put to use in the previous year 2022-23.

For the previous year 2022-23, the usual depreciation will be available
(as the asset is not acquired during 2022-23), although it is put to use for less than 180 days.
Question 5: X Ltd. owns two buildings A and Bon April I, 2022 (rate of depreciation: 10 percent, depreciated
value: Rs. 14, 15, 700). It purchases on December I, 2022 building C (rate of depreciation: I 0 percent) for Rs.
4,10,000 (out of which Rs. 3,10,000 is paid by an account payee cheque and Rs. 1,00,000 is paid in cash). It
sells building A during the previous year 2022-23(say on January 10, 2020) for Rs. 8,70,000.

!Extract of depreciation-rate!

Block Nature of Asset

Buildings 5% Residential building other than hotels and boarding
Non residential building, godown, office, factory, etc. including hotels
Buildings 10%
and boarding
Buildings 40% Temporary construction
Furniture 10% Any furniture including electrical fittings
Plant/Machinery 20% Ocean going ships, vessels, speed boats
P!ant/Machinery 30% Motor car (including lorries and buses) used for hiring purposes
Motor car, other than used in a business of running them on hire, acquired
P !ant/Machinery 30%
and put to use between 23-08-2019 and 3 1-03-2020
Motor buses, motor lorries and motor taxis used in a business of running
Plant/Machinery 45% them on hire, acquired and put to use between 23-08-2019 and 31-03-
2020
Computer including computer software
P !ant/Machinery 40%
Books owned by a professional
Air or water pollution contro l equipment
Plant/Machinery 40%

Oil Wells
P!ant/Machinery 15%

In general (if nothing is mentioned regard ing nature of plant & mac hinery
P !ant/Machinery 15%
and including motor car not used for hiring purpose)
Intangible assets Acquired after 3 I /3/98
25%

!section 32(1) (iia~

Additional d epreciation at the rateof20% of actual cost ofplant or machinery acquired and installed
after 31.03.2005 by an assessee engaged in the business of manufacture or production of any article or
thing or in the business of generation, transmission or distribution of power, shall be a llowed.

If plant and machinery is acquired and put to use for the purpose ofbusiness or profession for less than
180 days during the previous year in which it is acquired, additional depreciation will get restricted to
10% of actual cost (i.e., 50% of20%). The balance additional depreciation@ l O% of actual cost will
be allowed in the inunediately succeeding previous year.

However, additional depreciation will not be allowed on the following plant or machinery:
• Ships, aircraft, road transport vehicles, office appliances;

·10
 4. Interest on borrowed capital(Section 36(1)(iii)J - Deduction of interest is allowed in respect of
capital borrowed for the purposes of business or profession in the computation of income under
the head "Profits and gainsofbusiness or profession".

5. Section 36(1)(iii) -Any sum paid by the assessee as an employer by way of contribution towards a
recognized provident fund or approved superannuation fund.

6. Section 36(1)(iva) -Any sum paid by the assessee as an employer by way of contribution towards
a pension scheme referred to in section SOC CD, to the extent of 10% of salary of any employee.
Salary inc ludes dearness allowance, if the tenus o f employment so provide. Correspondingly,
section 40A (9) disallows the sum pa id in excess of I 0% of the salary o f any employee.

7. Section 36(1)(va) -Amount received by assessee-emplo yer as contributio n fro m his e mployees
to wards their we lfare fund to be allowed as deduction only if such amount is credited by the
assessee to the employee's account in the relevant fund on or before due date under the
relevant Act/Rule/order/notification. Amount credited after the said due date but on or before the
due date under section 139( I) would not be elig ible for deduction.

8. Section 36(1)(vii) -Any bad debts written off as irrecoverable in the accounts of the assessee for
the previous year, provided the debt has been taken into account in computing the income of the
prev ious year or any earlier previous year.

9. Section 36(1)(ix) -Any bona fide expenditure incurred by a company for the purpose of promoting
family planning amongst its employees.

In case the e xpenditure o r part thereo f is o f capital nature, one-fifth of such expenditure shall be
deducted for the previous year in which it was incurred; and the balance in four equal installments in four
succeeding previous year

Family planning expenses, whether revenue or capital, is not allowable as deduction for non-
corporate assesses, like individuals, HUFs, firms, LLPs.

10. Section 36(l)(xv) -An amount equal to the securities transaction tax (STT) paid by the assessee
in respect o f taxable securities transactions entered into in the course of his business during the previous
year, if the income arising from such taxable securities transactions is included in the income computed
under the head "Profits and gains of business or profession".

