Profits & Gains from Business

and Profession (PGBP)

 Expenses allowed (contd.)

Depreciation u/s 32
Block of assets
• "a group of assets falling within a class of assets, being building,
machinery, plant & furniture, in respect of which the same
percentage of depreciation is prescribed."
• Method of depreciation
1. Straight line method
2. WDV method
 Depreciation 32- Points to remember

• DP is calculated on the value of assets in hand on the last

day of accounting year.
• In case of newly acquired assets, full depreciation if it
is used for more than 180 days.
• No depreciation allowed for those assets which are
sold or demolished
 Depreciation 32

Conditions for claiming depreciation

• Asset must be owned by the assessee
• Used or ready to use for business purpose
• Used in the previous year
• Both tangible and intangible assets
 50% rate of depreciation

• If an asset acquired during the previous year.

• Put into use or ready to use for less than 180 days.
 Additional Depreciation

• In case of new plant and machinery is acquired, an additional

depreciation at the rate of 20% of actual cost of plant &
machinery is also allowed, if assessee is engaged in the
manufacturing of any goods and the asset is used for more than
180 days. If below 180 days @ 10% (20%x 50%)
• The additional depreciation is allowed over and above
the normal rate of depreciation
• For new undertaking set up for mfg on or after 31.3.2015
in Andhra/ Bihar/ Telangana/ WB – addl dep @ 35%
• If put to use for less than 180 days in a PY - @
17.5%( 35%x50%)
• Balance 50% of additional depreciation in the next PY
 Unabsorbed Depreciation
• When the total depreciation is more than available profit, the excess
is called unabsorbed depreciation.
• It can be set off first with other business income and balance with
any other income of the year and
• If there is still balance, it can be carried forward and added with next
years’ depreciation and treated like depreciation of current year
Business profits before depreciation xxx
Less Current year depreciation (Xxx)
Balance Xxx
Less B/fd Business Loss (Xxx)
Balance Xxx
Less B/fd unabsorbed depn (Xxx)
Balance Xxx
 Rate of depreciation
I. Buildings
a. Residential - 5%
b. Non residential others - 10%
c. Temporary buildings - 40%
II. Furniture, fittings fan - 10%
III. Machinery & Plant
a. Plant & machinery, motor car, AC, surgical equipments- 15%
b. Motor car for hire business - 30%
c. Computers & books - 60%
IV. Ship boat - 20%
V. Patent, copy rights, knowhow - 25%
 Investment allowance for new plant 32AC

• For manufacturers only

• Machines installed 1.4.2014 – 31.3.2017
• @ 15%
• investment more than 25 crores
• Deduction in the year of installation only
• If sold within 5 year- deduction allowed is fully taxable as
business income
• Does not include assets for which cost is fully allowed as
deduction
 Investment allowance for new plant [Sec
32AD]
• For manufacturers only
• Machines installed 1.4.2015 – 31.3.2020
• @ 15%
• Set up in Andhra/Bihar/Telangana/WB
• Deduction in the year of installation only
• If sold within 5 year- deduction allowed is fully taxable as
business income
• Does not include assets for which cost is fully allowed as
deduction
• 32AC+32AD possible
 Deduction in respect of Tea/ Coffee/ Rubber
Development [Sec 33AB]
• Deduction for any sum deposited with NABARD
• 40% of profit or amount deposited, whichever is less.

Deduction in respect of Site restoration fund

[Sec.33ABA]
 Production of Petroleum /Natural gas in India
 20% of profit or actual amount deposited with SBI/account
 Special deductions
• Scientific research[Sec.35]
• Revenue expenditure (given outside) -100%
• Capital expenditure on scientific research -100%
• Amount paid to company for scientific research -125%
• Amount paid for social research -125%
• Amount given to scientific research association -175%
• Amount paid to National Laboratory or University -200% or
175%
 Expenditure for Obtaining License to operate
Telecommunication Services U/s 35ABB

