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Profits and Gains of Business or Profession

Introduction :

Out of the various heads under which an assessee has to pay Income tax one of the
important heads is “Profits and Gains of Business or Profession” which is defined under
section 28 of the Income Tax Act. Under section 28 of the Income Tax Act, 1961, (“IT
Act”) the following types of income are chargeable to tax under the head “Profits and
gains of business or profession”:

1. Profits and gains of any business or profession.

2. Any compensation or other payments due to or received by any person:

a. Managing the whole or substantially the whole of the affairs of an Indian

company.

b. Managing the whole or substantially the whole of the affairs in India of

any other company.
c. Holding an agency in India for any part of the activities relating to the
business of any other person.
d. Any person for or in connection with the vesting in the Government, or in
any corporation owned or controlled by the Government of the
management of any property or business.  

3. Income derived by a trade, professional or similar association from

specific services performed for its members.
4. Profit on sale of import entitlement licenses, incentive by way of cash
compensatory support and drawback of duty.
5. Any profit on transfer of Duty Entitlement Pass Book Scheme.
6. Any profit on the transfer of the Duty Free Replenishment Certificate.
7. The value of any benefit or perquisite, whether convertible into money or
not, arising from business or the exercise of a profession.
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8. Any interest, salary, bonus, commission, or remuneration received by a

partner of a firm from such firm.
9. Any sum whether received or receivable in cash or kind, under an
agreement for not carrying out any activity in relation to any business or
not to share any know-how, patent, copyright, trade-mark, license,
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 service.
10. Any sum received under a Keyman Insurance policy.
11. Profits and gains of managing agency.
12. Income from speculative transaction.

 
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Business – Under section 2(13) of the IT Act, business includes any trade; commerce;
manufacture; or any adventure or concern in the nature of trade, commerce or
manufacture.

In Mazagaon Dock Ltd. v CIT1, the court held that production of goods from raw
material, buying and selling of goods to make profits and providing services to others are
different forms of “business”. Profits arising there from are therefore, chargeable to tax
under the head “Profits and gains form business or profession”. The term “business” is a
word of wide import and in fiscal statutes it must be construed in a broad rather than a
restricted sense.

In CIT v S.K. Sahana & Sons Ltd.2, it was held that if there is neither control over the
actual conduct of the day-to-day business nor is there any direct nexus with the profits or
losses of a business, there can be no question of a business or profession carried on by the
assessee in terms of section 28 of the IT Act and the case, therefore, must fall within the
ambit of Section 56 of the IT Act as income from other sources. 

Business includes Trade – In view of section 2(13) business, inter alia includes trade. In
State of Punjab v Bajaj Electricals Ltd.3, Shah J. observed that trade in its primary
meaning is the exchanging of goods for goods or goods for money; in its secondary
meaning it is repeated activity in the nature of business carried on with a profit motive,
the activity being manual or mercantile, as distinguished from the liberal arts or learned
professions or agriculture. 

Business includes Commerce – In W.L. Knopp v CIT 4, it was discussed that if a person
purchases goods with a view to selling them at a profit, it is an ordinary case of trade. If
such transactions are repeated on a large scale, it is called commerce. In determining a
case of trade or commerce, in contradiction to investment, one has to take into account
the nature of the assets, the occupation of the assessee, and the frequency and volume of
transactions. 
1
(1958) 34 ITR 368 SC
2
(1987) 33 Taxman 62 Patna
3
(1968) 70 ITR 730 SC
4
(1948) 16 ITR 398 Madras
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Business includes Manufacture – The word “manufacture” is defined by the Oxford

English Dictionary as making of articles or materials by physical labor or mechanical
power. “The essence of manufacturing is that something is produced or brought into
existence which is different from that out of which it is made, in the sense that the thing
produced is by itself commercial commodity which is capable as such of being sold or
supplied.” 

Business includes any adventure in the nature of trade, commerce or manufacture –

Section 2(13) by referring to an adventure in the nature of trade, commerce or
manufacture clearly suggests that the transaction cannot properly be regarded as trade or
business. It is allied to transactions that constitute trade or business, but may not be trade
or business itself. It is characterized by some of the essential features that make up trade
or business but not by all of them. 

