PROFITS AND GAINS FOR BUSSINESS OR

PROFESSION
1. Sec. 28: Income chargeable under this head
 The distinction between Businesses, Profession & Vocation is not relevant.
 Any compensation or other payment due to or received by any person managing the affairs of a Company,
Govt. corporation or holding agency in India
 Income from specific services performed for its members by a trade, professional or business association
 Incentive received or receivable by assessee carrying on export business as profit on sale of import
entitlements, cash assistance against exports under any scheme of GOI, Customs duty or excise re-paid or
repayable as drawback, Profit on transfer of Duty Entitlement Pass Book Scheme or Duty Free
Replenishment Certificate
 Value of any benefit or perquisite
 Sum due to ,or received by, a partner of a firm
 Any sum received under a Keyman insurance policy
 Any sum whether received or receivable, in cash or kind, under an agreement for not carrying any activity,
for not sharing any know-how, patent etc.
 Accordingly, any compensation received or receivable, whether revenue or capital, in connection with the
termination or the modification of the terms and conditions of any contract relating to its business shall be
taxable as business income.
 Fair market value of inventory on its conversion as capital assets: Fair market value of inventory on the
date of its conversion or treatment as capital asset, determined in the prescribed manner, would be
chargeable to tax as business income.

2. Some basic points:-

1. While calculating income Accounting Method (Mercantile or Cash) will be applicable as assessee
maintain Books of Accounts
2. Only expenses of same business will be deducted
3. Speculation business income will be calculated separately.
4. Illegal business income is also taxable:-
i) Legal or illegal all expenses are deductible
ii) But penalty etc. is not deductible.
5. If assessee got any award or facility due to his professional work then treated as business income.
6. If earlier deducted amount recover in future than taxable as Business income in year of receipt, even
when business is discontinued.

3. Expenses which are allowed

1. Sec. 30: Expenses of Business Premises
Any Rent, Municipal Tax, Land revenue, Fire Insurance, Ground rent & repair etc. are deductable.
i) If assesses is tenant then total repair is allowed whether current or of capital nature.
ii) Rent paid to partner is also allowed.
iii) If assessee pays any rent due by previous tenant then not deductable.
iv) Premises sub-let: where the assessee has sublet a part of the premises used allowance under the
section would be confined to the difference between the rent paid by the assessee and the rent
recovered from the sub tenant.
2. Sec. 31: Repair& Insurance of Plant, Machinery or Furniture: 100%
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3. Sec. 32:Depreciation:
Some basic concepts:-
(i) Asset should be owned by assesses
If asset taken on lease or on Rent then no Depreciation is allowed but if any capital Exp. incurred on
leased asset then Depreciation allowed.
(ii) Asset should be used for business
 (Sec.38) If asset partly use for business then proportionate Depreciation allowed.
 If asset provide to employee then it is treated as business use.
(iii) From A.Y. 2002-03 Deduction of Depreciation is compulsory whether assesses is claiming Depreciation
or not.
(iv) Depreciation is charged on the blocks of asset on the W.D.V.
(v) If in closing WDV there is any value of such asset which is purchased during the financial year and used
for less than 180 Days then on such value Half year Depreciation on that Machine &on Remaining
value of Block full year Depreciation will charge.
Condition:
(a) Assets already purchased whether used for less than 180 Days, full year Dep. will be charged.
(b) Depreciation is charged if the asset is available on closing of P.Y. means not sold.
(vi) Conditions to be Fulfilled (Eligible Assessee for Additional Dep)
 Deduction is available to all assesses who are engaged in the business of:
(i) Manufacture or production of any article or thing; or
(ii) Generation transmission or distribution of electricity.
 The assessee has purchased and installed new plant & machinery.

