Even if the starting point of this discussion is the profit head in the P&L account of the assesse.

Balance sheet is the account of assets and liabilities of that business. P&L account is the one
which see how profitable your business is. The tax under this head arises from the profit in the
profit and loss account (profits before taxes). Book keeping is done by accountancy standards.
When it comes to statutory standards- there might be some discrepancies. For example- You
withdrew 50k for personal expenses- accountant will enter this as personal expenses and reduce
from the profits in the books. But reading it within the income tax, you cannot claim it as a
deduction as personal expenses are not allowed and you have to add it back to the profits for the
purposes of tax. For example- Depreciation is only allowed for blocks of assets.

Profit from P&L account- All permitted expenditures (not claimed) (example- repairs, rent,
insurance etc.) + Expenditures that are not allowed by the statute (but claimed by you- personal
expenditure) + Deemed profits (legal fiction created by the statute) – Exempt incomes/incomes
belonging to other heads

Methods of book-keeping- Two methods- Cash system and mercantile system.

Cash system: Cash is the basis of your book keeping. Only enter income and expenditure when it
is actually received or actually paid.

Mercantile system: Keep entering the incomes and expenditure when they are due or when they
accrue. Example: Interest due on 2nd March will be entered into the books as soon as it becomes
due despite the same not getting paid.

Section 145: Allows the assesse to use whatever system of books that they want to, but the same
msut be continuous. From 2016, they have also suggested income computation and disclosure
system. Introduced for mercantile system users- for computation of income, all of these people
must follow these guidelines to help maintain uniformity in calculation of income. ICDS does
not interfere with your book keeping, that you can keep doing under the accountancy standards.
Act will prevail over the ICDS.

Profits or gains from Business or Profession

Profit is indicative of the fact that the profits are taxed and not the receipts alone are taxed.
Allowances for the expenditures incurred to earn the profits are not taxed. Profits= Revenue
receipt- revenue expenditures. Profits comprises both positive and negative profits. Losses from
business 1 can be set it off against profit from business 2 (intra-head set off). If not applicable,
then you can set it off against other incomes considering some conditions.

Business: Defined in Section 2(13)- Including any trade, commerce or manufacture or any
adventure or concern in the nature of trade, commerce or manufacture. Inclusive definition.
Trade is purchase and sale of goods. Manufacture is understood as a process that you can define
applying a process on a non-living thing and produce a new product. Manufacturing activity
generating profits. You may not own the goods which are used for producing the new product,
still it will be included in business. (Somebody else might give it to you).

Business- Continuity, regularity, profit motive. Even sporadic and isolated activities can be
classified as business. Even when someone is acting on ad-hoc basis (adventure in the nature of
trade/commerce) then also it can be considered as a business generating incomes under this head.
Example- Selling plots of land that you wanted to get rid of- Can be considered a business
activity because it is in the nature of trade/commerce. Can be capital gains too. Tie-breakers in
these situations are available. For example- how have you entered into your account sheets. How
will you show that piece of land in the books- Asset or stock in trade. If asset, then selling it off
would constitute as a capital gains. Tie-breakers employed by the courts to deal with this
problem. When it comes to book keeping, usually the courts have taken the approach where the
defer to the use by the assesse in the books.

Controversy in sale of stocks- for stock brokers- shares are stock-in-trade, so sale of the same
and profits out of it will be taxed as PGBP. But it is also true that people maintain the portfolio
as a capital assets- so the sale of such shares will be capital gains.

Profit motive- essential in case of businesses. In case of PGBP even if profit is not the motive but
the activity is an adventure in the nature of trade or commerce, then also income taxed under
PGBP.

Surplus, profits and gains are various kinds of terminologies are terms used in the context of
overall net receipts that you are getting. Profits is the legal term which denotes revenue-
allowable expenditure which forms taxable income.
Volume, frequency of transaction is also relevant for characterising something as PGBP or
capital gains. Adventure and nature etc. has to be proven by the authorities.

Profession defined in the section 2(36)- includes vocation. What is the substantive definition
then? An occupation in which a person uses their skills to provide services in exchange of
money. Skills can be intellectual and manual (artists, sculptors, singers etc.). Set kind of profit
motive- regularity.

Vocation- Skill- loosely understood as calling in life- something which you pursue- necessarily
includes some type of hobby or skill but not to the kind of extent to which you are pursuing it
with a profit motive. You are not even pursuing this activity with a profit or income earning
motive, if you receive anything as a result of that then also you will be taxed for it under PGBP.

P Krishna Menon v CIT, 1959 SC: The assesse in question was a retired police officer, then
started studies of Vedanta philosophy and started preaching it to his disciples. Amongst those
people who would come to learn was also some foreigner from England to Trivandrum. He was
so impressed that he transferred some amount to P Krishnan’s account as a reward for the
teachings. He started depositing some amount on a regular basis. Should this amount be taxed or
not? Was he practising a vocation and then the earnings from it should be taxed as PGBP or not?
Should this be considered as a personal gift or not?

Arguments: Assesse said that he was not expecting any income from anyone. The letter by the
person giving the amount depicted that there was no ask of any payment and have been
transferred purely as personal gift as a mark of appreciation. The court is asking is it a
remuneration for the vocation or a personal gift?

Held: Referred to the English cases and all. We do not perceive this receipt from the point of the
donor. We are asking why did the done received it in the first place. The receipt which happened
was on the account of the causa causans- primary cause for receiving this payment was that the
preaching that happened. Consequently the same is chargeable under PGBP.

Comments: Even if you did not want to receive it, but you received it as a result of your
vocation, that might be chargeable. In the present context, we have to be careful and see the
charging section and all to make the decision. Just because someone is following a vocation
doesn’t mean that any payment in exchange of that would not be chargeable.
Vocations- religious ceremonies yagna and all- can’t be saying that we will exclude this income.

Charging section: Section 28- Value of any perquisite or benefit as a result of the profession or
business is chargeable as PGBP. Very wide ambit. Cross-cutting.

Question is is it a personal gift or the payment is a result of the persona or the work done or
vocation?

Tips are not included- no vested right, may get it or may not get it, employer is merely a
fiduciary, not promised to them, not even coming from the hotel. So not needed to be deducted
as a part of salary income. Falling outside the scope of the employment.

“Causa causans”

07/03/2024- PGBP

Charging Section- Section 28

Clause 4- Will cover the examples like a watch gifted to you by a client for a deal that you did.
Doesn’t matter that the firm that has hired you is giving to you or you have received by someone
else.

Ms. Priyanka Chopra v. Dty. CIT (Mum tribunal 2018): Diaries in which some entries were
made, some cash etc. They found a mention to a Toyota car, which was also entered into the
book. Explanation given by the assesse- (zoned out). She participated in the ad campaign of the
Toyota car on NDTV- signed a contract with NDTV. But company gifted it to her outside of the
contract. Hence, it should not be included within the PGBP head.

