Vol 3

THIS BOOK HAS BEEN A REALITY
ONLY BECAUSE OF MY FAMILY &

STUDENTS.
CA SURAJ AGRAWAL
PREFACE
Taxation is a dynamic subject, which is not only a vast subject but also difficult to
comprehend in view of frequent amendments. Yet it is the scoring subject of your
syllabus. In addition, practice in the field of Taxation is also highly remunerative.
My association with the students has helped me to bring this book in its present form –
simplified, comprehensive and easy to understand.
The present edition of this book is designed to bridge the gap between theory &
applications and incorporates the following:
Updated with Finance Act 2019 & Finance (No. 2) Act 2019 (AY 2020-21)
Updated with The Taxation Laws (Amendment) Act, 2019
Income-tax (9th Amendment) Rules, 2019
Hope this book serves the purpose of the students. I shall be thankful to the readers for
their suggestions, criticism and feedback if any.
Email: [email protected]
Contact: 85272 30445 (Call or Whatsapp); 01147542530
ACKNOWLEDGEMENT
This book is a result of sincere efforts of our family members, colleagues, associates,
well-wishers and students, whose contribution cannot go unacknowledged.
Master Reyaan, my wife CA Monika Agrawal and my mother deserve special mention
for the time (on which they had the first right) they allowed me for this book.
I dedicate this book to my beloved late grandparents & Papa.
CA Suraj Agrawal
Updated as on 21.02.2020 (10th Edition – 1st Print)
“One more step towards success”

PROFILE – CA SURAJ AGRAWAL
CA Suraj Agrawal is a Commerce Graduate [B.Com (H)] from Kolkata University and has
qualified CA in November 2005 in First Attempt from Kolkata. He has also secured All India 27th
Rank in CA-Foundation – 1st level (First Attempt – 70% marks).
Besides CA, he has completed Certification Course of International Taxation of the ICAI in
2009. He has also qualified CPA (Certified Public Accountant) examination from AICPA
(USA) in 2009 with more than 90 Marks in each of four papers in First Attempt [Presently, he is
inspired to complete CIMA, London as well as LLM in International Taxation (UK) by Year
2024]
He has started his career by joining Direct Tax Department of Reliance Industries Limited,
Mumbai and worked for near 2 years in core tax team. He has also worked in Taxation Division
of Chaturvedi & Shah (Chartered Accountants), Delhi followed by Tax Division of Ernst &
Young, Gurgaon, India (A Leading Big 4 Firm having International Presence). During the
working tenure of more than 4 years, he is exposed to in-depth theoretical and practical
knowledge of Direct Taxation & has a consultancy exposure in various industries including
Energy - Oil & Gas, Airlines, Retail, Infrastructure and Shipping Industries.
With the above academic and practical knowledge, he is in teaching profession since 2010 to
serve professional students (taught 15,000 CA/CMAs Students till date). His in-depth
coverage of legal provisions in Tax with practical approach is very well recognized
among the students. He is also an associate member of ICAI and is also providing services as
Tax Consultant to various organisations.
He was also a member in WTO, FEMA & International Tax Study Group of the NIRC of the
ICAI for the year 2011-12 and was member of International Taxation & FEMA Research
Study Group of NIRC of the ICAI for the year 2010-11. He is regularly contributing tax articles
and various opinions on subjects of Direct Taxation including International Taxation in various
leading magazines [Taxmann] and professional forums.
CA Suraj Agrawal
“CA Rank Holder, Qualified CPA (USA), B.Com(H)”
Email: [email protected]
Contact: +91 85272 30445 / 011 4754 2530
Subjects: CA Inter / CMA Inter / CMA Final - DT & IDT
FB: http://www.facebook.com/suraj.agrawal.564
https://www.youtube.com/channel/UCv-ybxFp_X9EWiei7YhZQmw
https://www.facebook.com/Surajagrawaltaxationclasses.satc
INDEX
S. No. Particulars Page No.
21 Depreciation 21.1 – 21.12

21A.1 – 21A.04
21B.1 – 21B.08
22 PGBP 22.1 – 22.48

22A.1 – 22A.12
22B.1 – 22B.16
22C.1 – 22C.18
23 Misc. - Section 2(24) & Section 14A (Few Sections shifted to 23.1 – 23.04
VOL 1)
24 MAT 24.1 – 24.16
24A.1 – 24A.16
25 Mutual Association 25.1 – 25.04

25A.1 – 25A.04
26 Cooperative Society 26.1 – 26.04

26A.1 – 26A.04
27 HUF 27.1 – 27.06
28 ICDS 28.1 – 28.32
29 Salary 29.1 – 29.12

29A.1 – 29A.04
29B.1 – 29B.06
30 House Property 30.1 – 30.08

30A.1 – 30A.02
30B.1 – 30B.02
30C.1 – 30C.02
FINAL DT SATC 21.1
Depreciation [Section 32]

The assets in respect of which depreciation is claimed must belong to either of the following categories,
namely:
(a) buildings, machinery, plant or furniture, being tangible assets;
(b) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights
of similar nature, being intangible assets.
No depreciation is allowable on the cost of the land. Goodwill is now eligible for Depreciation as
Intangible Assets.
Some Important Points:
1) Beneficial owner: Assessee need not be a 2) Passive use vs. Active use: Use includes
registered owner, even a beneficial owner can active use as well as passive use. Active use
claim depreciation means actual use of the property for the purpose
of business or profession. Whereas passive use
3) Co-owner: In case of joint ownership, includes “ready to use”. It means, if a property
depreciation is allowed on proportionate basis. was not actually used for business or profession
but was ready to use in the PY, in such case,
assessee can claim depreciation to such assets
4) Property acquired on hire purchase: in case 5) Partly used for business or profession: As per
of hire purchase, the buyer can claim Sec. 38, if an asset is partly used for business or
depreciation even though he does not get legal profession and partly used for personal purpose,
title of the asset till he pays the last installment. then proportionate depreciation (as determined
a. Depreciation can be claimed on cash price by the Assessing Officer) shall be allowed.
of such asset on the date of agreement
b. Hire charges will be allowed as deduction
under section 37(1).
6) Capital expenditure on a property by the 7) House property let out to tenant for smooth
lessee: Where an assessee being a lessee of a running of the business: If an assessee lets
property incurs any capital expenditure by way out a property to his employee/others and where
of improvement, extension, super construction, such letting out supports smooth flow of his
etc. on building being used for his business or business, then rent received from
profession, he is entitled to depreciation in employees/others shall be chargeable under the
respect of such capital expenditure. head “PGBP” and such property shall be eligible
for depreciation u/s 32.
8) Sec. 53A of Transfer Of Property Act: 9) Deduction on account of depreciation shall

Possessor of an Immovable Property u/s 53A Of be made compulsorily, whether or not the
Transfer of Property Act can claim depreciation assessee has claimed the deduction in
even though he is not the registered owner of computing his total income.
the property.
SIGNIFICANCE OF DATE OF PURCHASE (EFFECT OF TIME ON DEPRECIATION)

Where-
(a) an asset is acquired by the assessee during the previous year, and
(b) is put to use in the same previous year for less than 180 days,
- the depreciation in respect of such asset is restricted to 50% of the normal depreciation. [Both
conditions should be satisfied together] - 5th October onwards
[There is no significance of date of sale for computation of depreciation]
SURAJ AGRAWAL TAX CLASS, LAXMINAGAR I 01147542530 I 85272 30445 I

