PGBP

CA SHREY RATHI PGBP 5.
RATAN TATA
CHAPTER 5
PROFIT AND GAINS FROM
BUSINESS & PROFESSION
“Ups and downs in life are very

important to keep us going, because a
straight line even in an E.C.G. means we
are not alive.”
SCOPE OF THIS CHAPTER

❖ Determination of incomes chargeable to tax u/h PGBP.
❖ Identification of expenses which are allowed / disallowed as deductions.
❖ Identification of expenses admissible only on actual payment.
❖ Understanding the provision of Compulsory maintenance of books of account.
❖ Application of presumptive tax provisions.
❖ Computation of Income on estimated basis.
INTRODUCTION
In order to charge income under the head “PGBP”, business or profession should be carried on by the assessee by himself
or on his behalf during the previous year.
Business is defined u/s 2(13) to include any trade, commerce or manufacture or any adventure or concern in the nature of
trade, commerce or manufacture.
Profession means an occupation requiring purely intellectual or manual skill. As defined u/s 2(36), profession includes
vocation as well.
CA SHREY RATHI PGBP 5.2
METHOD OF COMPUTATION UNDER HEAD INCOME FROM PROFIT & GAINS FROM
BUSINESS & PROFESSION
Income under the head PGBP [V Imp.]

Profit as per Profit & Loss A/c XXX
Add: Income not recorded in P&L A/c but taxable under this head XXX
Less: Income credited to P&L A/c but not chargeable under this head XXX
Add: Expenditure debited to P&L A/c but not allowed under Income Tax Act XXX
Less: Expenditure allowed under the Income Tax Act but not debited to P/L A/c XXX
Income chargeable under the head “PGBP” XXX
Q 1: An income credited to P/L A/c but chargeable to tax under different head shall be …………………. while computing income
under head PGBP.
(a) Added (c) No change
(b) Subtracted (d) Depends on the accountant [Ans: (b)]
Sir, what if an amount of ₹ 10,000

which was supposed to be credited was
wrongly debited?
Ans: Due to wrong debit, the profits must
have reduced. In order to rectify it, we will
have to add it with the double amount (₹ i.e.
20,000)
BASIS OF CHARGE [SECTION 28]

The following incomes are chargeable to tax u/h PGBP:
i) Profits and gains of any business or profession which was carried on by the assessee at any time during the previous
year.
ii) Any compensation due to or received by:
a) any person in connection with termination/modification of his agreement for managing the affairs of any
company.
b) any person holding any agency in India received any payment for termination or modification of terms of agency.
c) any person relating to transferring of management of any business in Government under any law.
d) any person, whether revenue or capital in connection with the termination or modification of the terms and
conditions of any contract relating to its business.
iii) The value of any benefit or perquisite whether convertible into money or not arising during the course of any business
or profession.
iv) Export incentives which includes:

a) Profit on sale of import licences;
b) Cash assistance by whatever name called;
c) Profit on sale of Duty Free Replenishment Certificate;
d) Duty drawback of customs and central excise;
e) Profit on transfer of Duty Entitlement Pass Book Scheme.
v) Interest, salary, bonus, commission received by a partner of a firm in which he is a partner.

• However where any interest, salary etc. has not been allowed to be deducted u/s 40(b), the income to be taxed shall
be adjusted to the extent of the amount disallowed.
• Any share in the profits of the firm is exempt in the hands of the partner.
vi) Any sum received in cash or kind on account of any capital asset (other than land, goodwill or financial instrument) if
the whole of the expenditure on such asset has been allowed deduction u/s 35AD.
vii) Any sum received for not carrying out any activity in relation to any business or profession or not to share any know-
how, patent, copyright, trademark etc.
➢ But any sum received on transfer of such rights shall be taxable u/h Capital Gains.
viii) Any sum received under Keyman insurance policy including bonus on such policy.
ix) Fair market value of inventory on its conversion as capital asset would be chargeable to tax as business income.
x) Income from speculative business. “Speculative transaction” means a transaction in which a contract for the purchase
or sales of any commodity including stocks and shares is periodically or ultimately settled otherwise than by the actual
delivery or transfer of the commodity.
Q 2: Which of the following incomes is not chargeable to tax u/h PGBP?

(a) Amount received for not carrying out any activity in relation to business
(b) Compensation received on account of termination of a business contract
(c) Income from speculative transaction
(d) Profit on sale of land [Ans: (d)]
METHOD OF ACCOUNTING [SECTION 145]

Income u/h PGBP shall be computed in accordance with the method of accounting regularly employed by the assessee.
There are two main methods of accounting:
1. Mercantile (Accrual) System: Net profit or loss is calculated after taking into consideration all incomes and expenditures
on accrual basis irrespective of the fact whether or not income is received or expenditure is actually paid during the
accounting year.
Exception: Section 43B and 35DDA are allowed deduction only on payment basis.
2. Cash System: Income actually collected or expenditure actually paid during the year shall be considered irrespective of
the fact whether it relates to the current year or not.
Sir, what if the question is silent as

to which method to apply?
Ans: Mercantile system is to be followed

if the question is silent.
Q 3: From the data given below, compute income chargeable u/h PGBP for Ms. Sonal for the year ending 31.03.2021.
Receipts (₹)
Cash Sales 5,00,000
Rent receipt from house property 60,000
Interest received on Bank FD 45,500
Interest received on Saving Bank A/c 1,820
Duty drawback was allowed to assessee during the year 15,000
Income from part time job 96,000
Payments (₹)
Purchases 3,20,000
Salary paid to employees 72,000
Machinery purchased during the year 2,00,000
General expenses 24,000
Rent paid for office building (2/3rd building was not occupied for business) 36,000
Drawings made for personal expenses 50,000
Sol 3: Computation of income u/h PGBP for Ms. Sonal for the A/Y 2021-22:
Particulars (₹)
Receipts taxable u/h PGBP
Cash sales 5,00,000
Duty drawback allowed to assessee during the year 15,000
Total Receipts (A) 5,15,000
Payments allowed u/h PGBP
Purchases 3,20,000
Salary paid to employees 72,000
Depreciation on machinery (assumed depreciation @ 15% for full year) 30,000
General expenses 24,000
Rent paid for office building (₹ 36,000 x 1/3) 12,000
Total Payments (B) 4,58,000
Income u/h PGBP (A – B) 57,000
Q 4: With the help of given P/L A/c, compute the income u/h PGBP for the A/Y 2021-22:
Profit & Loss Account
Particulars Amount (₹) Particulars Amount (₹)
Purchases 70,000 Sales 1,20,000
Reserves 10,000 Rent from House property 20,000
General Expenses (including ₹ 5,000 15,000
personal expenses)
Depreciation 15,000
Net Profit 30,000 Total
Total 1,40,000 1,40,000
Additional Information:
1) Assessee earned ₹ 12,000 on sale of import licence during the previous year which was not credited to the P&L A/c.
2) Depreciation as per Income Tax Act is ₹ 20,000.
Sol 4: Computation of income u/h PGBP for the A/Y 2021-22:

Particulars (₹) (₹)
Net Profit as per P/L A/c 30,000
Add: Expenses debited to P/L A/c but not allowed under this head
• Reserves 10,000
• General expenses (personal) 5,000 15,000
Less: Income credited to P/L A/c but not taxable under this head
❖ Rent from house property 20,000
Add: Income chargeable u/h PGBP but not credited to P/L A/C
❖ Sale of import licence 12,000
Less: Expenses allowed u/h PGBP but not debited to P/L A/c
❖ Depreciation (₹ 20,000 – ₹ 15,000) 5,000
Income u/h PGBP 32,000
RENT, RATES, REPAIRS AND INSURANCE FOR BUILDING [SECTION 30]

Any expenditure (other than capital nature) incurred by the assessee on building used by him for business and profession
shall be allowed deduction under this section.
➢ Building used partly for business and partly for other purposes: Proportionate expenses attributable for building used
for business will be allowed as deduction.
➢ Building used by the owner himself: No notional rent would be allowed to the owner. However, where a firm runs its
business in the premises owned by one of its partners, the rent payable to the partner shall be allowed deduction
provided it is reasonable.
Sir, my father took a building on rent for official

purposes and let-out 1/4th of the portion further
to Mr. Sharma. What is the amount of
expenditure that he can reflect as his expense?
Ans: Where the building is sub-let, then rent
paid by the assessee – rent received from the
sub-tenant shall be allowed as deduction.
Q 5: Mr. Verma took a property on rent for his business for ₹ 30,000 p.m. He sublet 1/4th of the portion to Mr. Kumar for ₹
8,000 p.m. Further, he also spent ₹ 10,000 annually on repairs for the portion occupied by him. Determine the amount of
expenditure deductible u/s 30.
(a) ₹ 2,74,000 (c) ₹ 3,70,000
(b) ₹ 2,71,500 (d) ₹ 3,76,000 [Ans: (a)]
REPAIRS AND INSURANCE OF MACHINERY, PLANT & FURNITURE [SECTION 31]

Any expenditure, being repairs & insurance (other than capital nature) incurred by the assessee on machinery, plant or
furniture used by him for business and profession shall be allowed deduction under this section. Repairs shall not include
replacement or reconstruction.
DEPRECIATION [SECTION 32]

Depreciation is the diminution in the value of an asset due to normal wear and tear.
Assessee will have to satisfy the following conditions to claim depreciation:
1. Asset must be owned by the assessee (including co-owners).

Notes:
Registered ownership is not necessary. Exclusive possession right to exclude others from
enjoyment of the assets, right to retain possession and defend the same are some of the features
1 of the ownership which would entitle a person to claim the benefit of the depreciation.
Capital expenditure in a building taken on lease. Assessee shall be entitled to depreciation in

2 respect of capital expenditure incurred by him on construction of any structure in respect of which
he holds lease or right to occupancy.
3 Hire-purchaser shall be allowed to claim depreciation only if the agreement shows that he has an
uninterrupted right over the asset as long as he discharges his obligation.
2. Asset must be used for business or profession.

Notes:
If a machine is ready for use at any moment, it can be said to be used for the purpose of the
1 business and therefore shall be granted depreciation.
Assets used partly for business purposes. Deduction shall be restricted to a fair proportionate part
2 thereof which the assessing officer may determine.
Residential quarters where assessee provides residential quarters to its employees and provides
3 with various assets such as refrigerators, furniture etc. it is considered to have been used wholly
for the purpose of business and therefore depreciation is admissible.
3. Asset should be used during the relevant previous year. Full depreciation is allowed if an asset is put to use atleast
for some time during the previous year. However depreciation allowance is limited to 50% of normal
depreciation if an asset is acquired and put to use for the purpose of business or profession for less than 180
days during the previous year.
Sir, my uncle purchased a machinery in

the F/Y 2020-21 however it was installed
and put to use in the year F/Y 2021-22.
How much depreciation can he claim? Ans: Where an asset is purchased in the last year
and put to use in the current year, then
depreciation shall be fully allowed in the year of
installation even if it is put to use for less than 180
days during the current previous year.
BASIC CONCEPTS FOR COMPUTATION OF DEPRECIATION:
(a) Depreciation is admissible for block of assets.

Group of assets comprises of:
It means a group of assets falling within same class
of assets and having same percentage of depreciation. o Tangible assets being building, machinery,
plant or furniture;
o Intangible assets being know-how, patents,
trademarks, licences etc.
(b) Method of computation of depreciation is written down value (WDV) method.
Sir, is no one allowed to claim

depreciation as per SLM of Ans: Depreciation is available in the case of
depreciation? tangible assets according to straight line
method (SLM) in case of an undertaking
engaged in generation or generation and
distribution of power.
Q 6: On which of the following assets, SLM can not be applied even by a power generating unit?
(a) Building used for official purpose
(b) Plant & machinery installed in power manufacturing unit
(c) Furniture used in office building
(d) Patents acquired for business [Ans: (d)]
Prescribed percentages for various blocks:

S. No. Nature of the Asset Rate
1. BUILDING
▪ Residential building other than hotels and boarding houses. 5%
▪ Building acquired for installing machinery for water supply project or temporary structures 40%
of wood or tin.
▪ Office, factory, godown, hotels, boarding houses and building not covered above. 10%
2. PLANT AND MACHINERY

▪ Ships including speed boats. 20%
▪ Buses, lorries and taxies used in the business of running them on hire, moulds used in rubber
and plastic goods factories & plant and machinery used in semi-conductor industry covering 30%
all integrated circuits.
➢ Motor car, buses, lorries and taxies acquired from 23.08.2019 – 31.03.2020 and put to 45%
use before 31.03.20
▪ Aeroplanes, lifesaving medical devices, oil wells, pollution control equipments, energy saving 40%
devises, computer including computer software & printers, books, annual publications by a
professional, books owned by libraries & windmills acquired on or after 01.04.2014.
▪ Any new plant & machinery installed to manufacture any article by using any technology in
a laboratory owned by a Public Sector Company or University. 40%
▪ Motor cars other than those used in a business of running them on hire and any other plant 15%
and machinery not covered above.
➢ Motor car acquired from 23.08.2019 – 31.03.2020 and put to use before 31.03.20 30%
3. FURNITURE & FITTINGS including electrical fittings. 10%
4. INTANGIBLE ASSETS like know-how, patents, copyrights, trademarks, licences, franchises and 25%
any other business or commercial rights of similar nature.
Sir, can depreciation be claimed on

land on which building is made?
Ans: No depreciation is allowable on

land on which the building is erected.
Q 7: Who of the following is not eligible to claim depreciation?

(a) A person making capital expenditure in a building taken on lease
(b) A person purchases an asset to be used for business on hire purchase
(c) A person purchases televisions & air-conditioners to be installed in employee’s apartments
(d) None of the above [Ans: (d)]
Q 8: What is the rate of depreciation on factory building?

