
All assessee
Note: Such deduction
is available to Indian
company in case of
following business,
namely;-
i) Business of laying
and operating a cross-
country natural gas
or crude or petroleum
oil pipeline network
ii) Developing or
maintaining and
operating or
developing,
maintaining and
operating a new
infrastructure facility.
35CCA
Payment to following Funds are allowed as
deduction:
a) National Fund for Rural Development; and
b) Notified National Urban Poverty Eradication
Fund
Actual payment to specified funds
All assessee
35CCC
incurred on notified agricultural extension
project for the purpose of training, educating
and guiding the farmers shall be allowed as
deduction, provided the expenditure to be
incurred is expected to be more than Rs. 25
lakhs (Subject to certain conditions).
150% of the expenditure (Subject to certain
conditions)
Note:-
100% deduction shall be allowed from the
1st day of April, 2021
All assessee
35CCD Expenditure incurred by a company (not being
expenditure in the nature of cost of any land or
building) on any notified skill development
project is allowed as deduction (Subject to
certain conditions).
conditions)
Note:
(i) No deduction shall be allowed to a
company engaged in manufacturing
alcoholic spirits or tobacco products.
(ii) 100% deduction shall be allowed for the
AY beginning on or after the 1st day of
April, 2021
Company engaged in
manufacturing of any
article or providing
specified services

35D
An Indian company can amortize certain
preliminary expenses
(Subject to certain conditions and nature of
expenditures)
project or capital employed, whichever is
more) Qualifying preliminary expenditure is
allowable in each of 5 successive years
beginning with the previous year in which
the extension of undertaking is completed
or the new unit commences production or
operation.
Indian Company
35D
Non-corporate taxpayers can amortize certain
preliminary expenses
(Subject to certain conditions and nature of
expenditures)
project) Qualifying preliminary expenditure
is allowable in each of 5 successive years
beginning with the previous year in which
the extension of undertaking is completed
or the new unit commences production or
operation.
Resident Non-
corporate assessees
35DD
Expenditure incurred after 31-3-1999 in
respect of amalgamation or demerger can be
amortized by an Indian Company
Expenditure is allowed as deduction in five
equal installments in 5 previous years
starting with the year in which
amalgamation or demerger took place.
Indian Company
35DDA Expenditure incurred under Voluntary
Retirement Scheme is allowed as deduction.
Each payment under VRS is allowed as
deduction in five equal installments in 5
previous years.
All Assessee

35E
persons on prospecting for the minerals or on
the
development of mine or other natural deposit
of such minerals shall be allowed as deduction
Eligible expenditure is allowed as deduction
in ten equal installments in 10 previous
years.
Resident persons
36(1)(i)
Insurance premium covering risk of damage or
destruction of stocks/stores Actual expenditure incurred
All Assessee
36(1)(ia)
owned by a member of co-operative society
engaged in supplying milk to federal milk co-
operative society Actual expenditure incurred
All Assessee
36(1)(ib)
other than cash, to insure employee’s health
under (a) scheme framed by GIC of India and
approved by Central Government; or (b)
scheme framed by any other insurer and
approved by IRDA Actual expenditure incurred
All Assessee
36(1)(ii)
would not have been payable as profit or
dividend if it had not been paid as bonus or
commission Actual expenditure incurred
All Assessee
36(1)(iii)
Interest on borrowed capital (Subject to certain
conditions)
for the purposes of the business or
profession shall be allowed as deduction.
However, if capital is borrowed for
acquiring an asset, then interest for any
period beginning from the date on which
capital was borrowed till the date on which
asset was first put to use, shall not be
All Assessee
36(1)(iiia
)
Discount on Zero Coupon Bonds (Subject to
certain conditions)
Pro-rata amount of discount on zero coupon
bonds shall be allowed as deduction over
the life of such bond
Specified Assessee

36(1)(iv)
Employer’s contributions to recognized
provident fund and approved superannuation
fund [subject to certain limits and conditions] Actual expenditure incurred
All Assessee
36(1)(iva
)
Any sum paid by assessee-employer by way of
contribution towards a pension scheme, as
referred to in section 80CCD, on account of an
employee.
Actual expenditure not exceeding 10% of
the salary* of the employee
*Salary = Basic Pay + Dearness Allowance
(to the extent it forms part of retirement
benefits)+ turnover based commission
All Assessee –
Employer
36(1)(v)
gratuity fund created exclusively for the benefit
of employees under an irrevocable trust shall
be allowed as deduction (Subject to certain
conditions).
Actual expenditure not exceeding 8.33% of
salary of each employee
All Assessee –
Employer
36(1)(va)
Deposit of employee’s contributions in their
respective provident fund or superannuation
fund or any fund set up under Employees’
State Insurance Act, 1948
Actual amount received if credited to the
employee’s account in relevant fund on or
before due date specified under relevant Act
All Assessee –
Employer
36(1)(vi)
Allowance in respect of animals which have
died or become permanently useless (Subject
to certain conditions)
Actual cost of acquisition of such animals
less realization on sale of carcasses of
animals
All Assessee
36(1)(vii)
Bad debts which have been written off as
irrecoverable (Subject to certain conditions)
off from books of accounts Note:-
However, if amount of debt or part thereof
has been taken into account in computing
the income of assessee on basis of income
computation and disclosure standards
notified under Section 145(2) without
recording the same in accounts then, such
debt shall be allowed in the previous year in
which such debt or part therof becomes
irrecoverable. It shall be deemed that such
debt or part thereof has been written off as
irrecoverable in the accounts.
All Assessee