Profession – Section 2(36) of the IT Act mentions that profession includes vocation. In
general terms the word “profession” implies professed attainments in special knowledge
as distinguished from mere skill.
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In Robbins Herbal Institute v Federal Taxation Commissioner5, it was held that many
vocations may fall within the ordinary and accepted use of the word “profession”; for
instance as those of tax experts, financial accountants, cost accountants, management
accountants, architects, engineers, journalists, and so forth. However, whether a person in
any given case carries on a profession is a question of degree and always of facts. 

Losses Incidental to Trade  

There may be expenditure or there may be a loss which may not be an admissible loss
under any of the provisions of the IT Act and yet such loss would have to be allowed in
order to determine what are the true profits of a business, and it is the duty of everyone
5
(1923) 32 CLR 457
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who has anything to do with taxing business to understand what are the principles of
commercial expediency.

In Calcutta Co. Ltd v CIT6, it was held that one has to keep in view the general
commercial principles while determining real and true profits of a business or profession. 

Trading Loss –

Trading losses of revenues nature incurred in carrying out the business are
deductible, if they are incidental to the operation of business. This rule is applicable even
if it is not specially coded anywhere under the IT Act. A trading loss is allowable as
deduction while computing business income only in the year in which it is incurred. In
order to avail deduction of trading loss, it should have been incurred by the assessee in
the character of a trader and the same should fall on him in that character. Business losses
can be allowed as deductions only if the following conditions are satisfied:

1. Loss should be revenue in nature – It is essential that loss should be of

revenue in nature. In CIT v Mysore Sugar Co. Ltd., it was held that loss of
capital nature is not deductible while calculating business income.
2. Loss should be incurred during the previous year – It is important that loss
to be deductible should have been incurred during the previous assessment
year.
3. Loss should be incidental to the business or profession carried on by the
assessee – In CIT v Abdullabhai Abdulkadar, it was opined that the loss
becomes allowable only if it “springs directly from and is incidental” to
the business or profession of the assessee. In Commonwealth Trust (India)
Ltd. v CIT, it was held that if there is a direct and proximate nexus
between the business operation and the loss, or it is incidental to it, then
the loss is deductible since without the business operation and doing all
that is incidental to it, no profit can be earned.
4. Loss should not be notional or fictitious.

6
(1959) 37 ITR 1 SC
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5. Loss should have been actually incurred and not merely anticipated to
incur in future.
6. There should not be any direct or indirect, restriction under the Act against
the deductibility of such loss.

Whether loss is incidental to the operation of business is a question of fact to be

decided on the facts of each case, having regard to the nature of the operations
carried on and the nature of the risk involved in carrying them out. 

Instances of Losses Deductible from Business Income:

o Loss of stock-in-trade due to destruction by fire – Motamal Jethumal v

CIT.
o Loss of stock-in-trade by an Act of God.
o Loss of stock-in-trade due to theft – Hopkin & Williams (Travancore) Ltd.
v CIT.
o Loss of cash, retained for business purposes, incurred due to theft after
business hours – Chhotulal Ajitsingh v CIT
o Loss of currency notes in transit during the course of operation of business
through highway robbery – Harnath Rai Lakhi Prasad v CIT
o Depreciation due to devaluation of foreign currency in the exchange value
of the unpaid price in foreign currency of goods exported.
o Loss incurred due to devaluation of rupee in foreign country which is
being utilized in the course of business – CIT v Mehboob Productions (P)
Ltd.
o Loss arising from sale of securities held in the regular course of business –
CIT v Dalmia Jain & Co. Ltd.
o Loss incurred due to theft or burglary in factory premises during or after
the working hours – CIT v Sarya Sugar Mills (P) Ltd.
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o Loss of precious stones or watches of a dealer while bringing them from

business premises to his house – CIT v K.T.M.S. Mahmood
o Loss arising from negligence or dishonesty of employees who have been
given specified duties in the course of business – Curtis v J.G Oldfield
Ltd.
o Loss incurred due to sale of lands acquired from a business-debtor in
satisfaction of debt – CIT v A.K.A.R Family.

