Business Evaluation Tax

Taxation Components Computation

• 1.5 Credit • 2 Quizzes Structure of
• Continuation • 2 Assignments
Individual
to FAC121 • End Semester
Direct Taxes A.Y. 2018-19
Income from salaries
Income from House property

Profits and gains from business or profession 5 Heads of Income
Capital Gains
Income from Other Sources
Gross Total Income Clubbing of Income
Less: Deductions u/s 80C to 80U Set Off and Carry Forward of Losses
Total Income
Tax on Total Income
Add: Surcharge
Tax and surcharge
Add: Education Cess
Add: Secondary and higher education cess
Less: Rebate
Tax Liability
Less: Pre-paid taxes
1. Self assessment tax
2. TDS
3. Advance Tax
Final tax liability (rounded off)
Profits and Gains
from Business and
Profession
 • Regularity
• Profit
• Number of
Business
transactions
Trade
• Attention of labour
Commerce
for a profit
Manufacturing
• 2 Parties
Activity
• Inclusive
Definition

Profession

Distinction
Intellectual between
skill/ Business /
Qualification/ Profession
Learning for Income
Tax
 • Profits /Losses • Arising for
of Business/ Basis of
better
Profits and Gains Perquisite
Profession Charge of
performance
carried out in a business/
P.Y. profession

Compensation for
termination/
modification of terms of
contract
 •Paid by
Interest, Salary, •Import License

Remuneration,
Export
partnership Basis of
•Duty Drawback
Charge
firm to the •Duty Entitlement
Bonus incentives
partners Pass Book Scheme

Speculative
Transaction
 • Not carrying a Basis of
particular Charge
business activity • Sum received
Sum received for not
orKeyman
sharingInsurance Policy under Keyman
carrying out an activity
patents, know Insurance Policy
how, trademark,
copyrights

Income of any trade,

professional association
from services to
members
What is
not Rent of
Business
Income
House
Property Dividend
• Dealer of Winnings from
Trader of shares lotteries, races,
property &stocks etc.
• Temporar
y let out
before
sale
 May be through
What should agent/
be taken care representative
of while
calculating
Business
Income

Business carried on by
Assessee Multiple Business

Not necessary
throughout the
year
Temporary
suspension/
inactivity-?
 What should
be taken care
of while
calculating
Business
Income

Real Profits only Illegal Business

 Allowable Losses

1. Loss of stock due to

What should natural disaster
be taken care
2. Loss due to exchange
of while
calculating
rate fluctuations
Business 3. Loss on sale of
Income goods/securities
4. Loss of cash/securities
in bank robbery
5. Loss of realisation of
Taxable in Allowance of Business amount advanced in
Assessment Year Losses business
6. Loss on account of
embezzlement by
employee
7. Loss of theft
8. Loss on seizure of
illegal goods/not fit for
consumption – seized by
customs
What should
be taken
care of
while
calculating Losses not allowable
Business
Income
1. Loss not incidental to trade
2. Loss on damage of capital asset
3. Loss on sale of shares held as
investment/(if stock in trade-?)
4. Loss of discontinued business
5. Penalties on violation of law
What is
Business
Income
Re Ex
Pr
ve pe
of
nu ns
it
e es
Credited to Debited to
Profit and Loss Profit and Loss
Account Account
 Particulars Rs.
Indirect
Method of Net Profit as per Profit and Loss Account xxxx
Income
Computation Add: All expenses not allowed as per Income Tax Act xxxx

Add: All Unrecorded Business Incomes xxxx

Less: All expenses allowed, but not recorded xxxx

Less: All Incomes which are not Business Incomes xxxx

Taxable Income From Business and Profession

 Profit and Loss Account

Step 1: Pick
Expenses/ Rs. Income Rs. Up Net Profit
NET PROFIT Losses
from the P/L
Expense 1 xxxx Revenue yyyy Account
(sales)
Expense 2 xxxx Profit on yyyy
sale
Expense 3 xxxx Recovery yyyy