Meaning Of New Plant & Machinery

New plant & machinery does not include:
 Second hand plant & machinery whether Indian or imported (i.e. plant & machinery should be brand
new)
 Any plant & machinery installed in any office premises or any residential accommodation like guest
houses (i.e. plant & machinery should be installed be installed at factory)
 Any office appliances including computers or computer software
 Any vehicle
 Ship or aircraft
 Any plant & machinery the actual cost of which is allowed to be debited to P&L A/c (i.e. plant &
machinery for which deduction is claimed u/s 35. 35AD, etc.)

Amount of Additional Deprecation

Case I: If new plant & machinery has been put to use during the year of acquisition:

(a) Put to use for less than 180 days or more: One time additional depreciation is allowed @ 20% of
the actual cost of the plant & machinery.
(b) Put to use for less than 180 days: one time additional is allowed @ 10% of the actual cost of the
plant & machinery. The balance 10% is allowed in the next year.

Case II: If new plant & machinery has been acquired during one previous year and has been subsequently
put to use during a different year:
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In such cases, one time additional depreciation is allowed @ 20% of the actual cost of the plant &
machinery in the year in which the asset has been put to use. The number of days for which the asset has
been put to use such year is irrelevant.

Special Provision For Units Set-Up In Certain States:

 This special provision is applicable to all kinds of assesses provided all the conditions listed below are
fulfilled:(not applicab
 The assessee sets up an undertaking enterprise for manufacture or production of any article or
thing on or after April 1, 2015.
 Such undertaking must be set up in any backward area (notified by the central government) in
Andhra Pradesh, Bihar, Telengana and West Bengal.
 The assessee acquires and installs ‘new plant and machinery’ for the purposes of such
undertaking on or after April 1, 2015 but before April 1, 2020.
 If all the above conditions are fulfilled, the rate of additional depreciation shall be taken to be 35%
instead of 20% where the new plant & machinery has been put to use for less than 180 days in the year
of acquisition depreciation @ 17.5% shall be allowed in the first year and the balance 17.5% shall be
allowed in the next year.(Deleted)

Points to be Noted:

 The amount of additional depreciation is in addition to the normal deprecation.

 Further the amount of additional depreciation is reduced from the actual cost of the plant & machinery
to arrive at its WDV value.

Rates of depreciation:
Assets Rates
Building Residential Purpose 5%
General Rate 10%
Buildings acquired on or after 1st September, 2002 for installing 40%
machinery and plant forming part of water supply project or water
treatment system and which is put to use for the purpose of business of
providing infrastructure facilities
Furniture 10%
& Fixture
Purely temporary erections such as wooden structures 40%
Plant & Running on hire 30%
Machinery Other than those on hire 15%
Computer 40%
Annual Publications owned 40%
General Rate 15%
Motor cars other than those used in a business of running them on hire, 30%
acquired during the period from 23.8.2019 to 31.03.2020 and put to use
on or before 31.03.2020
Motors buses, motor lorries, motor taxis used in a business of running
them on hire, acquired during the period from 23.8.2019 to 31.03.2020 45%
and put to use on or before 31.03.2020
Ships 20%
Intangible 25%
Asset(excl
ude
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goodwill)