Instances of Losses not Deductible for Business Income:

o Loss of advances made for setting up a new business which ultimately

could not be started – Narang Industries Ltd. v CIT
o Loss arising from the depreciation of funds kept in foreign currency for
capital purposes – CIT v Tata Locomotive & Engg. Co. Ltd.
o Loss arising from non-recovery of tax paid by an agent on behalf of the
non-resident – CIT v Abdullabhai Abdulkadar
o Loss suffered by the assessee firm doing business in distribution of films,
of amount advanced by it to film producer for acquiring distribution rights
– CIT v Sembi Traders
o Loss relating to any business or profession discontinued before the
commencement of previous year – CIT v Lahore Electric Supply Co. Ltd.
o Loss of security deposit made to obtain selling agency – CIT v Motiram
Nandram
o Loss incurred due to devaluation of Indian rupee in respect of unremitted
profits earned in past on which income-tax already had been levied – CIT
v Vicks Products Inc.

Deductions and Allowances 

Section 29 of the IT Act permits deductions and allowances laid down by sections
30 to 37 of the IT Act while computing profits or gains of business or profession.
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Sections 30 to 37 enumerate deductions expressly allowed in respect of expenses

and allowances. Sections 40, 40A and 43B cover expenses which are not
deductible. Following are the deductions which are allowed under the IT Act: 

Rent, rates, taxes, repairs and insurance of building – Under section 30, the
following deductions are allowed in respect of rent, rates, taxes, repairs and
insurance for premises used for the purpose of business or profession:

1. The rent of premises, if the assessee has occupied the premises as tenant and the
amount of repairs (not being capital expenditure), if he has undertaken to bear the
cost of repairs;
2. The amount of current repairs (not being capital expenditure), if the assessee has
occupied the premises otherwise than as a tenant;
3. Any sum on account of land revenue, local rates or municipal taxes; and
4. Amount of any premium in respect of insurance against risk of damage or
destruction of the premises.

In the case of Heastie v Vetich & Co., it was held that if a firm has taken on rent
premises belonging to one of its partners and pays rent to the landlord-partner,
rent would be deductible under section 30 of the IT Act. It was further held that in
such a case the landlord-partner is chargeable to tax under section 22 read with
section 23(1) of the IT Act in respect of the annual value of the property as if the
property is let out. 

If an assessee has occupied the property as a tenant and has undertaken to bear the
cost of repairs (not being capital expenditure), the amount of such repairs is
allowable as deduction. If however, the person occupies the property otherwise
than as a tenant, the amount paid by him on account of current repairs is allowable
as deductions. Further any sum paid on account of land revenue, local rates or
municipal tax is deductible subject to the provisions of section 43B of the IT Act. 
 
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Repairs and Insurance of machinery, plant and furniture – Under section 31

of the IT Act the following expenditures are allowed as deductions in respect of
machinery, plant or furniture used for the purpose of business or profession:

1. The amount paid on account of current repairs (not being capital repairs); and
2. The amount of insurance premium paid in respect of insurance against risk of
damage or destruction.

The expression “used for the purpose of the business or profession” implies that
current repairs and insurance in respect of machinery, plant or furniture are
allowed as deduction only if these assets are used for the purpose of assessee’s
own business, the profits of which are subject to tax. If the owner of plant,
machinery and furniture uses them for his own business, he can avail deduction
on current repairs and insurance under section 31. if the owner lets out plant,
machinery or furniture, the lessee would be entitled for deduction in respect of
current repairs and insurance. 

In order to avail deduction under section 31, it is necessary that plant, machinery
or furniture must be used for the purpose of assessee’s business during the
previous year. However it is necessary that these asstes should be used for
throughout the year it is sufficient enough if such assets are used for only a part of
the year. 
 

Tea/coffee/rubber development account – An assessee can claim deduction under

section 33AB of the IT Act on the fulfillment of the following conditions:

1. The assessee must be engaged in tea, coffee or rubber plantation.

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2. The assessee must make a deposit in “special account”.

3. The deposit should be made within the specified time-limit.
4. The account of the assessee should be audited.

For the purposes of deposit following are the special accounts:

1. Deposit with National Bank for Agriculture and Rural Development

(‘NABARD’) any amount in accordance with a scheme approved by the Tea
Board or Coffee Board or Rubber board; or
2. Deposit any amount in the Deposit Account opened by the assessee in accordance
with, an approved scheme framed by the Tea Board or Coffee Board or Rubber
Board with the previous approval of the Central Government. 