11. Section 36(l)(xvi) -An amount equal to commodities transaction tax (CIT) paid in respect of
taxable cornn1odities transactions entered into the course of business during the previous year, if the income
arising from such taxable commodities transactions is included in the income computed under the
head "Profits and gains of business or profession".

!sECTION 371

An expenditure shall be allowed under sectio n 37, provided :

• it is not in the nature of expenditure described under sections 30 to 36;

12
 • it is not in the nature o f capital expenditure;
• it is not a personal expenditure o f the assessee;
• it is laid out and expended wholly and exclusively for thepurpose of business/profession ;
• it is not incurred for any purpose which is an offence or whicbis prohibited by law; and
• it is not an expenditure incurred by the assessee on CSR activities referred to in section 135 of the
Companies Act, 2013 . Expenditure incurred for any purpose which is an offence or which isprohibited
by law" shall include and shall be deemed to have always ·included the expenditure incurred by an
assessee, -

(i) for any purpose which is a n o ffence under any law fo r the tin1e being m force, in India or outside
India or which is prohibited by a ny law for the time being in fo rce, in India or o utside lndia;or

(ii) to provide any benefit or perquisite to a person, w hether or not carrying on a business o r exercis ing a
professio n, and acceptance of such benefit or perquisite by suc h person is in vio lation o f a ny law or
rule or regulation or guidelines, as the case may be, for the time being in force, governing the
conduct o f such perso n; or

(iii) to compound an offence under a ny law fo r the time be ing in force, in India o r outside Ind ia.

!SECTION 37 (28~

Any expenditure incurred for advertisement in any souvenir, brochure, tract, pamphlet etc. published by
a political party is not a llowable as deduc tio n.
Amounts not deductible
Section Particulars
In the bands of any assessee
40(a)(i) Any interest, royalty, fees for technica l services o r other sum chargeable under the Act, which is
payable outside India or in Ind ia to a non-corporate non-resident or to a foreign company,
on which tax deductible at source has not been deducted or after deduction has not been
paid on or before the due date specified u/s 139(1).
However, if such tax has been deducted in any subsequent year or has been deducted m the
previous year but pa id in the subsequent year a fter the due date specified under section 139( 1),
such sum shall be a llowed as deduction in computing the income o f the previous year in which
such tax is pa id.
40(a)(ia) 30% of any sum payable to a resident on which tax is deductible at source under
Chapter XVII-B and such tax bas not been deducted or, after deduction has not been
paid on or before the due date for filing of return of income u/s 139(1).
However, if such tax has been deducted in any subsequent year or has been deducted in the
previous year but paid in the subsequent year after the due date specified under section 139( 1),

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 30% of such sum shall be allowed as deduction in computing the income of the previous year
in which such tax is paid.
40(a)(ii) Any sum paid on account of income-tax including surcharge or cess
40(a)(iii) Any payment chargeable under the head "Salaries", if it is payable outside India or to a non-
resident, if tax bas not been paid thereon nor deducted therefrom
40(a)(v) Tax paid by the employer on non-monetary perquisites provided to its employees, which
is exempt under section IO(lOCC) in the hands of the employee.

Expenses or payments not deductible in certain circumstances

Section Particulars
40A(2) Any expenditure incurred in respect of which a payment is made to a related person or
entity, to the extent it is considered excessive or unreasonable by the Assessing Officer.
Few examples of related persons are as under:
Assessee Related Person
Individua l Any relative of the individual (husband or wife, brother or sister, any linea l
ascendant or descendant of the individual)
Firm Any partner of the firm or relative of suchpartner
HUF orAOP Any member of the AOP or HUF or any relative of such member
Company Director of the company or any relative of the director
Any assessee Any individual who has a substantial interest (20% or more voting power o r
beneficial entitlement to 20% of profits) in the business or profession o f the
assessee; or a relative of s uch individual.
40A(3) Any expenditure, in respect of which a payment or aggregate of payments made to a person
in a sing le day o therwise than by account payee cheque or account payee bank draft o r ECS
through bank account or through such other prescribed e lectronic modes exceeds t l 0,000.

In case of payments made to transport operator for plying, hiring or leasing goods
carriages, an enhanced limit oH 35,000 shall apply.

If the payment/payments exceed this limit, the entire expenditure would be disa llowed.