(vii) Sec.43(1): Actual cost in some special circumstance

1. Asset used for Business after it ceases to be used for scientific research:
Actual cost to the assessee as reduced by any deduction allowed under section 35(1)
2. Inventory converted into capital asset and used for Business or profession: the fair market value
of such inventory as on the date of its conversion into capital asset shall be the actual cost of such
capital asset to the assessee.
3. Asset is acquired by way of gift or inheritance: its actual cost shall be written down value to the
previous owner.
4. Second hand asset: Actual cost of asset will be that such amount which is determined by
Assessing officer with the previous approval of joint commissioner.
5. Re-acquisition of asset: the actual cost to the assessee
(i) The written down value at the time of original transfer or
(ii) The actual price for which the asset is re-acquired by him. Lower
6. Acquisition of asset previously owned by any person to whom such asset is given on lease, Hire
or otherwise: actual cost of the transferred assets for transferee shall be same as the written
down value of the said assets at the time of transfer.
7. Building previously the property of the assessee: Actual cost to the assessee as reduced by an
amount equal to the depreciation calculated at the rates in force.
8. Transfer of capital asset by a holding company tea subsidiary company or vice-versa: Actual cost
shall be same as it would have been if the transferor company had continued to hold the capital
asset for the purposed of its own business.
9. Capital asset is transferred by the amalgamating company to the amalgamated company: Actual
cost shall be same as that asset is continually hold by the amalgamating co.
10. Capital asset is transfer by the demerged co. to the resulting co.: same provision as above
11. Capitalization of interest paid or payable in connection with acquisition of an asset:
12. Amount of duty of excise or additional duty shall be reduced if credit is claimed:
13. Subsidy, grant or reimbursement: - Amt. which is reimbursed by Govt. In form of subsidy or grant
in life of asset will be deducted from the actual cost of the asset.
14. Asset is acquired outside India by an assessee, being non-resident and such asset is brought by
him to India: the actual cost of asset will be the reduced by value of Depreciation charged till date
on that asset.
15. Capital asset is acquired under a scheme for corporatization: the actual cost shall be deemed to
be the amount which would have been regarded as actual cost had there been no such
corporatization
16. Capital asset on which deduction is allowable under sec. 35AD: the actual cost would be nil.

4. Sec .35: Expenses on Scientific Research

(A) Expenses incurred by assesses himself on research:100% allowed

Condition:-
(i) Research should be related to business.
(ii) Expenses may be Revenue or capital nature but not for purchasing land.
(iii) The assets which is Purchased cannot be sold.
(iv) If an asset is sold, (without using for other purpose) then deduction which is already allowed will be
treated as business income & surplus will be capital gain.
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(v) Expenses for salary and Raw Material related to 3 years immediately preceding the date of starting
of business will be allowed in first year.
(vi) If assesses is a company & Research is approved by Authority then 100% of expenses are allowed
(For in house research).

(B) Payment made to:-

(i) Certain association/institution for scientific research=100%
(ii) Certain institutions for research in social science or statistical research = 100%
(iii) A company to be used for scientific research = 100%
(iv) National Laboratory or a University or an Indian Institute of Technology = 100%
Condition:-
(i) Contribution should make to approved scientific or statistical research institute, college,
university or to National Laboratory.
(ii) Research may or may not relate to business.
 If deduction is not allowed for purchase of assets u/s 35, then assesses can claim
Depreciation on that assets.
 Expenses for Scientific research may carry forward like unabsorbed Depreciation.
(iii) Capital expenditure other than expenditure on land.

5. Sec.35AC: Expenses on Eligible Project or Scheme approved by National Committee: 100% deductable
Condition
(i) Payment should make to Public Company Local Authority or approved association for carrying out
eligible project.
(ii) If assessee is a company then it may spend on eligible project.

6. Sec.35AD: Expenditure on Specified Business: Expenses of Capital Nature are 100% deductible
Assesses who is carrying on any of the following specified Business:
(i) Setting up and operating a cold chain facility
(ii) hotel two star or above, building and operating a hospital with at least 100 beds for patients,
production of fertilizer, bee keeping and production of honey and bees, warehousing facility for
storage of sugar, transportation of iron ore.
(iii) Setting up and operating a warehousing facility for storage of agriculture produce.
(iv) Laying and operating a cross-country natural gas or crude petroleum oil pipeline network for
distribution including storage facility.
(v) Developing or maintaining and operating or developing, maintaining and operating a new
infrastructure facility.
Deduction will be only allowed if the accounts of the assessee are audited by a chartered accountant
and audit report is duly signed, furnished in prescribed format along with his return of income
Assets to be used for specified business for 8 years.

7. Sec. 35CCA: Payment made to following are allowed 100%

(i) Association and Institutions for carrying out Rural Development Programmers
(ii) National Fund for Rural Development
(iii) National Urban Poverty Eradication Fund
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8. Sec.35CCC: Weighted deduction of 150% for expenditure incurred on agriculture extension project.
Weighted Deduction of 150% for expenditure incurred on notified* agricultural extension project.
No other Deduction will be provided under any other provision of the act in the same or any other
assessment year.