Expense 4 xxxx Other yyyy

Incomes
Net Profit ZZZZ

Total
 Step 2: Check if there are
Profit and Loss Account
EXPENSES any Expenses not related to
Business and those related
NOT Expenses Rs. Income Rs. to business, but not
ALLOWED incurred as per Act
Expense 1 xxxx Revenue yyyy
(sales)
Expense 2 xxxx Profit on yyyy
sale
Step 3: Add it back to
Expense 3 xxxx Recovery yyyy the Net Profit as per
Step 1 as they are
Expense 4 xxxx Other yyyy disallowed, to calculate
Incomes Profit under Income Tax
Net Profit ZZZZ

Total

Effect: Profit will

increase
 Profit and Loss Account Step 4: Add All
Business related
Expenses Rs. Income Rs. Incomes not
recorded in the
UNRECORDED Profit and Loss
Expense 1 xxxx Revenue yyyy
BUSINESS (sales)
Account
INCOMES Expense 2 xxxx Profit on yyyy
sale
Expense 3 xxxx Recovery yyyy

Expense 4 xxxx Other yyyy Effect: Profit will

Incomes increase
Net Profit ZZZZ

Total
Unrecorded
Business
Incomes
 Profit and Loss Account Step 5: Deduct
All Business
Expenses Rs. Income Rs. related Expenses
ALLOWABLE not recorded in
EXPENSES the Profit and
Expense 1 xxxx Revenue yyyy
Loss Account
NOT (sales)
RECORDED Expense 2 xxxx Profit on yyyy
sale
Expense 3 xxxx Recovery yyyy

Expense 4 xxxx Other yyyy Effect: Profit will

Incomes Decrease
Net Profit ZZZZ

Total
Unrecorded
Business /
Allowable
Expenses
 Step 6: Check
Profit and Loss Account if there are
any Incomes
NON Expenses Rs. Income Rs. not treated as
Business
BUSINESS
Income
INCOMES Expense 1 xxxx Revenue yyyy
(sales)
Expense 2 xxxx Profit on yyyy
sale Step 7: Deduct
Expense 3 xxxx Recovery yyyy it from the Net
Profit as per
Expense 4 xxxx Other yyyy Step 1,as they
Incomes are not Business
Incomes
Net Profit ZZZZ

Total

Effect: Profit
will decrease
 Particulars Rs.
Indirect
Method of Net Profit as per Profit and Loss Account xxxx
Income
Computation Add: All expenses not allowed as per Income Tax Act xxxx
Increase
Add: All Unrecorded Business Incomes xxxx

Less: All expenses allowed, but not recorded xxxx

Decrease
Less: All Incomes which are not Business Incomes xxxx

Taxable Income From Business and Profession

 Expenses
allowed as
Deductions
under Income
Tax Act
Sec 30: Rent, Rates, Taxes, Repairs , Insurance for Building

Sec 31: Repairs and Insurance of Plant, Machinery and

Furniture

Sec 32: Depreciation of Business Assets

 Expenses
allowed as
Deductions
under Income
Tax Act
Sec 36: Specific Deductions

Sec 37: General Deductions

Sec 40 to 43B : Disallowances under the Act

 Rent – If not owned
ALLOWABLE
Repairs- If agreed to bear
EXPENSES –
as tenant
FOR OFFICE
BUILDING-
Sec -30
Cost of repairs – If building
is owned

Amount paid as Rates and

Municipal Taxes on Owned
Building -43B will apply

Insurance Premium for the

Owned/ Rented Building
What are
current
repairs
 Case Laws on Section 30
ALLOWABLE
EXPENSES – 1. Rent paid by firm to a partner for the premises?
FOR OFFICE
BUILDING
2. Premises taken on lease to carry business and assessee
pays rent of previous tenant – Will the arears of rent
of previous tenant be allowed as deduction ?