FINAL DT SATC 21.2
DEPRECIATION FOR UNDERTAKINGS OTHER THAN POWER GENERATING UNITS
In respect of –
(a) buildings, machinery, plant or furniture, being tangible assets;
(b) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial
rights of similar nature, being intangible assets,
owned, wholly or partly, by the assessee and used for the purpose of the business or profession,
depreciation shall be allowed on the Written Down Value of the block of assets at such percentage as may be
prescribed.
Block of Assets [Section 2(11)]:
A “block of assets” is defined as a group of assets falling within a class of assets comprising:
(a) tangible assets being buildings, machinery, plant or furniture;
(b) intangible assets being know-how, patents, copyrights, trademarks, licenses, franchises or any other
business or commercial rights of similar nature,
in respect of which the same percentage of depreciation is prescribed.
[Note: Each class of Assets has been further divided into blocks with a particular rate of depreciation for each
block. However, Intangible assets, have been granted into one block only with a depreciation rate of 25%.]
WRITTEN DOWN VALUE [Section 43(6)]
In the case of assets acquired by the assessee during the previous year, the WDV means the actual cost
to the assessee.
In the case of assets acquired before the previous year, the WDV shall be worked out as follows:
WRITTEN DOWN VALUE OF BLOCK OF ASSETS
Opening value of the block at the beginning of the Previous Year xxx
Add: ACTUAL COST of assets acquired during the Previous Year & falling
within this block xxx
Less: MONEYS PAYABLE (i.e. sale price & insurance compensation) in respect
of asset, which is sold, discarded, demolished or destroyed, together
with the scrap value, if any. xxx
WDV for the purpose of depreciation xxx

Depreciation at prescribed percentage xxx
Closing value of the block xxx
Notes:
1) The deduction of moneys payable shall only be to the extent that WDV becomes NIL
2) MONEYS PAYABLE means the sale price of the asset and includes any insurance, salvage or compensation
payable in respect of the asset.
3) Depreciation will not be charged in the following two cases:
a. When Money payable exceeds the amount of “Opening WDV + Assets acquired”
b. When block cease to exist (means when all the assets is sold).

FINAL DT SATC 21.3
RATES OF DEPRECIATION
PART A - TANGIBLE ASSETS
I Buildings
Block 1. Residential 5%
Block 2. Non Residential 10%
Block 3. Temporary Erections (Wooden Structure) 40%
II Furniture and Fittings

Furniture and fittings including electrical fittings 10%
III Plant & Machinery
Block 1. (a) Plant & machinery (General rate) 15%

(b) Motor cars not used for hiring purpose (new rate – Refer Page 12)
Block 2. Motors buses, motor lorries, motor taxis used in a business

of running them on hire (new rate – Refer Page 12) 30%
Block 3. Energy Saving Devices (as specified)
Air, Water Pollution control equipments, Solid waste

control equipment (Specified)
40%
All Kind of Books
Computers (Laptops) including computer printer & software
Aeroplanes, aeroengines
Block 4. Ships or Vessels 20%
PART B INTANGIBLE ASSETS

Know-how, patents, copyrights, trademarks, licences, franchises
or any other business or commercial rights of similar nature 25%
Goodwill (as decided by the Supreme Court in case of Smifs Securities Ltd. v CIT) 25%
[‘Goodwill’ is treated as Intangible Asset & eligible for Deprecation]
Now, there is no block with depreciation rate higher than 40%.
DIFFERENT SITUATION FOR DEPRECIATION CALCULATION:

1. Assets purchased and put to use for 180 days or more
2. Asset purchased and put to use for less than 180 days
3. Asset put to use for less than 180 days and the WDV is less than the actual cost of the asset purchased
4. Where any asset is sold at a price more than the WDV of the block of assets
5. When all the assets of block are sold at a price less than the WDV of the block of assets
Section 43(1) - IMP

Where an assessee incurs any expenditure for acquisition of any asset in respect which a payment (or
aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft/use
of electronic clearing system through a bank account or through such other electronic modes as may be
prescribed, exceeds ` 10,000, such payment shall be ignored for the purposes of determination of “Actual
Cost” of such asset.
Consequently, Depreciation/Additional Depreciation under Section 32 and Deduction u/s 32AD pertaining
to such payment is not available. Moreover, such expenditure will not be considered for the purpose of
Section 50.

FINAL DT SATC 21.4
COMPUTATION OF CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS
In the following 2 cases, the capital gains shall be calculated:
(1) When value of block ceases to exist; or
(2) Block ceases to exist.
SECTION 50: SHORT-TERM CAPITAL GAINS SHALL BE COMPUTED AS UNDER:
Full value of consideration received /receivable xxx
Less: Aggregate of following amounts:

Expenditure incurred wholly & exclusively for transfer xxx
WDV of the block of assets at the Beginning of the Previous Year xxx
Actual Cost of any asset falling within the block of assets
acquired during the Previous Year xxx
Short-term capital gains (if positive)/Short-term capital loss (if negative) xxx
Notes:
1) If Sec. 50 is not attracted than expenditure on transfer of assets from block of assets is allowable as business
expenditure u/s 37(1).
2) Short term Capital Loss arises when relevant Block of Asset ceases to exist (i.e. all assets in a block are
transferred).
3) Insurance compensation in respect of asset destroyed shall be deducted from WDV of Block under section
43(6) even if the same has not been actually received. (Mercantile Basis)
4) However, if STCG arises under section 50 because of insurance compensation then such STCG shall be
taxable in the previous year in which insurance compensation is actually received as per section 45(1A).
Example:
a. Opening WDV of block as on 1-4-2019 5,00,000
(15%)(Assets A,B,C,D & E)
b. Asset F acquired 30-6-2019 2,00,000
c. Asset A destroyed in fire on 31.12.2019
d. Insurance Compensation payable 10,00,000
Compensation is determined on 28.02.2020 and received on 31.12.2020.
Answer:
Assessment Year 2020-21
Opening WDV as on 01.04.2019 5,00,000
Add: Actual cost of assets acquired during the P/Y 2,00,000
Less: Moneys payable in respect of insurance compensation
receivable during the P/Y (Restricted to ` 7,00,000) 7,00,000
WDV Nil

Short Term Capital Gain under section 50
Insurance compensation Received 10,00,000
Less: Opening WDV as on 01.04.2019 5,00,000
Less: Assets acquired 2,00,000
Short Term Capital Gain 3,00,000
Note: Short Term Capital Gain u/s 50 shall be taxable in AY 2021-22, as per section 45(1A). As per Section
45(1A) the Capital gains shall be taxable in the year in which insurance compensation is received.