Notified Project:
(i) The project shall be undertaken by an assessee for training, education and guidance of farmers.
(ii) Have prior approval of ministry of agriculture, govt. of India.
(iii) An expenditure (not being expenditure in the nature of cost of any land or building) exceeding Rs. 25
lakhs is expected to be incurred for the project.

9. Sec.35CCD: Weighted deduction of 150% for expenditure incurred by a company onskill development
project.
 Deduction on notified skill development project
Condition for notified project:-
 Skill development project considered for notification if undertaken by an eligible co. company engaged
in the business manufacture or production of any article or thing not being beer, wine and other
alcoholic spirits and tobacco products.
 Skill development project for existing employees of the company is not eligible for notification.
 Other conditions: Maintain separate books of account and audited by an accountant and all these
books or statements must be furnished with returns of income.
Under this section from A.Y.2021-22 onwards deduction will be restricted to 100% only.

10. Sec. 35D: Amortization of Preliminary Expenses

Applicable to assesses
Deduction is available only to Indian Company and Resident non-corporate assessee
Eligible Preliminary Expenses:-
This type of expenses may be incurred before commencement of business and also for extension of existing
business.
(i) Expenses for preparation of Feasibility report, Project report, market survey or any engineering service
whether made by assessee himself or by an Approved concern.
(ii) Legal charges for drafting any Agreement, M.O.A & A.O.A.
(iii) Printing charges of M.O.A & A.O.A
(iv) Registration fee
(v) Expenses on issuing of share i.e. underwriting commission or Brokerage etc.

Exception:
In case of where assessee is person other than a company or a co-operative society the deduction
would be allowed only if the accounts of assessee is audited (by chartered accountant) from year to
year in which expenditure is incurred.
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Amount of deduction
If incurred after 31 March 1998: 1/5 each year’s upto 5 year starting from year of commencement of
business or year of extension.
Total amount cannot exceed.
5% of cost of Project
Which ever is higher.
Or 5% of capital employed

Cost of Project: Actual cost of fixed Assets on last day of P.Y.

Incase of extension: Extended value of F.A.
Capital Employed: Issued share capital + debenture + Long term borrowing (made by foreign country in
respect of purchase outside India plant and machinery repayment of debt not less than 7 years.

11. Sec. 35 DDA: Amount paid to employee on voluntary retirement:

1/5 each year upto 5 year.
In case of transfer of business (amalgamation demerger, reorganization or succession) during the
intervening period of said 5 year, the benefit of deduction will be available as earlier including the year of
transfer.

12. Sec. 36 (1) (ia): Insurance Premium of Cattle: The amount of any premium paid by federal milk Co-
operative Society towards an Insurance on the life of the cattle owned by the members.

13. Sec. 36 (1) (iii): Interest on borrowing

It is fully allowed but following points must be considered:-
i) Borrowed money must be used for business.
ii) Loan must be refundable.
iii) Any interest is actually paid or payable.
iv) Interest on Loan taken for paying dividend is allowed
v) Interest on capital is not allowed.
vi) In case of partnership firm 40 (b) will be applied
vii) It is not necessary that investment made out of borrowed funds should yield any profit in the year.
viii) Interest paid on late filling of return is not allowed.
ix) Interest paid on loan taken for purchase any asset:
Interest on money borrowed, for period prior to commencement of business is not allowed under this
sec., it can be treated as part of cost of asset.
x) If Interest allowed paid outside of India and Tax has not been deducted at source then interest is not
allowed.

14. Sec. 36 (1) (iiia) :Discount on issue of zero coupon bond to be allowed as deduction on pro-rata basis
in period of life of Bond.