(a) 5% (c) 15%
(b) 10% (d) 40% [Ans: (b)]
ACTUAL COST [SECTION 43(1)]

It means the actual cost of the assets to the assessee reduced by cost met by any other person directly or indirectly (e.g.
subsidy or grant by the Government shall not be included).
Actual cost of an asset includes:
All expenses directly expenses Install and fix it

relatable to acquisition of necessary to for use
the asset bring the
asset to site
Expenses on fuel, power Subsidy granted by

and insurance before the Central or State
commencement of Government
business.
❖ Interest paid before the commencement of production on amount borrowed for the acquisition of the asset forms part
of the actual cost.
❖ If an asset is acquired by gift or inheritance, WDV in the hands of previous owner will be considered as cost of
acquisition. Further, if an asset is acquired from 100% subsidiary company or from 100% holding company or the asset
is acquired in a scheme of amalgamation or demerger by an Indian company, WDV in the hands of transferor company
will be considered as cost of acquisition.
❖ If deduction is claimed u/s 35AD, actual cost is zero.
Sir, my father is a dealer of Panasonic Air-

conditioners. He used one of the air-
conditioner in his office. What shall be the Ans: Where inventory is converted into capital
treatment in this case? asset, the FMV of such inventory as on the
date of its conversion shall be the actual cost
of such capital asset to the assessee.
❖ Where a building used for private purpose is subsequently put to use for business purpose, then the cost of the building
for business purpose shall be taken as cost of acquisition as reduced by depreciation that would have been allowable
had the building been used for business since its acquisition. But if a plant & machinery or furniture used for private
purpose is brought into business purpose, then the actual cost for depreciation shall be the purchase price of such
asset.
❖ Any expenditure for acquisition of any 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 or a bank draft or use of electronic clearing system
through a bank account or through such other prescribed electronic mode exceeds ₹ 10,000, such expenditure shall
not form part of the cost of such asset.
Sir, my uncle purchased an asset for

business purposes for 6,00,000 and paid
72,000 as GST on the asset. On which Ans: Where an asset is acquired on which tax is
value shall he be entitled to depreciation? paid, then such tax shall not be considered in the
actual cost if input tax credit on such asset can
be claimed. However, where tax is not allowed
as deduction, then it will be included in the cost
of the asset for the purpose of depreciation.
❖ Where an asset which once belonged to the assessee is re-acquired with the main purpose of reduction of tax liability,
the actual cost in such case shall be written down value at the time of original transfer or the actual price for re-acquiring
such asset whichever is lower.
Q 9: Which of the following shall not be included in the cost of an asset for the purpose of depreciation?
(a) Transportation expenses incurred on asset before its installation
(b) Interest on loan paid on the asset after the installation of the asset
(c) Insurance expenses incurred before the installation of the asset
(d) None of the above [Ans: (b)]
Q 10: Mr. Kamal sold an asset for ₹ 2,00,000 whereas its written down value is ₹ 6,00,000. Thereafter he acquired the same
asset for ₹ 9,00,000 in the same year. What will be the cost of the asset for the purpose of depreciation?
(a) ₹ 2,00,000 (c) ₹ 6,00,000
(b) ₹ 4,00,000 (d) ₹ 9,00,000 [Ans: (c)]
STEPS FOR COMPUTING DEPRECIATION:
1 Find opening WDV of each block at the beginning of the year.
2 Cost of acquisition of assets acquired during the year.
Money received along with scrap value in respect of the assets of the same block which are sold,
3
discarded or destroyed during the year.
4 WDV of each block as on the last day of the previous year.
On the closing WDV as computed in Step 4, compute the depreciation at the rates prescribed for
5
each block.
Where any asset is used for less than 180 days in the year of purchase, then first, half depreciation is given for that asset
and then if any value is left in the block, full depreciation shall be charged on the balance amount.
Q 11: Mr. Mundra started business on 28th July 2021. He acquired assets worth ₹ 3,00,000 on 3rd August 2021. He further
acquired some furniture worth ₹ 2,00,000 on 28th October 2021. Compute depreciation for Mr. Mundra assuming rate of
deprecation for machinery & furniture to be 30% & 10% respectively.
(a) ₹ 1,10,000 (c) ₹ 1,00,000
(b) ₹ 55,000 (d) ₹ 45,000 [Ans: (c)]
Q 12: Shantanu purchased an asset for 2,40,000 for his business. He made a down payment of ₹ 50,000 through DD; ₹
1,00,000 through credit card after a week and balance through cash after a month. Cost of the asset for depreciation
purpose shall be:
(a) ₹ 2,40,000 (c) ₹ 1,00,000
(b) ₹ 1,50,000 (d) ₹ 90,000 [Ans: (b)]
Q 13: Written down value of 5 machines as on 01.04.2021 is ₹ 6,00,000. The following 4 machines of the same block were
bought:
Machines Date of Purchase Date when put to use Actual Cost (₹)
A 15.04.2021 30.10.2021 1,50,000
B 18.05.2021 19.05.2021 50,000
C 22.06.2021 23.09.2021 1,00,000
D 09.11.2021 28.02.2022 2,50,000
3 machines of this block (other than those which were acquired and put to use for less than 180 days) were sold for ₹
4,50,000. Assume rate of depreciation to be 15%.
(a) Calculate the depreciation for the P/Y 2021-22.
(b) What will be your answer if machine A which was purchased on 15.04.2021 was acquired on 15.03.2021?
(c) What will be your answer if the 3 machines were sold for ₹ 9,00,000 instead of ₹ 4,50,000?
Sol 13: (a) Computation of depreciation for the P/Y 2021-22:

WDV as on 01.04.2021 ₹ 6,00,000
(+) Assets acquired during the year (A + B + C + D) ₹ 5,50,000
₹ 11,50,000
(-) Money received on sale of assets ₹ 4,50,000
WDV as on 31.03.2022 ₹ 7,00,000
Depreciation on A & D (put to use for less than 180 days) (₹ 4,00,000 x 15% x 50%) ₹ 30,000
Depreciation on rest of the machineries (₹ 3,00,000 x 15%) ₹ 45,000
Depreciation for P/Y 2021-22 ₹ 75,000
(b) An asset purchased in the previous year and put to use in the current year shall be allowed full depreciation even if it is
put to use for less than 180 days.
Depreciation on D (put to use for less than 180 days) (₹ 2,50,000 x 15% x 50%) ₹ 18,750
Depreciation on rest of the machineries (₹ 4,50,000 x 15%) ₹ 67,500
Depreciation for P/Y 2021-22 ₹ 86,250
(c) Depreciation when the 3 machines are sold for ₹ 9,00,000 instead of ₹ 4,50,000.
WDV as on 01.04.2021 ₹ 6,00,000
(+) Assets acquired during the year (A + B + C + D) ₹ 5,50,000
₹ 11,50,000
(-) Money received on sale of assets ₹ 9,00,000
WDV as on 31.03.2022 ₹ 2,50,000
Depreciation on A & D (put to use for less than 180 days) (₹ 2,50,000 x 15% x 50%) ₹ 18,750
Note: First depreciation is computed on assets put to use for less than 180 days @ 50% of normal depreciation and then if
any value is left, full depreciation shall be allowed.
Q 14: Compute the amount of depreciation allowance. Mr. K purchased a house property on 01.01.2020 for ₹ 10,00,000.
Till 12.12.2021, the same was self-occupied as a residence. On this date, the building was brought into use for his profession.
Rate of depreciation is 10%.
Sol 14: Where a building used for private purpose is subsequently put to use for business purpose, then the cost of the
building for business purpose shall be taken as cost of acquisition as reduced by depreciation that would have been
allowable had the building been used for business since its acquisition.
Cost of the asset as on 01.01.2020 ₹ 10,00,000
(-) Depreciation @ 10% x 50% ₹ 50,000
WDV as on 01.04.2020 ₹ 9,50,000
(-) Depreciation @ 10% for full year ₹ 95,000
WDV as on 01.04.2021 (Cost for depreciation) ₹ 8,55,000
Depreciation for the P/Y 2021-22 (₹ 8,55,000 x 10%) ₹ 85,500
Q 15: YZ Ltd. owns the following assets:

Blocks WDV as on 01.04.2021 (₹) Rate of depreciation
1. Building 7,00,000 5%
2. Building 16,50,000 10%
3. Machinery 4,50,000 15%
4. Machinery 6,40,000 30%
5. Computers 3,40,000 40%
6. Furniture 2,50,000 10%
The following assets were acquired by the company during the P/Y 2021-22
Asset Cost of Acquisition Rate of depreciation Date of Acquisition
1. Building 3,50,000 10% 12.05.2021
2. Machinery 3,00,000 15% 05.06.2021
3. Computers 1,60,000 40% 06.06.2021
4. Patents 1,00,000 25% 07.08.2021
5. Copyrights 2,00,000 25% 30.09.2021
The following assets are sold by the company during the P/Y 2021-22
Asset Sale Consideration Rate of depreciation Date of Sale
1. Machinery 1,40,000 30% 05.09.2021
2. Building 2,00,000 10% 10.10.2021
3. Computers 50,000 40% 11.10.2021
4. Furnitures 70,000 10% 12.01.2022
Determine the total depreciation for the P/Y 2021-22.
Sol 15: Computation of depreciation for the P/Y 2021-22: (₹)

Block Op. WDV (+) Acq. (-) Sale Cl. WDV Dep.
Building – 5% 7,00,000 - - 7,00,000 35,000
Building – 10% 16,50,000 3,50,000 2,00,000 18,00,000 1,80,000
Machinery – 15% 4,50,000 3,00,000 - 7,50,000 1,12,500
Machinery – 30% 6,40,000 - 1,40,000 5,00,000 1,50,000
Machinery (computers) – 40% 3,40,000 1,60,000 50,000 4,50,000 1,80,000
Furniture – 10% 2,50,000 - 70,000 1,80,000 18,000
Intangible assets – 25% - 3,00,000 - 3,00,000 75,000
Total Depreciation 7,50,500
COMPUTATION OF DEPRECIATION WHERE THE BLOCK OF ASSETS CEASES TO EXIST

[V Imp.]
In case where all the assets are transferred, no depreciation Where a part of a block is sold and the sale
will be allowed. Then one of the following two situations will consideration of the assets sold exceeds the
arise: value of the block.
1. Sale price > WDV + Assets acquired during the year As WDV of the block is reduced to nil, no
or depreciation shall be allowed.
2. Sale price < WDV + Assets acquired during the year
then such excess or deficit shall be treated as short-term Further such excess shall be taxed as short-term
capital gain or short-term capital loss as the case may be. capital gain.
Q 16: Compute the depreciation and capital gain (if any) in the following cases: (Rate = 15%)
Cases Opening WDV of the block Assets acquired (if any) & date of Assets sold (if any) & date of transfer
as on 01.04.2021 (Assets M, acquisition
N, P & Q) (₹)
I 5,00,000 Asset R acquired on 15.04.2021 for ₹ Asset M, N & P sold on 20.02.2022 for
2,00,000. ₹ 4,00,000.
II 4,00,000 Assets R & S acquired on 30.07.2021 All assets sold on 02.01.2022 for ₹
for ₹ 3,00,000. 9,00,000.
III 7,00,000 Asset R acquired on 30.06.2021 for ₹ All assets sold on 31.03.2022 for ₹
1,00,000. 3,00,000.
IV 3,00,000 Assets R, S & T acquired on Assets M & N sold on 30.12.2021 for ₹
25.10.2021 for ₹ 2,50,000. 2,70,000.
V 2,00,000 Asset R acquired on 08.08.2021 for ₹ Assets N, P & Q sold on 15.01.2022 for
4,00,000. ₹ 8,00,000.
Sol 16: Computation of depreciation and capital gains (if any) in the following cases: (₹)
Cases Op. WDV (+) Acq. (-) Sale Cl. WDV Dep. @ 15% / Cap Gains
I 5,00,000 2,00,000 4,00,000 3,00,000 45,000 (Dep)
II 4,00,000 3,00,000 9,00,000 - 2,00,000 (STCG)
III 7,00,000 1,00,000 3,00,000 - 5,00,000 (STCL)
IV 3,00,000 2,50,000 2,70,000 2,80,000 23,250 (Dep)
(2,50,000 x 15% x 50%) +
(30,000 x 15%)
V 2,00,000 4,00,000 8,00,000 - 2,00,000 (STCG)
Sir, what if there is an amalgamation of

companies? Who will be claiming Ans: Where there is a change of ownership such
depreciation – the amalgamating as amalgamation/demerger of a company,
company or the amalgamated company? succession of any business etc. then compute
depreciation of the previous year as if no
conversion took place and then apportion the
depreciation in the ratio of number of days.
Q 17: H Ltd. has a block of assets carrying 15% rate of depreciation, whose written down value on 01.04.2021 was ₹
40,00,000. It purchased another asset of the same block on 01.11.2021 for ₹ 14,40,000 and put to use on the same day. H
Ltd. was amalgamated with T Ltd. w.e.f 01.01.2022.
Compute the depreciation allowance to H Ltd. and T Ltd. for the year ended 31.03.2022 assuming the assets transferred to
T Ltd. was valued at ₹ 50,00,000. [ICAI Module]
Sol 17: Computation of depreciation for H Ltd. & T Ltd. for the P/Y 2021-22:
Depreciation in case of amalgamation shall be computed as if no conversion took place and then apportion such
Particulars H Ltd. (₹) T Ltd. (₹)
Depreciation on ₹ 40,00,000 @ 15% = ₹ 6,00,000 (275:90) 4,52,055 1,47,945
Depreciation on ₹ 14,40,000 x 15% x 50% = ₹ 1,08,000 (61:90) 43,629 64,371
Total Depreciation 4,95,684 2,12,316
ADDITIONAL DEPRECIATION [SECTION 32(1)(iia)]