Held: The court said that the contract was not necessary. Even if she got the car not out of her
contract she could be charged for it as provided in clause (iv) of section 28.

Gifts and appreciations given to sportspersons by the government are generally not taxable under
PGBP.

Sushmita Sen v ACIT (2018): Entered into a contract with Coca Cola for advertisement. 145
lacs- she only included rs. 50 lac in her tax returns and not the rest 95 lacs (she received this as a
compensation for services). On further examination, it was revealed that she was subjected to
sexual harassment, she wanted to launch a complaint- but she was given this compensation of 95
lacs. She said it is a capital receipt.

Held: Accepted the contention. This is the type of compensation where you are not taxed.

Shahrukh Khan v ACIT (Mum Tribunal 2017): Shah Rukh Khan got a villa as a gift from a
friend. Villa owned by a company in Dubai, whose CEO was a close friend. In 2007, Shah Rukh
Khan made an appearance on the annual day of the company. Department made a case by saying
that this is a tax evading mechanism and wanted to charged the villa under section 28 (iv). Shah
Rukh Khan said that when he got it, it was kind of a gift, no contract and all was signed. He was
not there on the annual day function as a part of a professional commitment.

Held: Court said that cannot tax under 28 (iv), cannot pull out newspaper pictures to conclude a
commitment. Also not taxable under section 56()(), because at that point of time gift of
immovable property was not there in the statute.

CIT v Mahindra and Mahindra Ltd. (2018 SC): Entered into a contract of manufacture with the
American company. The American company gave a loan to Mahindra for procuring some tools
and equipments for the manufacture. On that loan, they were also paying some interest. After
some time, the company got owned by someone else, the owner now waived the principal
amount of Rs. 58 Lakhs of the loan. Can you classify this amount as income from business
activity. Another possibility of treating this 58 lacs of deemed profits under section 41 of the
statute. (Deemed profit can be charged in the hands of the assesse when assesse has incurred a
loss or benefit in form of a loan, and when the assesse can recover this afterwards- Eg: you
incurred a bad debt, then you wrote off the bad debt- 10k rs, this debt came back next year-
becomes a deemed profit, or if it is a trading liabiity).

Held: Invocation of clause iv should be only in context of a non-cash benefit. Gave it a strict
interpretation. Since here it is a cash benefit- it becomes non-taxable under section 28 (iv). Now,
we have the amendment where cash and kind both are allowed. Here, court said that they could
not include it as deemed profits as it is not a trading liability. The loan was borrowed for
purchase of tools and equipments- other kind of liability. Neither took any benefit in the past
(allowable benefit or expenditure; for example reduced the profit or claimed deduction on
interest), nor it is a trading liability (raw material and tools etc are not trading liability- don’t go
into the balance sheet).

FUNDAMENTAL: PGBP functions on the assumption that trading liability includes- revenue
receipt and expenditure and not capital receipts.

11/03/2024

Focus on clause (2)- Compensation which gets paid by any person. Can be a third party- need not
be a client- for the termination of agency or modification of terms.

(ii) any compensation or other payment due to or received by,—

(a) any person, by whatever name called, managing the whole or substantially the
whole of the affairs of an Indian company, at or in connection with the termination
of his management or the modification of the terms and conditions relating thereto;
(b) any person, by whatever name called, managing the whole or substantially the
whole of the affairs in India of any other company, at or in connection with the
termination of his office or the modification of the terms and conditions relating
thereto ;
(c) any person, by whatever name called, holding an agency in India for any part of the
activities relating to the business of any other person, at or in connection with the
termination of the agency or the modification of the terms and conditions relating
thereto ;
(d) any person, for or in connection with the vesting in the Government, or in any
corporation owned or controlled by the Government, under any law for the time
being in force, of the management of any property or business ;
(e) any person, by whatever name called, at or in connection with the termination or the
modification of the terms and conditions, of any contract relating to his business;
(e) recently added

For example- there is a reduction of pay but since you agreed to a higher pay- a compensation
being paid to you for the reduction- so it is taxable.

Sub-clause (e): Before 2019 when they used to receive payment in connection with termination
or modification of terms and conditions of contract- there was a problem which way to
characterize such compensation- PGBP or Capital gains?

Difference between a fund and a flow- Contract becomes the fund from which the income dlow
is coming. SO termination of the contract is a compensation for the losing out of the fund itself
should it be characterised as capital gains? When you are losing out the total fund itself and you
are receiving a compensation for it then it is a capital receipt. But when you are entering into
multiple contracts and one such contract is terminated- it is not the total fund that is
extinguished- so courts have given it the character of revenue receipt.

Ratio before 2019 amendment-

Test of “what has the assesse parted with?”- Trading structure: The compensation that you
are getting paid for (termination of the contract)- is the structure of the business itself is getting
changed by such a termination or there is a change in income earning apparatus- then capital
receipts. If the tax payer is free to carry on its business normally and not affecting the business
structure of the assesse, only termination of one contract- Revenue receipt

CIT v Parle Soft Drinks Bangalore (SC 2018): A contract which Parle group of companies
signed with Coca Cola. Numerous drinks produced by Parle- handing over of this business to
Coca Cola- condition in the handing over- bottling of the drinks will be handled by Parle (Secret
formulas held by a company- they make the masala and delegate the bottling to someone else).
Subsidiary of Parle with such bottling purposes set up in Bangalore. But then Coca Cola thought
and conveyed to Parle that bottling we will only do and rolled back the contract. Some
compensation that was paid as a result of that (arbitration and all). Parle company alleged that
there is a breach of contract- now that you are stopping us from manufacturing- it is a breach.
Question was- What is the nature of the compensation that was paid?

Held: The fundamental business was taken over by the result of such termination. Consequently,
the compensation for the same is capital receipt. Subsidiary was incorporated only for the
purpose of bottling- so termination would draw it out of business- then compensation is capital
receipt.

Whenver it was a regular course of business in which you enter and terminate contracts as a part
of business operations then the termination of contracts and compensation are treated as regular
profits and losses. But fundamental changes to your business and compensation for the same is
capital receipts.

Kettlewell Bullen Ltd. and Co. v CIT (1964 SC): Assesse was appointed as managing agent of
another company and kept receiving remuneration for being managing agent. The company that
was MA entered into an agreement which provided that if the termination of agency takes place
pre-maturely that would allow the agent to claim compensation. Also agent could resign when he
wanted to. There was a change in the structure of the company whose managing agent was the
assesse. The investor imposed the condition that in order to function further you have to sack the
original MA and now appoint me. SO now the company was forced to sack the assesse.
Compensation paid. Question arose- what is the nature of the compensation?