3. An assessee was running a hotel in Mussorie and

claimed deduction of the following expenditure :
Repair of furniture, Fixing of tiles in the kitchen,
construction of water tank, replacement of cement roof
with tiled roof

4. Premises used partly for business purposes and partly

for other purposes

5. Premises being sub-let

ALLOWABLE
EXPENSES –
FOR PLANT,
MACHINERY,
FURNITURE
Cost of repairs – on Plant,
Machinery and Furniture

Insurance Premium on
Plant, Machinery and
Furniture

What about Rent

on P/M and
Furniture
 Case Laws on Section 31
ALLOWABLE
EXPENSES –
FOR OFFICE
BUILDING 1. P/M and Furniture to be used for the business of the
assessee. Period of use of the Plant, Machinery and
Furniture during the P.Y.- some part or whole year?

2. First time insurance on car

3. A factory machine has got 2 to 3 electric motors. If

one of them is worn out and replaced by a new motor
of similar capacity involving heavy cost-would it be
treated as a revenue expenditure on repairs? What if
the P/M itself is replaced?
 ALLOWABLE
EXPENSES –
DEPRECIATION
ON BUSINESS
ASSETS

Rates and Mechanism different from Accounting

Depreciation

Is it compulsory to
What is Depreciation
Why allowed under
claim Income Tax Act
Depreciation
under the Income
Tax Act
 DIFFERENCE
BETWEEN
ACCOUNTING &
TAXATION
DEPRECIATION ACCOUNTING TAXATION
•Charge Against •Allowance against
Profit profit
•WDV and SLM •WDV
•Block of Asset
•Individual assets •50% of Normal
•On the basis of no. Depreciation OR
of days Normal Dep
 METHOD OF •Written
CALCULATING
DEPRECIATION Method Down Value
Method

Rates
UNDER
INCOME TAX Depreciation
ACT as per books
may be
different
 Book Profits = 30,000
DIFFERENCE (After Depreciation as
BETWEEN PROFIT AND LOSS ACCOUNT per books)
TAXABLE
EXPENSES RS. INCOMES RS.
PROFITS AND
BOOK PROFITS All Expenses 15,000 All Incomes 65,000

Depreciation as 20,000 Book Profit = 30,000

per books/ Add: Depreciation
Companies Act as per Books = 20,000
Net Profit 30,000 Less: Depreciation
as per IT Act = 15,000
Taxable Profit 35,000
Total 65,000 Total 65,000

Depreciation as per Income Tax Act is Rs.15,000

(Difference can be because of Rates or Methods
 CONDITIONS
FOR CLAIMING
Ownersh Type of
• Assessee must
be owner of
•Tangible or
Intangible
the Business
ip Asset
DEPRECIATION
and Asset •Land?

Use of
Asset
 Period of
CONDITIONS
USE OF ASSET EXPLAINED Usage
FOR CLAIMING
DEPRECIATION

Less than
180 Days –
Half
Depreciation

New asset purchased during

Used For Business Purposes P.Y.
More than
180 Days –
Full
Depreciation
Active/ Passive Use/ Ready to Use / For full or any
Trial run, Residential quarters for part of the
staff and assets along with it, Previous Year
Partially used for business purpose
DEPRECIATION
UNDER
INCOME TAX In Income Tax Act Depreciation is calculated on Block of Assets
ACT