15. Sec.36 (1) (iva): Employer’s contribution towards a pension scheme up to 10% of salary of employee.

16. Sec. 36 (1) (va): Sum received from employee towards certain welfare scheme if not credited to their
accounts before the due date means due date of fund then included in Business Income
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17. Sec. 36 (1) (vi): Allowance in respect of dead or permanently useless animals other then stock in
Trade.
1. No. Deduction in year of purchase
2. No. Depreciation etc.
3. In year of death or becoming useless
Purchase price - sale price (if any) will deduct

18. Sec. 36(1) (vii): Bad debts

Fully allowed if condition satisfied
(i) Such debts must be revenue in nature.
(ii) Should be related to business.
(iii) Such debts must have taken into account in computing income of assessee.
(iv) Now there is no action in force to recover that bed debts.
(v) IF such debts have been written off as irrecoverable in accounts of assess
(vi) If this amount is recovered, it shall be treated as income of Previous year in which it is recovered u/s 41
(4).
(vii) Amt of debt taken into account in computing the income of the assessee on the basis of notified ICDSs
to be allowed as deduction in the previous year in which such debt or part thereof becomes
irrecoverable.

19. Sec. 36(1)(ix): Expenses on promoting family planning allowed only for company.
Revenue Expenses =100%Capital Nature = 1/5 each year
Unabsorbed Expenses will be carried forward like unabsorbed depreciation.

20. Sec. 36(1)(xv): Securities Transaction Tax paid:100% allowed If securities held as stock in trade.

21. Sec. 36(1)(xvi): Deduction for commodities transaction tax paid in respect of taxable commodities
transactions: 100% allowed

22. Sec.37 (1): Expenditure allowable as deduction to calculate business income

1. Not of Capital Nature
2. Related with Business
3. Must Related to Previous year (In care of mercantile method)
4. Should spend in previous year (In case of cash method)
Some main Examples:-
(i) Income Tax is not deductible. But expenses for preceeding of income tax are allowed.
(ii) Deposit in 'Tatkal Telephone Deposit Scheme is allowed.
(iii) Brokerage or commission incurred for raising loan is allowed.
(iv) Personal gift is not allowed. But any gift to motivate any employee is allowed.
(v) Penalty is not allowed whether business is legal or illegal.
(vi) Any reserve or fund is not allowed
(vii) Expenditure on inauguration is allowed
(viii) Expenses on foreign tour for Business purpose is allowed
(ix) Difference of Trial balance is not allowed
(x) Approved Gratuity Fund is allowed but any provision for Gratuity is not allowed
(xi) Expenditure on Valuation of Share is allowed, but commission of issue of share is not allowed, it is
preliminary expenses.
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(xii) Subscription to any association for benefit of business is allowed.

(xiii) Payment to use goodwill for few times is allowed.
(xiv) Payment for Medical Insurance Premium of employees is allowed only if paid through cheque.
(xv) If any asset, is used for Business as well as personal purpose then Depreciation and Expense will be
allowed proportionately.
(xvi) No deduction for advertisement in magazines etc of political party.
(xvii) CSR expenditure not allowed as deduction.
(xviii) Tax paid by employer on monetary perquisites not allowed as deduction.
(xix) Employee welfare fund allowed as deduction
(xx) Interest on refund is not allowed

23. Sec. 37(2B): Expenditure in connection with advertisement like advertisement in newspapers,
Television or other media, payment to ad agency for making the advertisement, etc.
No deduction is available for any expenditure incurred by assessee on advertisement in any souvenir,
pamphlet, publication or newspapers of any political party.
Note: Such donation/expenditure is allowed as deduction u/s 80GGB/80GGC.