36(1)(vii
a)
Deductions for provision for bad and doubtful
debts created by certain banks, financial
institutions and non-banking financial
company (Subject to certain conditions).
limited to that amount of bad debts which
exceed the provision for bad and doubtful
debts created under section 36(1)(viia).
Deductions for provision for bad and
doubtful debts shall be limited to following:
(a) In case of scheduled and non-scheduled
banks: Sum not exceeding aggregate of
7.5% of total income (before any
deductions under this provision and Chapter
VI-A) and 10% of aggregate average
advances made by rural branches of such
bank;
(b) In case of Financial Institutions: Up to
5% of total income before any deductions
under this provision and Chapter VI-A; and
(c) In case of foreign banks: Up to 5% of
total income before any deductions under
this provision and Chapter VI-A
(d) In case of non-banking financial
company: Up to 5% of total income before
any deduction under this provision and
chapter VI-A
Banks, Public
Financial
Institutions, Non-
banking financial
company, State
Financial
Corporation, State
Industrial Investment
Corporations
36(1)(viii
)
Deduction under this provisions is allowed to
following entities in respect of amount
transferred to special reserve account:
a) Financial Corporation which is engaged in
providing long-term finance for industrial or
agricultural development or development of
infrastructure facility in India; or
b) Public company registered in India with the
main object of carrying on the business of
providing long-term finance for construction or
purchase of residential houses in India.
[Subject to certain conditions]
Deduction shall be allowed to the extent of
lower of following:
a) Amounts transferred to special reserve
account
b) 20% of profits derived from eligible
business
c) 200% of paid-up capital and general
reserve (on last day of previous year) minus
balance in special reserve account (on first
day of previous year)
Specified financial
corporations or
public company
36(1)(ix)
Expenditure incurred by a company on
promotion of family planning amongst
employees is allowed as deduction
1) Entire revenue expenditure is allowed as
deduction
2) Capital expenditure shall be allowed as
deduction in five equal installment in five
years
Company
36(1)(xii)
Any expenditure incurred by a notified
corporation or body corporate constituted or
established by a Central, State or Provincial
Act, for the objects and purposes authorized by
the respective Act is allowed as deduction
Actual expenditure incurred (not being in
the nature of capital expenditure)
Notified corporations
36(1)(xiv
)
for micro and small industries is allowed as
deduction Actual expenditure incurred
Public Financial
Institutions

36(1)(xv)
Securities Transaction Tax paid
corresponding income is included as
income under the head profits and gains of
business or profession
All Assessee
36(1)(xvi
)
paid by an assessee in respect of taxable
commodities transactions entered into in the
course of his business during the previous year
is allowed as deduction
Actual expenditure incurred if
corresponding income is included as
income under the head profits and gains of
business or profession
All Assessee
36(1)(xvi
i)
Amount of expenditure incurred by a co-
operative society engaged in the business of
manufacture of sugar for purchase of
sugarcane.
Deduction would be allowed the extent of
lower of following:
a) Actual purchase price of sugarcane, or
b) Price of sugarcane fixed or approved by
the Government
Co-operative society
engaged in the
business of
manufacture of sugar
37(1)
capital expenditure and expenditure mentioned
in sections 30 to 36] laid out wholly and
exclusively for purposes of business or
profession Actual expenditure incurred
All Assessee
37(2B)
Expenditure on advertisement in any souvenir,
brochure etc. published by a political party
shall not be allowed as deduction Not Allowed
All Assessee

Section Description
40(a)(i)
Any sum (other than salary) payable outside India or to a non-resident, which is chargeable
to tax in India in the hands of the recipient, shall not be allowed to be deducted if it was
paid without deduction of tax at source or if tax was deducted but not deposited with the
Central Government till the due date of filing of return.
However, if tax is deducted or deposited in subsequent year, as the case may be, the
expenditure shall be allowed as deduction in that year.
40(a)(ia)
Any sum payable to a resident, which is subject to deduction of tax at source, would attract
30% disallowance if it was paid without deduction of tax at source or if tax was deducted
but not deposited with the Central Government till the due date of filing of return.
However, where in respect of any such sum, tax is deducted or deposited in subsequent
year, as the case may be, the expenditure so disallowed shall be allowed as deduction in
that year.
40(a)(ib)
Any sum paid or payable to a non-resident which is subject to a deduction of Equalisation
levy would attract disallowance if such sum was paid without deduction of such levy or if it
was deducted but not deposited with the Central Government till the due date of filing of
return.
However, where in respect of any such sum, Equalisation levy is deducted or deposited in
subsequent year, as the case may be, the expenditure so disallowed shall be allowed as
deduction in that year.
Note: This provision has beeninserted by the Finance Act, 2016, w.e.f. 1-6-2016
40(a)(ii)
Any sum paid on account of any rate or tax levied on the profits and gains of business or
profession is not deductible
40(a)(iia) Wealth-tax or any other tax of similar nature shall not be deductible
40(a)(iib)
Amount paid by way of royalty, license fee, service fee, privilege fee, service charge or any
other fee or charge, by whatever name called, which is levied exclusively on (or any
amount appropriated) a State Government undertaking by the State Government shall not
be deductible.
40(a)(iii)
Salaries payable outside India, or in India to a non-resident, on which tax has not been
paid/deducted at source is not deductible.
40(a)(iv)
Payments to provident fund or other funds for employees’ benefit shall not be deductible if
no effective arrangements have been made to ensure deduction of at source from payments
made from such funds to employees which shall be chargeable to tax as ‘salaries’.
40(a)(v)
Tax paid by the employer on non-monetary perquisites provided to employees is not
deductible if the tax so paid is not taxable in the hands of employees by virtue of Section
10(10CC).
Amount expressly disallowed under the Act