Assets of similar
Depreciation is There can be
type and carrying Whole block gets
charged on the multiple block of
the same rate of depreciation even
whole block of assets for the
depreciation- if all assets are
assets and not same type of
How many blocks not used
individual assets assets – How?
are there?
 All assets were already
existing on 1st April 2017
ILLUSTRATTION
ON BLOCK OF
ASSETS
Name of the Asset Rate of Op. WDV as
Depreciation on 01/04/17
Plant A, B & C 15% 12,25,600
Plant D & E 20% 2,56,300
Plant X & Z 15% 8,94,100
Office Buildings 10% 48,36,400
Residential Building 5% 36,50,700
Furniture & Fixtures 10% 2,41,600
Televisions & Refrigerators 10% 6,98,900
Computer 40% 2,15,200
Trademarks & Patents 25% 6,04,500
 Block of Assets Rate of Op. WDV as
ILLUSTRATTION Depreciation on
ON BLOCK OF
ASSETS
01/04/17
Plant- I 15% 2119700
(Plant A, B, C , X & Z)
Plant – II 20% 256300
(Includes Plant D & E)
Office Buildings 10% 4836400
Residential Buildings 5% 3650700
Furniture, Fixtures and 10% 940500
Electronics
Computer 40% 2,15,200
Intangible Assets 25% 819700
 Particulars (For Each Block ) Amount
Opening WDV of the block as on the 1st day of the Previous *****
DEPRECIATION
Year (1)
UNDER INCOME
TAX ACT- Add: Actual cost of the assets acquired during the Previous *****
WRITTEN Year (2)
DOWN VALUE Less: Deduct the amount received or receivable in respect *****
of the assets sold or discarded during the Previous Year
(3)
Sub Total : Closing WDV for calculating Depreciation *****
4= (1+2-3)
Less: Amount of depreciation for the year ( On Closing ****
WDV at the rates applicable to the respective block)
(5)
Written Down Value at the end of the Previous Year (4- *****
5)
Assets already New Assets Assets in the 4 * Rate of
existing in the purchased during block which are
3 cannot Depreciation
block on the year in the sold during the
1.4.2017 same block year exceed (1+2)
Problem 1- Compute the written down value from the following information for
the assessment year 2017-18

Blocks of asset Rate of Depreciated

depreciation (%) value on 1.4.2017
1. Plant A, B and C 15 10,40,000
2. Plant D and E 40 2,60,000
3. Plant F 30 70,000
4. Building A, B, C and D 10 10,90,600
5. Building E, F and G 5 7,10,200
6. Building H, I, J and K 40 16,90,000
After April 1, 2017 the company purchases the following assets:-
Assets Date of purchase Rate of depreciation (%) Actual cost Rs.
Plant G April 6, 2017 30 6,000
Plant H May 11, 2017 15 18,000
Furniture June 6,2017 10 56,000
Car July 7,2017 15 2,56,000
Building L September 26, 2017 5 7,28,700
Computer September 27, 2017 40 90,000
Copyright September 30, 2017 25 17,50,000

The following assets are transferred —

Assets Date of sale Sale consideration Rs
Plant B December 20, 2017 25,10,900
Plant D January 31, 2018 12,000
Building L March 6, 2018 6,00,000
Particulars Block 1 Block 2 Block 3
P/M (15%) P/M (40%) P/M (30%)
Opening WDV 10,40,000 2,60,000 70,000
On 1.4.2017 (A,B,C) (D & E) (F)
Add: New Asset 2,74,000 90,000 6,000
purchased in the block (H & Car) COmputer (G)
Less: Any Asset in the 13,14,000 12,000 NIL
block sold (though (D)
(Cannot exceed the cost actual is
of the block) 25,10,900)
Closing WDV on NIL 3,38,000 76,000
31.3.2018
Particulars Block 4 Block 5 Block 6
Buil (10%) Buil (5 %) Buil -40%
Opening WDV 10,90,600 7,10,200 16,90,000
On 1.4.2017 (A,B,C D) (E,F,G) (H,I,J,K)
Add: New Asset NIL 7,28,700 NIL
purchased in the block (L)
Less: Any Asset in the NIL 6,00,000 NIL
block sold (L)
(Cannot exceed the cost
of the block)
Closing WDV on 10,90,600 8,38,900 16,90,000
31.3.2018
Particulars Block 7 Block 8
Fur (10%) INT A-25%
Opening WDV NIL NIL
On 1.4.2017
Add: New Asset 56,000 17,50,000
purchased in the block
Less: Any Asset in the NIL NIL
block sold
(Cannot exceed the cost
of the block)
Closing WDV on 56,000 17,50,000
31.3.2018
 Particulars (For Each Block ) Amount
Opening WDV of the block as on the 1st day of the Previous *****
DEPRECIATION
Year (1)
UNDER INCOME
TAX ACT- Add: Actual cost of the assets acquired during the Previous *****
WRITTEN Year (2)
DOWN VALUE Less: Deduct the amount received or receivable in respect *****
of the assets sold or discarded during the Previous Year
(3)
Sub Total : Closing WDV for calculating Depreciation *****
4= (1+2-3)
Less: Amount of depreciation for the year ( On Closing ****
WDV at the rates applicable to the respective block)
(5)
Written Down Value at the end of the Previous Year (4- *****
5)
4 * Rate of
Depreciation
Time Period
for
Depreciation
Calculation –
Exception 1
and 2