FINAL DT SATC 21.5
Example:
SATC Enterprises has WDV in building block (depreciation rate 10%) as on 1/4/19 ` 80,000. The block
consists of two building X and Y. Compute depreciation u/s 32 for the AY 2020-21 in the following cases:
Case A Building X sold for ` 20,000 on 1/5/19

Case B Building X sold for ` 100,000 on 1/1/20
Case C Building X sold for ` 100,000 and building S purchased for ` 35,000 as on 1/7/19
Case D Building X sold for ` 10,000 and building S purchased for ` 40,000 as on 1/7/19
Case E Building X sold for ` 10,000 and building S purchased for ` 40,000 as on 1/11/19
Case F Building X sold for ` 200,000 and building S purchased for ` 40,000 as on 1/11/19
Case G Building X and building Y both sold for ` 10,000 and ` 35,000 respectively.
Case H Building X and building Y both sold for ` 10,000 and ` 35,000 respectively as on 1/11/19. New
building T purchased for ` 5,000 as on 1/7/19.
Case I Building Z purchased for ` 40,000 on 1/7/19 and the same being put to use on 1/12/19.
Case J Building Q purchased for ` 50,000 on 1/7/19 but put to use on 1/11/20.
Case K Building S purchased for ` 10,000 on 1/7/19 but put to use on 1/11/19 and building X and Y sold
for ` 10,000 and ` 6,000 respectively.
Case L Building R purchased for ` 30,000 on 1/7/19 and sold the same for ` 40,000 on 11/11/19.
Case M Sold building X and Y for ` 95,000 on 11/7/19 and purchased Building R for ` 30,000 on 11/11/19.
Assume in all cases new building is charged to depreciation @ 10%.
Solution:
Computation of depreciation for the AY 2020-21
Particulars Case A Case B Case C Case D Case E Case F Case G Case H
Block: Building (Rate 10%)
WDV as on 1/4/19 80000 80000 80000 80000 80000 80000 80000 80000
Add: Purchase Nil Nil 35000 40000 40000 40000 Nil 5000
80000 80000 115000 120000 120000 120000 80000 85000
Less: Sale proceeds 20000 80000# 100000 10000 10000 120000# 45000 45000
WDV as on 31/3/2020 60000 Nil 15000 110000 110000 Nil Nil 40000
Depreciation 6000 Nil 1500 11000 90001 Nil Nil 4000
Short term capital gain 20000 80000
Short term capital loss (35000)
#
Sale proceeds cannot exceeds opening WDV as increased by actual cost of asset acquired during the previous
year. Excess, if any, shall be considered as Short Term capital gain.
Computation of depreciation for the AY 2020-21

Particulars Case I Case J Case K Case L Case M
Block: Building (Rate 10%)
WDV as on 1/4/19 80000 80000 80000 80000 80000
Add: Purchase 40000 50000 10000 30000 30000
120000 130000 90000 110000 110000
Less: Sale proceeds Nil Nil 16000 40000 95000
120000 130000 74000 70000 15000
Depreciation 100002 80003 69004 7000 7505
Short term capital gain
Short term capital loss
1 2
(` 70000 * 10%) + (` 40000 * 10% * ½) (` 80000 * 10%) + (` 40000 * 10% * ½)
3
Though the asset is acquired in the current year but put to use in next year hence no depreciation on the same.
(` 80,000 * 10%)
4 5
(` 10000 * 10% * ½) + (64000 * 10%) (` 15000 *10% * ½)

FINAL DT SATC 21.6
DEPRECIATION FOR POWER GENERATING UNDERTAKINGS
Assessee is in the business of generation or generation & distribution of power have the option to claim
depreciation on Straight Line Method on each asset or WDV method on Block of Assets.
Depreciation under Straight Line Method (SLM) [Section 32(1)(i)]
An assesses in the business of generation or generation & distribution of power will be allowed Depreciation in
respect of
• building, machinery, plant or furniture being tangible assets;
• Know-how, patents, copyrights, trademarks etc. being intangible assets
owned wholly or partly by the assesses and used for the purposes of business at the prescribed rates on actual
cost of each assets on the basis of Straight Line Method of depreciation.
Note:
1. Assesses have to exercise such option before the due date of furnishing the ROI relevant to the
Previous Year in which they begin to generate power.
2. The option once exercised shall be FINAL for all subsequent assessment years.
3. The aggregate depreciation u/s. 32(1)(i) shall not exceed the actual cost of the assets.
4. Restriction of 50% of Depreciation shall apply if the asset is put to use for less than 180 days in the year
of acquisition.
5. Additional depreciation under section 32(1)(iia) is also available to power generating undertakings
following WDV methods.
Terminal Depreciation [Section 32(1)(iii)]
In the case of any building, machinery, plant or furniture or intangible assets

on which depreciation has been claimed and allowed u/s. 32(1)(i) i.e. under SLM and
which is sold, discarded etc. in the Previous Year, and moneys payable for such assets is less than the
WDV, then
TERMINAL DEPRECIATION i.e. WDV of such asset (-) Moneys Payable for such assets,
shall be allowed as deduction only if such loss is actually written off in the books.
However, If asset is sold in the same Previous Year in which it was acquired, then there will be
STCL under section 45(1)
Balancing Charge [Section 41(2)]
In the case of any building, machinery, plant or furniture or intangible assets

in respect of which depreciation is claimed and allowed under section 32(1)(i) i.e. under SLM and
which is sold, discarded etc. in the Previous Year and moneys payable for such assets is more than the
WDV, then
BALANCE AMOUNT shall be chargeable to tax as PGBP to the extent it does not exceeds the amount
of depreciation already allowed.
Even if business is no longer in existence, the above provisions shall apply.
If assets is sold in the same Previous Year in which it was acquired, then there will be STCG under section
45(1)
Special provision for COA in case of Depreciable Assets under SLM [Section 50A]
If an asset on which depreciation is allowed under SLM u/s. 32(1)(i) is sold during the Previous Year,
then for computing Capital Gain, the WDV as adjustment is taken as COA.
WDV as adjusted should mean:
WDV of asset xxx
Add: Income assessed under section 41(2) xxx

FINAL DT SATC 21.7
ADDITIONAL DEPRECIATION [ON PLANT & MACHINERY ACQUIRED BY AN
INDUSTRIAL UNDERTAKING]: - Section 32(1)(iia)
Additional depreciation is allowed on any new machinery or plant (other than ships and aircraft) acquired and
installed after 31.3.2005 by an assessee engaged in the business of manufacture or production of any
article or thing at the rate of 20% of the actual cost of such machinery or plant.
Additional Depreciation will be restricted to 50% in case the asset is put to use for less than 180 days during the
previous year.
Further, the balance 50% of the additional depreciation on new plant or machinery acquired and used for less than
180 days, shall be allowed in the immediately succeeding previous year.
Such additional depreciation will not be available in respect of:

(a) any machinery or plant which, before its installation by the assessee, was used within or outside India by
any other person; or
(b) any machinery or plant installed in office premises, residential accommodation, or in any guest house;
or
(c) office appliances or road transport vehicles; or
(d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way
of depreciation or otherwise)
(e) Ships and Aircrafts.
Note:
1. Additional depreciation is allowed even if the block has NIL value.
2. Additional depreciation is not available if the new plant and machinery is sold in the year of acquisition
3. Additional depreciation shall be subtracted while computing next year opening WDV.
4. An assessee engaged in the business of Generation, Transmission or Distribution of power shall also be
allowed additional depreciation at the rate of 20% of actual cost of eligible new machinery or plant (other than
ships and aircrafts) acquired and installed in a previous year. [Only in WDV Method]
5. An assessee engaged in the business of printing or printing & publishing is also eligible for AD.
Example: Gamma Ltd. was incorporated on 1.1.2019 for manufacture of tyres and tubes for motor
vehicles. The manufacturing unit was set up on 1.5.2019. The company commenced its manufacturing
operations on 1.6.2019. The total cost of the plant and machinery installed in the unit is ` 120 crore. The
said plant and machinery included second hand plant and machinery bought for ` 20 crore and new plant
and machinery for scientific research relating to the business of the assessee acquired at a cost of ` 15
crore.
Compute the amount of depreciation allowable under section 32 of the Income-tax Act, 1961 in respect of
the AY 2020-21.
Solution
Computation of depreciation allowable for the A.Y. 2020-21 in the hands of Gamma Ltd.
Particulars ` in crore
Total cost of plant and machinery 120.00
Less: Used for Scientific Research (Note 1) 15.00
105.00
Normal Depreciation at 15% on ` 105 crore 15.75
Additional Depreciation:
Cost of plant and machinery 120.00
Less:
(a) Second hand plant and machinery (Note 2) 20.00
(b) Plant and machinery used for scientific research, the
whole of the actual cost of which is allowable as
deduction under section 35 (Note 2) 15.00 35.00
85.00
Additional Depreciation at 20% 17.00
Total Depreciation allowable for A.Y. 2020-21 (15.75 + 17) 32.75