An assessee engaged in the business of manufacture or production of any article shall be eligible for such additional
depreciation @ 20% of actual cost of new plant or machinery.
Such additional depreciation is allowed in the previous year in which the eligible asset is acquired and installed.
However, if such asset is acquired and put to use for less than 180 days in the previous year, then the rate of
depreciation shall be 10%. Balance 10% shall be allowed in the immediately succeeding previous year in respect of such
asset.
Provided no additional depreciation shall be provided in the following cases:
2. Any plant or machinery which

before its installation was used by any 3. Any plant or machinery installed in
1. Ships and aircrafts; other person within or outside India any office premises or any residential
(i.e. second-hand machinery); accommodation including guest houses;
4. Any road transport vehicle or office 5. Any plant or machinery, the whole
appliances; of the actual cost of which is allowed
as a deduction in any one previous
year.
CBDT clarification: The business of printing or printing and publishing amounts to manufacture or production of an article
or thing and is, therefore, eligible for additional depreciation.
Q 18: Which of the following assets are not eligible for additional depreciation?
(a) Office appliances (c) Second-hand machinery
(b) Aircrafts (d) All of the above [Ans: (d)]
Q 19: ABC Ltd. started a new business of manufacturing paper napkins on 01.04.2021. The company purchased the following
assets during the previous year 2021-22:
Asset Cost of acquisition Date of purchase Rate Date on which asset is
(₹) put to use
Plant A 20,00,000 08.04.2021 15% 09.04.2021
Machinery B 40,00,000 09.04.2021 15% 19.04.2021
Plant C 3,00,000 28.11.2021 30% 28.12.2021
Computer for office 1,50,000 03.05.2021 40% 05.05.2021
Computer for factory 2,50,000 04.06.2021 40% 24.06.2021
Furniture 6,00,000 02.04.2021 10% 05.04.2021
Air conditioner (office) 2,00,000 15.07.2021 15% 25.10.2021
Car 10,00,000 31.10.2021 15% 31.10.2021
Compute the amount of normal and additional depreciation for the A/Y 2022-23.
Sol 19: Computation of normal & additional depreciation of ABC Ltd. for the A/Y 2022-23:
Normal Depreciation:
Particulars Cost (₹) Rate Depreciation (₹)
Block 1: Plant A, Machinery B, Air Conditioner & Car 72,00,000 15% 9,90,000 *
Block 2: Plant C 3,00,000 30% 45,000 **
Block 3: Computer for office, computer for factory 4,00,000 40% 1,60,000
Block 4: Furniture 6,00,000 10% 60,000
Total Normal Depreciation 12,55,000
* (₹ 60,00,000 x 15%) + (₹ 12,00,000 x 15% x 50%) = ₹ 9,90,000
** (₹ 3,00,000 x 30% x 50%) = ₹ 45,000
Additional Depreciation:
Plant A 20,00,000 20% 4,00,000
Machinery B 40,00,000 20% 8,00,000
Plant C (put to use for less than 180 days) 3,00,000 10% 30,000
Computer for factory 2,50,000 20% 50,000
Total Additional Depreciation 12,80,000
Q 20: SR Ltd. a producing company established its undertaking in the backward areas of Andhra Pradesh in the P/Y 2020-
21. The company purchased some assets on 14th August 2020, however it was installed and put to use on 27th January 2021.
The rate of additional depreciation for the P/Y 2021-22 shall be:
(a) 10% (c) 35%
(b) 20% (d) 17.5% [Ans: (a)]
Q 21: LP Ltd., a manufacturing company furnishes you the following information:

(₹)
1. Value of block as on 01.04.2021
2. Block 1: Plant and machinery (consisting of 10 looms) (Rate - 15%) 5,00,000
3. Block 2: Buildings (consisting of 4 buildings) (Rate – 10%) 12,50,000
4. Acquired 5 looms on 15.08.2021 4,00,000
5. Sold 15 looms on 27.11.2021 10,00,000
6. Acquired 2 looms on 25.02.2022 3,00,000
Compute depreciation claim for the A/Y 2022-23.
Sol 21: Computation of depreciation for the P/Y 2021-22: (₹)

Particulars Op. WDV (+) Acq. (-) Sale Cl. WDV Dep.
Block 1: Plant & Machinery - 15% 5,00,000 7,00,000 10,00,000 2,00,000 15,000*
Block 2: Building – 10% 12,50,000 - - 12,50,000 1,25,000
Total Depreciation 1,40,000
* ₹ 2,00,000 x 15% x 50% = ₹ 15,000
Additional Depreciation:
Plant & Machinery (put to use for less than 180 days) 3,00,000 10% 30,000
Note: In case of additional depreciation, looms acquired on 25.02.2022 shall be considered as all the other looms were sold
on 27.11.2021.
SET OFF AND CARRY FORWARD OF UNABSORBED DEPRECIATION [SECTION 32(2)]

If depreciation allowance is not fully deductible u/h PGBP because of inadequacy of profits, it is deductible against income
under any other head (except from salary). It can be carried forward for any number of assessment years and set off against
income under any head (except from salary). Continuity of business is not relevant for the purpose of claiming unabsorbed
depreciation.
ORDER OF SET-OFF
Current year Brought forward Unabsorbed

depreciation business loss depreciation
Q 22: (a) Mr. Rajesh has provided the following particulars regarding his income for the P/Y 2021-22:
(₹)
i. Business income (before depreciation) 84,000
ii. Depreciation 1,12,000
iii. Income from house property 72,000
iv. Income from other sources 8,000
v. Income from salary 2,40,000
Compute the taxable income of Rajesh for the A/Y 2022-23.
(b) What would be the taxable income if the depreciation above is ₹ 2,12,000?
Sol 22: (a) Computation of taxable income of Rajesh for the A/Y 2022-23:
Particulars (₹)
Income from salary 2,40,000
Income from house property ₹ 72,000
(-) Unabsorbed depreciation ₹ 28,000 44,000
Income from business & profession (before depreciation) ₹ 84,000
(-) Depreciation = ₹ 1,12,000 (but limited to ₹ 84,000) ₹ 84,000 -
Unabsorbed depreciation = ₹ 1,12,000 – ₹ 84,000 = ₹ 28,000 (to be set off against any other head (except
salary)
Income from other sources 8,000
Taxable income 2,92,000
(b) Computation of taxable income if depreciation is ₹ 2,12,000 instead of ₹ 1,12,000.

Particulars (₹)
Income from salary 2,40,000
Income from house property ₹ 72,000
(-) Unabsorbed depreciation ₹ 72,000
Income from business & profession (before depreciation) ₹ 84,000
(-) Depreciation = ₹ 1,12,000 (but limited to ₹ 84,000) ₹ 84,000
Unabsorbed depreciation = ₹ 2,12,000 – ₹ 84,000 = ₹ 1,28,000 (to be set off against any other head
(except salary)
Income from other sources ₹ 8,000
(-) Unabsorbed depreciation ₹ 8,000
Taxable income 2,40,000
Unabsorbed depreciation to be carried forward = ₹ 1,28,000 – ₹ 72,000 – ₹ 8,000 = ₹ 48,000.
Q 23: Mr. Chandan has business income (before depreciation) of ₹ 5,00,000 for the current year. His current year
depreciation is ₹ 2,20,000. Unabsorbed depreciation relating to P/Y 2018-19 is ₹ 3,70,000. He also incurred business loss in
the P/Y 2019-20 ₹ 4,10,000. Determine the unabsorbed depreciation / business loss to be carried forward.
(a) Unabsorbed Depreciation – ₹ 3,70,000; Business loss – ₹ 1,30,000
(b) Unabsorbed Depreciation – ₹ 90,000; Business loss – ₹ 4,10,000
(c) Unabsorbed Depreciation – Nil; Business loss – ₹ 90,000
(d) Unabsorbed Depreciation – ₹ 5,00,000; Business loss - Nil [Ans: (a)]
DEPRECIATION ON SLM BASIS

An undertaking engaged in generation or generation and distribution of power can claim depreciation as per its choice to
anyone of the following methods:
a) b)
SLM Depreciation shall be claimed
on actual cost of each asset
seperately.
WDV Depreciation shall be claimed
like any other assessee.
Sir, Can the option of availing

depreciation be changed from year to
year by a power generating unit?
Ans: The option shall be exercised before the due

date of furnishing return of income. Once
exercised, it shall be final and shall apply to all
subsequent years.
Terminal Depreciation
If any asset on which depreciation is claimed on SLM basis is sold and Sale price < WDV of such asset, then depreciation shall
be allowed equal to WDV – Sale price in the year of sale.
Balancing charge
If any asset on which depreciation is claimed on the basis of SLM is sold and Sale price > WDV of such asset, then the least
of the following shall be taxable u/h PGBP:
(i) difference between the actual cost and WDV
(ii) difference between aggregate of money received and WDV
If sale price is more than actual cost then such excess shall be taxable u/h capital gains which can be short term or long
term.
It shall be noted that continuity of business is irrelevant.
Q 24: Determine the tax consequences in following cases for the A/Y 2022-23:
1. AC Ltd., a power generating unit (opted for SLM), has purchased machinery on 01.06.2021 for ₹ 10,00,000 which is
destroyed by fire on 15.11.2021 and an insurance claim of ₹ 8,70,000 is received on 12.02.2022.
2. DF Ltd., an undertaking established in 2019 for generation of power, has opted for SLM method of depreciation. The
company purchased a machinery for ₹ 5,00,000. The WDV of the machinery as on 01.04.2021 is ₹ 3,50,000. The
machinery is sold for ₹ 7,93,000 on 19.12.2021.
Sol 24: Computation of tax consequence for the A/Y 2022-23 in the following cases:
1. Cost of machinery purchased by AC Ltd., a power generating unit as on 01.06.2021 ₹ 10,00,000
(-) Insurance claim received on 12.02.2022 on destruction of asset ₹ 8,70,000
Terminal Depreciation for P/Y 2021-22 ₹ 1,30,000
➢ No depreciation shall be provided for an asset sold/discarded/destroyed during the year.
2. Cost of asset purchased in 2019 ₹ 5,00,000

Written down value (WDV) as on 01.04.2021 ₹ 3,50,000
Sale of asset on 19.12.2021 ₹ 7,93,000
Balance charge = difference between the cost and WDV = ₹ 1,50,000
Or difference between sale value and WDV = ₹ 4,43,000
Whichever is least = ₹ 1,50,000
Where sale price is more than the actual cost, such gain shall be taxable u/h Capital Gains.
Short Term Capital gains = ₹ 7,93,000 – ₹ 5,00,000 = ₹ 2,93,000
Q 25: NBV Ltd., an electricity company is following straight line method of depreciation. It starting its operation in the year
2020-21 and purchased assets worth ₹ 12,00,000 on 23rd March 2021. Compute depreciation for the P/Y 2021-22 assuming
rate of depreciation to be 15%.
(a) ₹ 90,000 (c) ₹ 1,66,500
(b) ₹ 1,80,000 (d) ₹ 83,250 [Ans: (b)]
Q 26: M/s Pragya & Associates, a sole trading concern is converted into a company w.e.f 29th November, 2021. The written
down value of the assets as on 1st April, 2021 is as under:
1. Building - 10% - ₹ 3,50,000
2. Furniture – 10% - ₹ 50,000
3. Plant and machinery – 15% - ₹ 2,00,000
Further, on 15th October, 2021, M/s Pragya & Associates purchased a plant (15%) for ₹ 1,00,000. After conversion, the
company added another plant worth ₹ 50,000 (15%).
Compute the depreciation available to M/s Pragya & Associates and Pragya Ltd.
Sol 26: Computation of depreciation for M/s Pragya & Associates and Pragya Ltd.:
Depreciation in case of succession of business shall be computed as if no conversion took place and then apportion such
Particulars Pragya & Pragya Ltd. (₹)

Associates (₹)
Depreciation on Building - ₹ 3,50,000 @ 10% = ₹ 35,000 (242:123) 23,205 11,795
Depreciation on Furniture - ₹ 50,000 @ 10% = ₹ 5,000 (242:123) 3,315 1,685
Depreciation on Plant & Machinery - ₹ 2,00,000 @ 15% = ₹ 30,000 (242:123) 19,890 10,110
Depreciation on Plant & Machinery purchased on 15th October, 2021 - ₹ 1,00,000
@ 15% x 50% = ₹ 7,500 (45:123) 2,009 5,491
Depreciation on Plant & Machinery purchased after conversion - ₹ 50,000 @ 15%
x 50% = ₹ 3,750 (only for company) - 3,750
Total Depreciation 48,419 32,831
Sir, What if an asset is sold

between the year?
Ans: No depreciation is charged on the assets

sold during the year even if it is sold on the last
day of the P/Y.
EXPENDITURE ON SCIENTIFIC RESEARCH [SECTION 35]
Scientific research means any activities for the extension of knowledge in the fields of natural and applied science including
agriculture, animal husbandry or fisheries.
Pre-commencement Expenditure Post Commencement Expenditure

Revenue or capital expenditure (other than acquisition of Revenue & Capital expenditure (other than acquisition of
land) incurred within 3 years immediately before land) incurred by the assessee shall be fully allowed
commencement of business on scientific research are provided such expenditure fully relates to the scientific
deductible in the previous year in which the business is research business.
commenced.
Deduction is limited to the extent it certified by the prescribed authority. [Section 35(2AB)].
SALE OF SCIENTIFIC RESEARCH ASSET [Section 41(3)]

1. Where a scientific research asset is sold without being used for any other purpose than research, then least of the
following amount shall be charged under PGBP in the year of sale:
(a) Sale proceeds
(b) Deduction u/s 35
Any excess of sale price over original cost of the asset shall be subject to the provisions of capital gains.
2. Where the scientific research asset is used for any other purpose than research, then the actual cost of such asset to
be included in the relevant block of asset shall be taken as nil as the full amount has been allowed deduction u/s 35.
UNABSORBED CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH

Where full effect on account of deduction of capital expenditure on scientific research could not be claimed then it will be
deemed to be an expenditure of the coming previous years and so on.
Q 27: Ms. Shweta purchased an asset for scientific research for ₹ 12,00,000 in the P/Y 2015-16. During the P/Y 2021-22, the
asset ceased to be used for the purpose of scientific research.
1. Profit from business before depreciation ₹ 7,00,000
2. WDV of block of asset as on 01.04.2021 (15%) ₹ 10,00,000
3. Sale value of scientific research asset ₹ 10,00,000
Compute the total income assuming scientific research asset is sold:
(a) without using it for any other purpose than research
(b) after using it for the purpose of business
It shall also be assumed that if scientific research asset is used for business, then it shall be eligible for depreciation @ 15%.
Sol 27: Computation of total income of Ms. Shweta for the P/Y 2021-22:
(a) Scientific research asset is sold without using it for any other purpose than research:
Particulars (₹)
Profit from business before depreciation ₹ 7,00,000
(-) Depreciation @ 15% of ₹ 10,00,000 ₹ 1,50,000 5,50,000
Sale of scientific research asset 10,00,000
Total Income 15,50,000
(b) Scientific research asset is sold after using it for business:

Particulars (₹)
Profit from business before depreciation ₹ 7,00,000
(-) Depreciation [WN 1] Nil 7,00,000
Total Income 7,00,000
WN 1: Computation of depreciation:
WDV of block of assets as on 01.04.2021 ₹ 10,00,000
Sale of scientific research asset ₹ 10,00,000
WDV as on 31.03.2022 NIL
As the value of block as on 31.03.2021 is reduced to nil, no depreciation shall be charged.
CONTRIBUTION MADE TO OUTSIDERS

Where the assessee does not himself carry on research but makes contribution to other institutions for this purpose, a
weighted deduction is allowed as follows:
Contribution made to Weighted Deduction
1. An approved association, university, college whose objective is research in social science 100% of actual
or statistical research. [Section 35(1)(iii)] expenditure
2. An Indian company whose main objective is scientific research and development. 100% of actual
[Section 35(1)(iia)] expenditure
3. A national laboratory or a university or an Indian institute of technology [Section 150% 100% of actual
35(2AA)] or a research association [Section 35(1)(ii)] to be used in scientific research for expenditure
approved programmes.
❖ Donation made to a company for social or statistical research shall not be allowed deduction.
INSERTION OF SECTION 35(1A) [W.E.F. 1.06.2020]

The research association, university, college, company or other institution referred to in section 35(1)(ii) / 35(1)(iii) /
35(1)(iia) shall not be entitled to any deduction unless they:
a) file a statement to the prescribed income-tax authority, of any sum received by them.
b) furnish to the donor, a certificate specifying the amount of donation.
Q 28: A company incurred ₹ 12,00,000 on purchase of land for scientific research. It constructed a building for ₹ 25,00,000
to be used for scientific research. Determine the amount of expenditure admissible u/s 35.
(a) ₹ 37,00,000 (c) ₹ 25,00,000
(b) ₹ 49,50,000 (d) ₹ 53,50,000 [Ans: (c)]
Q 29: Mr. Kundan contributed 70,000 to an Indian company for scientific research & 80,000 to an approved university for
social science & statistical research. Compute the amount of deduction available u/s 35?
(a) ₹ 80,000 (c) ₹ 70,000
(b) ₹ 1,50,000 (d) ₹ 1,90,000 [Ans: (b)]
Q 30: Siddhant contributed 50,000 to an Indian company for social science & statistical research and 60,000 to IIT for
scientific research. Compute the amount of deduction available u/s 35?
(a) ₹ 50,000 (c) ₹ 90,000
(b) ₹ 60,000 (d) ₹ 1,10,000 [Ans: (b)]
Q 31: SS Ltd. commenced production of mustard oil on 1st January 2022. The company made the following expenditure on
scientific research upto the year ending on 31st March 2022:
1. On 12th January 2022, the company paid ₹ 90,000 to a university being an approved institute for the purpose of carrying
out approved scientific research in natural science.
2. On 27th January 2022, the company paid ₹ 50,000 to an approved institution for the purpose of carrying out research
in social & statistical science.
3. On 5th February 2022, the company paid ₹ 75,000 to Indian Company for carrying out approved programmes of scientific
research.
4. On 15th February 2022, the company purchased land for ₹ 7,00,000. Later on a quality control laboratory was
constructed to start an in-house research. (Cost of construction: ₹ 5,40,000, Date of completion of construction: 30th
March 2022)
5. Pre-commencement expenditure for its laboratory are as under:
Revenue Expenditure:
(a) Expenditure on salary of research staff upto 31st December 2021 is ₹ 1,20,000 (it includes ₹ 30,000 being paid before
31st December 2018). Amount certified by the prescribed authority is ₹ 70,000.
(b) Expenditure on research material is ₹ 80,000 (out of which only 80% is approved by the prescribed authority.
Capital Expenditure (₹)
Expenditure upto 31st December Expenditure incurred between 1st
2018 January 2019 to 31st December 2021
Purchase of Land 3,00,000 4,00,000
Purchase of Equipments 2,20,000 2,70,000
Cost of cultivation of mustard 40,000 60,000
Determine the amount of deduction available to SS Ltd. u/s 35 for the A/Y 2022-23, if the scientific research is related to the
business of the assessee company.
Sol 31: Computation of deduction u/s 35 to SS Ltd. for the A/Y 2022-23:
S. No. Particulars (₹)
1. Payment made to a university being an approved institute for carrying out approved scientific 90,000
research in natural science.
2. Payment made to an approved institution for carrying out research in social & statistical science. 50,000
(100%)
3. Payment made to an Indian Company for carrying out approved programmes of scientific research. 75,000
(100%)
4. Construction of quality control laboratory (building) (100% shall be allowed) [No deduction for 5,40,000
purchase of land]
5. Pre-commencement expenditure: Revenue expenditure

(a) Salary to staff (₹ 1,20,000 – ₹ 30,000 = ₹ 90,000) but limited to ₹ 70,000, being certified by 70,000
the prescribed authority
(b) Research material = ₹ 80,000, but limited to 80% = ₹ 64,000, being certified by the prescribed 64,000
authority
Capital expenditure:
Expenditure upto 31st December, 2018 shall be ignored as incurred prior to 3 years before -
commencement of business on scientific research.
Expenditure between 1st January 2019 – 31st December 2021
• Purchase of land (not allowed) -
• Purchase of equipments (100%) 2,70,000
• Cost of cultivation of mustard (100%) 60,000
Deduction u/s 35 12,19,000
CAPITAL EXPENDITURE ON SPECIFIED BUSINESS [SECTION 35AD]

In order to promote specific industries, the Government has brought in this section where an assessee carrying on specified
business shall be allowed 100% deduction of capital nature (except land, goodwill & financial instruments)
Specified Businesses:
• 1. Laying and operating a cross country natural gas or crude

or petroleum oil pipeline network for distribution including
storage facilities.
• 2. Building and operating a hotel of two star or above

category anywhere in India.
• 3. Developing and building a housing project under a scheme

for Slum redevelopment / rehabilitation.
• 4. Setting up and operating an inland container depot (ICD)

or container freight station (CFS).
• 5. Bee-keeping and production of honey and beeswax.
• 6. Setting up and operating a warehousing facility for storage

of sugar.
• 7. Setting up and operating a cold chain facility.
• 8. Setting up and operating a warehousing facility for storage

of agricultural produce.
• 9. Building and operating a hospital with atleast 100 beds for

patients anywhere in India.
• 10. Developing and building a housing project under a scheme

for affordable housing.
• 11. Production of fertilizer in India.
• 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. Assessee engaged in developing, operating and

maintaining an new infrastructure facility commencing its
operations on or after 01.04.2017. Infrastructure facility shall
include roads, ports, airports, water treatment system etc.
Sir, is deduction allowed on old

machinery also?
Ans: Old plant or machinery is allowed to the extent
of 20% of the value of total plant & machinery.
However second-hand imported machinery is
treated as new.
Notes:
(i) The specified businesses should not be set up by splitting up or reconstruction of a business already in existence.
Further where a deduction under this section has been claimed and allowed, no deduction u/s 80A or section 10AA
is permissible
(ii) Expenditure incurred prior to the commencement of business wholly and exclusively for the aforesaid specified
businesses shall be allowed deduction in the year of commencement provided the amount is capitalised in the books
of accounts of the assessee.
(iii) The accounts should be audited by a CA and audit report should be submitted.
(iv) Any expenditure in respect of which a payment or aggregate of payments made to a person in a day otherwise
than by an account payee cheque or a bank draft or use of electronic clearing system through a bank account or
through such other prescribed electronic mode exceeds ₹ 10,000, would not be eligible for deduction under this
section.
(v) Where the business is of laying a cross country natural gas or crude or petroleum oil pipeline network, the following
conditions should also be satisfied:
(a) It is owned by an Indian Co. or a consortium of Indian Companies or a corporation established under any Central
or State Act.
(b) It has been approved by the Petroleum and Natural Gas Regulatory Board.
(c) The business should make such proportion of its total pipeline capacity available for use on common carrier basis
by any other person.
(vi) Any asset which has claimed deduction u/s 35AD shall be used only for the specified business for a period of 8 years.
 Where such asset is sold: then amount received on sale shall be considered to be income u/h PGBP.
 Where such asset is used for any purpose other than specified business: then the total amount of deduction so
claimed shall be reduced by the amount of depreciation allowance in accordance with the provisions of section 32
as if no deduction had been allowed u/s 35AD shall be deemed to be the income of the assessee u/h PGBP.
W.E.F. A.Y. 2020-21, this deduction has been made optional. Also, where a deduction has been claimed u/s 35AD, no
deduction will be allowed under any other section.
Q 32: Which of the following is not a specified business u/s 35AD?

(a) Production of fertilizer in India
(b) Building a school for atleast 500 students
(c) Building a hospital with atleast 100 beds for patients
(d) Setting up and operating an inland container depot [Ans: (b)]
Q 33: LP Ltd. commenced the business of operating a four star hotel in Agra on 01.04.2021.
1. Cost of land (acquired in May 2019) ₹ 60 lakhs
2. Cost of construction of hotel building: 2019-20: ₹ 30 lakhs
2020-21: ₹ 150 lakhs
3. Plant and machineries acquired during financial year 2021-22 ₹ 40 lakhs
(All the above expenditures were capitalised in the books of the company)
4. Net Profit before depreciation for the financial year 2021-22 ₹ 80 lakhs
Determine the income/loss for LP Ltd. for A/Y 2022-23.
Sol 33: Computation of income or loss for LP Ltd. for A/Y 2022-23
Particulars (₹ in lakhs)
Net profit before depreciation 80
Less: Deduction u/s 35AD
Pre-commencement expenditure:
Cost of construction of hotel building: 2019-20 ₹ 30
2020-21 ₹ 150 180
Post-commencement expenditure: Plant & machineries acquired during 2021-22 40
Loss to be carried forward 140
Note: Cost of acquiring land is not admissible u/s 35AD.
AMORTISATION OF PRELIMINARY EXPENSES [SEC 35D]
An Indian company or a resident person other than a company can claim deduction under this section.
Preliminary expenses are expenditure incurred before the commencement of business or after the commencement of
business in connection with the extension of an existing undertaking or setting up a new unit.
Amount of Deduction Indian Company - 5% of Cost of project or 5% of Capital employed whichever is higher
A resident person other than a company - 5% of Cost of Project
Instalments Deduction is to be allowed in 5 equal instalments.
Condition Audit of accounts is necessary to claim deduction under this section.
➢ Cost of project means the actual cost (or additional cost incurred in connection with extension or setting up an
undertaking) of fixed assets on the last day of P/Y in which the business is commenced or extension is completed as the
case may be.
➢ Capital employed means the aggregate of issued share capital, debentures and long-term borrowings on the last day of
P/Y as referred above.
Q 34: RST Ltd. is incorporated in Jaipur on 16th August 2021. It commences business on 18th December 2021. The following
expenses are incurred by the company before commencement of business:
(i) Preparation of feasibility report, project report etc.: ₹ 1,70,000
(ii) Expenses on issue of shares & debentures: ₹ 80,000
(iii) Underwriting commission paid: ₹ 50,000
Fixed assets and capital as on 31st March 2022 are as under:
(i) Cost of Fixed Assets ₹ 70,00,000
(ii) Share Capital ₹ 20,00,000
(iii) Debentures ₹ 10,00,000
(iv) Long term borrowing from a financial institution ₹ 30,00,000
Determine the amount of deduction admissible u/s 35D.
Sol 34: Computation of deduction admissible u/s 35D:

An Indian Company shall be allowed deduction u/s 35D to the extent of 5% of [Cost of project or Capital employed whichever
is higher].
Cost of Project = Value of fixed assets = ₹ 70,00,000
Capital employed = Share capital + Debentures + Long term borrowings = ₹ 20,00,000 + ₹ 10,00,000 + ₹ 30,00,000 = ₹
60,00,000
Maximum deduction u/s 35D = 5% of ₹ 70,00,000 = ₹ 3,50,000
Preliminary expenses incurred by the company:
1. Preparation of feasibility report, project report etc. ₹ 1,70,000
2. Expenses on issue of shares & debentures ₹ 80,000
3. Underwriting commission paid ₹ 50,000
Total preliminary expenses ₹ 3,00,000
As the expenses incurred by the company is below the maximum amount of deduction permissible u/s 35D, the whole
amount shall be allowed deduction u/s 35D in 5 equal instalments.
Deduction u/s 35D for the P/Y 2021-22: = ₹ 3,00,000 / 5 = ₹ 60,000
EXPENDITURE ON VOLUNTARY RETIREMENT SCHEME [SEC. 35DDA]
Amount of Deduction Expenditure on payment to employee in connection with VRS shall be allowed deduction
in 5 equal instalments starting from the year in which such amount has actually been
paid.
Other Notes If payment is made by the employer in more than one year, then deduction shall be
allowed in 5 instalments starting from the year of every payment.
DEDUCTIONS [SECTION 36]
1. Insurance premium
Any premium paid in respect of Insurance premium paid on the Insurance premium paid on the
insurance against risk of damage or lives of cattle owned by the health of employees by any mode
destruction of stocks or stores. members of a primary milk co- other than cash.
operative society.
2. Bonus or commission paid to an employee is allowable as deduction only if it is not paid in lieu of profits or dividend.
This deduction is allowable only on payment basis or payment is made before the due date of furnishing return of
income u/s 139. {Refer Section 43B}
3. Interest on borrowed capital is allowed as deduction provided it is used for the purpose of business or profession.
But interest on own capital is not allowed as deduction. {Refer Section 43B}
➢ Discount on issue of zero coupon bonds is allowed as deduction on pro-rata basis.
4. Employee’s contribution towards RPF or other welfare schemes shall be allowed as deduction only if such sum is
credited by the employer to the employee’s account in the relevant fund within the time limit.
5. Employer’s contribution to provident fund is allowed deduction only if the fund is recognised or contribution is made
to New Pension Scheme upto 10%/14% of salary of employee. {Refer Section 43B & Deductions chapter [Sec 80CCD(2)]}
6. Where animals are used in the business (not as stock in trade) have died or become useless, then depreciation shall be
purchase price minus amount recovered from dead body (carcasses) of animals.
7. Amount of bad debt or part thereof shall be allowed deduction provided the following conditions are satisfied:
(i) Such debt has been taken into account in computing the income of the assessee or represents money lent in the
ordinary course of business.
(ii) It has been written off as irrecoverable in the accounts of the assessee.
TREATMENT OF SUBSEQUENT RECOVERY OF BAD DEBTS [Section 41(4)]