W.DV. Of the block becomes Block is empty on the last day of

zero, but block is not empty P.Y. and W.D.V. is not zero

Depreciation
for the Year
will be zero
Time Period
for
Depreciation
Calculation –
Exception 3

Asset acquired during the year

Asset existing at the beginning and used for less than 180 days
of P.Y. and used during the P.Y. in P.Y

Exception 3:
Full Half
Depreciation Depreciation for
for the Year is the Year is
allowed allowed
Problem 2: Exception 1
Block 1 – Plant -15% Rs
Opening WDV On 1.4.2017 (A, B) 80,000
Add: New Asset purchased in the block 30,000
(Plant C) W.D.V. of
Block becomes
Less: Any Asset in the block sold 1,10,000 zero even if
(Cannot exceed the cost of the block) (A) (Though actual assets exist in
Rs.1,80,000) the block

Closing WDV on 31.3.2018 NIL

Depreciation for 2017-18 NIL

Final Closing W.D.V. on 31.3.2018 after NIL

depreciation
Problem 3: Exception 2
Block 1 – Plant -15% Rs
Opening WDV On 1.4.20167 (A, B) 2,37,000
Add: New Asset purchased in the block 20,000
(Plant C) Even though
Less: Any Asset in the block sold 49,000 there is a
Closing W.D.V.
(Cannot exceed the cost of the block) Block is empty
(A, B and C)
Closing WDV on 31.3.2018 2,08,000

Depreciation for 2017-18 NIL

Final Closing W.D.V. on 31.3.2018 after NIL

depreciation
Problem 3 : Exception 2
Block 1 – Plant -15% Rs
Opening WDV On 1.4.2017 (A, B) 2,37,000
Add: New Asset purchased in the block 20,000
(Plant C)
Block is empty
Less: Any Asset in the block sold 2,57,000 and W.D.V. is
(Cannot exceed the cost of the block) (Though actual also zero
(A, B and C) Rs.3,57,000)
Closing WDV on 31.3.2018 NIL

Depreciation for 2017-18 NIL

Final Closing W.D.V. on 31.3.2018 after NIL

depreciation
Problem 4: Exception 3
Block 1 – Plant -15% Rs
Opening WDV On 1.4.2017 NIL
Add: New Asset purchased in the block xxxx Depreciation will
be calculated @
(Purchased on 10.05.17) (Put to use on 50% of 15% on the
10.01.18) closing W.D.V. as
put to use for less
Less: Any Asset in the block sold NIL than 180 days
(Cannot exceed the cost of the block)
Closing WDV on 31.3.2018 xxxx
(a)
Depreciation for 2017-18 xxxx
(b)
Final Closing W.D.V. on 31.3.2018 after xxxx
depreciation (a-b)
Problem 4: Exception 3

Block 1 – Building -10% Rs

Opening WDV On 1.4.2017 14,15,700
On 3,10,000 @ 50% of
Add: New Asset purchased in the block 3,10,000 10% = 15,500
On 1st December,2017 (Building C)
On (8,55,700 –
Less: Any Asset in the block sold 8,70,000 3,10,000) =5,45,700@
(Cannot exceed the cost of the block) 10% = 54,570
(Building A )
Total = 15,500+
Closing WDV on 31.3.2018 8,55,700 54,570 = 70,070