40(b)
Following sum paid by a partnership firm to its partners shall not be allowed to be
deducted:
1) Salary, bonus, commission or remuneration paid to non-working partners;
2) Remuneration or interest paid to the partners is not in accordance with the terms of the
partnership deed;
3) Remuneration or interest to partners is in accordance with the terms of the partnership
deed but relates to any period prior to the date of the deed;
4) Interest to partners is in accordance with the terms of the partnership deed but exceeds
12% per annum;
5) Remuneration to partners is in accordance with the terms of the partnership deed but
exceeds the following permissible limit:
a) On first Rs. 3 Lakhs of book profit or in case of loss – Rs. 1,50,000 or 90% of book
profit, whichever is more;
b) On the balance of the book profit – 60% of book profit
40(ba)
Interest, salary, bonus, commission or remuneration paid by Association of Persons or
Body of Individuals to its members shall not be allowed as deduction (Subject to certain
conditions).
40A(2)
Any payment to related parties (relatives, directors, partner, member of HUF/AOP, person
who has substantial interest in business of the taxpayer, etc.) in respect of any expenditure
shall be disallowed to the extent such expenditure is considered excessive or unreasonable
by the Assessing Officer having regard to its fair market value.
40A(3)/(3A)
An expenditure, which is otherwise deductible under any provision of the Act, shall be
disallowed if payment thereof has been made otherwise than by account payee cheque/bank
draft and it exceeds Rs. 20,000 (Rs. 35,000 in case of payment made for plying, hiring or
leasing goods carriages) in a day (Subject to certain conditions and exceptions).
40A(7)
Provision for payment of gratuity to employees, other than a provision for contribution to
approved gratuity fund, shall not be allowed as deduction (Subject to specified conditions).
Gratuity actually paid (or payable) during the year and contribution to approved gratuity
fund is allowed as deduction.
40A(9)
Any sum paid as an employer for setting up or as contribution to any fund, trust, company,
AOP, BOI, Society or other institution (other than recognized provident fund, approved
superannuation fund, approved gratuity fund or pension scheme referred to in section
80CCD) shall not be allowed as deduction deduction if such contribution or payment is not
required by any law.

Section Particulars
43B(a) Any Tax, Duty, Cess or Fees under any Law
43B(b)
Any contribution to Provident Fund/Superannuation Fund/Gratuity Fund/Welfare
Fund
43B(c)
Bonus or Commission paid to employees which would not have been payable as
profit or dividend
43B(d)
Interest on Loan or Borrowings from Public Financial Institutions/State Financial
Institutions etc.
43B(e) Interest on loan or advance from bank
43B(f) Payment of Leave Encashment
43B(g) Sum payable to the Indian Railways for the use of railway assets.
Expenses deductible on actual payment basis
The following expenses shall be allowed as deduction if such expenditure are actually paid on or
before the due date of filing of return of income:-

Section Particulars Provision
42
Special allowance in case of business of
prospecting etc. for mineral oil (including
petroleum and natural gas) in relation to which
the Central Government has entered into an
agreement with the taxpayer for the association
or participation (Subject to certain conditions).
Following deductions shall be allowed as deductions:
a) Any infructuous exploration expenditure
b) Expenditure on drilling or exploration activities or
services, etc.
c) Allowance in relation to depletion of mineral oil, etc.
43A
Special provisions consequential to changes in
rate of exchange of Currency (Subject to certain
conditions).
Any increase or decrease in the liability incurred in
foreign currency (to acquire a capital asset) pursuant to
fluctuation in the foreign exchange rates shall be
adjusted with the actual cost of such asset only on
actual payment of the liability.
43C
Acquisition of any asset (except stock-in-trade)
by the taxpayer in the scheme of amalgamation
or by way of gift, will etc.
Cost of acquisition of any asset (except stock-in-trade)
acquired by the taxpayer in the scheme of
amalgamation or by way of gift, will etc. from the
transferor (who sold it as stock-in-trade) shall be the
cost of acquisition in the hands of transferor as
increased by cost of any improvement made
Other provisions

Section Particulars
Limit of exemption or
Computation of
income/deduction
Available to
44B read
with 172
Income from shipping
business shall be computed
on presumptive basis (Subject
to certain conditions).
7.5% of specified sum shall be
deemed to be the presumptive
income
Non-resident engaged in shipping
business
44BB
Income of a non-resident
engaged in the business of
providing services or
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
shall be computed on
presumptive basis (Subject to
certain conditions).
10% of specified sum shall be
income
Non-resident engaged in activities
connected with exploration of
mineral oils
44BBA
Income of a non-resident
operation of aircraft shall be
computed on presumptive
basis (Subject to certain
conditions).
income
Non-resident engaged in the business
of operating of aircraft
44BBB
Income of a foreign company
civil construction or the
business of erection of plant
or machinery or testing or
commissioning thereof, in
connection with turnkey
power projects shall be
computed on presumptive
basis (Subject to certain
conditions).
income
Foreign Company
Provisions applicable to Non-Resident/Foreign Company