For the purposes of section 33AB of the IT Act the amount of deduction is:

1. A sum equal to amounts deposited in special account; or

2. 40 percent of the profit of such business computed under the head “Profits and
gains of business or profession” before making any deduction under section 33Ab
and before adjusting brought forward business loss under section 72 – whichever
is less.

 
 

 Site Restoration Fund – An assessee can claim deduction under section 33ABA
of the IT Act on fulfilling the following conditions:    

1. The assessee must be engaged in production of petroleum or natural gas in India.

2. The assessee has an arrangement with the Central Government.
3. The assessee must make a deposit in “special account”.
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4. The deposit should be made within the specified time-limit.

5. The accounts of the assessee should be audited.

For the purposes of claiming deduction under this section it is essential that the taxpayer
is engaged in the business of the prospecting for, or extraction or production of,
petroleum or natural gas or both in India and the central Government has entered into an
agreement with the taxpayer for such business. 

The deposits for the purposes of this section must be made in:

1. Deposit with SBI any amount in an account maintained by the assessee with that
bank and the amount must be deposited in accordance with a scheme approved by
the Government of India in the Ministry of Petroleum and Natural Gas; or
2. Deposit any amount in an account opened by the assessee in accordance with, in a
scheme framed by the Ministry of Petroleum and Natural Gas.

For the purposes of section 33ABA of the IT Act the amount of deduction is:

1. A sum equal to amounts deposited in special account; or

2. 20 percent of the profit of such business computed under the head “Profits and
gains of business or profession” before making any deduction under section
33ABA and before adjusting brought forward business loss under section 72 –
whichever is less.
 

Reserves under Shipping business – Deduction under section 33AC of the IT Act with
respect to the reserves under Shipping business is not available from the assessment year
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2005-06 onwards. 
 

Expenditure on Scientific research – The term “scientific research” means “any

activities for the extension of knowledge in the fields of natural or applied sciences
including agriculture, animal husbandry or fisheries”. If any dispute arises as to whether
any activity constitutes scientific research or any asset is being used for scientific
research, the Central Board of Direct Taxes will refer the question to the prescribed
authority which shall be the Director general (Income Tax exemptions) in concurrence
with the Secretary, Department of Scientific & Industrial Research, Government of
India. 

Under section 35 of the IT Act amount deductible in respect of scientific research may be
classified as follows:

1. In house research – this category includes the following:

a. Revenue Expenditure – Where the assessee himself carries on

scientific research and incurs revenue expenditure during the
previous year, deduction is allowed for such expenditure only if
the research relates to the business. Revenue Expenses incurred
before the commencement of business but within three years
immediately before commencement of business, on scientific
research related to the business is deductible in the previous year in
which business is commenced. Deduction is limited only to an
amount certified by the prescribed authority.

b. Capital Expenditure – Where the assessee incurs any expenditure

of a capital nature on scientific research related to his business, the
whole of such expenditure incurred in any previous year is
allowable as deduction for that previous year. For example it was
held in CIT v Smith Kline & French (India) Ltd., that expenses on
purchase of cars and buses which are used to transport employees
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engaged in scientific research would be allowed as deductible

amount. Capital Expenditure incurred before the commencement
of business but within three years immediately before
commencement of business, on scientific research related to the
business is deductible in the previous year in which business is
commenced. No deduction is available in respect of any capital
expenditure incurred on the acquisition of any land after February
29, 1984.
c. Expenditure on an approved in-house research – Section 35(2AB)
provides for a weighted deduction in respect of expenditure on in-
house research and development facility.

2. Payment to outsiders – It includes the following:

a. Contribution to an approved scientific research association - Where

the assessee does not himself carry on scientific research but
makes contributions to any institution for this purpose, then a
weighted deduction is allowed. The amount of deduction is equal
to one and one-fourth times of any sum paid to a scientific research
association or to a university, college or any other institution.

b. Contribution to an approved national laboratory – Under section

35(2AA) weighted deduction equal to one and one-fourth times of
actual payment is allowed on the satisfaction of the following
conditions:

i. The payment is made to National laboratory; or University; or

Indian Institute of Technology; or Specified person as approved by
the prescribed authority.
ii. The above mentioned payment is made under a specific direction
that it should be used by the aforesaid person for undertaking a
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scientific research programme approved by the prescribed

authority.