Depreciation for 2017-18 70,070

Final Closing W.D.V. on 31.3.2018 after 7,85,630

depreciation
Problem 4: Exception 3

Block 1 – Building -10% Rs

Opening WDV On 1.4.2017 14,15,700
As Closing W.D.V. is
Add: New Asset purchased in the block 3,10,000 less than the cost of
On 1st December,2017 (Building C) Building C which is
used for less than 180
Less: Any Asset in the block sold 15,87,000 days depreciation will
(Cannot exceed the cost of the block) be calculated @ 50%
(Building A ) of 10% on 1,38,700 =
6,935
Closing WDV on 31.3.2018 1,38,700

Depreciation for 2017-18 6935

Final Closing W.D.V. on 31.3.2018 after 1,31,765

depreciation
 On 1.4.16 the following details are given :

DEPRECIATION 1.4.16: Opening W.D.V. of Plant A, B, C @ 20% Rs. 5,00,000

UNDER INCOME
TAX ACT- 20.5.2016: Plant D purchased for Rs. 3,00,000
WRITTEN
DOWN VALUE
10.10.2016: Plant A (WDV Rs.1,00,000) lost by theft

Opening W.D.V. Rs.5,00,000

+ New Asset Rs.3,00,000

- Sale / Theft NIL

W.D.V. for Depreciation Rs.8,00,000

Dep on Closing W.D.V. @ 20% Rs.1,60,000

Closing W.D.V. on 31.3.2017 Rs.6,40,000

Practical Exercise on Depreciation
Particulars Block 1 Block 2 Block 3
Buil (10%) Buil (5%) P/M (15%)
Opening WDV 3,50,000 10,00,000 20,40,000
On 1.4.2017
Add: New Asset 1,00,000 5,00,000 6,50,000
purchased in the block (May 2017) (May 2017) (Nov 2017)
Less: Any Asset in the 60,000 NIL 2,70,000
block sold 24,20,000 - 6,50,000=
17,70,000 * 15%=
(Cannot exceed the cost 2,65,500
of the block) and
6,50,000 * 7.5% =
Closing WDV on 3,90,000 15,00,000 24,20,000 48,750
31.3.2018
Total = 3,14,250
Depreciation on Closing 39,000 75,000 3,14,250
WDV (10% of (5 % of
3,90,000 15,00,000)
Particulars Block 4 Block 5 Computers
Fur (10%) P/M (40%)
Opening WDV 1,76,000 NIL 1,81,000 - 5,000=
On 1.4.2017 1,76,000 * 10%=
17,600
Add: New Asset 5,000 80,000 and
purchased in the block (Nov 2017) (Oct 2017) 5,000 * 5% = 250

Less: Any Asset in the NIL NIL Total = 17,850

block sold
(Cannot exceed the cost
of the block)
Closing WDV on 1,81,000 80,000 50% of 40%
31.3.2018 of 80,000