However, disallowance would not be attracted if the cases and c ircumstances in w hic h
payment is made otherwise tha n by way of an account payee cheque or bank draft are
covered in Rule 6DD. Few Examples of exceptions covered in Rule 6DD:
Payment to RBI, SBI, Co-operative banks

Payment made to Government, which according to its Rules, has to be made in lega l tender

Payment for purchase of agricultural produce, forest produce, fish and fish produc ts,
productions of horticulture or apiculture to the cultivator, grower or producer of such produce
or products.
 40A(3A) Where an expenditure has been allowed as deduction on accrual basis in any p~evious year,
and payment is made in a subsequent previous year otherwise than by account payee cheque
or account payee bank draft or ECS through bank account or through such other prescribed
electronic modes and such payment (or aggregate of payments made to a pe:-son in a day is
made in a subsequent previous year) is in excess of the limits of { 10,000/ { 35,000
specified above, the payment/aggregate of payments so made shall be deemed as profits
and gains of the business or profession and charged to tax as income of the subsequent
previous year.

However, the deeming provision w ill not apply in the cases and circumstances covered in
Rule 600.

Certain Deductions to be allowed only on Actual Payment [Section 43B]

In respect of the following sums payable by an assessee during the P .Y., deduction is allowable only if the
sum is actually paid on or before the due date of filing of return u/s 139(1} for the said P.Y.
Otherwise, the same would be allowed o nly in the year in which the sum is actually paid.

(i) Tax, duty, cess or fee, under any law for the time being in force; or

(ii) Contribution to any provident fund or superannuation fund or gratuity fund or any other
fund for the welfare of employees; or

(iii) Bonus or commission for services rendered by employees, where such sum would not have
been payable to him as profits or dividend if it had not been paid as bonus or commission; or

Interest on any loan or bor·rowing from any public financial institution or a State Financial
(iv) Corporation or a State Industrial Investment Corporation, in accordance with the terms and
conditions of the agreement governing such loan or borrowing; or

Interest on any loan or borrowing from a deposit taking NBFC or systemically important
(v) non-deposit taking NBFC (i.e., whose total assets as per the last audited Balance Sheet is { 500
crore or more), in accordance with the tem1s and conditions of the agreement governing such
loan or borrowing

Interest on any loan or advance from a scheduled bank or co- operative bank other than a
(vi) prin1ary agricultural credit society or a primary co-operative agricultural and rural development
bank in accordance with the terms and conditions of the agreement governing such loan or

(vii) advances; or

(viii) Payment in lieu of any leave at the credit of his employee.

A ny sum payable to the Indian Railways for use of Railway assets.

15
 •!• Computation of business income under section 44AD -
Section 44AD is applicable if the taxpayer is a resident individual, resident Hindu undivided family or a
resident partnership finn (not being a limited liability partnership). The taxpayer sho uld be engaged in any
business (but not in the negative list given below).
A person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 cannot adopt the
presumptive taxation scheme of section 44AD. The presumptive taxation scheme of section 44AD can be
opted by the eligible persons, if the total turnover or gross receipts from the business do not exceed Rs.
2,00,00,000. In other words, if the total turnover or gross receipt of the business exceeds Rs. 2,00,00,000 then
the scheme of section 44AD cannot be adopted.
[Applicable w.e.f. Assessment Year 2024-25)
However, if the amount of cash received during the previous year does not exceed 5% of the total turnover or
gross receipt of such year then the threshold limit for total turnover or gross receipt shall be taken as Rs.
3,00,00,000 instead ofRs. 2,00,00,000. The receipts through the mode of cheque or a bank draft which is not
an account payee, shall be considered a receipt in cash for this purpose.
In case of a person adopting the provisions of section 44AD, income is computed on presumptive basis at the
rate of 8% o f the turnover or gross receipts of the eligible business for the year. In order to promote digital
transactions and to encourage small unorganized business to accept digital payments, section 44AD is
amended with effect from the assessment year 2017-18 to provide that income shall be computed at the rate
of 6% instead of 8% if turnover/gross receipt is received by an account payee cheque or an account payee
bank draft or use of electronic clearing system through a bank account or through such other electronic mode
as may be prescribed during the previous year or before the due date of filing of return under section
139(l).The rate of8% or 6% is comprehensive (i.e., no further deduction is allowed under any other section,
even the deduction of r·e muneration and interest to partners is not available). An assessee (who opts for the
above scheme) is eligible for the following benefits-
! . He can submit his return of income in ITR-4 (ITR-4 is a simplified form as compared to other forms) .
2. He is exempted fro m maintenance ofbooks of account.
3. He can pay advance tax pertaining to his business income in one instalment (i.e., on or before March 15 of
the financial year immediately prior to the assessment year). Other assessees are required to pay advance tax
in four instalments (i.e. , on or before June 15, September 15, December 15 and March 15 of the financial year
immediately prior to the assessment year).