 
 

Deduction in respect of expenditure on Know-how – Deduction under section 35AB is

available only if expenditure is incurred before April 1, 1998. If expenditure on
acquisition of technical know-how is incurred after March 31, 1998, depreciation is
available under section 32 of the IT Act. 
 

Amortization of Telecom License Fees – Deduction under section 35ABB of the IT Act
is available if the following conditions are satisfied:

1. The expenditure is capital in nature.

2. The expenditure is incurred for acquiring any right to operate telecommunication
services.
3. The expenditure is incurred either before the commencement of business or
thereafter at any time during the previous year.
4. The payment for which has been actually made.

The payment will be allowed as deduction in equal installments over the period starting
from the year in which such payment has been made and ending in the year in which the
license comes to an end. The deduction starts from the year in which actual payment of
expenditure is made irrespective of the previous year in which the liability for the
expenditure is incurred according to the method of accounting regularly employed by the
assessee. 
 
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Expenditure on eligible project or scheme – Deduction is available under section 35AC

of the IT Act for promoting social and economic welfare or upliftment of the public. Any
taxpayer can claim deduction under section 35Ac as follows:

1. A company - Deduction is available if the taxpayer incurs any expenditure by way

of payment of any sum to a public sector company or a local authority or to an
association or institution approved by the National Committee for carrying out
any eligible project or scheme.
2. A person other than a Company - Deduction is available if the taxpayer incurs any
expenditure by way of payment of any sum to a public sector company or a local
authority or to an association or institution approved by the National Committee
for carrying out any eligible project or scheme.

The claim for deduction under section 35Ac should be supported by an audit certificate
obtained from the Public Sector Company, local authority or approved association or
institution to whom the payment is made in Form No. 58A, or from the chartered
accountant in cases where the claim is in respect of expenditure directly incurred by a
company on an eligible project or scheme in Form No. 58B. 
 

Payment to the association and institutions carrying out Rural Development

Programmes – Section 35CCA of the IT Act provides deduction of sums paid by an
assessee to:

1. Any association or institution to be used for carrying out any programme of rural
development approved before March 1, 1983.
2. An association or institution which has its object the training of persons for
implementation of a rural development programme approved before March 1,
1983.
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3. The National Fund for rural development set up by the Central Government.
4. The National Urban Poverty Eradication Fund set up and notified by the Central
Government.

 
 

Payment to an association and institution for carrying out programmes of

conservation of natural resources – No deduction under section 35CCB of the IT Act is
available if expenditure is incurred after March 31, 2002. 
 

Amortisation of preliminary expenses – Deduction under section 35D of the IT Act is

available for the preliminary expenses in the case of an Indian company or a resident
non-corporate assessee. A foreign company even if it is resident in India, cannot claim
any deduction under section 35D. Expenses incurred at the following two stages are
qualified for deduction:

1. Before commencement of business – For setting up any undertaking or business.

2. After commencement of business – In connection with extension of an industrial
undertaking or in connection with setting up a new industrial unit.

Amortisation of expenditure in the case of Amalgamation or Demerger – The

provisions of section 35DD of the IT Act are:

1. The taxpayer is an Indian Company.

2. It incurs expenditure for the purpose of amalgamation or demerger.
3. The expenditure is allowed as deduction in five successive years in five equal
installments.
4. The first installment is deductible in the previous year in which amalgamation or
demerger takes place.
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Amortisation of expenditure under Voluntary Retirement Scheme – Under section

35DDA of the IT Act, one-fifth of the amount paid to an employee in connection with his
voluntary retirement scheme, shall be deducted in computing the profits and gains of the
business for that previous year and the balance shall be deducted in equal installments for
each of the four immediately succeeding years. 
 