Depreciation on Closing 17,850 16,000

WDV (20 % of
80,000)
Total Depreciation Rs
Block 1 – Building – 10% 39,000
Block 2– Building – 5 % 75,000
Block 3 – Plant & Machinery – 15% 3,14,250
Block 4 – Furniture – 10% 17,850
Block 5 – Plant & Machinery – 40% 16,000
Total 4,62,100
Illustration -2 Block 1 Block 2 Block 3
Particulars P/M (40%) Furn (10%) P/M (15%)
Opening WDV NIL NIL NIl
On 1.4.2017
Add: New Asset 1,30,000 62,000 12,500
purchased in the block (60,000+70,000) (42,000 + 20,000) (July2015)
Less: Any Asset in the NIl NIL NIL
block sold
Closing WDV on 1,30,000 62,000 12,500
31.3.2018
Depreciation on Closing 40,000 6,200 1875
WDV (10 % of (15% of
62,000) 12,500)
Final WDV on 31.3.2018 90,000 55,800 10,625
Illustration -3 Block 1 Block 2 Block 3
Particulars P/M (15%) P/M (40%) Buil (10%)
Opening WDV NIL NIL NIl
On 1.4.2017
Add: New Asset 47,00,000 10,00,000 15,00,000
purchased in the block A,B,C, Car, AC D&E (Sept2016)
Less: Any Asset in the NIl NIL NIL
block sold
Closing WDV on 47,00,000 10,00,000 15,00,000
31.3.2018
Depreciation on Closing 6,22,500 2,00,000 1,50,000
WDV (15% of 36 lac (20% of (10% of
&7.5% of
11 lac) 10,00,000) 15,00,000)
Final WDV on 31.3.2018 40,77,500 8,00,000 13,50,000
 Expenses
allowed as
Deductions Sec 36: Specific
under Income
Tax Act Deductions

Sec 37: General

Deductions

Sec 40 to 43B :
Disallowances under the Act
 Specific
Deductions Insurance Premium on Goods,
under Section Stocks
36

Insurance premium on the life

of cattle

Insurance premium on health

of employees (No monetary
ceiling) (Payment should not
be in cash)
 Specific
Deductions
under Section Bonus , Commission paid to
36
employees( Legal or
contractual)

Not allowed as deduction if

bonus given in lieu of
profits/dividend

Payment of Bonus made during

P.Y. or before filing return for
the relevant P.Y.- 43 B
 Specific
Deductions Interest on loan borrowed for business- whether for
under Section long term assets or Working Capital
36

Loan taken from a third person- proprietor charging

interest on capital- is it allowed??
Interest paid by firm to partner?
A person engaged in business of paper can claim
deduction of interest for capital borrowed on
setting a garment business (even if the new
business is unremunerative)

Can it be taken from a relative or family member?

Loan borrowed for personal use? (Education of
child/marriage)
Interest on loan to pay income tax vs interest on
late payment of any taxes-not allowed
The department needs no proof whether there was
a need to borrow loan or not
 Specific
Deductions
under Section Employers contribution towards
36
employees retirement benefits-
P.F., Gratuity, Pension, etc.

P.F., Gratuity and Pension fund

should be approved by the
authority

Deduction is available only if

contribution is made on or
before due date
 Bad Debts – allowed as business deduction
Specific provided it was treated as income in that or
Deductions earlier P.Y.
under Section Represents money lent in normal course of
36 business
There must be a debt, incidental to
business, and considered while computing
assessable business income
Allowed only if it is written off as
irrecoverable from the books of accounts

Recovery of bad debt is treated as income-

business may or may not continue

Provision for bad and doubtful debts is not

allowed as deduction
Bad debts of discontinued business not
allowed as deduction
 Specific
Deductions X sells goods on credit – Out of credit
under Section
36
sales Rs.50,000 written off as bad debt

Z, a money lender gives loan to A. A

becomes insolvent. If interest income is
included on accrual basis , can be written
off as bad debt and claim deduction. Also
non recovery of loan can be deductible if
written off in books (Exception to being
recorded as income )

Money given in advance for purchase of

material and forfeited by creditor-
 Expenses
allowed as
Deductions
under Income Sec 36: Specific Deductions
Tax Act

Sec 37: General

Deductions

Sec 40 to 43B :
Disallowances under the Act
 Specific Expenditure not claimed under other sections -30to 36
Deductions
under Section
37
Expenditure should not be capital in nature

Expenditure should not be personal

Expenditure should be incurred in the previous

year

Expenditure must be related to business /profession

carried on by the assessee in the P.Y.