 Allowed as Deduction equally over the number of years of Validity

of Licenses
 Expenditure on specified business 35AD
Type of business Deduction
1 Cold chain
2 Ware house for agri prod
3 Laying pipeline for cross country petrol/ natural gas
4 Building/ operating 2 star and above hotels 2011-12 AY
5 Building/ operating hospitals 100 beds above
6 Developing/ building housing projects 2012-13 AY
100%
7 Fertiliser prodn
8 Building/ operating inland container depo 2013-14 AY
9 Bee keeping & prodn of honey & bee wax
10 Operating WH for sugar
If commenced operation on 1.4.2012 of 1,2,5,6,7 150%
 Expenditure on specified business 35AD
Type of business Deduction
11 Slurry pipeline – iron ore 2015-16 AY
12 Semi conductor water fabrication mfg unit
100%
Conditions-
• Not formed by splitting up or reconstruction or business already in
existence
• Not formed by t/f to specified business of machinery & plant
(exceeding 20%)
• If there is a cash payment of more than Rs10000 in a day then it will b
disallowed.
 Expenditure on payment to rural development fund
35CCA
• Deduction @ 100%
• Funds – notified by CG
• National Fund for Rural development
• National Poverty Eradication Fund
 Expenditure on agriculture extension project
35CCC
• Deduction @ 150%

Expenditure on skill development project 35CCD

• Deduction @ 150%
• No deduction for L & B
 Amortisation of preliminary expenses 35D
• Indian Company or resident non corporate assessee
• Legal charges on MOA, AOA, printing of MOA, & AOA,
Registration fees, expenses connected to issue of shares or
debentures
• Deduction @ 1/5 of amount incurred
Corporate assessee Non-Corporate assessee
5% of cost of project or 5% of the cost of the project
5% of capital employed
Whichever is More
Amortisation of expenditure incurred for
amalgamation/ demerger [35DD]

• Indian company
• Deductions in five successive installments
• i.e., 20% each year
Amortisation of expenditure under voluntary
retirement scheme[35DDA]

• Any assessee
• Deduction 1/5 every
year
 Expenditure on Prospecting for Development of
certain minerals [35E]

• Indian companies and Resident assessee

• I/10 every year allowed
 Other deductions u/s 36
1. Insurance premium to protect the asset
2. Health insurance premium of employees
3. Bonus to employees
4. Interest on borrowed capital
5. Proportionate amount of Discount on Zero coupon Discount Bonds
6. Contribution to NPS/RPF/ Approved Superannuation/Gratuity etc.
7. Bad debts – actually written off as irrecoverable
8. STT/ Banking TT paid
9. Special reserve created by specified entity – 20% of profit or amt
credited to special reserve
 Expenditure on family planning
• Incurred by companies
• Revenue expenditure- Fully allowed
• Capital Expenditure - 1/5th every year
• Non-corporate assessee can claim u/s 32
(Depreciation on capital expenditure) and 37(1)
(Revenue expenditure)
Health insurance premium of employees 36(1)
(ib)

• It is allowed as deduction if following conditions are

satisfied :
a. The Premium is paid by Cheque by the employer;
and
b. Premium is paid under the Scheme framed in this
behalf by the General Insurance Corporation of
India and approved by the Central Government.
BONUS OR COMMISSION PAID TO
EMPLOYEES
1. Admissible only if not payable as profit or dividend
2. Deductible on payment basis
3. Payment is made during the previous year or on or
before the due date of furnishing return of income u/s
139.
 EMPLOYEE’S CONTRIBUTION
TOWARDS STAFF WELFARE SCHEME.
Any sum received by the assessee from his employees as
contributions :
• to any provident/ superannuation fund or
• any fund set up under Employee’s State Insurance Act, or
• any other fund for the welfare of such employee
is treated as income in the hands of assessee.
However, employer’s contribution (not employee’s contribution)
towards such fund is allowed as deduction subject to section 43B.
i.e. such contribution is paid on or before the due date of furnishing
return.
 Other deductions u/s 37
Conditions for allowing a deduction
1. It should not be a capital expenditure or
2. Not personal
3. Not prohibited by law such as fine, penalty
4. Not be an illegal expenditure
5. Relate to PY
6. Respect of assesee’s business
7. Exp incurred wholly for B/P
8. Exp in relation to CSR – no deduction
9. Exp in relation to IT proceedings – Full deduction
 Other deductions u/s 37

• Litigation expenses to protect the trade or business /asset/or to

retain title of asset.
• Legal expenses to receive loan.
• Litigation expenses in restoring trade mark.
• Legal expenses to alter the AOA in conformity with the changes
brought about in the companies ACT.
• Damages paid to workers/fulfil the contract Damages for breach of
contract
 Other deductions u/s 37