Held: Court asked did your trading structure get hampered? If yes, then it is a capital receipt. The
court has also applied this in every other case. If your change or termination of contract is
completely throwing you out of business then it is capital receipt.

Comments: If you are a person who keeps on taking managing agency for multiple persons then
loss of one of these Managing agency contracts doesn’t really affect the fundamental business of
the assesse. But when it is the only contract- then the compensation for the contract’s termination
is revenue receipt or capital receipt (basic structure question).

From 2019 it is changed and now every compensation for every modification or
termination is characterised as PGBP income.

Pritam Das Narang v CIT distinct because there was no employment at all, also the amount was
never termed as compensation for anything, so it is a fund and not a flow out of the employment.

They have added clause (e) because these characterisation issues were becoming more and more
prevalent and proving difficult for computation.

Compare with section 17- Compensation for termination for contract of service is profit in Lieu
of salary.

(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under
the Imports and Exports (Control) Act, 1947 (18 of 1947) ;
(iiib) cash assistance (by whatever name called) received or receivable by any person against
exports under any scheme of the Government of India ;
(iiic) any duty of customs or excise re-paid or re-payable as drawback to any person against
exports under the Customs and Central Excise Duties Drawback Rules, 1971
These sections talk about the exchanges that take place- licence and all, cash assistance for
exports and all. Governments have come up with export promotion schemes- at times you can
transfer such export licence for a payment and such payment becomes PGBP. This is a full
package of incentives that one gets.

(v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to,
or received by, a partner of a firm from such firm :
Provided that where any interest, salary, bonus, commission or remuneration, by whatever
name called, or any part thereof has not been allowed to be deducted under clause ( b)
of section 40, the income under this clause shall be adjusted to the extent of the amount not
so allowed to be deducted
Such salary of partner not counted as salary under the salary head but the PGBP head.

NON-COMPETE CLAUSES

(va) any sum, whether received or receivable, in cash or kind, under an agreement for—
(a) not carrying out any activity in relation to any business or profession; or
(b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any
other business or commercial right of similar nature or information or technique
likely to assist in the manufacture or processing of goods or provision for services
Such payment will be treated as PGBP income provided-

Provided that sub-clause (a) shall not apply to—

(i) any sum, whether received or receivable, in cash or kind, on account of transfer of
the right to manufacture, produce or process any article or thing or right to carry on
any business or profession, which is chargeable under the head "Capital gains";
(ii) any sum received as compensation, from the multilateral fund of the Montreal
Protocol on Substances that Deplete the Ozone layer under the United Nations
Environment Programme, in accordance with the terms of agreement entered into
with the Government of India.
Sub-clause (i): Karachi Bakery gives an agreement to wax saying you will not carry on this
activity on Karkhana road for the next 5 years and go elsewhere. Gives compensation for the
same. This payment which is being made in the hands of Wax bakery- is it PGBP or Capital
gains?- “under an agreement for not carrying out any business activity” But sub-clause (i). Did it
transfer a right to do or carry out a business on Karkhana road or did it agree not to carry out an
activity? In this case, it is important to look at the wording of the agreement- negative covenant
if just signing the non-compete clauses.

Negative covenant or proactively transferring right to carrying out the right to conduct
business- The first is PGBP, second is Capital gains. Very important distinction. This clause v(a)
was brought in 2003. Before 2003 in the absence of such particular clause- non-compete fee was
considered capital gains. Along with the clause they also brought in a provision providing that
the cost of acquisition for such business activity will be considered nill (under section 55).
(Capital gains= Sale amount- cost of acquisition- if CoA is 0, computation fails and the charging
provision also fails). In this context, they prevented assesse claiming that since there is no CoA
you cannot charge me for capital gains.

Dy CIT v Mediworld Publications Pvt. Ltd. (2011): Assesse which was a publication company,
it entered into an agreement to transfer all its rights titles and interests in healthcare journals to
someone else. This agreement contained a non-compete clause- but no fee stipulated. They
received payment for such asset transfer (rights and interest). Whether the proviso applies or just
the fact that you have signed a negative covenant and you are receiving PGBP? Should you sit
and separate the amount specified for non-compete fee or should you consider it as a whole as an
asset transfer and the proviso applies?

Held: This is a part of the whole package becoming a capital receipt because there was a transfer
of intangible assets by the assesse.

Comment: Language of the statute says that you will treat the amount as PGBP if it is in relation
of not performing any activity. “Simplicitor negative covenant”. If there was a fee prescribed
then you would have to see whether you are bundling up with the other rights and saying it is a
package deal or if a separate amount is prescribed then you see the framing of the clause and if it
is a negative covenant then it is PGBP. Provided, first of all, you must have the right which you
are transferring. The clause is very broadly framed- when you have the information and all it will
be PGBP. When you are making someone sign this type of a contract of not sharing the
information or non-compete you should have the right yourself which you are transferring. Many
cases die at the level of tribunals are the ones in which the MD itself was made to sign the
agreement.

12/03/2024

ALLOWABLE DEDUCTIONS- PGBP

PnL Account – Allowance expenditure = Net amount

We need to arrive at a net figure, that is why we’ll see what are the permissible expenditures.
Even before such scoping, we need to keep in mind that capital receipts are not taxable and only
revenue receipts are taxable.

Thus, expenditure must be revenue in nature and not capital in order to be claimed as a
deduction.

Profits are generated from circulating assets, fixed assets are capital assets.

Difference between revenue expenditures and capital expenditures. An example of revenue

expenditure is advertisement costs versus expansion of business costs as capital expenditure.
Revenue expenditure involve day to day costs- recurring in nature.

- Revenue expenditures: Operational costs, recurring in nature. Eg: Salaries,

depreciation costs.
- Capital expenditure: Heavy, one-time costs, resulting in acquisition of an asset which
brings in enduring benefit to the business, profit making apparatus. Enduring benefit
used to be a test for adjudging capital expenditures. If you have paid the costs in
instalments doesn’t mean that it is not a capital expenditure.

Classical Understanding: When an expenditure is made not only once and for all but with a view
to bringing into existence an asset or an advantage for an enduring benefit for a trade.

Elements-

1. Once and for all;

2. Bringing into existence a new asset OR enduring benefit for the trade.

Meaning of enduring benefit: Long term advantages which do not arise from the existence of a
new tangible asset. Something like a royalty or technology. You will be able to reap the benefit
for a long term.