FINAL DT SATC 21.8
Notes:
1) As per section 35, no depreciation shall be allowed in respect of plant and machinery purchased for
scientific research relating to assessee’s business, since deduction is allowable under section 35 in respect
of such capital expenditure.
2) As per section 32(1)(iia), additional depreciation is allowable in the case of any new machinery or plant
acquired and installed by an assessee engaged in the business of manufacture or production of any article
or thing, at the rate of 20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of:

(1) any machinery or plant which, before its installation by the assessee, was used either within or outside
India by any other person;
(2) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by
way of depreciation or otherwise)
Additional depreciation @35% to be allowed to assessees setting up manufacturing

units in notified backward areas of specified States and acquiring and installing of new
plant & machinery [Proviso to section 32(1)(iia)]
a) Under section 32(1)(iia), to encourage investment in new plant or machinery, additional depreciation of 20%
of the actual cost of plant or machinery acquired and installed is allowed. Such additional depreciation under
section 32(1)(iia) is allowed over and above the normal depreciation under section 32(1)(ii).
b) In order to encourage acquisition and installation of plant and machinery for setting up of manufacturing units
in the notified backward areas of the States of Andhra Pradesh, Bihar, Telangana and West Bengal, a
proviso has been inserted to section 32(1)(iia) to allow higher additional depreciation at the rate of 35%
(instead of 20%) in respect of the actual cost of new machinery or plant (other than a ship and aircraft)
acquired and installed during the period between 1st April, 2015 and 31st March, 2020 by a manufacturing
undertaking or enterprise which is set up in the notified backward areas of these specified States on or after
1st April, 2015.
c) Such additional depreciation shall be restricted to 17.5% (i.e., 50% of 35%), if the new plant and machinery
acquired is put to use for the purpose of business for less than 180 days in the year of acquisition and
installation.
d) The balance 50% of additional depreciation (i.e., 50% of 35%) would, however, be allowed in the
immediately succeeding financial year.
Eligibility for grant of additional depreciation under section 32(1)(iia) in the case of an assessee engaged in
printing or printing and publishing [Circular No. 15/2016, dated 19-05-2016]
An assessee, engaged in the business of manufacture or production of an article or thing, is eligible to claim
additional depreciation under section 32(1)(iia) in addition to the normal depreciation under section 32(1).
The CBDT has, vide this Circular, clarified that the business of printing or printing and publishing amounts to
manufacture or production of an article or thing and is, therefore, eligible for additional depreciation under
section 32(1)(iia).

FINAL DT SATC 21.9
Manufacturing industries set up in the notified backward areas of specified States to be
eligible for a deduction @15% of the actual cost of new plant & machinery acquired and
installed during the previous year [Section 32AD]
1. Section 32AD has been inserted to provide for a deduction of an amount equal to 15% of the actual cost of
new plant and machinery acquired and installed, if the following conditions are satisfied by the assessee –
a) The assessee sets up an undertaking or enterprise for manufacture or production of any article or thing
on or after 1st April, 2015 in any backward area notified by the Central Government in the State of
Andhra Pradesh or Bihar or Telangana or West Bengal; and
b) the assessee acquires and installs new plant and machinery for the purposes of the said undertaking or
enterprise during the period between 1st April, 2015 and 31st March, 2020 in the said backward areas.
2. For the purposes of this section, “New plant and machinery” does not include—
a) any ship or aircraft;
b) any plant or machinery, which before its installation by the assessee, was used either within or outside
c) any plant or machinery installed in any office premises or any residential accommodation, including
accommodation in the nature of a guest house;
d) any office appliances including computers or computer software;
e) any vehicle;
f) any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of
depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of
business or profession” of any previous year.
3. Further, if any new plant and machinery acquired and installed by the assessee is sold or otherwise
transferred except in connection with the amalgamation or demerger or re-organisation of business, within a
period of 5 years from the date of its installation, the amount allowed as deduction in respect of such new
plant and machinery shall be deemed to be the income chargeable under the head “Profits and gains from
business or profession” of the previous year in which such new plant and machinery is sold or transferred, in
addition to taxability of gains, arising on account of transfer of such new plant and machinery.
4. However, this restriction shall not apply to the amalgamating or demerged company or the predecessor in a
case of amalgamation or demerger or business reorganization referred to in section 47(xiii), 47(xiiib) and
47(xiv), within a period of five years from the date of its installation, but shall continue to apply to the
amalgamated company or resulting company or successor, as the case may be.

FINAL DT SATC 21.10
Example
X Ltd. set up a manufacturing unit in notified backward area in the state of Telangana on 01.06.2019. It
invested ` 30 crore in new plant and machinery on 1.6.2019. Further, it invested ` 25 crore in the plant and
machinery on 01.11.2019, out of which ` 5 crore was second hand plant and machinery. Compute the
depreciation allowable under section 32. Is X Ltd. entitled for any other benefit in respect of such
investment? If so, what is the benefit available?
Solution
Computation of depreciation under section 32 for X Ltd. for A.Y. 2020-21
Particulars ` (in crores)

Plant and machinery acquired on 01.06.2019 30.000
Plant and machinery acquired on 01.11.2019 25.000
WDV as on 31.03.2020
Less: Depreciation @ 15% on ` 30 crore 4.500
Depreciation @ 7.5% (50% of 15%) on ` 25 crore 1.875
Additional Depreciation@35% on ` 30 crore 10.500
Additional [email protected]% (50% of 35%) on ` 20 crore 3.500 20.375
WDV as on 01.04.2020 34.625
Computation of deduction under section 32AD for X Ltd. for A.Y. 2020-21
Deduction under section 32AD @ 15% on ` 50 crore 7.50
Notes:
(1) As per the second proviso to section 32(1)(ii), where an asset acquired during the previous year is put to use
for less than 180 days in that previous year, the amount deduction allowable as normal depreciation and
additional depreciation would be restricted to 50% of amount computed in accordance with the prescribed
percentage. Therefore, normal depreciation on plant and machinery acquired and put to use on 1.11.2019 is
restricted to 7.5% (being 50% of 15%) and additional depreciation is restricted to 17.5% (being 50% of 35%).
(2) As per third proviso to section 32(1)(ii), the balance additional depreciation of ` 3.5 crore, being 50% of ` 7
crore (35% of ` 20 crore) would be allowed as deduction in the A.Y.2021-22.
(3) As per section 32(1)(iia), additional depreciation is allowable in the case of any new machinery or plant
acquired and installed after 31.3.2005 by an assessee engaged, inter alia, in the business of manufacture or
production of any article or thing. In this case, since new plant and machinery acquired was installed by a
manufacturing unit set up in a notified backward area in the State of Telengana, the rate of additional
depreciation is 35% of actual cost of new plant and machinery. Since plant and machinery of ` 20 crore was
put to use for less than 180 days, additional [email protected]% (50% of 35%) is allowable as deduction.
However, additional depreciation shall not be allowed in respect of second hand plant and machinery
of ` 5 crore.
Likewise, the benefit available under sections 32AD would not be allowed in respect of second hand
plant and machinery. Accordingly, additional depreciation and investment allowance under sections 32AD
have not been provided on ` 5 crore, being the actual cost of second hand plant and machinery acquired and
installed in the previous year.