Amortisation of expenditure on prospecting etc. for development of certain minerals

– Section 35E of the IT Act provides for the amortisation of expenditure incurred wholly
and exclusively on any operation relating to prospecting for the minerals or group of
associated minerals or on the development of a mine or other natural deposit of any such
minerals or group of associated minerals specified in the seventh schedule. Deduction is
allowed only in the case of Indian companies and resident assessees other than
companies. The benefit of amortisation is not available to a foreign company even if such
company declares its dividends in India. 

Insurance premium – Under section 36(1)(i) of the IT Act the amount of any premium
paid in respect of insurance against risk of damage or destruction of stocks or stores used
for the purposes of business or profession is allowable as deduction. 
 

Insurance premium paid by a federal milk co-operative society – Under section 36(1)
(ia) of the IT Act, insurance premium paid by a federal milk co-operative society on the
lives of cattle, owned by the members of a primary milk co-operative society affiliated to
it, is allowed as deduction. 
 

Insurance premium on health of employees – Under section 36(1)(ib), any premium

paid by any mode other than cases by the assessee as an employer to effect or to keep in
force an insurance on the health of his employees is allowed as deduction. Deduction is
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available only if the premium is paid under a scheme framed in this behalf by the General
Insurance Corporation of India and approved by the Central Government or any scheme
of any other insurer approved by IRDA. 
 

Bonus or Commission to employees – Under section 36(1)(ii) of IT Act, bonus or

commission paid to an employee is allowable as deduction if that bonus or commission
should not have been otherwise payable to them as profit or dividend.   
 

Interest on Borrowed Capital – Under section 36(1)(iii), the interest paid on capital
borrowed for the purposes of business or profession is allowable as deduction on the
satisfaction of the following conditions:

1. The assessee must have borrowed money.

2. The money so borrowed must have been used for the purpose of business.
3. Interest is paid on such borrowing.

 
 

Employer’s contribution to recognized provident fund and approved

superannuation fund – Employer’s contribution towards recognized provident fund or
an approved superannuation fund is allowable as deduction subject to the limits laid
down for the purpose of recognizing the provident fund or approving the superannuation
fund. For claiming a deduction, scheme should either be framed under the Employer’s
provident Fund Act or should be approved by Commissioner under the Income Tax Act. 
 

Contribution towards approved gratuity fund – Under section 36(1)(v), employer’s

contribution towards an approved gratuity fund created by him exclusively for the benefit
of his employees under an irrevocable trust is allowable as deduction. The following
points should be satisfied:
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1. The amount deductible on account of ordinary annual contribution cannot exceed

8.3% of the salary of each employee.
2. The amount to be allowed as deduction on account of an initial contribution
which an employer may make in respect of the past services of an employee
admitted to the benefits of a fund cannot exceed 8.3% of the employee’s salary
for each year of his past service with the employer.

 
 
Employee’s contribution towards staff welfare schemes –

Under section 36(1)(va) deduction in respect of any sum received by the taxpayer as
contribution from his employees towards any welfare fund of such employees is allowed
only if such sum is credited by the taxpayer to the employee’s account in the relevant
fund on or before the due date. If the remittance of employee’s contribution to provident
fund is not made within ‘due date’, deduction under section 36(1)(va) is not available. 
 

Write off allowance for Animals –

In respect of animals which are used for the purpose of business or profession and have
died or become permanently useless, the difference between the actual cost of the animals
to the assessee and the amount realized in respect of carcasses or sale of animals is
allowable as deduction.  
 

Bad Debts – In order to claim deduction under section 36(vii), one must keep in view the
following points:

1. There must be a debt – Before claiming an amount as a bad debt, it must be

shown that it is a proper dent. In other words, a bad debt presupposes the
existence of a debt and relationship of debtor and creditor. Unless, therefore, there
is an admitted debt, it cannot be allowed as bad debt when it is written off.
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2. Debt must be incidental to the business or profession of the assessee – the debt
which is claimed as bad debt must be incidental to the business or profession
carried on by the assessee.
3. Debt must have been taken into account in computing assessable income – Bad
debt is assessable as deduction only if it is taken into account in computing the
total income of the assessee of the previous year in which it is written off or an
earlier year.
4. Debt must have been written off in the books of account of the assessee – Bad
debt is allowable as deduction only if it is written off as irrevocable in the books
of the assessee in the previous year in which claim for deduction is made.