We might encounter situations where the enduring benefit test breaks down. There commercial
context becomes important.
Empire Jute Mill company ltd. v CIT, 1980 SC: Assessee company was into the jute
manufacturing business. These jute manufacturers had an association prescribing rules for
negotiation of profits with other players. At the same time, these rules also placed restrictions on
the loom hours which ensured that you do not over-produce and reduce profits. If you did not
utilise your complete loom hours, you could sell-off those loom hours to others. What is the
nature of the expenditure made to buy these loom hours? Revenue or capital?

Held: By purchasing the extra loom hours as an assesse company you are not incurring a capital
expenditure because these do not add anything to the existing assets of the assesse. No addition
to or expansion of profit making apparatus of the assesse. Merely enabled to operate for a larger
number of hours. And this advantage is clearly not one of enduring nature. They are not
recurring in nature or not a part of circulating capital and also not a part of capital or fixed asset.
Falling within the cracks. By enabling you to operate for increased number of hours, these are
removing the restrictions on working hours, therefore are a cost of operating that is why these are
a part of revenue expenditure.

Comments: That an advantage which merely facilitate the trading operations of the assesse or
enabling the management of the assesse business in a more efficient or profitable manner, by
leaving the fixed assets untouched those are generally revenue expenditure in nature. Can’t
throw away the enduring benefit test, but this is also important.

Are the loom hours purchased a type of fund which gives rise to a flow of income? Just lifting of
the restriction, you always had the capacity for production. For the person who sold you the loom
hours is this a capital receipt or revenue receipt? Should be revenue receipt. But when we come
to capital gains, a different understanding exists.

Eg: Procurement of software for two years which will allow them to facilitate the management of
the company better. How would you characterise it? Assuming that the expenditure brings in
enduring benefit, then also it is necessary that there must be an increase in the fixed assets of the
assesse. In this case, no asset increase has happened. Only for two years, can’t transfer it to
anyone else. Can be capital expenditure where you have procured the technology for royalty
basis.
Does this mean that the enduring benefit test has become redundant? Enduring benefit is not
dormant, but it is also not the only benchmark for assessing the nature of expenditure.

Section 30. Rent, rates, taxes, repairs and insurance for buildings:

One kind of allowable expenditure. Rents, repairs on the building, insurance of the buildings too
can be claimed as deductions.

- But these expenditures must not be capital in nature.

- Since we do not have a definition for what a capital expenditure is, it’ll depend on facts
of a given case and on judicial interpretation. Capital expenditures are not allowed. For
adjudging whether these are capital expenditure or not, then those enduring benefit etc.
test have to be applied.

Making more efficient normal operations vs. Adding enduring benefit/allowing a new activity to
be performed.

14/03/2024

Capital expenditure elements

- Once and for all

- Existence of new asset
 - Enduring benefit
- Commercial/business Expediency-facilitating trade

Asian Hotels Pvt Ltd. CIT, 2023 Del HC: Assesse company was running an operating Hyatt
hotels in Delhi. Luxury Hotel- 6 years within the operation- company undertook a major
restoration and reconstruction work. Hotel undertook expenditure of 8 crores at once, overall 35
crores over several years. Included activities such as change of flooring, false ceiling,
refurbishing of toilets etc. Hired a professional architect to oversee these activities- they also
paid the amount for interiror designing and all.

Arguments/question: Should these expenditures be allowed as revenue expenditure? Section 37

Held by the tribunal: Disallowed these expenditures which the hotel claimed as revenue
expenditure and rejected the kind of these observations. Renovation and refurbishment has been
carried out over several years. Not once and for all. Conceptualising and supervising the
refurbishment of the hotel involved a substantial amount and was paid to the firm of architect-
total expenditure incurred in all the AY mentioned was rs. 35 crores which exceeded the total
cost incurred in original setting up of the hotel. How can you say that this is revenue in nature?
This is not a current repair allowed in the statute. Assesse treated a significant part of the
expenditure as CE in its books of account. Tribunal can’t overlook such fact. The renovation
and refurbishment of 5-star deluxe hotels (commenting on the nature of the repair activity)- For a
hotel these repairs are not incidental expenses but this is their main business (you enter a hotel
for their ambience) if you are enhancing this experience you can’t label it as a regular repair
work. The kind of refurbishment done by the hotel will put them in a different league
altogether. Director’s report- comprehensive renovation project for the entire property- reveals
the object behind the renovation- goal to be no. 1 in the country and bring into existence “a new
Hyatt Hotel”. Tribunal observes that the area covered by the Hotel doesn’t really exclusively
matter- given the kind of the business, one has to also consider the building layout, the
ambience etc. The fact that the hotel did not have a single room added to it doesn’t mean that you
haven’t increased the tarrif rates as well as the occupancy of your hotel is increased. “Profit
making apparatus” of the hotel is increased. The appellate failed to provide comparative detail
to prove that there was no significant increase in profit making apparatus after the refurbishment.
Thus, this entire amount is capital expenditure.
Held by the HC: Overturned the ruling of the tribunal. Revenue expenditure- Expenditure which
is facilitating the trading operations or it is such an expenditure which allows the assesse to
operate more efficiently leaving the fixed capital untouched.

- Enduring benefit isn’t the sole criterion for determining capital expenditure. The
expenses did not result in any enduring benefit. Nothing new added- so revenue
expenditure. Did not take into account the nature of business and

Comments: When you are incurring a revenue expenditure- you are not bringing into existence
anything new. Assese here was arguing that we have not even added one new room- we are only
maintaining it or increasing its efficiency nby refurbishing. In a lawyeer’s office any
refurbishment of the office may be slated as an incidental expense, but for the hotel it is
necessary for profit-making and not an incidental expense. Ma’am agrees that it is difficult to
prove that there is no enduring benefit.

When business acquire assets you claim depreciation or amortisation of expenses. Not allowed in
case of profits. General rule is that the revenue expenditures are allowed and not capital
expenditures- but there are certain exceptions to it (15% of the expenditure on purchase of
asset/machinery in manufacturing sector is deductible)

Section 30- Buildings

Section 31- Plant, machinery and furniture

Sarvana Spinning Mills v CIT, 2007 SC:

- assessee a textile mill engaged in the manufacture of yarn - claimed deduction on account
of "modernization and replacement expenses" amounting to about Rs. 98 lakhs and in
another year about Rs. 78 lakhs as deduction under the same head. The question arose
whether the assessee was entitled to claim the aforesaid amounts as "current repairs"
under section 31(i).
- SC:
o The basic test to find out as to what would constitute current repairs is that the
expenditure must have been incurred to ‘preserve and maintain’ an already
 existing asset and the object of the expenditure must not be to bring a new asset
into existence or to obtain a new advantage.
o In fact, in the instant case, in the balance sheet the assessee had indicated the
expense as an item incurred for purchase of a new asset. ‘Current repairs’
denotes repairs which are attended to when the need for them arises from the view
point of a businessman. The expression ‘current’ preceding ‘repairs’ appears
to have been used by the legislature with a view to restricting the allowance
to expenditure incurred for preservation and maintenance thereof in its
current state in contradiction to that incurred on any improvement or an
addition thereto. ‘Current repairs’ means repairs undertaken in the normal
course of user for the purpose of preservation maintenance or proper
utilization or for restoring it to its original condition. Such repairs should not
bring into existence nor obtain a new or different advantage.
o Each machine in a segment has an independent role to play in the mill and the
output of each division is different from the other. "Repair" implies the existence
of a part of the machine which has malfunction. If the argument of the assessee is
to be accepted, it would mean that periodically one machine out of 25 would be
replaced, and on that basis, from time to time, each of these 25 machines in the
textile plant would be entitled to claim allowance under section 31(i). Held: The
Assessing Officer was right in holding that each machine including the Ring
Frame was an independent and separate machine capable of independent and
specific function and, therefore, the expenditure incurred for replacement of the
new machine would not come within the meaning of the words "current repairs”.
In the present case, it is not the case of the assessee that a part of the machine (out
of 25 machines) needed repairs. The entire machine had been replaced. Therefore,
the expenditure incurred by the assessee did not fall within the meaning of
"current repairs" in section 31(i).

CIT v. Bharati Hexacom Ltd., 2023 SC: Claim towards licence fees which Telecom operators
were made to pay which they claim as RE under section 37. In 1994, a once and for all
expenditure for right to operate was made by the Bharati. This policy changed in 1999- they
were made to pay certain entry fee and along with it a variable licence fee in gross revenue on an
annual basis. The telecom operator migrated to the new policy and started paying annual
payments and claimed it as revenue expenditure under section 37. Assessor says that amortise
the cost of licence under section 35ABB. Del HC split this amount- before 1999 capital
expenditure and after 1999 revenue expenditure.

Court says that you have to claim it under section 35ABB (Capital Expenditures incurred by
telecommunication operators for the purchase of licence- Right to operate- allowed as deduction
in accordance with the computation as this section provides).

Held: Supreme court held that this is a package deal and can’t be splitted. Computation
change cannot lead to a change in the nature of the expenditure. You have only changed
the computation methods and initial nature of the licence fee remains the same- that is
capital expenditure. This is an expense that you are incurring to operate the very business- so it
is a capital expenditure. It remains capital expenditure and not revenue just because you are
paying the variable licence fee.

15/03/2024

Depreciation: Section 32- allowable expenditure- regular wear and tear- every year the value of
the regular wear and tear will be deductible under section 32. After a point of time the asset will
become 0 and then the business can scrap that asset and buy a new asset. Two methods of
depreciation in accountancy standards-

- Straight line method: Under the straight line method- the depreciation amount remains
same and will be deducted every year throughout the life of the asset. Example- if 10% is
the depreciation- then every year the value of a 100 Rs asset will decrease by 10 Rs.
- Written down value method- In this method the value decreases with the decrease in the
opening amount. So in this case the deductible values will be as such: 10,9,8…

You allow the depreciation on block of assets for income tax purposes. What is a block of assets?
Definition in the statute- each of the block of assets (for example residential buildings block,
non-residential building blocks, furniture blocks, intangible assets block). You will account for
the depreciation according to the statute and not according to the accounting standards
that you are following.

Example for computation purposes:

Non-residential buildings block-

Asset A- 3,00,000

Asset B- 5,00,000

Asset C- 7,00,000

Total= 15,00,000

Depreciation at 10% SO the taxable amount will be= 13,50,000

Add Asset D- Value- 6,50,000

Now the value of the block in the next year is 20,00,000. Let’s say we sold off asset B- value of
the block now at the end of year is now 17,00,000. (3,00,000 reduced which is the scrap value of
asset B)

Whether Good Will can be depreciable or not?

Amendment within the statute: Goodwill is not included within the calculation of intangible
block of assets for the purpose of depreciation.

Section 36: Deductions in terms of insurance premium which you are paying to insure your raw
material and stock in trade, insurance for the health of the employees, bonus amounts or
commissions, Interest on capital borrowed.

36(1)((iii) - For buying assets or operate business you might need to borrow some amount- the
section which allow you to avail a benefit to that extent is 36(1)(iii). Wide language- interest
paid for the purposes of business or profession- Does not say for the purpose of earning
profits for the business or profession. The interest which is claimed on borrowings can be
deducted for any business purpose- some nexus and commercial expediency is necessary to
demonstrate. It may not even be for your own business.

To claim deduction, the assessee is required to satisfy three conditions

 1. that the money must have been borrowed by the assessee,
2. that it must have been borrowed for the purpose of business, and
3. that the assessee must have paid interest on the said amount and claimed the same to be
allowed as a deduction

Hero Cycles Pvt Ltd v CIT, 2015 SC: Assesse company had borrowed certain capital from the
bank and paying interest to the bank on certain market rate. Consequently, came to an
expenditure from which it deducted the interest. Assessor on the other hand came to know that
by borrowing the company also gave interest free loan to subsidiary and loan on less rates to its
employees. The assessor refused to allow such kind of an interest deduction when this is the kind
of the splurging you are doing. The employer on the other hand demonstrated that we are
providing these loans from the reserves we have and not the from the amount we borrowed.
Secondly, the loan was taken because the company’s subsidiary was running into some losses
and had to give the loans as a condition for borrowing loans on the subsidiary’s behalf.
Compelled to give the loan.

Held: Business expediency was being read for the purposes of the borrowing of the loan. Once it
is established that there is a nexus between the expenditure and the purpose of business,
revenue authorities cannot claim to put itself in the armchair of the businessmen or the
BoD to determine if the expenditure is reasonable or not. Discretion always with the
assesse.

Comments: This provision is susceptible to tax-evasion and all. You can borrow the loan and
use it for other purposes and claim interest. But the statute still gives it a wide ambit by just
limiting the phrasing to ‘purposes of businesses’.

Section 37- Residuary section- when your expenditures are of the nature which do not fall under
30-36, then you come under section 37-
For application of Section 37:

- Not being in the nature described in 30-36

- Not a capital expenditure
- Not a personal expense of the assesse
- Expenditure which is wholly and exclusively for the purposes of business
- Not an expenditure which is for an offence/prohibited under law
- Not a CSR expenditure

As a business you might be incurring expenses which are not included in 30-36, for example-
advertising and marketing, drafting legal documents.

We have jurisprudence which classifies certain expenditures as those of dual nature- partly
personal, partly business- these type of expenditures are not allowed. This dual purpose test is
ingrained in this.