FINAL DT SATC 21.11
DEPRECIATION IN CASE OF SUCCESSION, AMALGAMATION, BUSINESS RE -
ORGANISATION OR DEMERGER –[FIFTH PROVISO TO SEC. 32(1) AND SEC. 44DB]:
These provisions are applicable while determining depreciation if there is a change of ownership of
assets because of the following:
a) Conversion of firm or sole proprietary concern into company [by satisfying conditions of section
47(xiii)/(xiv)];
b) Conversion of private company/unlisted public company into LLP by satisfying condition of section 47(xiiib);
and
c) Succession to business other than on death – business of HUF taken over by a member, business of a firm
taken over by a partner, conversion of HUF concern into company;
d) Amalgamation of a company;
e) Demerger of a company etc
In the year in which change of ownership takes place because of the aforesaid reasons, deprecation shall
be calculated as under:
1. Compute depreciation of the previous year in which ownership of assets changes (because of the aforesaid
reasons) on the assumption that the succession, amalgamation or demerger has not taken place.
2. The amount of deprecation so determined shall be appropriated between the (a) predecessor and
(b) successor, as the case may be, in ratio of number of days for which the assets are used by them
during the previous year in which ownership changes.

FINAL DT SATC 21.12
Income-tax (9th Amendment) Rules, 2019

Effective from 23-08-2019
New depreciation rates on vehicles purchased between 23-08-2019 to 31-03-2020

Notification No. 69/2019 dated 20.09.2019
Depreciation Rate
S. No. Block of Asset (Machinery & Plant) – Motor Cars
(WDV Method)
(i) Motor cars, other than those used in a business of running them on hire,
acquired or put to use on or after the 1st day of April, 1990 except those
15
covered under entry (ii);
(ii) Motor cars, other than those used in a business of running them on hire,
acquired on or after the 23rd day of August, 2019 but before the 1st day of
30
April, 2020 and is put to use before the 1st day of April, 2020.
(iii) Motor buses, motor lorries and motor taxis used in a business of running them
on hire other than those covered under entry (iv). 30
(iv) Motor buses, motor lorries and motor taxis used in a business of running them
on hire, acquired on or after the 23rd day of August, 2019 but before the
45
1st day of April, 2020 and is put to use before the 1st day of April, 2020.

FINAL DT SATC 21A.1
PRACTICAL QUESTIONS
1. M/s. Dollar Ltd., a manufacturing concern, furnishes the following particulars:
`)
(`
(i) Opening Writing Down Value of plant and machinery (15% block) 5,00,000
(ii) Purchase of plant and machinery (put to use before 01.10.2019) 2,00,000
(iii) Sale proceeds of plant and machinery which became obsolete- the plant and
machinery was purchased on 01-04-2017 for ` 5,00,000. 5,000
Further, out of purchase of plant and machinery:
(a) Plant and machinery of ` 20,000 has been installed in office.
(b) Plant and machinery of ` 20,000 was used previously for the purpose of business by the seller.
Compute depreciation and additional depreciation as per Income-tax Act, 1961 for the AY 2020-21.
2. Mr. Abhimanyu is engaged in the business of generation and distribution of electric power. He always opts to
claim depreciation on written down value for income-tax purposes. From the following details, compute the
depreciation allowable as per the provisions of the Income-tax Act, 1961 for the assessment year
2020-21:
` in lacs)
(`
(i) Opening WDV of block (15% rate) 42
(ii) New machinery purchased on 12-10-2019 10
(iii) Machinery imported from Colombo on 12-4-2019 9
This machine had been used only in Colombo earlier and
the assessee is the first user in India.
(iv) New computer installed in generation wing of the unit on 15-7-2019 2
3. Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose written down value on 01.04.2019
was ` 40 lacs. It purchased another asset (second-hand plant and machinery) of the same block on
01.11.2019 for ` 14.40 lacs and put to use on the same day. Sai Ltd. was amalgamated with Shirdi Ltd. with
effect from 01.01.2020.
You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the previous year
ended on 31.03.2020 assuming that the assets were transferred to Shirdi Ltd. at ` 60 lacs.
4. M/s Sidhant & Co., a sole proprietary concern is converted into a company, Sidhant Co. Ltd. with
effect from November 29, 2019. The written down value of assets as on April 1, 2019 is as follows:
Items Rate of Depreciation WDV as on 1st April, 2019
Building 10% ` 3,50,000
Furniture 10% ` 50,000
Plant and Machinery 15% ` 2,00,000
Further, on October 15, 2019, M/s Sidhant & Co. purchased a plant for ` 1,00,000 (rate of depreciation 15%).
After conversion, the company added another plant worth ` 50,000 (rate of depreciation 15%).
Compute the depreciation available to (i) M/s Sidhant & Co. and (ii) Sidhant Co. Ltd. for Assessment
Year 2020-21
5. What are intangible assets? Give four examples. What is the rate of depreciation on a block of
intangible assets?
6. Gopichand Industries furnishes you the following information:

`)
(`
Block I WDV of Plant and machinery (consisting of 10 looms) 5,00,000
Rate of depreciation 15%
Block II WDV of Buildings (consisting of 3 buildings) 12,50,000
Rate of depreciation 10%
Acquired on 5-07-2019 – 5 looms for 4,00,000
Sold on 7-12-2019 – 15 looms for 10,00,000
Acquired on 10-01-2020 – 2 looms for 3,00,000
Compute depreciation claim for the Assessment year 2020-21.

FINAL DT SATC 21A.2
7. M/s. QQ & Co., a sole proprietary concern, was converted into a company on 1.9.2019. Before the
conversion, the sole proprietary concern had a Block of Plant and Machinery (Rate of depreciation 15%),
whose WDV as on 1.4.2019 was ` 3,00,000. On 1st April itself, a new plant of the same block was purchased
for ` 1,20,000. After the conversion, the company has purchased the same type of Plant on 1.1.2020 for
` 1,60,000.
Compute the depreciation that would be allocated between the sole proprietary concern and the
successor company.
8. Honest Industry furnishes you the following details pertaining to the financial year 2019-20:
Description Plant & Building Intangible
Machinery Assets
(patents)
Rate of depreciation 15% 10% 25%
Opening balance as on 01-04-2019 14,50,000 25,00,000 15,00,000
Acquired before 30-09-2019 12,00,000 Nil 5,00,000
Acquired after 01-12-2019 4,00,000 18,00,000 Nil
Transferred in March 2020, one of the
patents held for the past 2 years - - 3,00,000
A machinery acquired in July 2019 original cost ` 1,50,000 was destroyed by fire and the assessee received
compensation of ` 50,000 from the insurance company. Newly acquired building given above includes value
of land of ` 3,00,000.
Calculate the eligible depreciation claim for the assessment year 2020-21. Note: Ignore
additional/accelerated depreciation.
9. Determine the tax consequences in following cases for AY 2020-21:

(a) X Co., an undertaking established in 2006 for generation and distribution of power, has opted for SLM
method of depreciation. The written down value of its machinery as on 1.4.2019 was ` 5,10,000. The
machinery is sold for ` 4,60,000 on 1.5.2019.
(b) A Co. a power-generating unit (opted for SLM) has purchased machinery on 1-5-2019 for ` 5,10,000
which is destroyed by fire on 15-09-2019 and an insurance claim of ` 3,00,000 is received on 31-1-2020.
(c) X Co., an undertaking established in 2008 for generation of power, has opted for SLM method of
depreciation. The company had purchased machinery for ` 4,50,000. The written down value of its
machinery as on 1.4.2019 is ` 3,00,000. The machinery is sold for ` 4,60,000 on 1-10-2019.
10. An industrial undertaking which commenced the manufacturing activity with effect from 1st
September, 2019 has acquired the following assets during the previous year 2019-20:
Assets Date of Date when put to Cost of
acquisition use acquisition
`)
(`
Factory buildings 04.04.2019 01.09.2019 50,00,000
Plant and Machinery:
Air pollution control equipment 04.05.2019 01.09.2019 400,000
Machinery A 05.05.2019 01.09.2019 200,000
Machinery B 07.06.2019 01.09.2019 500,000
Machinery C 30.08.2019 01.09.2019 10,00,000
Machinery D 01.09.2019 31.10.2019 400,000
Machinery E 01.01.2020 28.02.2020 300,000
Machinery F (second hand) 11.01.2020 13.01.2020 200,000
Motor car 01.07.2019 01.02.2020 500,000
Air conditioner (installed in the 01.02.2020 02.02.2020 100,000
office)
Compute depreciation allowable for AY 2020-21 and the WDV as on 1-4-2020.

FINAL DT SATC 21A.3
11. A newly qualified Chartered Accountant Mr. Dhaval commenced practice and has acquired the following
assets in his office during FY 2019-20 at the cost shown against each item. Calculate the amount of
depreciation that can be claimed from his professional income for A.Y 2020-21:
SI. No. Description Date of acquisition Date when put to use Amount (` `)
1. Computer 27 Sept., 19 2 Oct., 19 35,000
2. Computer printer 2 Oct, 19 3 Oct, 19 12,500
3. Books
(of which books being annual 1 Apr, 19 1 Apr, 19 13,000
publications are of ` 12,000)
4. Office furniture 1 Apr, 19 1 Apr, 19 3,00,000
(Acquired from practising C.A.)
5. Laptop 26 Sep.,19 5 Oct., 19 43,000
6. Fire extinguisher 1 Apr, 19 No instance arose to
use during FY 2019-20 2,500
7. Purchased practising CA's office in April '19 who had run it for 4 years, for ` 5 lacs which includes ` 2 lacs
for land and ` 3 lacs for cost of furniture (included in 4 above)
Note: Depreciation is to be provided at the applicable rates.
12. X starts a new business on April 10, 2019 and he purchases the following assets.
` in lakh)
Cost (`
Building A - Office building 60.70
Building B - Residential building for manager 40.10
Building C - Factory building 70.40
Plant and machinery A - Office computer 1.20
Plant and machinery B - Fax machine 0.60
Plant and machinery C – Cars 6.10
Plant and machinery D - Air pollution control equipment 2.40
Plant and machinery E - PABX telephone system 1.10
Plant and machinery F - Air-conditioners 6.80
Plant and machinery G - Scooters for employees 1.90
Furniture - Office furniture 2.85
Furniture - Furniture for welfare centre of employees 4.10
Know-how - Know-how to manufacture goods 18.70
Categorise these asset in different blocks of assets.
13. Singhania & Co. own six machines, put in use for business in March, 2019. The depreciation on these
machines is charged @ 15%. The written down value of these machines as on 1st April, 2019 was `
8,50,000. Three of the old machines were sold on 10th June, 2019 for ` 11,00,000. A new plant was bought
for ` 8,50,000 on 30th November, 2019.
You are required to:
(a) determine the claim of depreciation for Assessment Year 2020-21.
(b) compute the capital gains liable to tax for Assessment Year 2020-21.
(c) If Singhania & Co. had sold the three machines in June, 2019 for ` 21,00,000, will there be any difference
in your above workings? Explain.
14. The written down value of the block of assets of Rosy Ltd. as on 1st April, 2019 was ` 5 lakh. An asset
of the same block was acquired on 11th May, 2019 for ` 3 lakh. There was a fire on 18th September,
2019 and the assets were destroyed by fire and the assessee received a sum of ` 11 lakh from the
insurance company.
Compute the capital gain assuming

(a) All the assets were destroyed by fire; and
(b) Part of the block of assets was destroyed by fire.
What will be the answer if assessee received ` 6 lakh from insurance company instead of ` 11 lakhs?
Ignore Additional Depreciation!

FINAL DT SATC 21A.4
15. X owns the following assets on April 1, 2019 (rate of depreciation: 15 per cent)
Assets Written down value on Date of acquisition
April 1, 2019
`
Plant A 3.00,000 April 1, 1976
Plant B 2,00,000 May 10, 1975
Plant C 5,00,000 March 13, 1988
During the previous year 2019-20, the following plants ore purchased/sold by X:
Assets Rate of Date of Selling price Cost price Date when the
Depreciatio purchase/sale ` ` asset is put to use
n
Plant D (office
air conditioner) 15% March 10, 2020 4,08,000 March 30, 2020
Plant E (old) 15% March 1, 2020 20,000 March 31, 2020
Plant A 15% April 1, 2019 6,00,000
Building A 10% June 10, 2019 2,00,000 July 5, 2019
Plant C 15% May 10, 2019 12,50,000 -
Plant F (second-hand) 40% June 10,2019 15,00,000 December 31, 2019
Determine the amount of depreciation and capital gain/loss for the assessment year 2020-21
(expenditure incurred on sale of plants A and C is ` 10,000). Assume that additional depreciation is
not available.
16. Mr. A, is an individual carrying on business. His stock and machinery were damaged and destroyed in a fire
accident. The value of stock lost (totally damaged) was ` 6,50,000. The opening WDV of the block as on 1-4-
2019 was ` 10,80,000.
During the process of safeguarding machinery and in the fire fighting operations, Mr. A lost his gold chain and
a diamond ring, which he had purchased in April, 2008 for ` 1,20,000. The market value of these two items as
on the date of fire accident was ` 1,80,000.
Mr. A received the following amounts from the insurance company:

i) Towards loss of stock ` 4,80,000
ii) Towards damage of Machinery. ` 6,00,000
iii) Towards gold chain and diamond ring. ` 2,30,000
You are requested to briefly comment on the tax treatment of the above three items under the
provisions of the Income-tax Act, 1961.