44C
Deduction for Head office
Expenditure (Subject to
certain conditions and limits)
Deduction for head-office
expenditure shall be limited to
lower of following:
a) 5% of adjusted total income*
b) Head office exp. as
attributable to business or
profession of taxpayer in India
* In case adjusted total income
of the assessee is a loss,
adjusted total income shall be
substituted by average adjusted
total income
** Adjusted total income or
average adjusted total income
shall be computed after
prescribed adjustments i.e.
unabsorbed depreciations, carry
forward losses, etc.
Non-resident
44DA
Deduction of expenditure
from royalty and FTS
received under an agreement
made after 31-03-2003 which
is effectively connected to the
PE of non-resident in India
(Subject to certain
conditions)
Expenditure incurred wholly
and exclusively for the business
of PE or fixed place of
profession in India shall be
Non-resident

Section Particulars Threshold
44AA
account – Specified Profession
(Subject to certain conditions and
circumstances)
Persons carrying on specified profession
and their gross receipts exceed Rs. 1,50,000
in all the three years immediately preceding
the previous year
44AA
Compulsory maintenance of books of account –
Other business or profession
(Subject to certain conditions and
circumstances)
1) If total sales, turnover or gross receipts
exceeds Rs. 10,00,000 in any one of the
three years immediately preceding the
previous year; or
2) If income from business or profession
exceeds Rs. 1,20,000 in any one of the three
years immediately preceding the previous
year
44AB
Compulsory Audit of books of accounts (Subject
to certain conditions and circumstances)
1) If total sales, turnover or gross receipts
exceeds Rs. 1 Crore in any previous year, in
case of business; or
2) If gross receipts exceeds Rs. 50 Lakhs in
any previous year, in case of profession.
Section Nature of business Presumptive income
44AD
Income from eligible business can be computed
on presumptive basis if turnover of such
business does not exceed two crore rupees.
Note: If an assessee opts out of the presumptive
taxation scheme, after a specified period, he
cannot choose to revert back to the presumptive
taxation scheme for a period of five assessment
years thereafter. [Section 44AD(4)]
(Subject to conditions)
Presumptive income of eligible business
shall be 8% of gross receipt or total
turnover.
44ADA
Income from eligible profession u/s 44AA(1)
can be computed on presumptive basis if the
total gross receipts from such profession do not
exceed fifty lakh rupees in a previous year.
(Subject to conditions) Presumptive income of such profession
shall be 50% of total gross receipt.
44AE
Presumptive income of business of plying,
hiring or leasing of goods carriage if taxpayer
does not own more than 10 goods carriage
Rs. 7,500 for every month during which the
goods carriage is owned by the taxpayer
Accounts and Audit
Presumptive Taxation

 SOME IMPORTANT FAQs WITH CASE LAWS FROM INCOME FROM
PROFITS AND GAINS OF BUSINESS OR PROFESSION :-
1. Can the assessee treat shares held in subsidiary company, which is ordered to be
wound up, as trading loss?
Relevant Case Law - CIT v. H. P. Mineral and Industrial Development Corporation Ltd. (2008)
305 ITR 111 (HP)
Relevant Section - 28
 One of the assessee’s subsidiary companies was ordered to be wound up and the assessee
decided to write off the value of the shares held by it in the subsidiary company.
 The lower authorities decided in favour of the assessee holding that there was no question
of selling off the shares as the subsidiary company had gone into liquidation.
 The High Court held that once a company had been ordered to be wound up, there was no
question of any party dealing in the shares of that company.
 The Tribunal had come to a finding that the shares were stock-in-trade and had therefore
allowed the loss. The loss had to be treated as a trading loss. The mere fact that the shares
were not sold was of no significance since in fact the shares could not have been sold and
had become worthless.
2. Whether the amount transferred to the reserve fund account as per the provisions of section 67
of the Gujarat Co-operative Societies Act, 1962, was diversion of income at source by overriding
title or could such transfer be treated as business expenditure
deductible either under section 28 or section 37?
Relevant Case Law - CIT v. Mehsana District Co-op. Milk Producers’ Union Ltd. (2008) 307
ITR 83 (Guj.)
 The assessee contended that under sub-section (2) of section 67 of the Gujarat Co-
operative Societies Act, 1962, at least one-fourth of the net profits of the society were
required to be carried to the reserve fund every year, and hence there was a diversion at
source by virtue of the provisions of section 67 which operates as an overriding title.
 Hence, it was submitted that the amount transferred to the reserve fund could not be
charged as income liable to tax under the Act. Alternatively, it was pleaded that the
amount of profits transferred to the reserve fund would constitute a charge on the taxable
income under the provisions of section 28 of the Income-tax Act, 1961, or an expenditure