TS Hajee Moosa v CIT, Madras HC 1985: Assesse firm in the business of export of handloom
garments and products. During assessment it was discovered that in the PY the firm had sent the
partner to a foreign tour for the purpose of signing some business deal. However, the firm had
also sent the spouse of the partner and incurred expenditure on her travel also. The department
said that insofar as the expenditure on partner is concerned it would be allowed, but not for the
spouse. The firm said that partner was diabetic and for taking care of him, the spouse had to
accompany him. She was also well-trained in design of the textile and had necessary
qualifications. The court and AO both asked that did she attend the meetings and just catered to
Partner’s health?

Held: Health of the partner is something personal to him and has not exclusive concern with the
business. Therefore, the payment incurred on the spouse is not wholly (quantum) and exclusively
for the purpose of business and was only partly for the purpose of businesses. Therefore, it won’t
be allowed under section 37.

Comments: According to Ma’am it is a very strict reading. Wholly and exclusively means it
has to be exclusively for business.

18/03/2024

Education expenses by a company or proprietary firm is a divided opinion.

Aswathnarayana & Eswara v Dy. CIT 2021 (Mad. HC): The partner;s son had joined the firma
nd worked and actively participated in the firm’s consultancy. Sent to Australia to do a degree in
Engineering itself. Came back- firm demonstrated that because of his advanced education the
firm was able to sign valuable contracts and earn more. Claimed as deduction

Held: Court allowed the deduction. Here, it was held that “directly related” to the business.

Gujarat State Fertilizer Chemical v CIT (Guj HC) 2023: Company had made contributions to
the construction of statue of unity in Gujarat. The company claimed a deduction on this amount.
The trust to whom the contribution was made and claimed as deduction under section 80G. AO
said the trust is covered under 80G therefore, 50% of the amount can be deducted. The company
said that the full amount of 10 crores can be claimed as deduction under section 37. Company
claimed that they are a company engaged in the business of chemical and fertilisers which was
used by the farmers. Farmers in Gujarat respect Sardar Vallabhbhai Patel therefore contributing
to the construction of statue would enhance our goodwill and hence increase business.

Held: Allowed by the Gujarat HC.

EXPLANATION I- OFFENCE AND PROHIBITED BY LAW

There are certain statutory imposts that are imposed on the assesse. Maybe in the name of fines
and penalties etc. We have to see whether they are “PENAL” in nature or “COMPENSATORY”
in nature. If the fines penalties etc. are penal in nature then they are not allowed, if compensatory
they are allowed. If they are of mixed nature- then it is upon the revenue authorities to separate
the penal and compensatory components of the impost and then allow the compensatory ones.

IN this context, had there been a fine in the Navsari Cotton Mills for the mess created by the
mill, then the revenue authorities must see what is the component of the fine which is penal in
nature and that would not have been allowed.

CIT v Piara Singh 1980 SC: The assesse was indulged in regular smuggling activity. Currency
smuggling in Pakistan and India. On one such trip he was caught. The currency which got
confiscated was claimed as allowable deduction under section 37 by the assesse during IT
assessment.

Held: Allowed the expenditure. When you are a smuggler then the payment to police on being
caught in such a case is a “normal incident” of your business and hence must be allowed.

CIT v Prakash Chand Lunia: When you are in a business of silver this kind of a quantum of
silver must be accounted for in the books of account. Infraction of Section 69A. Confiscated the
silver and all. Invoked the ruling of Piara Singh and wanted to allow the expenditure on
confiscation of silver. “Whether the assesse can claim the loss of confiscated silver

Held: The main business of assesse is dealing with silver sale, not a smuggling of silver business.
In order to indulge in larger profits the assesse infracted the law, and hence deduction not
allowed.

Comments: When it comes to income tax, the nature of income doesn’t matter. Even if it is
tainted with illegality it doesn’t matter. Here, the inquiry is about- you were otherwise carrying
out a legal business and to earn more profit you indulged in infraction of law and therefore the
deduction is not allowed. IN Piara Singh- a technical reading given to the nature of deduction-
when you are smuggler such type of confiscation is a regular expense.

Can also say that in Piara Singh the whole business is an infraction of law, but did not extend the
reasoning. You could have applid the penal and compensatory discussion here. Very problematic
ruling- salary given to your soldiers when you are mafia can also be deducted if this is blindly
applied.

Should you allow such deductions? Arbitration awards and all too also come in this class.

Haji Azeez and Abdul Shakoor Bros. v CIT, 1961 SC: Assesse firm doing the business of
importing dates from abroad. Some prohibition on importing dates by steamers existed at that
time. Consequently, the confiscation of goods happened. They paid the fines and got the goods
back. Should these fines be allowed as deductions or not?

Held: “Expenses which are permitted as deductions are such which are made to enable a person
to carry on a business. Such penalties which are incurred by an assesse in proceedings launched
against him in infraction of law cannot be called commercial losses. Infraction of law is not a
normal incident of business. Therefore, where a penalty is incurred for the contravention of any
specific statutory provision cannot be said to be commercial losses.”- exact wording of the court

Comment: Can compare with Piara Singh

Jamna Auto Industries v CIT 2008 (P&H HC): Assesse firm sent partner abroad for signing a
contract. When signing- they did not have any licences to import. Promised that we will import
these goods and all. Subsequently they failed to get a licence and there was a breach of contract.
Arbitration. Award- Damages awarded in consequence of the breach. Should this be allowed or
not? The assesse said we misjudged and as a result of that there was a breach.

Held: The test for allowability of the xpenditure of the deduction has to be incurred with the sole
object for furthering the business- necessitated and . Such damages are normal incidences of
business. Damages are in the ordinary course of business and are not opposed to public policy.
Damages in breach of contract are normal incidents of business. If the assesse had been acting in
unlawful manner which has rendered him liable to penalty- sum so paid cannot be claimed as
deduction- infraction of law is not normal incidents

Comments- Here the assesse was taking a normal business risk by undertaking the signing of the
contract- you did not get the licence- that was a misjudgement and breach in consequence of
such risk taking is a normal incident of business. Therefore, the damages must be allowed.

Compensatory awards are allowed- Penal fines are not allowed.

 19/03/2024

Infraction of law and penal provisions are not allowable.

Malwa Vanaspati & Chemical Company v CIT (1997) (SC): Assesse company made defaults in
payment of sales tax to the MP government. Some penal provisions provided. Some conditions
for procuring raw material at a concessional rate. The assesse did not abide by the conditions.

Held: The court observed that the penalty provisions had a part which involved penal provisions
for breach of the conditions. Penal provisions were not allowed. But the concessional rate that
was enjoyed was rolled back and such impost was considered compensatory in nature and
allowed. (6%, 8%, 10% example).