4. Expenses which are not allowed

1. Sec. 40(a):
(a) If any interest, royalty, fee for technical service or any other same is payable outside India or to a non-
resident without any TDS than no deduction.
(b) If any sum is payable to a resident on which TDS is deductable under Sec.192 to 194LA but not deducted
than 30% of such expenditure is not deductable.
But in a & b, if tax has been deducted or paid in subsequent year than expenditure allowed in the year in
which tax has been paid to government which was earlier disallowed

2. Sec. 40(b): Exp. which are not deductable in partnership firm& LLP
(A) Any Salary, Salary includes all Bonus, Commission, Fee or Remuneration paid to partner. Firstly is will
be disallowed. But if following condition fulfill, it will be allowed.
(i) Allowed to only Working partner.
(ii) Should be according to Partnership deed
(iii) Salary for year prior to year of Partnership deed is not allowed
(iv) Salary exceeds from specified limit is not allowed.

Specified limit :
(B) In case of ordinary firm:
On first 3,00,000/- of Book Profit :90% of B.P. or 1, 50,000/-Whichever is higher.
On balance -60% book profit
Book Profit (b.p.) = Net Profit after all adjustment of Sec 30 to 44 D and Interest to partner.
Add = Remuneration etc. to partner if earlier deducted.

(C) Interest to partner on Loan or on Capital

Condition
i) Should be according to Partnership deed.
ii) Interest for year prior to year of Partnership deed is not allowed
iii) Maximum 12% p.a. allowed.
 Rule of Sec.40(b) not applied on salary, interest paid to individual who is partner in representative
capacity and such remuneration is because of his personal effort or capital.
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 No adjustment can be made between interest on drawing & interest on capital.

3. Sec. 40(ba): Expenditure in A.O.P. or B.O.I. which are not allowed is as follow:
(i) Salary and interest to Members are not allowed
(ii) Sec. 40(ba) will not apply on Salary and interest paid to individual who is Member in representative
capacity and such remuneration is because of his personal effort or capital.
(iii) Interest drawing from Member then net interest will be treated.
4. Sec .40 A (2): Excessive Payment
Payment to following specified persons is allowed up to reasonable amount.
i) Relative of assesses
ii) Person having substantial interest in organization.
iii) Relative of person having substantial interest.

5. Sec.40 A (3) :Cash payment above 10,000/-

When a payment exceeding Rs. 10,000/- at a time is made other than account payee cheque or Demand
Draft or Electronic Clearing System or through such other prescribed electronic modes then there will be
no deduction.
In case of payment made to transporter in cash is allowed upto Rs. 35,000
Exception:-
i) A person may make different payment at different times during the day to same person and
aggregate of Payment during day to some party may exceed Rs. 10,000/-
ii) If one bill is more than Rs. 10,000/-, then payment may be made in installments less than Rs.
10,000/-
iii) Payment to Bank or Financial Institute.
iv) Such Payment to Govt. which is compulsory in cash
v) Payment to any Farmer, Grower, Producer of animal husbandry or to such person who lives at such
place where banking facility is not available.
vi) Payment to authorized dealer of currency.
vii) Payment on bank holiday.
viii) Payment of capital exp.
ix) In case of retirement benefits if amount up to Rs. 50,000.
x) Payment made by commission agents.
xi) Payment made by credit card, debit card, bill of exchange mail or telegraphic transfer through a
bank and letter of credit arrangements through a bank.
xii) It does not apply for loan transactions. However interest payments are deductible expenditure.
Purchase of An Asset: Where the assessee purchases any asset for which a payment or aggregate
of the payments made to a person in a day exceeds Rs. 10,000 and such payment is made other
than the allowed means(A/c Payee Cheque/Bank Draft/Electronic Clearing System) then such
expenditure shall be ignored for the purpose of determination of actual cost while calculating
depreciation.