having the characteristics of business expenditure under section 37. The Assessing
Officer rejected the contention and this was upheld by the Tribunal.
 The High Court held that it was only in the event the society did not choose to use the
reserve fund for the business of the society that the question about investing the reserve
fund in the specified category of investments and thereafter utilizing the same for the
objects specified by the State Government could arise.
 Hence, not only was there no diversion of income by overriding title but in fact there was
no outgoing of funds from the domain of the assessee society. In fact, the profits at the
specified percentage were set apart so as to be available to the society for use in the
business of the society at a later point of time.
 Once the society was in a position to use the funds lying in the reserve fund for the
business of the society as and when the society so chose, there could be no question of
keeping out such profits from the purview of taxation.
 The Tribunal was right in law in holding that the amount transferred to the reserve fund
account as per the provisions of section 67 of the Gujarat Co-operative Societies Act,
1962, was not diversion of income at source by overriding title nor could such transfer be
treated as business expenditure deductible either under section 28 or section 37.
3. Whether the amount received by the assessee under a lease agreement is income from other
sources or business income?
Relevant Case Law - East West Hotels Ltd. v. DCIT (2009) 309 ITR 149 (Kar.)
 The assessee was engaged in the hotel business activities. The assessee by an agreement
with IHC gave one of its hotels on lease for an initial period of 33 years with an option to
renew for a further period of 33 years.
 The assessee claimed that the amount received from IHC had to be treated as its business
income. The claim was rejected by the Assessing Officer on the ground that the assessee
was not getting any business income as the hotel had been leased out by the assessee to
IHC and any amount received by the assessee from such company had to be treated as
income from other sources and not business income.
 The Commissioner (Appeals) as well as the Tribunal held that the income received by the
assessee from such hotel building was income from other sources.
 The High Court held that the clauses in the agreement were more in the nature of a lease
deed and not a licence given for a particular period with no intention to resume its
business of hotel in the premises.

 It could not be said that the assessee had been managing the hotel through IHC.
Therefore, the amount received from IHC had to be treated as income from other sources
and not as business income.
4. Whether the swapping premium is profit derived from the business of providing long term
finance in terms of section 36(1)(viii) of the Income-tax Act, 1961 ?
Relevant Case Law - Rural Electrification Corporation Ltd., In re (2009) 308 ITR 321 (AAR)
Relevant Section: 36(1)(viii)
 The main object of the applicant, a public sector undertaking, was to provide long-term
finance, primarily to State Electricity Boards, for the purpose of transmission, distribution
and generation of electricity to enable industrial, agricultural and infrastructure
development.
 The applicant was filing income-tax returns right from the beginning and the Department
had all along, in the past, allowed deduction under section 36(1)(viii) of the Income-tax
Act, 1961, in respect of the special reserve created and maintained for providing long-
term finance for industrial or agricultural development or development of infrastructure.
 For the assessment year 2004-05, the applicant credited Rs.170.85 crores as “swapping
premium” received and claimed deduction thereon under section 36(1)(viii). “Swapping
premium” was a scheme under which long-term finance given at a higher percentage of
interest was converted to a lower rate of interest.
 The applicant itself had declared the swapping premium receipt in its balance-sheet as
“Other income” and not income from lending operations. The Assessing Officer held that
the applicant forfeited the claim for allowance of deduction under section 36(1)(viii) in
respect of the “swapping premium”.
 The Commissioner (Appeals) agreed with the Assessing Officer. The applicant appealed
to the Appellate Tribunal but withdrew the appeal. Meanwhile, the applicant obtained
permission of the Committee on Disputes to pursue the matter before the Authority.
 The Authority ruled:
(i) That the applicant was an eligible entity, i.e., a financial corporation as laid
down in section 36(1)(viii).
(ii) That the applicant was engaged in the business of providing long-term finance
to its clients for rural electrification which paved the way for industrial,
agricultural and infrastructural development. The availability of electricity
contributed significantly to the overall development of the country including that

of industry, agriculture and infrastructure. The provision of electricity was
essential for modernization and growth of agriculture and also catered to the
requirements of industry including small and medium industries, agro-industries,
Khadi and village industries, etc. The applicant had been providing finance for
industrial and agricultural development and, keeping in view these
very goals, the Government of India had granted approval to the applicant for
deduction under section 36(1)(viii). The applicant could be said to be engaged in
providing longterm finance for industrial and agricultural development in India.
(iii) That the long-term loan financed by the applicant to its clients in the
beginning had not been tampered with on rescheduling of the interest and no fresh
loan agreements had also been drawn.
(iv) That clause (e) of the Explanation to section 36(1)(viii) defined long-term
finance as “any loan or advance where the terms under which moneys are loaned
or advanced provide for repayment along with interest thereon during a period of
not less than five years”. In this case, the loans had been advanced in the
beginning for five years and those loan amounts had not undergone any change,
so the period of five years had to be counted from the date of advancing the initial
loans and not from the date of rescheduling the interest rates.
(v) That the “swapping premium” was nothing but discounted interest and had
“originated” in the long-term finance initially advanced. The premium was
actually traced to the original source and was not a step removed from the
business of providing long-term finance. No fresh agreement had been entered
into for advancing long-term financing and the one-time measure for rescheduling
the interest had been actuated by business expediency. The swapping premium
was simply a compensation received for agreeing to a lesser amount as against a
higher fixed rate of interest initially fixed. The business of providing long-term
finance was the immediate and effective source of the swapping premium
received.
(vi) That the swapping premium could not be termed as compensation for breach
of contract because neither party had breached the contract. The disclosure of the
swapping premium in the balance-sheet as “Other income” instead of business
income was also immaterial since entries in the books of account are not
determinative of the true character of a receipt.
(vii) That, therefore, the applicant was entitled to deduction under section 36(1)
(viii) in respect of the swapping premium received.
5. Whether the payments made by the assessee to its employees under the nomenclature ‘Good
work reward’ constitute bonus within the meaning of section 36(1)(ii) of the Income-tax Act,
1961 or were allowable as normal business expenditure under section 37 ?