Expenditure is not incurred for any purpose which is an

offence or illegal (Example of pharma companies)
 Expenses
allowed as
Deductions
under Income Sec 36: Specific Deductions
Tax Act

Sec 37: General Deductions

Sec 40 to 43B :
Disallowances under the Act
 Deduction will not
Disallowances – Salary, Rent,
Commission,
be allowed if TDS is
Section 40(a) deducted but not
and 40 (a) (iii) Interest
deposited with
Payments eligible Central
for tax deduction Government before
at source filing return

Payments will not

be allowed as
deduction if TDS is Deduction will
not deducted as be allowed in a
per due date subsequent year
when deposited
Disallowances –
Section 40(a)
Payment to Non
and 40 (a) (iii)
resident

Interest, Royalty,
Fees, Rent, Salary
Commission 40(a) (iii)
40(a) (i)

Default to Default to Default to

deduct TDS- deposit TDS- deposit TDS-
100% amount 100% amount 100% amount
disallowed disallowed disallowed
Disallowances –
Section 40(a) Payment to
Resident

Salary, Interest,
Royalty, Fees,
Rent,
Commission

Default to Default to
deduct TDS- 30% deposit TDS-
amount 30% amount
disallowed disallowed
 Full amount
Will be
Disallowances –
disallowed
Section 40A(3) Expenditure in
cash or bearer
cheque exceeding
Rs.10,000-may be
an allowed Some exceptions
expense apply

• Payment made to Bank,

Limit of Rs.10,000
Government,
is per person, per
• Through Banking system,
day basis
Payment to be made on a
public holiday when banks
are closed,
• Payment made by a money
changer against purchase of
foreign currency in his normal
course of business
1.X pays the salary of December 2017 to his employees by
bearer cheques as follows:
Employee A: Rs.6,000
Employee B: Rs.10,000
Employee C: Rs. 10,500

2. X Ltd. purchases goods on credit for Rs.86,000 paid as

follows:
Rs.5,000 in cash on 11th May
Rs. 30,000 by bearer cheque on 31st May
Rs. 51,000 by account payee cheque on 16th May
3. R purchases goods worth Rs.15,000 from G against one bill
but makes payment of Rs.8,000 and Rs.7,000 at different times
on the same date – Will 40A (3) be applicable?

4. R purchases a building for Rs.10,00,000 and makes a

payment in cash- What if he is a dealer in real estate?
Disallowances –
Section 40A(2)

Payment in respect
of expenditure for Unreasonable with
goods, services, regard to the FMV
facilities of the transaction

Will be disallowed
if payment is
unreasonable or
excessive- only to
the extent of
excessive payment
List of payments:
1. Individual to relative
2. Company to director or relative of director
3. Firm to partner or relative of partner
4. Payment to a person having a substantial interest in the business of the payer

Examples:
5. X is a trader. He purchases goods from his brother at Rs.1,40,000 though the
market value is Rs.1,30,000.
6. X has a substantial interest in Y Ltd. Y Ltd. takes on hire trucks owned by X and
pays rent.
7. X is a trader. He sells goods to his brother at Rs.1,00,000 whose market value is
Rs.1,40,000. X has not incurred any expenditure.
8. X carries a business. He employs his son as Manger and pays him salary
@Rs.10,000 p.m. Can be disallowed by the AO if not appropriate to his
qualification ?
Examples on 40A(2) and 40A(3)

1. A Ltd. purchases goods on credit from a relative of a director on 20.6.2016 for

Rs.50,000( M.V. Rs.42,000) The amount is paid in cash on 25.6.2016

2. B Ltd purchases raw material in credit from A who is a director in B Ltd. The
amount of the bill was Rs.36,000.(M.V Rs.19,000). The payment is made in
cash on 26.7.2016
Disallowances – Assessee maintains books as per mercantile
Section 43B
system- Following payments are allowed as
deduction on actual payment during the P.Y.
3. Sum paid as
1. Tax, Duty,
bonus or 5. Sum paid by
Cess, Fee
commission to employer as
2. Employers employees leave salary to
contribution to employee
4. Interest on
employees
loan taken
welfare funds
from Banks, PFI