A deduction because bad debts is based on a mere estimate. Therefore, if any amount has been claimed and allowed as a
bad debt is recovered subsequently, then it shall be treated as income of the previous year in which it is recovered, even if
business is not in existence.
Q 35: Mr. Anuj sells mobiles on credit to Mr. Vaibhav (outstanding balance as on 1st April 2020 being ₹ 60,000. Sales made
during the year 2020-21 were ₹ 1,10,000. Vaibhav made a payment of ₹ 20,000 during the year. On 31st March 2021, he
writes off ₹ 45,000 as bad debts.
However, in August 2021, Anuj recovers from Vaibhav as full and final payment of:
(a) ₹ 70,000 (b) ₹ 1,00,000 (c) ₹ 1,35,000.
Find out the tax consequences for different assessment years.
Sol 35: Computation of tax consequences for different assessment years:

A/Y 2021-22: Mr. Anuj writes off ₹ 45,000 as bad debts. So, deduction shall be allowed of ₹ 45,000 in all the cases.
A/Y 2022-23:
Outstanding balance as on 01.04.2020 ₹ 60,000
(+) Sales made during 2020-21 ₹ 1,10,000
(-) Payment received during 2020-21 ₹ 20,000
Outstanding balance as on 31.03.2021 ₹ 1,50,000
(-) Bad debts written off ₹ 45,000
Outstanding balance as on 01.04.2021 ₹ 1,05,000
(a) Received ₹ 70,000 as full and final payment: Further ₹ 35,000 shall be allowed as deduction
(b) Received ₹ 1,00,000 as full and final payment: Further ₹ 5,000 shall be allowed as deduction
(c) Received ₹ 1,35,000 as full and final payment: ₹ 30,000 shall be income, being bad debts recovered
8. Family planning expenditure

Any expenditure incurred by a company for promoting family planning among its employees is allowable as deduction.
However, if such expenditure if of capital nature, 1/5th 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.
Sir, What If the family planning

expenditure is not deductible due to
lack of profits? Ans: If any family planning expenditure cannot be
allowed deduction due to insufficient profits, then it
shall be set off and carry forward as if it is
unabsorbed depreciation.
Q 36: FGH Ltd. has ₹ 3,00,000 as its business income for the P/Y 2021-22 before allowing expenditure on family planning.
The company had incurred the following expenditure on family planning during the P/Y 2021-22:
(a) Capital Expenditure: ₹ 9,00,000
(b) Revenue Expenditure: ₹ 1,70,000
Compute the deduction available to FGH Ltd. for expenditure on family planning assuming the company has ₹ 30,000 as
Income from Other Sources.
Sol 36: Computation of deduction of family planning for FGH Ltd.:

Particulars (₹)
Business Income 3,00,000
(-) Family planning expenditure
1. Capital expenditure = ₹ 9,00,000 x 1/5 = ₹ 1,80,000
2. Revenue expenditure = ₹ 1,70,000
₹ 3,50,000
(But limited to ₹ 3,00,000, being business income) 3,00,000
Business Income after family planning expenditure NIL
Unabsorbed family planning expenditure (₹ 3,50,000 – ₹ 3,00,000 = ₹ 50,000), to be set off as if it is 30,000
unabsorbed depreciation
(-) Unabsorbed family planning expenditure (to the extent of income) 30,000
Nil
Total family planning expenditure (₹ 3,00,000 + ₹ 30,000) 3,30,000
Unabsorbed family planning expenditure (₹ 3,50,000 – ₹ 3,30,000), to be carried forward 20,000
9. Securities Transaction Tax (STT) and Commodities Transaction Tax paid shall be allowed deduction in the
course of business of share brokers.
RECOVERY OF ANY DEDUCTION [Section 41(1)]

If any deduction has been allowed relating to any expenditure and subsequently it is recovered, then the amount recovered
shall be deemed to be income of the previous year in which it is recovered even if business is not in existence.
Q 37: Ms. Kanchan spent 3,00,000 for purchased of 4 animals to be used in her business as assets in the P/Y 2016-17. One
animal became useless and was sold for 5,000 in the P/Y 2021-22. Determine the amount of deduction u/s 36 to Ms.
Kanchan.
(a) ₹ 2,95,000 (c) ₹ 2,25,000
(b) ₹ 70,000 (d) ₹ 2,20,000 [Ans: (b)]
GENERAL DEDUCTION [SECTION 37]

Any expenditure not being capital expenditure or personal expenditure of the assessee expended wholly and exclusively
for the purpose of business or profession during the previous year shall be allowed as deduction. It should be noted that
expenditure should not be covered by section 30 to 36.
Building, plant & machinery or furniture not exclusively used for business or profession [Section 38] – Deduction shall be
restricted as determined by the assessing officer.
CAPITAL V/S REVENUE EXPENDITURE

The terms have not been defined in the Income Tax Act. While differentiating between the two, one has to depend upon its
natural meaning and facts of each case. Few things to be kept in mind while differentiating are as under:
1 Acquisition of asset
v/s Routine
2 Benefit of expenditure
in one year v/s Several
3 Recurring v/s Non-
recurring expenditure
expenditure years
Instances of expenses deductible u/s 37(1): A complete list of expenses allowable u/s 37(1) could not be drawn but few
instances are pen down where expenditures are allowable u/s 37(1):
1. Salary to employees (not being proprietor).
2. Litigation expenses incurred for protecting the business.
3. Legal charges for obtaining a loan.
4. Damages for failure to fulfil a contract in time.
5. Expenditure incurred on keyman insurance policy.
6. Brokerage paid for raising loan to finance business.
Any expenditure on corporate social responsibility (CSR) shall not be allowed deduction.
Any expenditure incurred by the assessee for any purpose which is an offence or is prohibited by law shall not be allowed
as deduction. (e.g. freebees provided to medical practitioner by pharmaceutical industry)
Expenses incurred on advertisement in any souvenir, brochure etc published by any political party shall not be allowed
deduction u/h PGBP. But they are allowed deduction u/s 80GGB/80GGC from the Gross Total Income. {Refer chapter
deductions}
Q 38: Which of the following expenditure is not deductible u/h PGBP?

(a) Commission paid to an agent to get a business order
(b) Printing & Stationery expenses
(c) Compensation paid to a client for not being able to complete the order in time
(d) Legal expenses in connection with arrears of rent of a property [Ans: (d)]
EXPENSES NOT DEDUCTIBLE [SECTION 40(a)] [V. IMP]

(i) Interest, royalty, fees for technical services payable outside India or payable to a non-resident on which tax has not
been deducted or after deduction has not been paid to the government on or before the due date of filing return u/s
139(1).
➢ However, deduction shall be allowed in the previous year in which TDS is paid.
(ii) Interest, brokerage, rent, fees or any amount payable to a resident on which TDS has not been deducted at source
or after deduction has not been paid on or before the due date mentioned u/s 139(1) shall not be allowed to be
deducted to the extent of 30% of such sum.
➢ However, deduction shall be allowed in the previous year in which TDS is paid.
(iii) Any sum paid under the Income Tax Act. Tax paid on perquisites by the employer on behalf of the employee shall
still not be allowed deduction. (Refer chapter income exempt from tax)
(iv) Payment of salaries outside India or to a non-resident on which tax has not been deducted or paid shall not be
allowed deduction.
Sir, what shall happen if the TDS on

salary is deducted in the subsequent
year? Ans: If tax is deducted on such salary in
subsequent previous year, even then such
salary shall not be allowed as deduction in
that previous year.
Notes:
1. Any reserve or provision is not allowed as deduction for any type of tax.
2. Interest paid to Government is allowed deduction under any law other than Income Tax.
3. Any payment relating to legal proceedings under any law is allowed as deduction.
4. Any expenditure which is illegal shall not be allowed deduction. Therefore, penalty if paid for illegal activities shall not
be allowed deduction (e.g. penalty levied for suppression of facts under GST law). However, if penalty paid is not for an
illegal activity, full deduction shall be allowed (e.g. penalty paid for delay in a business contract).
Income Tax v/s Other Taxes as per Section 40(a):

S. No. Amount Income Tax Other Taxes
(i) Tax X ✓
(ii) Provision / Reserve X X
(iii) Interest X ✓
(iv) Penalty X X
(v) Expenses on legal proceedings ✓ ✓
Q 39: Mr. Sharma paid ₹ 30,000 p.m. as rent for his residential building to Mr. Lakhan. He made the full payment to Mr.
Lakhan without deduction of TDS. Determine the amount of exemption available assuming Mr. Lakhan is a resident.
(a) ₹ 3,60,000 (c) ₹ 2,52,000
(b) ₹ 1,08,000 (d) Nil [Ans: (d)]
PAYMENTS MADE TO SPECIFIED PERSONS [SECTION 40A(2)]

Where the assessee incurs any expenditure in respect of which payment has been made to specified persons and the
assessing officer believes such expenditure is unreasonable having regard to the fair market value of goods or services or
facilities etc. then expenditure considered by him to be unreasonable shall not be allowed deduction.
➢ Specified persons means spouse, brother or sister or any lineal ascendant or descendant, partner, director or any person
having substantial interest.
➢ Substantial interest means where a person is the beneficial owner of atleast 20% of equity capital in case of companies
or 20% of profits in case of any other concerns at any time during the previous year.
Q 40: Mr. Kundra purchased stationery from its brother for his office. He purchased stationery worth ₹ 25,000 but its market
value is ₹ 19,000. The amount of deduction available to Mr. Kundra shall be:
(a) ₹ 25,000 (c) ₹ 6,000
(b) ₹ 19,000 (d) Nil [Ans: (b)]
CASH PAYMENTS [SECTION 40A(3)] [V IMP.]
Where the assessee incurs an expenditure in respect of which a payment or aggregate of payments made to a person in a
day otherwise than by an account payee cheque or a bank draft or use of electronic clearing system through a bank account
or through such other prescribed electronic modes exceeds ₹ 10,000, then no deduction shall be allowed in respect of such
expenditure.
In case of transport operators, limit has been extended to ₹ 35,000.
Exceptions: Payment made

(a) to Government (both Central & State Government);
(b) to a person who ordinarily resides or carries on business in a village not served by any bank;
(c) through banking system;
(d) to Banks, LIC or financial institutions;
(e) for the purchase of the products manufactured without the aid of power in a cottage industry;
(f) by an authorised dealer against purchase of foreign currency or travellers’ cheques in the normal course of his business.
(g) to employees regarding terminal benefits such as gratuity, retrenchment compensation etc. not exceeding ₹ 50,000.
(h) for the purchase of agricultural or forest produce or produce of animal husbandry or dairy or poultry farming or fish
products or the products of horticulture or apiculture to the cultivator, grower or producer of such articles.
(i) by any person to his agent who is required to make payment in cash for goods or services on behalf of such person.
The following points should be kept in mind while understanding the scope of Section 40A(3).
1. If an assessee makes payment of two different bills (none of them exceeds ₹ 10,000) by way of cash, then nothing shall
be disallowed even if the aggregate payment is more than ₹ 10,000. This is because Section 40A(3) is applicable in
respect of an expenditure which is in excess of ₹ 10,000.
2. If assessee makes payment of one expenditure at different days and no payment exceeds ₹ 10,000 (although the
expenditure exceeds ₹ 10,000), then nothing shall be disallowed.
3. This section is applicable only for payment under PGBP and other sources and not for any other chapter.
Q 41: Mr. Akshay made payment in cash to the following persons. Which of the following shall be disallowed u/s 40A(3)?
(a) Payment made to a farmer for purchase of agricultural produce
(b) Payment made to an employee as gratuity. Gratuity amount being ₹ 40,000
(c) Payment made to a person who ordinarily resides in a village not served by any bank
(d) None of the above [Ans: (d)]
Q 42: SS Oils contracted with Chaudhary Travels to transport their product from Delhi to Kolkata at an agreed consideration
of ₹ 40,000. ₹ 10,000 shall be paid in advance on 24th January 2022 & the balance shall be paid at the time of unloading of
the goods in Kolkata on 29th January 2022. Determine the amount of disallowance u/s 40A(3).
(a) Nil (c) ₹ 40,000
(b) ₹ 30,000 (d) ₹ 10,000 [Ans: (a)]
Q 43: Ranjeet purchased goods valuing ₹ 85,000 from Abhinav on 23rd April 2021. He made a payment of 10,000 by bearer
cheque on 24th April 2021. Further he made a payment of 15,000 through Google Pay on 4 th May 2021. Again a payment
was made of 25,000 in cash on 14th June 2021 & the remaining amount was paid through demand draft on 19th June 2021.
Determine the amount of allowable expenditure.
(a) ₹ 50,000 (c) ₹ 85,000
(b) ₹ 60,000 (d) ₹ 25,000
Q 44: Determine the amount of disallowance in each of the following cases:

1. Y generally pays salary to his employees by account payee cheque. However, salary of August, 2021 was paid by cash
to 3 employees M, N & Q payment being ₹ 9,800, ₹ 10,000 and ₹ 11,250 respectively.
2. Z Ltd. purchased goods on credit from X Ltd. on 16th July 2021 for ₹ 88,000 which is paid as under:
(i) ₹ 8,000 by cash on 17th July 2021
(ii) ₹ 25,000 by a bearer cheque on 28th July 2021
(iii) ₹ 55,000 by an account payee cheque on 06th August 2021
3. Mr. Ram purchased goods on credit from Mr. Shyam on 10th December, 2021 for ₹ 12,000 and on 28th December
2021 for ₹ 7,000. The total payment of ₹ 19,000 is made by cash on 4th January 2022.
4. BC Ltd. purchased goods on credit from a relative of a director on 21st July 2021 for ₹ 70,000 (market value: ₹ 57,000).
The amount is paid in cash on 30th July 2021.
5. A Ltd. purchases raw material on credit from B who holds 30% equity share capital in A Ltd. The amount of bill is ₹
14,000, market price being ₹ 9,600. The amount is paid in cash.
Sol 44: Computation of amount of disallowance in the following cases:

1. Payment to Q of ₹ 11,250 shall be disallowed u/s 40A(3), since the payment made during a day to a person exceeds ₹
10,000.
2. Payment of ₹ 8,000 shall be allowed as it does not exceed ₹ 10,000; payment of ₹ 25,000 by a bearer cheque shall be
disallowed as it exceeds ₹ 10,000; payment of ₹ 55,000 shall be allowed even if it exceeds ₹ 10,000 as such payment is
made by an account payee cheque.
3. Payment of ₹ 12,000 out of the total payment of ₹ 19,000 shall be disallowed, since section 40A(3) deals with an
expenditure whose aggregate payment in a day to a person does not exceed ₹ 10,000. Payment of ₹ 7,000 shall be
allowed.
4. Since BC Ltd. has purchased goods of ₹ 57,000 from a relative of the director for ₹ 70,000, i.e. from a specified person,
₹ 13,000 shall be disallowed u/s 40A(2), being unreasonable payment made to specified person. As the whole amount
is paid in cash, ₹ 57,000 shall be disallowed u/s 40A(3).
5. Purchase of raw material from a shareholder holding 30% equity share shall be considered as a specified person. Any
unreasonable payment shall be disallowed u/s 40A(2). Purchase of goods worth ₹ 9,600 for ₹ 14,000 will lead to
unreasonable payment of ₹ 4,400 which shall be disallowed u/s 40A(2). Rest of the payment of ₹ 9,600 shall be allowed
as it does not exceed ₹ 10,000.
DEDUCTION FOR PARTNERSHIP FIRM [SECTION 40(b)] [V IMP.]

1. Interest on capital to the partners is allowed upto 12% p.a. provided it is mentioned in the partnership deed.
2. Any salary, bonus, commission is allowable deduction only when it is prescribed in the partnership deed and only when
it is paid to a working partner.
MAXIMUM PERMISSIBLE LIMIT FOR REMUNERATION [V Imp.]

Book Profit Maximum Remuneration
In case book profit is positive:
On the first ₹ 3,00,000 of the book profit ₹ 1,50,000 or 90% of book profit
whichever is more
On the balance of book profit 60% of book profit
In case book profit is negative ₹ 1,50,000
Sir, how do we compute

Book Profit? Ans: Book profit = Income u/h PGBP + remuneration to partners if
debited to P/L A/c – brought forward depreciation.
Further, it shall be noted that income chargeable to tax under other
heads or brought forward losses or deductions u/s 80C to 80U shall be
ignored while computing book profit.
As per Section 10(2A), in the case of partner of a firm (which includes limited liability partnership), his share in the total
income of the firm shall be exempt. Therefore, any profit of the firm shall not be included in the income of partners.
Any interest, salary, commission, bonus made by an association of persons or body of individuals to its members will
not be allowed as a deduction in computing the income of the association or the body.
Q 45: ABS & Associates (a partnership firm) distributed remuneration of ₹ 2,00,000 to a non-working partner whereas the
Book Profit was 2,10,000. The amount of deduction available to the partnership firm shall be:
(a) Nil (c) ₹ 1,50,000
(b) ₹ 2,00,000 (d) ₹ 1,89,000 [Ans: (a)]
Q 46: Calculate the deduction allowable to firm u/s 40(b).

(₹)
Book Profit Actual Salary Paid Maximum Deduction Actual Deduction to Firm
1,70,000 1,40,000 1,53,000 1,40,000
70,000 90,000 1,50,000 90,000
4,20,000 3,55,000 3,42,000 3,42,000
(80,000) 1,15,000 1,50,000 1,15,000
6,00,000 2,80,000 4,50,000 2,80,000
(30,000) 1,68,000 1,50,000 1,50,000
Q 47: P/L A/c of YZ & Co. (a limited liability partnership firm) for the year ending 31st March 2022 is as follows:
Profit & Loss A/c
Cost of goods sold 3,40,000 Sales 8,92,000
Other expenses 4,11,000 Net Loss 3,46,000
Interest to partners 1,55,000
Remuneration to partners 2,90,000
Depreciation 42,000
12,38,000 12,38,000
Other Information:
1. Out of other expenses, ₹ 48,000 is not deductible u/s 36 and 37.
2. Interest to partners is not deductible to the extent of ₹ 39,000.
3. Depreciation as per Section 32 is ₹ 58,000.
Compute the income of the firm.
Sol 47: Computation of income of the firm:

Net Loss as per Profit & Loss A/c 3,46,000
Add: Expenses debited to P/L A/c but not allowed
➢ Other expenses not deductible u/s 36(1) & 37 48,000
➢ Interest to partners 39,000 87,000
Less: Expenses allowed but not debited in the P/L A/c
➢ Depreciation (₹ 58,000 – ₹ 42,000) 16,000
Loss u/h PGBP before remuneration u/s 40(b) 2,75,000
Add: Inadmissible remuneration u/s 40(b) [WN 1] 1,40,000
Loss u/h PGBP for the firm 1,35,000
WN 1: Computation of remuneration to partners allowable u/s 40(b):
Calculation of Book Profit:
Book Profit = Income u/h PGBP + Remuneration to partners if debited to P/L A/c – Brought forward depreciation
Book Profit = (₹ 2,75,000) (as computed above) + ₹ 2,90,000 = ₹ 15,000
Maximum permissible limit for remuneration:
In case the book profit is positive, it is:
First ₹ 3,00,000 = 90% of book profit or ₹ 1,50,000 whichever is higher
Balance book profit = 60% of book profit
In this case as the book profit is ₹ 15,000, maximum permissible remuneration shall be 90% of book profit (i.e. ₹ 13,500) or
₹ 1,50,000 whichever is higher = ₹ 1,50,000
Inadmissible remuneration = Remuneration distributed between partners – Maximum remuneration allowed u/s 40(b) = ₹
2,90,000 – ₹ 1,50,000 = ₹ 1,40,000
Q 48: From the information given in the following P/L A/c, compute the income of the firm and the partner:
Profit & Loss A/c
Reserves 30,000 Gross Profit 3,25,000
Interest to Partner Z @ 15% 60,000 Rent of House Property 65,000
Salary to Z (non-working) 70,000 Net Loss 50,000
Salary to X & Y (working) 2,80,000
(₹ 1,40,000 + ₹ 1,40,000)
4,40,000 4,40,000
Sol 48: Computation of income of the firm and the partners:

Net Loss as per Profit & Loss A/c 50,000
Add: Expenses debited to P/L A/c but not allowed
o Reserves 30,000
o Interest to Z to the extent of 3% (₹ 60,000 x 3/15) 12,000
o Salary to Z, being non-working 70,000 1,12,000
Less: Income credited to P/L A/c but not taxable u/h PGBP
o Rent from House Property 65,000
Loss u/h PGBP before remuneration u/s 40(b) 3,000
Add: Inadmissible remuneration u/s 40(b) [WN 1] 30,700
Income u/h PGBP for the firm 27,700
WN 1: Computation of remuneration to partners allowable u/s 40(b):

Calculation of Book Profit:
Book Profit = Income u/h PGBP + Remuneration to partners if debited to P/L A/c – Brought forward depreciation
Book Profit = (₹ 3,000) (as computed above) + ₹ 2,80,000 = ₹ 2,77,000
Maximum permissible limit for remuneration:
In case the book profit is positive, it is:
First ₹ 3,00,000 = 90% of book profit or ₹ 1,50,000 whichever is higher
Balance book profit = 60% of book profit
In this case as the book profit is ₹ 2,77,000, maximum permissible remuneration shall be 90% of book profit (i.e. ₹ 2,49,300)
or ₹ 1,50,000 whichever is higher = ₹ 2,49,300
Inadmissible remuneration = Remuneration distributed between partners – Maximum remuneration allowed u/s 40(b) = ₹
2,80,000 – ₹ 2,49,300 = ₹ 30,700
Income of Partners:
Particulars X (₹) Y (₹) Z (₹)
Interest to Partner Z (to the extent not taxable for the firm) - - 48,000
Salary to X & Y (₹ 2,49,300 divided equally) 1,24,650 1,24,650 -
Income of the partners 1,24,650 1,24,650 48,000
Note: Any salary, interest or profit which is taxable in the hands of the firm shall not be taxable in the hands of the partners.
DEDUCTION ON PAYMENT BASIS [SECTION 43B] [V.V. IMP.]

Notwithstanding anything contained in any other provisions of Income Tax Act, the deduction is allowed in respect of certain
expenditures only if the amount has been actually paid by the assessee during the previous year.
Expenditures allowed on payment basis are as under:
1 Any sum payable by way of tax, duty, cess or fee by whatever name called under any law for the
time being in force.
2 Employer’s contribution to any provident fund or gratuity fund or superannuation fund or any
other fund for the welfare of the employees.
3 Any sum payable to an employee as bonus or commission.
Interest on any loan or borrowing from a scheduled bank, a co-operative bank, a public financial
4 institution or a state financial institution or a state industrial investment corporation like IDBI,
LIC, UTI etc.
5 Any sum payable by an employer in lieu of any leave at the credit of his employees.
6 Any sum payable by the assessee to the Indian Railways for use of Railway Assets.
However, in case an assessee follows mercantile system of accounting, the payments can be claimed on due basis as well
provided the payment is made on or before the due date of furnishing the return of income u/s 139(1).
It shall be noted that if payment is made after the due date of 1st year in which it becomes payable, then deduction shall be
allowed in the year of payment only.
Q 49: Z Ltd. took a term loan in the P/Y 2021-22 from HDFC Bank. Interest on loan is ₹ 2,10,000. Z Ltd. follows mercantile
system of accounting. Due date for filing of return is 31st October 2022. The amount is paid as under:
Date of Payment (₹)

18th June 2021 30,000
25th November 2021 40,000
03rd September 2022 15,000
11th January 2023 25,000
09th July 2023 20,000
31st October 2023 35,000
Payment not made so far 45,000
Decide in which P/Y, deduction of interest shall be allowed?
Sol 49: Computation of deduction of interest paid by Z Ltd. with reference to Section 43B:
An assessee following mercantile system of accounting can claim deduction of interest on loan on due basis provided the
payment is made on or before the due date of filing of return. It shall also be noted that payment made after the due date
of 1st year in which it becomes payable, then deduction shall be allowed in the year of payment only.
P/Y 2021-22: 18th June 2021 + 25th November 2021 + 3rd September 2022 = ₹ 30,000 + ₹ 40,000 + ₹ 15,000 = ₹ 85,000
P/Y 2022-23: 11th January 2023 = ₹ 25,000
P/Y 2023-24: 9th July 2023 + 31st October 2023 = ₹ 20,000 + ₹ 35,000 = ₹ 55,000
Payment of ₹ 45,000 shall not be allowed deduction as it is still unpaid.
Q 50: Which of the following expenses are not deductible on payment basis u/s 43B?
(a) Bonus & Commission paid to employees
(b) Payment on encashment of leave standing to the credit of the employees
(c) Advertisement expenses
(d) Interest on loan paid to a scheduled bank [Ans: (c)]
VALUE OF LAND & BUILDING HELD AS SIT [SECTION 43CA]

Where land or building or both held as stock-in-trade, is transferred at less than the stamp duty value, then the stamp duty
value shall be deemed to be the full value of consideration for computing income u/h PGBP.
However, if the stamp duty value does not exceed 110% of the sale consideration received or accruing then, such
consideration shall be deemed to be full value of consideration for the purpose of computing profits and gains from transfer
of such assets.
➢ Where the date of the agreement fixing the amount of consideration for the transfer of the immovable property and
the date of registration are not same, the stamp duty value on the date of the agreement shall be taken. But it is also
necessary that part payment shall be paid by any mode other than cash on or before the date of agreement.
➢ Where the assessee claims that value adopted by the SVA is more than the Fair market value (but he has not disputed
under any court) then AO may refer the case to valuation officer. In such cases value determined by valuation officer
or value adopted by SVA whichever is lower.
Some illustrations for better understanding are as under:

Case Date of Act. Sales SDV on DOA SDV on DOR Full Value Remarks
transfer Con. of Con.
(₹ in lakhs)
1 01.05.21 105 (12 125 185 125 SDV on the DOA shall be full value of
lakhs recd (15.12.20) (01.05.21) consideration since the SDV > 110%
by A/c of consideration & a part payment
payee was received on the DOA by way of
cheque) A/c payee cheque.
(15.12.20)
2 01.06.21 120 (15 125 194 194 SDV on the DOR shall be full value of
lakhs recd (20.03.21) (01.06.21) consideration since part
in cash) consideration is received in cash &
(20.03.21) SDV exceeds 110% of consideration.
3 15.07.21 140 (12 150 176 140 Actual sales consideration would be
lakhs recd (15.12.20) (15.07.21) full value of consideration, since SDV
by A/c on the DOA (which has to be
payee adopted as full value of
cheque) consideration) does not exceed
(15.12.20) 110% of actual consideration.
4 19.02.22 150 (Full 183 198 198 SDV on the DOR shall be full value of
amt recd on (22.05.21) (19.02.22) consideration since the SDV exceeds
the DOR) 110% of consideration.
(22.05.21)
Q 51: ABC Builders transferred a building for ₹ 50 lakhs whereas its stamp duty value on the date of agreement is ₹ 56 lakhs.
The purchaser paid 10% as advance on the date of agreement through banking channels. Determine the value of the building
as per Section 43CA assuming the stamp duty value on the date of registration to be ₹ 59 lakhs.
(a) ₹ 50 lakhs (c) ₹ 59 lakhs
(b) ₹ 56 lakhs (d) ₹ 55 lakhs [Ans: (b)]
MAINTENANCE OF ACCOUNTS [SECTION 44AA]
(1) Every person carrying on legal, medical, engineering, architectural, accountancy, technical, consultancy, interior
decoration or any other notified profession or any person being film artist, company secretary, information technology
professional whose gross receipts exceeds ₹ 1,50,000 in all the 3 years immediately preceding the previous year or in
case of new setup, his receipts are likely to exceed the aforesaid limit must main prescribed books and other
documents as may enable the Assessing Officer to compute his total income.
(2) Maintenance of books of accounts based on turnover:

A. Individual / HUF: Where income > ₹ 2,50,000 or gross receipts / turnover exceeds ₹ 25,00,000 in any of the 3 years
immediately preceding the accounting year or in case of new setup, income/sales is likely to exceed the aforesaid
limits must maintain prescribed books.
B. Person others than individual or HUF: Where income > ₹ 1,20,000 or gross receipts / turnover exceeds ₹ 10,00,000
in any of the 3 years immediately preceding the accounting year or in case of new setup, income/sales is likely to
exceed the aforesaid limits.
(3) Prescribed Books:

i. Cash Book;
ii. Journal, if mercantile system is followed;
iii. Ledger;
iv. Carbon copies of bill exceeding ₹ 25.
In case of medical profession, two additional books are to be maintained:

i. Daily case register
ii. Inventory register
(4) The books and documents shall be kept and maintained at the place where the person is carrying on the profession,
or where there is more than one place, at the principal place of business.
It shall be noted that professionals whose gross receipts are less than the specified limits have to maintain such books
of accounts as may enable the Assessing Officer to compute the total income.
Sir, for how many years are we

supposed to keep our prescribed books? Ans: The prescribed books shall be kept and
maintained for a minimum period of 6 years from
the end of the relevant assessment year.
Q 52: Vinod is a person carrying on professions as film artist. His gross receipts from profession are as under:
(₹)
Financial year 2018-19 1,15,000
What is his obligation regarding maintenance of books of accounts for Assessment Year 2022-23 under section 44AA of
Income Tax Act, 1961? [ICAI Module]
Sol 55: Section 44AA(1) requires every person carrying on any notified profession, whose gross receipts exceeds a specified
limit to maintain such books of account and other documents as may enable the Assessing Officer to compute his total
income in accordance with the provisions of the Income Tax Act, 1961.
A person carrying on a notified profession shall be required to maintain specified books of accounts:
(i) If his gross receipts in all the three years immediately preceding the relevant previous year has exceeded ₹ 1,50,000;
or
(ii) If it is new profession which is setup in the relevant previous year, it is likely to exceed ₹ 1,50,000 in that previous
year.
In the present case, Vinod is a person carrying on professions as film artist, which is a notified profession. Since his gross
receipts have not exceeded ₹ 1,50,000 in financial year 2018-19, the requirement u/s 44AA to compulsorily maintain the
prescribed books of account is not applicable to him.
Mr. Vinod, however, required to maintain such books of accounts as would enable the Assessing Officer to compute his
total income.
Q 53: A person started business of garments in the P/Y 2021-22. He will have to maintain books of accounts as per Section
44AA if his income is likely to exceed:
(a) ₹ 2,50,000 (c) ₹ 1,20,000
(b) ₹ 10,00,000 (d) ₹ 1,50,000 [Ans: (a)]
COMPULSORY AUDIT OF ACCOUNTS [SECTION 44AB]

1. A person carrying on business: If the total sales/receipts of business exceeds ₹ 1,00,00,000 for the P/Y.
2. A person carrying on profession: If the gross receipts exceeds ₹ 50,00,000 for the P/Y.
In order to reduce compliance burden on SME’s, the FA 2020 has increased the threshold limit for a person carrying on
business from ₹ 1 crore to ₹ 5 crores in cases where:
(a) aggregate of all amounts received including amount received for sales or gross receipts during the P.Y., in cash, does
not exceed 5% of the said amount; and
(b) aggregate of all payments made including amount incurred for expenditure, in cash, during the P.Y. does not exceed
5% of the said payment.
Tax audit report may be furnished by the said assessee atleast 1 month prior to the due date of filing of return of income.
Some other points:

1. The assessee has to get his accounts audited and furnish audit report of CA by 31st October of the relevant assessment
year along with the return.
2. If the audit report is not submitted along with the return then AO may treat it as defective return.
3. In cases where accounts are required to be audited under any other law, then there is no need for audit under Income
Tax Act. Assessee shall only furnish an audit report under this section.
Q 54: What is the turnover limit for audit in case of a professional person?
(a) ₹ 50,00,000 (c) ₹ 10,00,000
(b) ₹ 1,00,00,000 (d) ₹ 5,00,00,000 [Ans: (a)]
Q 55: An assessee is carrying on business having a turnover of ₹ 4.35 crores during the P/Y 2021-22 out of which ₹ 38 lakhs
is cash turnover. Is the assessee required to get his books of accounts audited?
Sol 55: The assessee carrying on business has to get his books of accounts audited where the turnover exceeds ₹
1,00,00,000. However, the said limit shall be extended to ₹ 5,00,00,000 where aggregate of all amounts received during the
P.Y., in cash, does not exceed 5% of the total turnover.
In this case, as the cash turnover (i.e. 38 lakhs) exceeds 5% of the total turnover [₹ 4.35 crores x 5% = ₹ 21,75,000], he will
have to get his books of accounts audited as his turnover exceeds 1,00,00,000.
COMPUTATION OF INCOME ON ESTIMATED BASIS [SECTION 44AD, 44AE ETC.]
SECTION 44AE: Business of plying, leasing, hiring of trucks. Income shall be computed as under:
Eligible assessee: This section is applicable to assessee having not more than 10 trucks at any time during the previous
year.
Presumptive Income:
Heavy goods vehicle ₹ 1,000 per ton of gross vehicle weight or unladen weight, as the case may
be, for every month or part of a month during which such vehicle is owned by
the assessee during the P/Y.
Other than heavy goods vehicle ₹ 7,500 p.m. or part of the month during which such vehicle is owned by the
assessee during the P/Y.
Sir, how do we get to know whether a

particular vehicle is a heavy goods
vehicle or not? Ans: Heavy goods vehicle means any goods
carriage, the gross vehicle weight of which
exceeds 12,000 kilograms. The vehicles which
have weight upto 12,000 kgs shall be other
than heavy goods vehicle.
Q 56: Karan brought 4 trucks weighing 14,000 kgs on 30th August 2021. He transferred 2 trucks on 3rd February 2022.
Determine the presumptive income u/s 44AE assuming that he started to use his trucks from 1 st September 2021.
(a) ₹ 3,64,000 (c) ₹ 4,76,000
(b) ₹ 3,76,000 (d) ₹ 4,12,000 [Ans: (c)]
Q 57: Mr. Hameed had 4 goods vehicles (other than heavy vehicles) as on 01.04.2021. He acquired 7 goods vehicles (other
than heavy vehicles) on 27.07.2021. He sold 2 goods vehicles on 21.04.2021. He has brought forward business loss of ₹
50,000 relating to A/Y 2017-18 of a discontinued business. Assuming he opts for presumptive taxation of income as per
section 44AE, compute his total income.
Sol 57: An assessee following presumptive income u/s 44AE shall compute his income based on 7,500 p.m. or part of the
month for each heavy vehicle.
April 2021: ₹ 7,500 x 4 x 1 = ₹ 30,000
May 2021 – June 2021: ₹ 7,500 x 2 x 2 = ₹ 30,000
July 2021 – March 2022: ₹ 7,500 x 9 x 9 = ₹ 6,07,500
Presumptive Income u/s 44AE ₹ 6,67,500
(-) Brought forward business loss of A/Y 2017-18 ₹ 50,000
Total Income of Mr. Hameed for P/Y 2021-22 ₹ 6,17,500
Q 58: Mr. X commenced the business of operating goods vehicle on 01.04.2021. He purchased the following vehicles during
the P/Y 2021-22. Compute his income u/s 44AE for the A/Y 2022-23:
S. No. Gross Vehicle Weight (in Kgs) No. of trucks Date of purchase
1. 7,000 2 10.04.2021
2. 6,500 1 15.03.2022
3. 10,000 3 16.07.2021
4. 11,000 1 02.01.2022
5. 15,000 2 29.08.2021
6. 15,000 1 23.02.2022
Would your answer change if the goods vehicle purchased in April 2021 were put to use only in July, 2021?
[ICAI Module]
Sol 58: Since Mr. X does not own more than 10 vehicles at any time during the previous year 2021-22, he is eligible to opt
for presumptive taxation scheme u/s 44AE. Presumptive income shall be computed as under:
(a) 1,000 per ton of gross vehicle weight or unladen weight p.m. or part of the month for each heavy goods vehicle owned
by him plus;
(b) 7,500 p.m. or part of the month for each goods vehicle other than heavy goods vehicle, owned by him would be deemed
as his income from such goods carriage business.
• Heavy goods vehicle means any goods carriage, the gross vehicle weight of which exceeds 12,000 kilograms
No. of Date of purchase No. of months for which Calculation Presumptive Income
vehicles the vehicle is owned (₹)
Heavy goods vehicle
2 29.08.2021 8 (2 x 8 x 1,000 x 15) 2,40,000
1 23.02.2022 2 (1 x 2 x 1,000 x 15) 30,000
Other than heavy goods vehicle
2 10.04.2021 12 2 x 12 x 7,500 1,80,000
1 15.03.2022 1 1 x 1 x 7,500 7,500
3 16.07.2021 9 3 x 9 x 7,500 2,02,500
1 02.01.2022 3 1 x 3 x 7,500 22,500
Total Presumptive Income 6,82,500
The answer would remain same even if the two vehicles purchased in April, 2021 were put to use in July, 2021, since the
presumptive income has to be calculated p.m. or part of the month for which the vehicle is owned by Mr. X.
SECTION 44AD: All other businesses (except 44AE).

Eligible assessee: Individual, HUF & Partnership Firms (not LLPs) whose gross turnover from the above business does not
exceed ₹ 2 crores.
Presumptive income: Income shall be 8% of total turnover paid or payable to the assessee. However, the presumptive
rate of 6% of total turnover will be applicable in respect of amount received by
➢ an account payee cheque
➢ an account payee bank draft
➢ use of electronic clearing system through a bank account
during the previous year or before the due date of filing of return u/s 139(1) in respect of that previous year.
Exception: Presumptive scheme is not applicable to:
a) A person carrying on legal, medical, engineering, architectural, accountancy, interior decoration profession, film artists,
company secretaries or any other profession as notified by the board.
b) A person earning income in the nature of commission or brokerage.
c) A person carrying on any agency business.
Where an assessee eligible for presumptive income basis u/s 44AD does not follow it, he shall not be allowed to opt for
presumptive income for the next five assessment years after the assessment year of first non-compliance of section
44AD.
Q 59: Mr. Jadeja engaged in business of garments. His total turnover is ₹ 1,62,00,000 out of which ₹ 85,00,000 is cash
turnover. Compute his presumptive income u/s 44AD.
(a) ₹ 12,96,000 (c) ₹ 11,26,000
(b) ₹ 11,42,000 (d) ₹ 9,72,000 [Ans: (b)]
Q 60: Mr. Praveen engaged in retail trade, reports a turnover of ₹ 1,98,50,000 for the financial year 2021-22. His income
from the said business as per the books of accounts is ₹ 13,20,000. Retail trade is the only source of income for Mr. Praveen.
P/Y 2021-22 was the first year of his business for which he declared his income on presumptive basis u/s 44AD.
1. Is Mr. Praveen eligible to opt for presumptive income for the A/Y 2021-22?
2. If so, determine his income on presumptive taxation scheme assuming whole of the turnover represents cash receipts.
Advice Praveen.
3. In case Mr. Praveen does not opt for presumptive basis, what are his obligations under the Income Tax Act, 1961.
4. What is the due date of filing of return under both the options? [ICAI Module]
Sol 60:
1. Yes, Mr. Praveen is eligible to opt for presumptive taxation scheme u/s 44AD as his total turnover for the F/Y 2021-22
does not exceeds ₹ 200 lakhs in respect of his retail trade business.
2. If Mr. Praveen follows presumptive taxation scheme u/s 44AD, his income would be ₹ 15,88,000, being 8% of ₹
1,98,50,000. As his income as per the books of accounts is lower than the presumptive income, he should not follow
the presumptive taxation scheme.
3. If Mr. Praveen does not follow the presumptive taxation scheme, he would not be eligible to claim the benefit of Section
44AD for next 5 assessment years i.e., A/Y 2023-24 to A/Y 2027-28. Further Mr. Praveen shall now be required to
maintain his books of accounts and get them audited u/s 44AB, since his turnover exceeds ₹ 100 lakhs.
4. In case he opts for presumptive taxation scheme u/s 44AD, the due date would be 31st July, 2022.
In case he does not opt for presumptive taxation scheme & his books of accounts gets audited, which is the case, the
due date of filing of return would be 31st October 2022.
SECTION 44ADA: Presumptive income in case of Profession.