Relevant Case Law - Shriram Pistons and Rings Ltd. v. CIT (2008) 307 ITR 363 (Del.)
 The “good work reward” that was given by the assessee to some employees on the
recommendation of senior officers of the assessee did not fall in any of the categories of
bonus specified under the industrial law.
 There was nothing to suggest that the good work reward given by the assessee to its
employees had any relation to the profits that the assessee may or may not make. The
reward had relation to the good work done by the employee during the course of his
employment and at the end of the financial year on the recommendation of a senior
officer of the assessee, the reward was given to the employee.
 Consequently, the “good work reward” could not fall within the ambit of section 36(1)(ii)
of the Income-tax Act, 1961. The “good work” reward was allowable as business
expenditure under section 37(1) of the Act.
6. Whether the Tribunal was justified in deleting the addition of an amount represented rate
difference payment in the purchase of milk paid by the assessee even though the said payment
was paid at the end of the previous year?
Relevant Case Law - CIT v. Solapur Dist. Co-Op. Milk Producers and Process Union Ltd. (2009)
315 ITR 304 (Bom.)
 The assessee-societies were federal milk societies and their members were primary milk
cooperative societies. The business of the assessee was to purchase milk from its
members and other producers of milk at the rate, i.e., similar to both the members and
outside milk producers and sell the milk to various parties.
 The rate of purchase price was fixed by the board of the assessee-societies. The purchase
price was linked to the fat content of milk and also varied according to seasons. For
instance, the rate for purchase of milk in the lean season was different from the flush
seasons.
 The assessee-societies fixed the rate of processing of milk at the beginning of the year on
the basis of the price declared by the Government of Maharashtra and the price which
other buyers paid to the vendors. These rates were revised from time to time. It was made
always clear that the rates were provisional and the final milk rate difference was
determined in the month of March every year and the difference was paid subsequently in
the following year.

 The primary milk society also in turn made payment of the final rate difference to the
individual milk producers around Diwali. The assessees claimed deduction of the final
rate difference. The Assessing Officer refused to exclude the final rate difference paid
from the total amount paid by the assessee. The Commissioner (Appeals) upheld the
order. The Tribunal allowed the appeal and allowed deductions of the final rate.
 The High Court held that the amount to be paid was not out of the profits ascertained at
the annual general meeting. It was not paid to all shareholders. The amount which was
the subject-matter was paid to members who supplied milk and in some case also to
nonmembers.
 The payment was for the quantity of milk supplied and in terms of the quality supplied.
The commercial expediency for payment of this price was the market conditions and the
need to procure more milk from the members and non-members to the assessee.
 Therefore, the amount paid could not be said to be dividend to the members or
shareholders or payment in the form of bonus as bonus also had to be paid from the
accrued profits. It was deductible.
7. Whether the expenses incurred by the assessee for promotion films, slides,
advertisement films is capital expenditure?
Relevant Case Law - CIT v. Geoffrey Manners and Co. Ltd. (2009) 315 ITR 134 (Bom.)
 The assessee incurred expenditure on film production by way of advertisement for the
marketing of products manufactured by it. The Assessing Officer disallowed the expenses
incurred by the assessee for promotion films, slides, advertisement films and treated it as
capital expenditure.
 The Commissioner (Appeals) held that the films were in the form of advertisement whose
life term could not be ascertained. Therefore, they could not be held as capital
expenditure. The Tribunal upheld the order of the Commissioner (Appeals).
 The High Court held that if the expenditure is in respect of an ongoing business of the
assessee and there is no enduring benefit it can be treated as revenue expenditure. If the
expenditure is in respect of business which is yet to commence then it cannot be treated
as revenue expenditure since the expenditure is on a product yet to be marketed.
 Hence, the expenditure incurred in respect of promoting ongoing products of the assessee
was revenue expenditure.

8. Whether the expenditure incurred by the assessee in the machinery repairs could be treated as
revenue expenditure though this related to the cost of motors and other
items resulting in an enduring benefit to the assessee and was in the nature of capital
expenditure?
Relevant Case Law - CIT v. Hero Cycles P. Ltd (2009) 311 ITR 349 (P&H)
 The assessee claimed expenditure of Rs. 73,180 on purchase of motors and certain other
items of machinery. The Assessing Officer rejected the claim for treating the amount as
revenue expenditure on the ground that the items purchased by the amount were not spare
parts but independent items and the amount had, thus, to be treated as capital expenditure.
 On appeal, the plea of the assessee that most of the items purchased were electric motors
for replacement of existing machinery, was upheld. The Tribunal affirmed the order and
held that occasional replacements were necessary having regard to the machinery
installed.
 The High court held that the Tribunal was right in law in allowing expenditure of
Rs.73,180 shown by the assessee in the machinery repairs account as revenue
expenditure.
9. Whether the fine paid for belated payment of excise duty is a allowable business
expenditure?
Relevant Case Law - CIT v. Hoshiari Lal Kewal Krishan (2009) 311 ITR 336 (P&H)
 The assessee claimed deduction of Rs. 31,433 paid as fine for belated payment of the
excise duty instalment. This was disallowed by the Assessing Officer as well as the
appellate authority but the Tribunal allowed it.
 The Supreme Court in Prakash Cotton Mills P. Ltd. v. CIT [1993] 201 ITR 684, observed
that whenever any statutory impost paid by an assessee by way of damages or penalty or
interest is claimed as an allowable expenditure under section 37(1) of the Income-tax Act,
the assessing authority is required to examine the scheme of the provisions of the relevant
statute providing for payment of such impost notwithstanding the nomenclature of the
impost as given by the statute, to find whether it is compensatory or penal in nature.
 The authority has to allow deduction under section 37(1) of the Income-tax Act, wherever
such examination reveals the concerned impost to be purely compensatory in nature.