6. Sec .41:Profits chargeable to tax

o Remission or cessation of trading liability
o Balancing charge, sale of capital asset used for scientific research, Recovery of a bad debt subsequently
etc.
o Withdrawal from reserves created
o Brought forwarded losses of defunct business
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7. Sec .41(2):Balancing Charge:

o This provision applies only to companies which are engaged in generation or generation and
distribution of power which have opted to charge depreciation on SLM basis.
o The difference between the WDV of the asset and its sale price is taxable u/h PGBP as balancing charge
if the asset is subject to depreciation on SLM basic.
o The excess of sale price over the actual cost of the asset is not treated as balancing charge. Such excess
amount is subject to capital gains.
8. Sec .41(3):
o Scientific research asset sold without using for the purposes of any other business:
o Where any asset which has been used for scientific research is sold without using for the purposes of
any other business, least of the following shall be taxable as PGBP income:
o Sale price of asset; or
o Deduction allowed u/s 35
Note: Capital gains shall arise if the sale price exceeds the cost of the asset. Capital gains shall be long
term if the asset was sold after a period of 3 years; otherwise capital gains shall be short-term.
9. Sec .41(4):
o Recovery of bad debts:
o Where any debt has been allowed as bad debts u/s 36(1)(vii) and subsequently the assessee recovers
any amount in respect of such bad debt, the amount of recovery shall be taxable in the year of
recovery.
10. Sec .43A:
o Section 43A applies where an assessee has acquired any asset from outside India and has taken a loan
in foreign currency from outside India for purchasing this asset.
o Similarly, gains arising on principal repayments due to foreign exchange fluctuations shall be reduced
from the WDV of asset and depreciation shall be computed at the reduced value in future years.
o
11. Sec. 43B: Certain deduction to be allowed only on actual payment
i) Any tax, duty, cess or fee payable under any law.
ii) Any Bonus, fee, commission or leave encashment payable to employee.
iii) Any interest payable to any Bank (Scheduled, unscheduled or co-operative, Primary Co-operative
agricultural and rural development bank) or to any Public financial Institute or State Industrial
Development Corporation.
iv) Contribution to P.F., ESI or Approved Gratuity Fund.
v) Payment made to Indian Railways for using Railway assets.
vi) Any sum paid as an employer in lieu of earned leave of his employee
vii) Any sum payable by the assessee as interest on any loan or borrowing from a deposit taking non-
banking financial company or systemically important non-deposit taking non-banking financial
company.
All Payments: should be paid on or before the due date of furnishing the return of income in respect of
Previous Year in which liability to pay such sum was incurred. However in case Payment of outstanding
liability is made after due date, deduction can be claimed in year of payment.
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12. Sec. 44AA: Compulsory Maintenance of Accounts

(i) Non specified business or profession
 Individual/HUF → Income > Rs. 2.5 lakhs or turnover or gross receipts > 25 lakhs in any of the
preceding three previous year.
 Person (other than individual of HUF → Income > 1.2 lakhs or turnover or gross receipts 10 lakhs
(ii) Specified profession
Turnover or gross receipts > Rs. 1.50 lakhs in all the preceding three previous year.
OR
Turnover or gross receipts > Rs. 1.50 lakhs in any of the preceding three previous year.

Then Prescribed books of accounts and other documents Under Rule 6F are maintained

Note 1: If professionals whose gross receipts are less than the specified limit then they are required to
maintain books of accounts which will enable the assessing officer to compute the total income.
Note 2: Specified profession – legal, Medical, Engineering, Accountancy, Architectural, Technical
Consultancy, Interior Decoration, Film Artists, CS, Information Technology, Professional and Authorised
Representatives.
Minimum period of maintenance of books of accounts shall be 6 years from the end of the relevant
assessment year.