Income shall be 50% of gross receipts to the assessee.
Eligible assessee: A resident professional, whose total gross receipt in the previous year does not exceed ₹ 50 lakhs.
Some common provisions for the above sections:
i) All expenses including depreciation u/h PGBP shall be deemed to have been deducted. It shall be noted that losses can
be set off against such income. It shall also be noted that deduction u/s 80C to 80U shall be allowed.
ii) The assessee is neither required to maintain any books of accounts u/s 44AA nor is he required to get his accounts
audited u/s 44AB.
iii) Where any assessee claims that his income is lower than the estimated income then he will have to maintain books of
accounts and get his accounts audited.
Q 61: Mr. Sarthak is a professional whose gross receipts for the P/Y 2021-22 is ₹ 42,00,000. His income from profession as
per the books of accounts is ₹ 16,50,000. What shall be his income taking the most beneficial option.
(a) ₹ 21,00,000 (c) ₹ 16,50,000
(b) ₹ 42,00,000 (d) ₹ 8,25,000 [Ans: (c)]
QUICK REVISION BEFORE EXAMS
Section Particulars
28 Incomes charge to tax u/h PGBP:
1. Any income from Business / Profession carried on for any period during the P/Y;
2. Compensation received on termination of contract;
3. Export incentives;
4. Interest, salary received by a partner;
5. Any sum received for not carrying out any activity;
6. Sum received from Keyman Insurance Policy;
7. FMV on conversion of SIT into Capital Asset &
8. Income from Speculative Business.
145 Method of Accounting:
1. Accrual (Mercantile) Basis: Transaction relating to the C/Y shall be taken irrespective whether it is paid /
received. Exceptions: Sec. 35DDA & 43B.
2. Cash Basis: Transaction involving inflow/outflow of money shall be recorded irrespective whether it
relates to C/Y or not.
30 Rent, rates, repairs & insurance of building: Only revenue exp. allowed in relation to business.
If sub-let, exp = Rent paid – rent recd. Partner can receive reasonable rent from the firm for his property.
31 Repairs & insurance of P/M & Furniture: Only revenue exp. in relation to business shall be allowed.
32 Two conditions to be satisfied to claim depreciation:

1. Asset must be used for business & profession.
2. Assessee should be the owner of the asset (incl. co-owners)
Half depreciation on assets used for less than 180 days.
Depreciation is admissible for block of assets having same nature & percentage. Method is WDV. SLM allowed
only for power generating units.
Steps for computing depreciation: Op. WDV + Acquisitions – Sale Value = Cl. WDV. Find depreciation on the Cl
WDV.
43(1) Actual Cost: Exp of asset + any cost incurred before its first use.
o Asset used u/s 35AD: Cost shall be nil
o SIT converted into Capital Asset: Cost shall be FMV
o Where GST paid on Capital Asset is not allowed ITC, it shall be added in the cost of asset
o Building used for private purpose put to official purpose: Actual cost shall be reduced by notional
depreciation, assuming it was being used for business.
o Where cash payment > ₹ 10,000 for acquiring an asset, it shall not be included in the cost of asset.
o Where asset is reacquired, the cost shall be WDV at the time of transfer or cost of re-acquisition whichever
is lower.
Treatment where block of asset ceases to exist:
Case 1: Where all assets are transferred: a) Where SV > Op. WDV + Acquisitions, it’s a STCG
b) Where SV < Op. WDV + Acquisitions, it’s a STCL
Case 2: Where few assets transferred and the SV > Op. WDV + Acquisitions, it’s a STCG.
32(1)(iia) Additional Depreciation: 20% of new plant & machinery allowable to manufacturing assessees. If used for less
than 180 days, 10% in the C/Y and balance 10% in the next year.
Exceptions: a) Ships and aircrafts; b) Second-hand machinery; c) Office appliances; d) Road transport vehicle
& e) Asset on which 100% deduction is allowed.
32(2) Set off and carry forward of Unabsorbed Dep: Allowed set off from any head (except salary) for infinite years.
Order of Set-off: 1. C/Y Depreciation; 2. B/F Business Loss & 3. Unabsorbed Depreciation.
Depreciation on SLM Basis: Allowed only to power generating units on tangible assets on individual basis.
o Terminal Dep: When asset is sold at a price lower than WDV.
o Balancing charge: When asset is sold at a price higher than WDV. If SV exceeds original cost, then Cap
Gains shall arise.
35 Scientific Research Expenditure:
Pre-commencement Exp: 100% Revenue + Cap Exp. (except land) for previous 3 years.
Post-commencement Exp: 100% Revenue + Cap Exp. (except land). For Company: 150% (except Land &
Building)
Sale of Scientific Research Asset: SV is PGBP income. If exceeds original cost, Cap Gains shall arise.
However, if used in Non-SRA business, it will be added in block with nil value.
Unabsorbed Cap. Exp. on Scientific Research: Deemed expenditure of future years.
Contribution made to Outsiders: Contribution made to
1. Approved university, association, college, whose objective is social science & statistical research – 100%
2. Indian company for scientific research – 100%
3. Approved research association, IIT, national laboratory for scientific research – 150%
35AD Capital Expenditure on Specified Business – 100% (except land, goodwill & financial instruments)
1. Cross country natural gas, crude or petroleum pipeline network; 2. Hotel of 2 star or above; 3. Slum
redevelopment; 4. ICD or CFS; 5. Bee-keeping & production of honey & beeswax; 6. Warehousing facility for
sugar; 7. Cold chain facility; 8. Warehousing facility for agricultural produce; 9. Hospital with atleast 100 beds
for patients; 10. Affordable housing project; 11. Fertilizer in India; 12. Slurry pipeline for transportation of iron
ore; 13. Semi-conductor wafer fabrication manufacturing unit & 14. Infrastructure facilities such as roads,
ports etc.
o Only 20% old plant & machinery allowed.
o Pre-commencement exp shall also be allowed.
o Asset should not be transferred within 8 years. If sold, amount recd shall be PGBP income. If transferred
to non-specified business, then deduction claimed – notional dep shall be deemed income.
35D Amortization of Preliminary Expenses: Allowed in 5 equal installments. Maximum Deduction:

1. Indian Companies: 5% of (cost of project or capital employed, whichever is higher)
2. Others: 5% of cost of project
35DDA Voluntary Retirement Scheme expenditure allowed only on payment basis in 5 equal instalments from the
year of payment.
36 Business Deductions:
1. Insurance Premium paid to cover risk of damage of stocks & stores; paid on the lives of cattle owned; paid
on the health of employees by any mode other than cash.
2. Bonus or commission paid to employees.
3. Interest on borrowed capital for business
4. Employee’s + Employer’s contribution to provident fund etc.
5. Bad Debts
6. Family planning expenditure by company (capital exp: 1/5th)
37 General Deduction: Any expenditure not being capital or personal incurred wholly & exclusively for business
or profession shall be covered here.
40(a) Expenses not deductible:
1. Interest, royalty, fees paid outside India or to a NR on which no TDS was deducted. Deduction shall be
allowed in the previous year in which TDS is paid.
2. Interest, brokerage, rent, fees paid to a resident on which no TDS was deducted shall be disallowed to
the extent of 30%. Deduction shall be allowed in the previous year in which TDS is paid.
3. Any sum paid under Income Tax Act (Tax, interest, penalty etc)
Salary payment outside India on which TDS is not deducted. It shall not be allowed even if TDS is deducted in
subsequent year.
40A(2) Where any unreasonable payment is made to specified person, then unreasonable expenditure shall not be
allowed. Specified person means spouse, brother or sister or any lineal ascendant or descendant, partner,
director or any person having ≥ 20% profit sharing.
40A(3) Cash Payments: Where a payment of an expenditure to a person in cash exceeds ₹ 10,000, the whole amount
is disallowed. The limit is extended to ₹ 35,000 in case of transport operators.
40(b) Deduction for Partnership Firm:
1. Interest on capital allowed @ 12% p.a.
2. Maximum Permissible Remuneration
Book Profit Maximum Remuneration
On the first ₹ 3,00,000 ₹ 1,50,000 or 90% of book profit whichever is more
Balance book profit 60% of the book profit
Where book profit is negative ₹ 1,50,000
Book profit = Income u/h PGBP + remuneration to partners if debited to P/L A/c – brought forward
depreciation.
43B Deduction on Payment Basis:
1) Taxes; 2) Employer’s contribution to approved funds; 3) Bonus or commission; 4) Interest on loan; 5) Leave
Salary; 6) Payment to Indian railways.
Where the assessee is following mercantile system of accounting, payments shall be allowed where it is paid
on or before the due date of furnishing ROI.
43CA Land & Building held as SIT: Where SDV ≤ 110% of SC, then SC shall be considered.
SDV on the DOA shall be considered where advance is received through banking channels, otherwise SDV on
the DOR shall be taken.
44AA Maintenance of Accounts: The following will have to maintain prescribed books of accounts:
1. Person carrying on notified profession (legal, medical, engineering etc.): Where gross receipts exceed ₹
1,50,000 in all 3 years immediately preceding the P/Y.
2. Person carrying on business and having income/turnover:
o Individual / HUF: Income > ₹ 2,50,000 or Turnover > ₹ 25,00,000 in any of the 3 years immediately
preceding the P/Y.
o Others: Income > ₹ 1,20,000 or Turnover > ₹ 10,00,000 in any of the 3 years immediately preceding
the P/Y.
Prescribed Books: Cash Book, Journal, Ledger (for accrual basis) & Carbon copies of bill exceeding ₹ 25.
The books should be maintained for a minimum period of 6 years from the end of A/Y.
44AB Compulsory audit of accounts

1. Person carrying on business: Where total sales > ₹ 1,00,00,000.
For SME’s, where the amount received / paid in cash does not exceed 5% of the respective amount, the
threshold limit for audit will be ₹ 5 crores instead if ₹ 1 crore.
2. Person carrying on profession: Where gross receipts > ₹ 50,00,000.
If books are audited, the assessee has to submit the report by 31st October of relevant A/Y.
44AE Presumptive income for transporters: (Max. 10 trucks allowed at any time during the P/Y)
1. Heavy goods vehicle (above 12,000 kgs): ₹ 1,000 per tonne p.m. or part for which it was owned by the
assessee
Other than heavy goods vehicle: ₹ 7,500 p.m. or part for which it was owned by the assessee
44AD Presumptive income for businessman: 6% of turnover received through banking channels + 8% of turnover
for others
Eligibility: Individual/HUF/Firm (incl. LLP) having turnover upto 2 crores.
Restriction: Where an assessee eligible u/s 44AD does not follow it, he shall be prohibited to follow this
section for the next 5 A/Ys.
44ADA Presumptive income for professionals: 50% of gross receipts.
Eligibility: A resident professional having receipts upto 50 lakhs.
NOTES FOR STUDENTS
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CA SHREY RATHI PGBP 5.

“Ups and downs in life are very

SCOPE OF THIS CHAPTER

Income under the head PGBP [V Imp.]

Sir, what if an amount of ₹ 10,000

BASIS OF CHARGE [SECTION 28]

iv) Export incentives which includes:

v) Interest, salary, bonus, commission received by a partner of a firm in which he is a partner.

Q 2: Which of the following incomes is not chargeable to tax u/h PGBP?

METHOD OF ACCOUNTING [SECTION 145]

Sir, what if the question is silent as

Ans: Mercantile system is to be followed

Sol 4: Computation of income u/h PGBP for the A/Y 2021-22:

RENT, RATES, REPAIRS AND INSURANCE FOR BUILDING [SECTION 30]

Sir, my father took a building on rent for official

REPAIRS AND INSURANCE OF MACHINERY, PLANT & FURNITURE [SECTION 31]

DEPRECIATION [SECTION 32]

1. Asset must be owned by the assessee (including co-owners).

Capital expenditure in a building taken on lease. Assessee shall be entitled to depreciation in

2. Asset must be used for business or profession.

Sir, my uncle purchased a machinery in

BASIC CONCEPTS FOR COMPUTATION OF DEPRECIATION:

(a) Depreciation is admissible for block of assets.

(b) Method of computation of depreciation is written down value (WDV) method.

Sir, is no one allowed to claim

Prescribed percentages for various blocks:

2. PLANT AND MACHINERY

Sir, can depreciation be claimed on

Ans: No depreciation is allowable on

Q 7: Who of the following is not eligible to claim depreciation?

Q 8: What is the rate of depreciation on factory building?

ACTUAL COST [SECTION 43(1)]

Actual cost of an asset includes:

All expenses directly expenses Install and fix it

Expenses on fuel, power Subsidy granted by

Sir, my father is a dealer of Panasonic Air-

Sir, my uncle purchased an asset for

STEPS FOR COMPUTING DEPRECIATION:

1 Find opening WDV of each block at the beginning of the year.

2 Cost of acquisition of assets acquired during the year.

4 WDV of each block as on the last day of the previous year.

Sol 13: (a) Computation of depreciation for the P/Y 2021-22:

Q 15: YZ Ltd. owns the following assets:

Sol 15: Computation of depreciation for the P/Y 2021-22: (₹)

COMPUTATION OF DEPRECIATION WHERE THE BLOCK OF ASSETS CEASES TO EXIST

Sir, what if there is an amalgamation of

ADDITIONAL DEPRECIATION [SECTION 32(1)(iia)]

Provided no additional depreciation shall be provided in the following cases:

2. Any plant or machinery which

Q 21: LP Ltd., a manufacturing company furnishes you the following information:

Sol 21: Computation of depreciation for the P/Y 2021-22: (₹)

SET OFF AND CARRY FORWARD OF UNABSORBED DEPRECIATION [SECTION 32(2)]

Current year Brought forward Unabsorbed

(b) Computation of taxable income if depreciation is ₹ 2,12,000 instead of ₹ 1,12,000.

DEPRECIATION ON SLM BASIS

Sir, Can the option of availing

Ans: The option shall be exercised before the due

2. Cost of asset purchased in 2019 ₹ 5,00,000