Comment: We have to look behind the objective of the levy to assess whether the levy is penalty
or compensation. The assesse may either be involved in some type of criminal proceedings. Or
we have to see the quantum of the impost to see this. In the context of taxing statutes- such
compensatory imposts are not categorised as damages. Breach here is in the nature of non-
compliance rather than ‘contractual’ terms. Need to look into the object and purpose of the levy
and impost.

Strict line is also taken in these type of cases- infraction of law is not allowed. But here there is a
difference between “infraction of law” and “non-compliance”. Partly the reason why a softer
approach is taken for compensatory imposts.

Apex Laboratories Pvt. Ltd. v Dy. CIT 2022 (SC): The laboratories is company which incurred
certain expenditures worth rs. 5 crores towards gifting of freebies (such as hospitality, gold
coins, fridge, TV etc.) towards doctors for creating awareness for a medicine called zincovit.
Claimed the expenditure under section 37. There was a circular which was issued by the Indian
Medical council which prohibited doctors from accepting these kinds of freebies. CBDT came
out with the notification that these kinds of expenditures will not be allowed. The Apex
laboratories challenged the notification by claiming that IMC has disallowed the doctors from
accepting such freebies, it cannot control pharma companies, CBDT cannot club these two
activities (offering and accepting).
Held: It is a matter of great public importance and concern that doctors prescription can be
manipulated. The freebies hence are not free but leading to injuries to health. Therefore, it is
clearly a prohibition of law for the reason that it is against public policy. Therefore, the
notification of CBDT is valid.

Other technical lines: Assesse’s are claiming that for something to be against prohibition of law
the activities must be offences in India, and if they are offences outside India they cannot be
claimed as prohibition of law.
 DISALLOWANCE OF CSR EXPENDITURES

CSR expenditures are not tax neutral. Section 135 of the companies act- 2%- read with CSR
rules- Schedule 7 of the companies act provide for a list of activities which can be claimed as
deductions under 80G- for example, research expenditures. Section-35 of the income tax act too.
Section 35 refers to various types of research. Under 37 you are prohibited, but what about
section 35 or section 80G? Donations to funds and all are deductible under section 80G.
Problematic

Schedule 7 of the companies is not tax neutral- Statutorily.

JMS Mining Pvt Ltd. v Principal CIT 2021 (Calc. Tribunal): Assesse company engaged in the
business of management and operation of mines. Claimed a deduction under 80G for donation of
funds to some musical academy trust and some other charity where as per the assesse they had
contributed their CSR amounts. The CSR amounts are disallowed by virtue of Explanation II to
section 37 but under 80G the company claimed that these are the organisations which are
covered for 80G related deductions. (proves that the list that is created in schedule 7 is not tax
neutral) Question before the tribunal- Does the prohibition provided for in section 37
Explanation II only applies to PGBP head or it also extends to the donations in Section 80G
(General deductions)?

Held: This prohibition or disallowance is only to be extended to the business income and can’t be
imported to the part involving general deductions. “For the purposes of sub-section” in
Explanation II provides that the disallowance is restricted only to section 37 (which itself is
restricted to PGBP income). Disallowance in Explanation II is not applicable to section 80.

So these types of expenditures you can claim as deductions under other heads (general
deductions).

21/03/2024

Schedule VII of the companies act is not tax neutral. Confining it to expenditures under PGBP
head, but if it is falling under section 80 then no disallowance. This kind of a reading goes on to
prove the point that schedule VII is not tax neutral. Calcutta tribunal- except for two specified
funds all the rest of them are open for CSR. – Section 80 G Swaccha Bharata and Clean Ganga
Fund- donations are allowed other than the funds spent under CSR. Therefore, if a company is
making CSR expenditure under these funds then they cannot claim these deductions. Otherwise,
CSR expenditures such as for PM cares fund and all are allowed. Calcutta tribunal is saying that
schedule VII is not tax neutral. Example- 100 crores profit made by a company A- mandated
under section 135 to spend 2 crores as CSR. Consequences- Situation 1- spent 2 crores towards
construction of a school in rural areas- straightaway applying explanation II section 37-
expenditure not allowed and added for tax purposes. Situation II- spending 3 crores by
contributing for Swaccha Bharat Kosh- applying section 37 explanation II adding back the
expenditure- cannot claim under section 80G- 2 crores will not be allowed because these are
CSR expenditures- 1 crore will be allowed. Situation III- 1 crore to Swaccha Bharat Kosh rest 1
crore is towards some other trust which is mentioned under section 80G- adding back by
applying section 37 Explanation II- then allowing 1 crore under section 80G.

Split- non-neutrality of the section 37 comes into play- indicative list where you can spend your
CSR- amongst these are education, art clutre, protecting national heritage, environment etc.
When you match these fields with 80G you get a win-win. A company spending for construction
of a school will not be able to claim any added advantage. Someone cleverer spending for a trust-
can claim deductions. In that sense, there is a mismatch.

Nature of CSR expenditure becomes important: Is CSR expenditure wholly and exclusively for
the purposes of business? Or is it only for philanthropic purposes? Because if it is not for the
purposes of business then you could not have claimed that. Before 2015 you could not have
claimed it. Scholarly critique: If you are mandating 2% you are imposing a kind of tax only. You
will also find scholarship that says that companies were spending much more than 2%.
Companies are spending in tax deductible areas and not others.

When you are denying taking any kind of deductions then it should be applied across the board.
Here, you can claim for some areas. Company’s CSR policy is uploaded on their website and
they can implementation in various ways. When there are these modes of implementation it
should be implemented- but it is not happening- companies are making last moment compliance
with any trust and charity and ticking the box and also claiming deductions. Company’s which
have planned their CSR policy for years investing in education and all are not able to claim
deductions but others are. Not a very ideal situation.
Scholarship, theorising and empirical work claiming that CSR bringing in more sales and
popularity for the company. Before 2015 it was debatable that CSR spending is wholly and
exclusively for the purposes of business. Companies were claiming deductions by proving that.
But not possible anymore. If you are exceeding this 2% limit then you can exploit the loophole in
section 135 and claim deductions.

Other provisions which mention other non-allowable deductions. These are soft-regulations for
ensuring equalisation levy.