13. Sec.44AB: Audit of Accounts of Certain Persons Carrying on Business or Profession

o In the following situations, Section 44AB requires an assessee to get his books of accounts audited from
a Chartered Accountant and submit the tax audit report along with his return of income:
o Where a person carrying on business declares income as per actual basis (i.e. such person doesn’t opt
for section 44AD). Audit of books of accounts is required if turnover from business exceeds Rs. 1 crore.
The Requirement of 44AB does not apply to a person who declares profit & Gains on presumptive basis
u/s 44AD and turnover does not exceed 2 Crore.
o If Any Person Carrying Business having cash receipt & Payment not more than Rs 5% of total Receips or
Total Payment then Limit is more than Rs 10 Crore then audit applicable.
o Where a person carrying on business has declared income on presumptive basis u/s 44AD for earlier
years and the provisions of Section 44AD(4) get triggered for current year, audit of books of accounts is
mandatory if his total income from the current year exceeds the exemption limit (2.5L/3L/5L).
o Person Carrying on Profession:
Case 1: Gross receipts Audit of books of accounts is mandatory irrespective of the level of
from profession exceeds income/loss.
Rs. 50 lakhs
Case 2: Gross receipts (a) If income is computed in accordance with the provisions of Section
from profession don’t 44ADA (ie income declared is 50% or more of gross receipts), audit of
exceed Rs. 50 lakhs books of accounts is not required.
(b) If income declared is less than the limit of 50% of gross receipts as given
u/s 44ADA and the total income of the person for the relevant previous
year exceeds the exemption limit (2.5L/3L/5L). audit of books of
accounts is mandatory.
o If requirement of Section 44AB are no fulfilled, penalty is payable u/s 271B. The amount of penalty
shall be ½% of turnover/gross receipts subject to a maximum of Rs. 1,50,000.
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5. Minimum Profit in some special cases (Presumptive Scheme of Taxation)

1) Sec. 44AD: Special provision for computing profits and gains of any business (excluding the business
covered under section 44 AE)
 8% of turnover
Rate of 6% of turnover, where receipts by an a/c payee cheque, a/c payee bank draft or by use
of electronic clearing system [on or before due date of filing of return u/s 139(1)]
 if turnover up to 2 Crore and eligible assesses (resident, HUF, individual, Partnership firm but not
LLP)
 Audit is not done and relief from maintenance of book.
 Where an eligible assessee declares profit for any previous year in accordance with the provisions
of this section and he declares profit for any of the five consecutive assessment years relevant to
the previous year succeeding such previous year not in accordance with the provisions of sub
section(1), he shall not be eligible to claim the benefit of the provisions of this section for five A.Y.
subsequent to the A.Y. relevant to the previous year in which the profit has not been declared in
accordance with the provisions of sub-section(1).
 No further deduction is allowed. However salary and Interest paid by firm to partner is deductible
for A.Y. 2020-21.

2) Sec. 44ADA(1): Special provision for computing profit and gain of professions on presumptive basis:
(w.e.f. AY 2017-18)
Assessee:
(i) Resident Individual or Resident Firm Excluding LLP
(ii) Engaged in notified profession U/S 44AA.
 Legal, Medical, Engineering, Architectural, Accountancy, Technical consultancy and Interior
decoration etc.
 50% of Gross receipts or higher sum as claimed by assessee
 If gross receipts ≤50 lakh
 audit is not done and relief from maintenance of books of accounts

3) Sec .44 AE: Business of plying or hiring Goods carriage.

Goods Carriage Presumptive Income

Rs. 1,000 per ton of gross vehicle weight on During which
Heavy goods vehicle unladen weight as the case may be, for every such vehicle is
month or part of a month owned by the
Other than heavy Rs. 7,500 for every month or part of a month assessee for the
goods vehicle previous year.
Condition:
(i) Assesses should not have more than 10 vehicles at any time during P.Y.
(ii) Per Month: Any fraction of month will be taken as full month
(iii) Use of vehicle is not mandatory.
(iv) Gross vehicle weight if greater than 12,000 kg. or 12 tonnes then it is the heavy vehicle.
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Computation of business income in cases where income is partly agricultural and partly business in
nature
Taxability in case of composite income
Rule Nature of composite income Business income Agricultural
(Taxable) Income (Exempt)
7A Income from the manufacture of rubber 35% 65%
7B Income from the manufacture of coffee
- sale of coffee grown and cured 25% 75%
- sale of coffee grown, cured, roasted and 40% 60%
grounded
8 Income from the manufacture of tea 40% 60%

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