 Hence, in the present case, the High Court held that it had been clearly found that though
termed as fine, the payment was not in the nature of punishment but was by way of
compensation. The payment was deductible.
10. Whether section 40(b) of the Income-tax Act, 1961, is applicable to the amount of
salary and bonus paid by the assessee-firm to its partners for their individual service
as against their Hindu undivided family character?
Relevant Case Law - CIT v. Unimax Laboratories (2009) 311 ITR 191 (P&H)
Relevant Section - 40(b)
 The Assessing Officer made an addition under section 40(b) of the Income-tax Act, 1961,
on account of salary and bonus paid by the assessee-firm to its four working partners.
Those partners were partners in their representative capacity as karta of their Hindu
undivided families.
 Since these partners represented their respective Hindu undivided families, they were
treated to be partners for the purpose of disallowance of benefits under section 40(b) of
the Act by the Assessing Officer.
 However, on appeal the addition was deleted on the ground that the salary and bonus
were paid to these persons as individuals and in these circumstances section 40(b) of the
Act had no application.
 The High Court held that the Tribunal was right in allowing the amount of salary and
bonus paid by the firm to partners for services rendered by them on the ground of having
technical qualification and expertise, though they represented their Hindu undivided
families and section 40(b) of the Act was not attracted.
11. Whether the amount written back by the assessee to the credit of its profit and loss account
during the accounting period under consideration constituted income of the assessee-company
under section 41(1) of the Income-tax Act 1961?
Relevant Case Law - Jay Engineering Works Ltd. v. CIT (2009) 311 ITR 299 (Del.)
Relevant Section: 41(1)
 The assessee had written back in its accounts unclaimed balances totalling Rs.1,16,240.
The Inspecting Assistant Commissioner added back this amount to the income of the
assessee. This was upheld by the Commissioner (Appeals) as well the Tribunal.

 The High Court held that the amounts were not statutory liabilities but contractual
liabilities. These amounts were unilaterally written off by the assessee. Therefore, the
unclaimed liability written off by the assessee was taxable as income.
12. Whether the amount transferred to profit and loss account in case of waiver of loan taken by
assessee for business purposes assessable as business income under
section 41(1) of the Income-tax Act, 1961?
Relevant Case Law - Solid Containers Ltd. v. DCIT (2009) 308 ITR 417 (Bom.)
Relevant Section: 41(1)
 The assessee had taken a loan for business purposes which was written back and directly
credited to the reserves account, as a result of consent terms arrived at in a suit.
 The assessee claimed this amount as capital receipt, even though it had offered the
interest on the said loan as its income by crediting the same to its profit and loss account.
 The Assessing Officer added the amount to the total income of the assessee as its income
and this was upheld by the Tribunal.
 The High Court held that it was a loan taken for trading activity and ultimately, upon
waiver the amount was retained in the business by the assessee. The amount had become
the assessee’s income and was assessable.
13. Is depreciation under section 32 allowable in respect of emergency spares of plant and
machinery, which though acquired during the previous year, have not been put to use in that
year?
Relevant Case Law - CIT v. Insilco Ltd. (2009) 179 Taxman 55 (Del.)
 On this issue, the Delhi High Court observed that the expression “used for the purposes
of business” appearing in section 32 also takes into account emergency spares, which,
even though ready for use, yet are not consumed or used during the relevant period.
 This is because these spares are specific to a fixed asset, namely plant and machinery,
and form an integral part of the fixed asset. These spares will, in all probability, be
useless once the asset is discarded and will also have to be disposed of. In this sense, the
concept of passive use which applies to standby machinery will also apply to emergency
spares.

 Therefore, once the spares are considered as emergency spares required for plant and
machinery, the assessee would be entitled to capitalize the entire cost of such spares and
claim depreciation thereon.
Note – One of the conditions for claim of depreciation is that the asset must be “used for the
purpose of business or profession”. In the past, courts have held that, in certain
circumstances, an asset can be said to be in use even when it is “kept ready for use”.
For example, depreciation can be claimed by a transport company on spare engines kept in store
in case of need, though they have not actually been used by the company. Hence, in such cases,
the term “use” embraces both active use and passive use. However, such passive use should also
be for business purposes.
14. What is the tax treatment of pre-payment premium paid by the assessee-company to IDBI for
restructuring its debt?
Relevant Case Law - CIT v. Gujarat Guardian Ltd. (2009) 177 Taxman 434 (Del.)
Relevant Section - 43B
 The assessee-company paid pre-payment premium to IDBI during the relevant previous
year for restructuring its debts and reducing the rate of interest. It claimed the full
payment as business expenditure in that year on the reasoning that it was an upfront
payment representing the present value of the differential rate of interest that would have
been due on the loan if the restructuring of loan had not taken place.
 The Assessing Officer and Commissioner (Appeals) were of the view that the premium
has to be amortised over 10 years, and accordingly allowed only 1/10th of the premium
as deduction for the relevant previous year. The Tribunal, however, concurred with the
assessee’s view and held that in terms of section 36(1)(iii) read with section 2(28A), the
deduction for pre-payment premium was allowable.
 The issue under consideration is whether the deduction has to be allowed in one lump-
sum as claimed by the assessee or should the same be deferred over a period of time as
opined by the Assessing Officer and Commissioner (Appeals).
 The Delhi High Court concurred with the Tribunal’s view that the deduction has to be
allowed to the assessee-company in one lump sum according to the provisions of section
43B(d).
 Section 43B(d) provides that any sum payable by the assessee as interest on any loan or
borrowing from any public financial institution shall be allowed to the assessee in the
year in which the same is paid, irrespective of the period or periods in which the liability
to pay such sum is incurred by the assessee according to the method of accounting