• Negative list - The following persons are not eligible to avail any benefit under section 44AD-
a. a person canying on profession as referred to in section 44AA(l);
b. a person earning income in the nature of commission or brokerage;
c. a person canying on any agency business; or
d. a person who is in the business of plying, hiring or leasing goods carriages;

16
 e. the assessee who has claimed any deduction under sections lOA, lOAA, lOB, lOBA, 80HH to 80RRB in
the relevant assessment year.

Is it possible to declare higher income- A taxpayer who is covered by section 44AD can declare higher
mcome.
Is it possible to declare lower income- If an assessee declares profit for any previous year under the scheme
of section 44AD, he carmot declare lower profit for the next 5 consecutive subsequent assessment years. If he
declares lower profit, then he shall not be eligible to claim the benefit of the provisions of section 44AD for 5
subsequent assessment years [i.e., subsequent to the assessment year relevant to the previous year in which
the profit has not been declared at the rate of 8 per cent]. For example, an e lig ible assessee claims to be taxed
on presumptive basis of 8 per cent o f turnover under section 44AD for assessment year 2022 -23. He offers
income of Rs. 8 lakh on the turnover of Rs. 1 crore. For assessment year 2023-24 and assessment year 2024-
25 also he offers income in accordance with the provisions of section 44AD. However, for assessment year
2025-26, he offers income ofRs. 41akh on turnover o fRs. I crore. In this case, since he has not offered income
in accordance with the provisio ns of section 44AD for 5 consecutive assessment years, after assessment year
2022-23, he will not be eligible to claim the benefit o f section 44AD for next five assessment years (i.e., fo r
assessment years 2026-27 to 2030-3 1). Consequently, for the assessment years 2025-26 to 2030-31,-
a. he w ill have to maintain the books of account as per section 44AA (irrespective of income or turnover), if
his total income exceeds the exemptio n limit ; and
b. he wi ll have to get his books of account audited under sectio n 44AB (irrespective of turnover), if his total
income exceeds the exempt ion li mit.
If the taxpayer wants to declare lower inco me, he cannot submit his return o f income in ITR-4 (return can be
submitted in ITR-3 or ITR-5).
Question 7:
X & Co . (a firn1 ofX andY w ith unlimited liability) is engaged in the business o f who lesale trading (turnover
of 2022-23 being Rs. 87,80,000, out of which Rs. 64,50,000 is received by account-payee cheques up to
October 3 1, 2023). It wants to claim the fo llowing deduction-
Particulars ~

Salary and interest to partners [as pern1itted by section 40(b)] 60,000

Salary to employees 4,90,000
Deprec iation 2,70,000
Cost of material used (a bill ofRs. 70,000 is paid in cash) 75,90,000
Other expenses 3,45,000
Total 87,55,000
Net profit (Rs. 87,80,000 minus Rs. 87,55,000) 25,000

17
 Determine the net income of X & Co. for the assessment year 2023 -24 assuming that long-term capital gain
is Rs. 40,000, the firm is eligible for a deduction ofRs. 5,000 under section 80G and the firm wants to pay tax
under section 44AD.
•!• Computation of professional income on estimated basis under section 44ADA -
The provisions of section 44ADA are given below -
1. The assessee is a resident individual or a resident firm (other than LLP) .
2. The assessee is resident and engaged in a profession referred to in section 44AA( 1) (i.e., such as legal,
medical, engineering or architectural profession o r the profession of accountancy or technical consu ltancy
or interior decoration o r any o ther profession as is notified by the Board).
3. Gross receipts of the assessee from the profession does not exceed Rs. 50 lakh. It has been increased to
75 lakh from the assessment year 2024-25 in the case of an assessee where the amount (or aggregate of
amo unts) received during the previous year in cash/bearer or crossed cheque/draft does not exceed 5
percent of the gross receipts of the previous year.
4 . If the above two conditions are satisfied, income of the assessee shall be calculated on estimated basis at
a sum equal to 50 per cent of the total gross receipts.
5. The assessee can voluntarily declare a hig her income in his return.
6. All deductio ns under sections 30 to 38, including depreciation and unabsorbed depreciation, are deemed
to have been already allowed and no further deduction is allowed under these sections.
7. The written down va lue is calculated, where necessary, as if depreciation as applicable has been a llowed.
Moreover, it w ill be assumed that disallowance, if any, und er sections 40, 40A and 43B has been
considered while calculating the estimated income @ 50 per cent.
8. An assessee can declare his income to be lower than the deemed profits and gains as stated above. The
following consequences are applicable if the taxpayer declares his income w hich is lower than the deemed
profits and gains as stated above -
• The assessee w ill have to maintain the books of acco unt as per section 44AA, if his total income exceeds
the exemption limit.
• The assessee w ill have to get his books of account audited under section 44AB (iJTespective of turnover),
if his total income exceeds the exemption limit .