FINAL DT SATC 21B.1
SOLUTION TO PRACTICAL QUESTIONS
1. Computation of written down value of Plant and Machinery of M/s. Dollar Ltd. for the A.Y. 2020-21
Particulars `
Opening written down value (as on 01.04.2019) 5,00,000
Add: Purchase of plant and machinery during the previous year 2,00,000
7,00,000
Less: Sale proceeds of obsolete plant and machinery sold during the year 5,000
Closing Written Down Value (as on 31.03.2020) 6,95,000
Computation of Depreciation and Additional Depreciation for A.Y. 2020-21 as per section 32 of the
Income-tax Act, 1961
Particulars `
Normal Depreciation (` 6,95,000 x 15%) 1,04,250
Additional Depreciation(Refer Note 2)(` 2,00,000 – ` 20,000 - ` 20,000) x 20% 32,000
Depreciation on Plant and Machinery 1,36,250
Notes:-
(1) Since the new plant and machinery was purchased and put to use before 1.10.2019, it was put to use for
more than 180 days in the year. Hence, full depreciation is allowable for A.Y. 2020-21.
acquired by an assessee engaged, inter alia, in the business of manufacture or production of any article
or thing, at the rate of 20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia, –
(i) any machinery or plant which, before its installation by the assessee, was used either within or
outside India by any other person;
(ii) any machinery or plant installed in office premises, residential accommodation or in any guest house.
In view of the above provisions, additional depreciation cannot be claimed in respect of -

(i) Plant and machinery of ` 20,000 used previously for the purpose of business by the seller.
(ii) Plant and machinery of ` 20,000, installed in office.
Therefore, in the given case additional depreciation has to be provided only on ` 1,60,000 (i.e., `2,00,000
- ` 40,000).
2.
Computation of depreciation under section 32 for A.Y. 2020-21
Particulars ` `
Normal Depreciation
Depreciation@15% on ` 51,00,000, being machinery (put to use for more 7,65,000
than 180 days) [Opening WDV of ` 42,00,000 + Purchase cost of imported
machinery of ` 9,00,000]
[email protected]% on `10,00,000, being new machinery put to use for less 75,000
than 180 days
8,40,000
Depreciation@40% on computers purchased ` 2,00,000 80,000 9,20,000
Additional Depreciation (Refer Note below)

Additional Depreciation@10% of `10,00,000 [being actual cost of new 1,00,000
machinery purchased on 12-10-2019]
Additional Depreciation@20% on new computer installed in generation 40,000 1,40,000
wing of the unit [20% of ` 2,00,000]
Depreciation on Plant and Machinery 10,60,000
Note:-
The Finance Act, 2012 has extended the benefit of additional depreciation to new plant and machinery
acquired and installed in power sector undertakings. Accordingly, additional depreciation is allowable in the
case of any new machinery or plant acquired and installed by an assessee engaged, inter alia, in the
business of generation or generation and distribution of power, at the rate of 20% of the actual cost of such
machinery or plant.

FINAL DT SATC 21B.2
Therefore, new computer installed in generation wing of the unit is eligible for additional depreciation@20%.
Since the new machinery was purchased only on 12.10.2019, it was put to use for less than 180 days during
the previous year, and hence, only 10% (i.e., 50% of 20%) is allowable as additional depreciation.
However, additional depreciation shall not be allowed in respect of, inter alia, any machinery or plant which,
before its installation by the assessee, was used either within or outside India by any other person. Therefore,
additional depreciation is not allowable in respect of imported machinery, since it was used in Colombo,
before its installation by the assessee.
3.
Statement showing computation of depreciation allowable to Sai Ltd. & Shirdi Ltd. for A.Y. 2020-21
Particulars `
Written down value (WDV) as on 1.4.2019 40,00,000
Addition during the year (used for less than 180 days) 14,40,000
Total 54,40,000
Depreciation on ` 40,00,000 @ 15% 6,00,000
Depreciation on ` 14,40,000 @ 7.5% 1,08,000
Total depreciation for the year 7,08,000
Apportionment between two companies:

(a) Amalgamating company, Sai Ltd. 4,50,820
` 6,00,000 × 275/366 43,342
` 1,08,000 × 61/152 4,94,162
(b) Amalgamated company, Shirdi Ltd.

` 6,00,000 × 91/366 1,49,180
` 1,08,000 × 91/152 64,658
2,13,838
Notes:
(1) The aggregate deduction, in respect of depreciation allowable to the amalgamating company and
amalgamated company in the case of amalgamation shall not exceed in any case, the deduction
calculated at the prescribed rates as if the amalgamation had not taken place. Such deduction shall be
apportioned between the amalgamating company and the amalgamated company in the ratio of the
number of days for which the assets were used by them.
(2) The price at which the assets were transferred, i.e., ` 60 lacs, has no implication in computing eligible
depreciation.
4. In the case of conversion of sole proprietary concern into a company as per section 47(xiv), the depreciation
should be first calculated for the whole year assuming that no succession had taken place. Thereafter, the
depreciation should be apportioned between the sole proprietary concern and the company in the ratio of the
number of days for which the assets were used by them. It is assumed that in this case, the conditions
specified in section 47(xiv) are satisfied.
Computation of depreciation allowable to Sidhant & Co. for A.Y. 2020-21

Particulars ` `
Building
WDV as on 1.4.2019 3,50,000
Depreciation@10% 35,000
Furniture 50,000
WDV as on 1.4.2019 5,000
Depreciation@10%
Plant and Machinery

WDV as on 1.4.2019 2,00,000
Add: Additions during the year (purchased on 15.10.2019) 1,00,000
3,00,000
Depreciation for the year
(15% of ` 2,00,000 + 50% of 15% of ` 1,00,000) 37,500
(` 30,000 + ` 7,500)

FINAL DT SATC 21B.3
(Depreciation on new machinery is restricted to 50% of eligible
depreciation, since the asset is put to use for less than 180 days in that
year)
Total depreciation for the year 77,500
Proportionate depreciation allowable to Sidhant & Co. for 242 days

On existing assets (i.e. 1.4.2019 to 28.11.2019)
(i.e. 242/366 x ` 70,000) 46,284
On new machine for 45 days i.e., 45/169 × ` 7,500 1,997 48,281
Computation of depreciation allowable to Sidhant Co. Ltd. for A.Y. 2020-21

Particulars `
(i) Depreciation on the assets on conversion Proportionately for 123 days i.e. after 29,219
conversion period (124/366 x ` 70,000)+ (124/169 × ` 7,500) = ` 23,716 + ` 5,503
(ii) Depreciation @ 50% of normal rate of 15% on ` 50,000, being the value of plant 3,750
purchased after conversion, which was put to use for less than 180 days
Depreciation allowable to Sidhant Co. Ltd. 32,969
Note: Since it has not been specifically mentioned that M/s Sidhant & Co. and Sidhant Co. Ltd. are
manufacturing concerns or companies engaged in the business of generation or generation and distribution of
power, additional depreciation is not provided for.
5. Intangible assets are assets which are not corporeal i.e., not capable of being touched. Such assets are
represented by rights of the persons through them. According Section 32(1), the following are intangible
assets :
(i) Know-how
(ii) Patents
(iii) Copyrights
(iv) Trade Marks
(v) Licences
(vi) Franchises
(vii) Any other business or commercial rights of similar nature.
They are to be depreciated at the rate of 25%.
6.
Computation of depreciation for Gopichand Industries for A.Y. 2020-21
Particulars ` `
Block 1 : Plant & machinery (Rate of depreciation – 15%)
WDV as on 1st April (10 looms) 5,00,000
Add: Additions during the year
- 5 looms acquired on 5th July 4,00,000
- 2 looms acquired on 10th January 3,00,000
12,00,000
Less : Assets sold during the year
- 15 looms sold on 7th December 10,00,000
W.D.V. as on 31st March (2 looms) 2,00,000
Depreciation on ` 2 lakhs @ 15% (limited to 50%) 15,000