regularly followed by the assessee. As there was no dispute that the pre-payment
premium paid represented interest and that it was paid to a public financial institution
 i.e. IDBI, the Court held that, as per the provisions of section 43B(d), the assessee’s claim
for deduction has to be allowed in the year in which the actual payment was made i.e. the
previous year relevant to the assessment year under consideration.
Note – Section 36(1)(iii) provides for deduction of interest paid in respect of capital borrowed
for the purposes of business or profession. Section 2(28A) defines interest to include, inter
alia, any other charge in respect of the moneys borrowed or debt incurred. Section 43B
provides for certain deductions to be allowed only on actual payment. From a combined
reading of these three sections, it can be inferred that –
(i) pre-payment premium represents interest as per section 2(28A);
(ii) such interest is deductible as business expenditure as per section 36(1)(iii);
(iii) such interest is deductible in one lump-sum on actual payment as per section 43B(d).

Introduction
The Central Government recently notified 10 Income Tax Computation & Disclosure Standards
(ICDS) effective financial year 2015–16. This will affect the compliance practice of all taxpayers
following the mercantile system of accounting for computing income chargeable to income tax
under the heads:
 Profits and gains of business or profession or
 Income from other sources
Objective of ICDS
ICDS were developed with a view to minimising tax related disputes by bringing greater
consistency in the application of accounting principles governing the computation of income.
These standards were developed using the old Indian General Audit and Accounting Practices
(GAAP).
Main Features of ICDS
 In case of conflict between the provisions of the Income-Tax Act, 1961 and ICDS, then
the provisions of the Income-Tax Act would prevail.
 No need to maintain separate books of accounts for ICDS. It only for income
computation.
Applicability
 Applicable to all Assesses following Mercantile System of Accounting and chargeable to
tax under the head “Profit and Gains of Business or Profession” OR “Income from Other
Source”
 It is applicable to all assesses
o Irrespective of applicability of Tax Audit
o Irrespective of Turnover
o Irrespective of Status of Individual (AOP, Firm, Resident, Non Resident etc.)
Non Compliance of ICDS
Every assesse is required to implement ICDS and potential impact will be considered by
companies while estimating advance tax liability for FY 15-16, due on 15 June 2015.
Noncompliance of ICDS will result in best judgement assessment by tax authorities, which may
lead to protracted litigations.

List of ICDS
No. Income Computation and Disclosure Standards Corresponding
Accounting Standards
ICDS I Accounting Policies AS-1
ICDS II Valuation of Inventories AS-2
ICDS III Construction Contracts AS-7
ICDS
IV
Revenue Recognition AS-9
ICDS V Tangible Fixed Assets AS-10
ICDS
VI
The Effect of Changes in Foreign Exchange Rates AS-11
ICDS
VII
Government Grants AS-12
ICDS
VIII
Securities AS-13
ICDS
IX
Borrowing Cost AS-16
ICDS X Provisions, Contingent Liabilities and Contingent
Assets
AS-29

What is Depreciation?
Depreciation as per Income Tax Act, 1962 is an allowable deduction from Business or
Profession Income. In short, it has become mandatory to calculate depreciation. The decrease in
value of an asset/property over a period is referred to as Depreciation. If any taxpayer
has acquired and used an asset in their profession or business, he can claim depreciation during
the computation of Profits and Gains of Business/Profession. For depreciation calculation or to
know how to calculate depreciation, Depreciation rates are needed. The depreciation rates as per
Income Tax Act for AY 2016-17, 2017-18 are as follows.
Depreciation Calculation
Depreciation calculation is done by two methods. One is as per the Companies Act i.e. for
companies, the depreciation is calculated as per the provisions of Companies act. Another
method is as per Income Tax Act i.e. depreciation is calculated as per the provisions Income Tax
Act. Here we have provided the Depreciation rate chart as per Income Tax Act, 1961 for AY
2016-17 which is easy for us to calculate.
Income Tax Depreciation Rates applicable from the AY 2003-04 onwards
Below rates of depreciation are applicable from AY 2003-04 onwards. That is, for Depreciation
Rates for AY 2016-17 & Depreciation rates for AY 2017-18 also you can refer below tables.
General Rate of Depreciation as per Income Tax
S.
No.
Asset Class Asset Type
Depreciation
Rates
1. Building
Residential buildings excluding boarding houses and hotels. 5%
Boarding houses and hotels. 10%

Purely temporary constructions like wooden structures. 100%
2. Furniture Any fittings / furniture including electrical fittings. 10%
3.
Plant and
machinery
Taxis/Lorries/motor buses used in a business of running them on hire. 30%
Motorcars excluding those used in a business of running them on hire. 15%
Computers and computer software. 60%
Books owned by assessee carrying on a profession being annual publications. 100%
Books belonging to assessee carrying on business in running lending
libraries.
100%
Books belonging to assessee carrying on profession not being annual
publications.
60%

4.
Intangible
assets
Franchise, patents, trademark, copyright, license, know-how or other
commercial or business rights of similar nature.
25%

Bibliography
 M.Com Study Material
 ICAI Study Materials
 www.taxguru.com
 www.CAClubIndia.com
 www.archive.india.gov.in
 www.icaiknowledgegateway.org

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