Question 8:
Mr. Sivam, a retail trader of Cochin gives the fo Ilowing Trading and Profit and Loss Account for the year
ended 3 I st March, 2023:
Trading and Profit and Loss Account for the year ended 31 .03.2023.
Particulars ~ Particulars ~
To Opening stock 90,000 By Sa les 1, 12,11 ,500
To Purchases I , 10,04,000 By C losing stock 1,86, 100
To Gross Profit 3,03 ,600 -
I , 13,97, 600 1' 13,97,600
To Salary 60,000 By Gross profit b/d 3,03 ,600
To Rent and rates 36,000 By Income from UTI 2,400
To Interest on loan 15,000
To Depreciation 1,05,000
To Printing & statio nery 23,200
To Postage & telegram 1,640
To Loss on sa le of shares (Short 8, 100
term)

18
 To Other general expenses 7,060
To Net Profit 50,000
3,06,000 3,06,000
..
Add1t1onal Informat10n:
It was found that some stocks were omitted to be included in both the Opening and Closing Stock, the values
of which were:
Opening stock ~ 9,000
Closing stock ~ 18,000

Salary include s ~
I 0,000 paid to his brother, which is unreasonable to the extent of~ 2.000.
The who le amount of printing and stationery was paid in cash by way of o ne-time payment to Mr. Ramesh.

(i) The depreciation provided in the Pro fit and Loss Account ~ I ,05,000 was based on the following
info rmation:

(ii) The o pening balance of plant and machinery (i.e., the written down value as on 31.3.2022 minus
depreciation fo r P.Y. 202 1-22) is ~ 4,20.000. A new plant fa lling under the same block of
deprec iation was bought on 0 I. 7.2022 fo r ~ 70,000. Two old plants were so ld on 1.10.2022 for
~ 50,000.

( iii) Rent and rates includes GST liability of~ 3,400 paid o n 7.4.2023.

(iv) Other general expenses include ~ 2,000 paid as donatio n to a Public Charitable Trust.

You are required to compute the profits and gains of Mr. Sivam under presumptive taxation under section
44AD and profits and gains as per no m1al provisions of the Act assuming he has not opted for the
provis ions of sectio n 115BAC. Assume that the whole of the amo unt of turnover received by acco unt
payee cheque or use of electro nic clearing system through bank account du ring the previous year.

Question 10: From the following particulars ofShri Khote for the year ending 3 1st March, 2023, find o ut his
taxable inco me from bus iness fo r the assessment year 2023-24 :
Particulars ~ Particu lars f

To Opening Stock 1,20,000 By Sales 2, 14,20,000

To Purchases 2, I 0,00,000 By Pro fit o n sale of in1po rt licence 5,000
To Salaries 25,000 By Gift received 24,000
To Legal Expenses 10,000 By C losing Stock 2,00,000
To Bad Debts 5,000
To Rent 50,000
To Interest on loan 2,500
To Depreciatio n 15,000
To Income tax paid 2,000
T o Outstanding Customs Duty 25,000
 To Advertisement 2,000
To Legal expenses 12,000
To Contribution towards URPF 5,000
To General expenses 17,500
To Traveling expenses 1,00,000

To Net Profit 2,58,000

2,16,49,000 2,16,49,000
In computing the income, the following facts are to be taken into consideration:
1. Interest on loan is paid to brother ofShri Khote for loan taken for payment of advance income tax.
2. During the previous year 2018-l 9, assessee had claimed~ 45.000 as bad debt out of which only~ 35,000
was allowed. During the previous year, he recovers ~ 25.000.
3 . Contribution towards unrecognised provident fund was paid within time.
4. Legal expenses include ~ 2,000 paid for preparation of income tax return.
5. Stock is undervalued by 10%.
6. Gift received was given by a supplier for achieving target sale.
7. Outstanding customs duty has been paid on 31-12-2023.
8. During the previous year, he comes to know that his former employee had embezzled cash of~ 5.000 on
31- 3-2022, which was not accounted for.
9. Traveling expenses include~ 50.000 being cost of trip to Singapore by an employee for I 0 days. However.
o nly 8 days of trip is usefu l to bus iness and 2 days has been allowed as holiday to employee.
I 0. Rent includes expenditure on extension of shed on rented building~ 26,000. However. such extension was
completed on 1-5-2023 with total cost on 50.000.
11. General expenses includes-
• Salary of~ I ,200 paid to domestic servant.
• Compensatio n of~ 2,000 paid for retrenchment of an employee.

20