Transfer to special reserve – Deduction under section 36(1)(viii) is available to the

following:

1. A financial corporation (including a public company and a Government

Company) which is engaged in providing long term finance for industrial or
agricultural development or development of infrastructural facility in India; or
2. A public company formed and registered in India with the main object of carrying
on the business of providing long term finance for construction or purchase of
residential houses in India.

From the assessment year 2008-09, the following persons can claim deduction in respect
of amount transferred to the special reserve account:
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1. ICICI, IFCI, IDBI, LIC, UTI, Infrastructure Development Finance Company

Limited or a public financial institution notified by the Central Government under
section 4A of the Companies Act, 1956.
2. A financial corporation established by or under any central, state or provincial Act
or which is a Government company under section 617 of the Companies Act.
3. Banking Company 
4. Co-operative Bank other than a primary agricultural credit society or a primary
co-operative agricultural and rural development bank.

 
 

Family Planning Expenditure – Any bona fide expenditure incurred by a company for
the purpose of promoting family planning among its employees is allowable as
deduction. If such expenditure is of a capital nature, one-fifth of such expenditure is
allowable as deduction for the previous year in which it was incurred and the balance is
deductible in equal installments in the next four years. 
 

Contribution to Credit Guarantee trust Fund – From the assessment year 2008-09, a
public financial institution can claim deduction in respect of its contribution to a notified
credit guarantee trust fund for small industries under section 36(1)(xiv) of the IT Act. 
 

Banking Cash Transaction Tax – Banking Cash transactions tax paid by an assessee
during the previous year on taxable banking transactions entered into by him is allowed
as deduction while calculating his income from business or profession.  
 
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General Deductions – Section 37(1) of the IT Act is a residuary section. In order to

claim deduction under this section following conditions have to be satisfied:

1. The expenditure should not be of the nature described under the sections 30 to 36
of the IT Act.
2. The expenditure should not be in the nature of capital expenditure.
3. The expenditure should not be personal expenditure of the assessee.
4. The expenditure should have been incurred in the previous year.
5. The expenditure should be in respect of business carried on by the assessee.
6. The expenditure should have been expended wholly and exclusively for the
purpose of such business.
7. The expenditure should not have been incurred for any purpose which is an
offence or is prohibited by any law.

Thus the IT Act under sections 30 to 37 in the form of specific deductions and general
deductions has given a wide coverage to the assessee to obtain the privilege of some
allowances if his income is being covered under the Profits and gains of business or
profession.   

Depreciation
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“Depreciation” usually means loss or decline in value which occurs gradually

over useful life of a material thing, due to physical wear, tear and decay and is
generally limited to losses or decline in value which cannot be restored by current
repairs and maintenance. In order to avail depreciation, one should satisfy the
following conditions:

1. Asset must be owned by the assessee.

2. The asset must be used for the purpose of business or profession.
3. The asset should be used during the relevant previous year.
4. Depreciation is available on tangible as well as intangible assets.

In order to be entitled to depreciation allowance, the assessee has to show that the
asset is owned by him or the assessee is the co-owner of the asset. It is only the
owner of the assets who is entitled to claim depreciation on them. In R.B. Jodha
Mal Kuthiala v CIT, the Supreme Court held that the real test was to ascertain
whether the assessee was entitled to the income form the property and hence the
owner must be the person who can exercise the rights of the owner not on behalf
of the owner but in his own right. If this criteria is satisfied, registration of
building, car, ship, etc. is not relevant. 

In Mysore Minerals Ltd. v CIT, it was held that it is not necessary that the
assessee should be the registered owner of the asset. Exclusive possession rights,
to exclude others from enjoyment of the assets, full control over the assets, right
to retain possession and defend the same are but some of the characteristics of the
ownership which would entitle a person to claim the benefit of the depreciation
allowance under section 32 of the IT Act, if such asset is used for the purpose of
carrying on a business or profession. 

Some assets which are qualified for depreciation allowance under the IT Act are
the following:
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1. Tangible assets – Building, machinery, plant or furniture.

2. Intangible assets – Know-how, patents, copyright, trade-marks, licenses,
franchises or any other business or commercial rights of a similar nature (acquired
after March 31, 1998).