• Contribution to union formed to oppose the nationalization of

assessee’s business
• Expenses incurred during festival
• Premium paid for loss of profit
• Professional tax paid
• All maintenance expenditure
• Expenses incurred to register trade marks
• Entertainment expenses
• Periodical payment for the use of goodwill
 Allowable losses

1. Embezzlement or theft
2. Loss due to non recovery of advance
3. Robbery or dacoity
 Expenses allowable on actual payment

1. Excise duty, Sale tax, land revenue and local taxes

2. Any sum payable as bonus or commission
3. Employees contribution to PF/SF/GF
4. Interest on loan from bank or PFI
5. Any sum payable in lieu of earned leave
ACTUAL PAYMENT ON OR BEFORE 139(1) RETURN
 Deemed incomes u/s 41

• Any losses/ expenses previously written off recovered

• Sale of assets on which exemption claimed u/s 35 (to the extent
of deduction – taxable as profits, excess over cost is capital gains)
• Bad debts recovered
• Any recovery of any income even after
discontinuance of business taxable in the hands of recipient
• Profit on sale of assets under SLM method (amount less than
cost of asset)
 Compulsory Audit [Sec.44AB]

• An assessee has to audit his books of accounts before specified date

• in case of business – Turnover/ gross receipts > 1Cr
• In case of profession – Gross receipts > 50L ( AY 2017-18)
• In case of 44AD assessee he need to audit his accounts only if
• his turnover exceeds 2 Cr or
• Declares profits below deemed profits of 6%/8% as the case may be

• 44AD/ADA/AE/BB/BBB – declaring profits below deemed profits

• 33AB/ABA, 35AD/D/E
 Computing profits for business of plying, hiring
goods carriages [Sec 44AE]

• Applicable to : assessee conducting business of plying,

hiring leasing goods carriages not owning more than 10
vehicles
• Income = 7,500 per goods carriage per month or part of
month
• No deduction under sec 30-38, it is deemed as allowed
• Deduction for salary & interest on capital of partners allowed
• It is an optional scheme
PGBP –
Practice Questions
Compute the income from Business of Shri Lal from the following P & L:
Trade Expenses 450Gross Profit 235900
Establishment Charges 2200Dividens from Cooperative Society 2600
Rent and Rates 1400Rent from Property 500
Discount 200Bad Debts Recovered  
Income Tax 700(allowed as deduction earlier) 2000
Advertisement Expenses 1450  
Postage 100  
Gifts for Publicity 125  
Fire Insurance Premium 250  
Charities 375  
Donations 400  
Repairs and Renewals 250  
Audit Fees 250  
Net Profit 232850  
  241000  241000
  Net Profit   232850
Add: Items not allowed:    
  Income Tax 700 
  Charities 375 
  Donations 400 1475
    234325
Less: Income from Property 500 
  Dividend 2600 3100

Income from Business 231325

Q. The following is the P & L A/c of Mr. Vivek for the year ended on 31 March, 2019. Compute his
taxable income from business for that year:
Dr. Profit & Loss A/c Cr.
Opening Stock 15000 Sales 80000
Purchases 40000 Closing Stock 20000
Wages 20000 Gift from Father 10000
Rent 6000 Sale of Car 17000
Repairs of Car 3000 Income Tax Refund 3000
Wealth-tax paid 2000   
Medical Expenses 3000   
General Expenses 10000   
Depreciation on Car 3000   
Advance Income Tax paid 1000   
Profit for the year 27000   
  130000  130000

Following further informations are given:

1. Mr. Vivek carries on his business in rented premises, half of which is used as his residence.
2. Mr. Vivek bought a car during the year for Rs. 20,000. He charged 15% depreciation on the value
of car. The car was sold during the year for Rs. 17,000. The use of the car was 1/4th for personal
purposes.
3. Medical Expenses were incurred during sickness of Mr. Vivek for his treatment.
4. Wages include Rs. 250 per month on account of Mr. Vivek's driver for 10 months.
 Computation of Income from Business
(For the assessment year 2019-20)
Profit as per P & L A/c 27,000
Add: Items Disallowed:
1/4 Wages regarding driver's salary for personal
use of car 625
1/2 Rent regarding personal use of house 3000
1/4 repairs of Car regarding personal use 750
Wealth Tax 2000
Medical Expenses 3000
Depreciation 3000
Advance Income Tax 1000 13,375
40,375
Less: Items not taxable:
Income tax refund 3000
Gift from father 10000
Sale of Car (Capital Receipt) 17000 30,000
Taxable Income from Business 10,375
On the basis of trading and P & L A/c of Mr. H calculate his income from Business:
Salary 100000 Gross Profit 396260
Advertising 45500 Rent on Property 48000
Office Expenses 92500 Refund of Income Tax 3000
Insurance Expenses (Goods) 8600 Bad Debts Recovered 7800
Fire Insurance (HP) 3400  
Life insurance Premium 5000  
Dep. on Car 13000  
Tax provision 26000  
Entertainment Expenses 18500  
Cost of Patent 21000  
Motor Car expenses 12000  
Bad debts 2500  
General Expenses 3000  
Net Profit 104060  
  455060  455060
Other informations:
Advertising includes : (i) Goods presented to customers (30 articles @ Rs. 800 each) (ii) TV prizes to
Customers (two TV @ Rs. 4500 per set) (iii) Diaries/Calendars Rs. 3000 (iv) balance amount
newspapers advertisement
Recovery of Bad Debts includes Rs. 6000 which was not accepted by ITO for deduction in 2015-16
Cost of Motor Car is Rs. 100000 on which depreciation allowed @ 15% p.a.
  Net Profit   104060
Add: Items Disallowed:    
  Life Insurance Premium 5000 
  Tax Provision 26000 
  Fire Insurance (HP) 3400 
  Patents 21000 55400
    159460
Less: Items allowed and not taxable under this head    
  Rent 48000 
  Refund of Income Tax 3000 
  Bad Debts Recovered 6000 
  Depreciation on Car (15000-13000) 2000 
  Depreciation on Patents 5250 64250
Income from Business 95210
Ms. Q is a medical practitioner. She keeps her books on cash basis and for the year ended 31 March
2016 her summarized Cash A/c is as under:

Opening Balance 2700 Cost of Medicine 20000

Bank Loan 6000 Surgical Equipment 6000
Sale of Medicine 30500 Motor Car 12000
Consultation fees 10000 Car Expenses 1800
Visiting fees 8000 Salary 1200
Interest on Investments 9000 Rent of Dispensary 1200
Rent from Property 7200 General Expenses 600
Sale of Building 15000 Personal Expenses 3600
Sale of Furniture 5000 Life Insurance Premium 2000
Interest on Bank Loan 360
    Property Insurance 400
    Fixed Deposit in Bank 30000
    Closing Balance 14240
  93400   93400
Keeping in view the following additional information, compute her income from profession
1/3rd car expenses are for personal use
Written-down value of the house property on 1st April 2015 was Rs. 20000 and that of furniture was
Rs. 4000. There were no other assets in these blocks.
Rate of Dep. on Car and surgical equipments is 15%
  Incomes    
  Sale of Medicines 30500 
  Consultation Fees 10000 
  Visiting Fees 8000 48500
Less: Expenses Allowed    
  Cost of Medicines 20000 
  Car Expenses (2/3) 1200 
  Salary 1200 
  Rent 1200 
  General Expenses 600 
  Interest on Bank Loan 360 
  Depreciation on Car (1800 x 2/3) 1200 
  Depreciation on Surgical Equipments 900 26600
Income from Profession 21840
Dr. Gupta is a medical practioner of Ludhiana. From the following, calculate his income
from profession
Gross Receipts from Dispensary 235000
Gross Receipts from Consultation 165000
Operation fees 250000
Visiting Fees 50000
Gifts from Patients 30000
Medicines purchased 125000
Closing Stock of Medicine 35000
Salaries paid to employee 150000
Surgical equipments purchased 48000
Dr. Gupta went to attend a medical seminar in Germany to update the knowledge and
spent Rs. 25000 on it
He owns a house whose municipal value is Rs. 50000. Half portion of the house is used
for profession. Expenses paid on the house: Municipal Taxes 10% of M.V., Repairs Rs.
10000, Renovation expenditure Rs. 30000
Medical books purchased
20000
  Income    
  Receipts from dispensary 235000 
  Receipts from consultation 165000 
  Operation fees 250000 
  Visiting Fees 50000 
  Gifts from patients 30000 730000
     
Less: Expenses    
  Medicines(125000-35000) 90000 
  Salaries 150000 
  Dep. on Surgical Euipments @ 15% 7200 
  Visit to Germany 25000 
  Dep. on books @ 60% (other than annual publication) 12000 
  Expenses on building:    
  Municipal Tax 50% 2500 
  Repairs 50% 5000 291700
Income from Profession 438300