Section 40

40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall
not be deducted in computing the income chargeable under the head "Profits and gains of
business or profession",—
(a) in the case of any assessee—
(i) any interest (not being interest on a loan issued for public subscription before the 1st
day of April, 1938), royalty, fees for technical services or other sum chargeable
under this Act, which is payable,—
(A) outside India; or
(B) in India to a non-resident, not being a company or to a foreign company,
on which tax is deductible at source under Chapter XVII-B and such tax has not
been deducted or, after deduction, has not been paid on or before the due date
specified in sub-section (1) of section 139 :
Provided that where in respect of any such sum, tax has been deducted in any
subsequent year, or has been deducted during the previous year but paid after the
due date specified in sub-section (1) of section 139, such sum shall be allowed as a
deduction in computing the income of the previous year in which such tax has been
paid:
Provided further that where an assessee fails to deduct the whole or any part of the
tax in accordance with the provisions of Chapter XVII-B on any such sum but is not
deemed to be an assessee in default under the first proviso to sub-section (1)
of section 201, then, for the purposes of this sub-clause, it shall be deemed that the
assessee has deducted and paid the tax on such sum on the date of furnishing of
return of income by the payee referred to in the said proviso.
Explanation.—For the purposes of this sub-clause,—
(A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of
sub-section (1) of section 9;
(B) "fees for technical services" shall have the same meaning as
in Explanation 2 to clause (vii) of sub-section (1) of section 9;
Example: Under section 36 interest paid on capital borrowed for the purposes of business is an
allowable expenditure. A borrowed certain amount or the purposes of business and paying
interest- company A will be denied such deduction if this amount is paid to an entity outside
India or it is paid to a non-resident in India and you have failed to deduct tax at source. It
therefore puts the assesse at a disadvantage by making an otherwise allowable expenditure non-
allowable. Acts as a kind of soft regulation. (Because interest income payable to a non-resident
must have some connection with India- So this becomes a soft regulation to ensure that tax is
deducted at the source wherever there is such connection.

26/03/2024

Which was inserted in the year 2014, the reason being that whenever any company distributes
any profts there is a distribution of dividends tax (imposed under section 115 O). Entailed that
the burden of this kind of tax was to be borne by the company itself. Dividend to the
shareholders was tax-free. Now, this section is abolished and the shareholder is bound to pay tax.
So, shareholder need to pay taxes according to the amount received. A very deep background
story behind this- There was a flat tax rate on DDT. This led to the unequal treatment of the
people earning income from labour and income from capital (because incremental in case of
labour). If you have a lot of money you will invest it in shares and earn dividend. So, they have
abolished 115 O. Example: If you fall within 15%, then dividend taxed at 15%.

Main section: The central government would get the DDT. Consequently, the state governments
that were deriving the profits from state governments undertakings and had they distributed the
profits in the form of dividend and then they would have to pay DDT to the central government.
To sidestep this the state government was siphoning off the profits in the forms of charges and
other levies. They then claimed it as expenditure from PGBP. Central government realised that
we are losing out on the amount as a consequence of such circumvention.

Deduction shall not be allowed for the purposes of computation of …(reading out the section). In
case of state government enterprises this provision is applicable. Deduction not allowable when
such charges, royalty etc. are paid. If you find that such a charge and all is imposed on every
type of undertaking, then allowed. Not allowed in case of “Exclusively imposed on state
government undertaking”.
Section 40A- Related party transactions- can understand as an anti-avoidance measure, Pertains
to expenditure which has been incurred with respect to a related party. A scrutiny that the
assessing officer can make wrt to reasonability of such expenditure.

(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to
be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is
of opinion that such expenditure is excessive or unreasonable having regard to the fair market
value of the goods, services or facilities for which the payment is made or the legitimate needs of
the business or profession of the assessee or the benefit derived by or accruing to him therefrom,
so much of the expenditure as is so considered by him to be excessive or unreasonable shall not
be allowed as a deduction :

 Expenditure to person in clause (b)

 Unreasonable or expenditure
 Fair market value of goods, services etc. or
 Legitimate needs of business or
 Benefit derived by the assesse
 Such excessive expenditure will not be allowed as a deduction

For example- Paying rent to a relative for a godown- 20k rent- 10k is the FMV, then extra 10k
would not be allowed. This is one provision which does not allow the application of the business
judgment rule. AO can decide for the business taking circumstances into account.

Subjective scrutinies that one can get into.

Who are related persons? Example- Director of a company can be a related party where the
company is the assesse.

Related party can also be a person having a substantial interest in the company or any relative of
such person. Can also be a company where the director or controlling person has interest (sub-
clause v).

List provided here is exhaustive.

Anti-avoidance section.

Section 43B- Allowed to be taken as deduction only when actually paid- Due but assesse has not
paid them then these expenses won’t be allowed. Example- Tax, cess, fee; sum payable by an
employer for PF and all.

Section 40, 40A and 43B are the chunk of provisions that disallow your otherwise allowable
expenditures. These supersede the sections of allowable deductions.

Income from undisclosed sources

IN businesses, there are certain kinds of income that are labelled as incomes from undisclosed
sources. Incomes from undisclosed sources- they are not clubbed with PGBP but get other kind
of treatment. Examples:

Section 68- Cash credits- there is cash credited in the books of the assesse- no explanation or
unsatisfactory explanation. Will get into trouble.

Section 69A- unexplained money-

69A. Where in any financial year the assessee is found to be the owner of any money, bullion,
jewellery or other valuable article and such money, bullion, jewellery or valuable article is not
recorded in the books of account, if any, maintained by him for any source of income, and the
assessee offers no explanation about the nature and source of acquisition of the money, bullion,
jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the
Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other
valuable article may be deemed to be the income of the assessee for such financial year.

Prakash Chand Lunia case. Will be considered as income- where no explanation and
unsatisfactory explanation.

Example: Assesse got unsecured loans from three people. The AO found that the these three
people themselves did not have ebough money to lend this amount of money. Addresses given
were also fake.

Section 69B: Unexplained investments

Section 69C: Unexplained expenditures- extravagant bedding, going on trips and all. If you are
unable to explain then all of this will be considered your income.

Section 115BBE- These types of incomes are chargable as 50% etc.

Presumptive basis of tax: Businesses not having profits/revenue (confirm) can apply for such
presumptive basis- Purpose is to promote small businesses by letting them function without such
stringent requirements.
 CAPITAL GAINS BEGINS

Section 45-Charging provision, Section 48- Computation provision. We had started the course
with this unwritten rule that all revenue receipts are taxable unless made exempt and all capital
receipts are not-taxable unless specifically made to be so.

Here, we are not taxing the capital receipt/asset itself but the “gain”. If in case your computation
provision fails then in those situations the charging provison also fails- because in those situation
it is concluded that the legislature never wanted this income to be taxed.

Computation= Full value of consideration– cost of acquisition- Cost of improvement-

expenditure incurred wholly and exclusively in connection with the transfer= Gross amount (take
someone’s notes- ma’am wrote a lot on the board)- This computation giving you your gain or
loss. In case you have no cost of acquisition then assessee’s have claimed and courts have
granted that if computation provision fails then the charging provision also fails.

Simplest computation.

Full value consideration- Transfer of asset leading to a gain or loss, unless you are expending
this amount in the set sections (54) then it is exempt.