Block II: Buildings (Rate of depreciation – 10%)
WDV as on 1st April (3 buildings) 12,50,000
Depreciation on ` 12,50,000 @ 10% 1,25,000
Total depreciation for the year 1,40,000
Notes:
th
(i) Closing balance of Block 1 : Plant and machinery represents the looms acquired on 10 January. These
looms have been put to use or less than 180 days during the previous year, and therefore, only 50% of
normal depreciation is permissible.
(ii) No additional depreciation @ 20% of the cost of new plant and machinery is provided for assuming that
all conditions contained in the section 32(1)(iia) have not been fulfilled [Students may choose to
claim AD]

FINAL DT SATC 21B.4
7.
Computation of depreciation in the case of transfer of business:
Depreciation is to be calculated as if there is no succession. (` )
WDV as on 1st April 3,00,000
Add : Additions made before succession 1,20,000
4,20,000
Less : Sale consideration of the asset sold Nil
4,20,000
Depreciation @ 15% 63,000
Allocation of depreciation between sole proprietary concern and the successor company:
The depreciation of ` 63,000 is to be allocated in the ratio of number of days the assets were used by the sole
proprietary concern and the company.
Proprietary concern
1st April to 31st August = 153 days ` 63,000 x 153 / 366 = ` 26,336
Successor company
` 63,000 - ` 26,336 = ` 36,664 (i.e. ` 63,000 x 213 /366)
The depreciation of ` 12,000 [50% of 15% on ` 1,60,000] in respect of asset purchased by the successor
company on 1st January is fully allowable in the hands of the successor company.
Note: Since it has not been specified that the company is a manufacturing company or a company engaged
in the generation or generation and distribution of power, additional depreciation has not been provided for.
8.
Computation of depreciation allowable to Honest Industry for the A.Y. 2020-21
Particulars Plant & Building Intangible Total (` )
Machinery assets
(patents)
Rate of depreciation 15% 10% 25%
Opening Balance as on 1.04.2019 14,50,000 25,00,000 15,00,000
Add: Assets acquired during the year 16,00,000 15,00,000 5,00,000
30,50,000 40,00,000 20,00,000
Less: Moneys payable in respect of 50,000 - 3,00,000
asset sold or destroyed
W.D.V as on 31.03.2020 30,00,000 40,00,000 17,00,000
Asset held for less than 180 days 4,00,000 15,00,000 -
Depreciation@50% of applicable rate 30,000 75,000 - 1,05,000
Asset held for more than 180 days 26,00,000 25,00,000 17,00,000
Depreciation at the applicable rates 3,90,000 2,50,000 4,25,000 10,65,000
Total Depreciation allowable 11,70,000
Note - Land is not a depreciable asset. Therefore, ` 3 lacs, being the value of land, has been reduced from `
18 lacs, being the value of building acquired during the year, for the purpose of computing depreciation.
9. The tax consequences in aforesaid cases shall be as follows -

(a) In this case, moneys payable is less man written down value of the asset. So, deduction for terminal
depreciation shall be allowed. Terminal Depreciation u/s 32(1)(iii) = 5,10,000 - 4,60,000 = ` 50000.
(b) In this case, machine is destroyed in the same previous year in which it is first brought into use. So, no
terminal depreciation will be allowed. The deficiency of ` 2,10,000 [` 5,10,000 - ` 3,00,000] shall be
treated as Short-Term Capital Loss
(c) In this case moneys payable exceed actual cost.

So, Balancing Charge u/s 41(2) = [(Lower of 4,50,000 or 4,60,000) - 3,00,000] = ` 1,50,000; and Capital
Gains = 4,60,000 - 4,50,000 = ` 10,000 ignoring indexation.

FINAL DT SATC 21B.5
10. Computation of the depreciation allowable for the Assessment Year 2020-21 and the written down
value as on 1st April, 2020-
Nature of Asset Actual Rate of Normal Additional WDV as on

Cost dep. Depreciation Depreciation 1-4-2020
Factory buildings 50,00,000 10% 500,000 0 4500000
Plant & machinery:
Air pollution control equipment 400,000 40% 160,000 80,000 160,000
Machinery A, B & C 17,00,000 15% 255,000 340,000 1105000
Machinery D & E (used for less than 700,000 15% 52,500 70,000 577500
180 days)
Machinery F, motor car & AC (used 800,000 15% 60,000 Not Eligible 740000
for less than 180 days)
11. Computation of depreciation allowable for A.Y. 2020-21

Asset Rate Depreciation
Block 1 Furniture 10% 30,000
Block 2 Plant (Computer, laptop, Printer & books) 40% 32,800
Block 3 Plant (Fire Extinguisher) 15% 375
Total depreciation allowable 63,175
Notes :
a) Computation of depreciation
Block of Assets `
Block 1: Furniture-Rate 10%

Put to use for more than 180 days [` 3,00,000@10%] 30,000
Block 2: Plant-Rate 40%

(a) Computer : (put to use for more than 180 days)
[` 35,000 @ 40%] 14,000
(b) Laptop (put to use for less than 180 days)
[` 43,000 @ 20%] 8,600
(c) Books : (all kinds) (Put to use for more than 180 days) 5,200
[` 13,000 @ 40%]
Computer printer (put to use for 180 days) [` 12,500 @40%] 5,000
32,800
Block 3 : Plant - Rate 15%
Fire extinguisher [` 2,500 @ 15%] 375
b) Where an asset is acquired by the assessee during the previous year and is put to use for the purposes
of business or profession for a period of less than 180 days, the deduction on account of depreciation
would be restricted to 50% of the prescribed rate. In this case, since Mr. Dhaval commenced his practice
in the previous year 2019-20 and acquired the assets during the same year, the restriction of depreciation
to 50% of the prescribed rate would apply to those assets which have been put to use for less than 180
days in that year, namely, laptop.
c) In case of fire extinguishers, it is sufficient if they are kept ready for use. Actual use is not essential.

FINAL DT SATC 21B.6
12.
Block 1- Building (rate of depreciation: 5%)
Building B- Residential building 40.10
Block 2- Building (rate of depreciation: 10%)

Building A- Office building 60.70
Building C- Factory building 70.40
Total 131.10
Block 3- Plant and machinery (rate of depreciation 15%)

Plant B- Fax machine 0.60
Plant E- PBAX telephone 1.10
Plant F- Air-conditioner 6.80
Plant G- Scooters 1.90
Plant C- Cars 6.10
Total 16.50
Block 4- Plant and machinery (rate of depreciation 40%)

Plant A- Office Computer 1.20
Plant D- Air Pollution control equipment 2.40
Block 5- Furniture (rate of depreciation: 10%)

Office furniture 2.85
Furniture for welfare centre 4.10
Total 6.95
Block 6- Know-how (rate of depreciation: 25%)

Know-how to manufacture goods 18.70
13.
(i) Computation of depreciation for A.Y. 2020-21
Particulars `
W.D.V. of the block as on 1.4.2019 8,50,000
Add: Purchase of new plant during the year 8,50,000
17,00,000
Less: Sale consideration of old machinery during the year
W.D.V of the block as on 31.03.2020 11,00,000
6,00,000
Since the value of the block as on 31.3.2020 comprises of a new asset which has been put to use for less
than 180 days, depreciation is restricted to 50% of the prescribed percentage of 15% i.e. depreciation is
restricted to 7½%. Therefore, the depreciation allowable for the year is ` 45,000, being 7½% of `
6,00,000.
Note: It is assumed that the firm is not eligible for additional depreciation under section 32(1)(iia).
(ii) The provisions under section 50 for computation of capital gains in the case of depreciable assets can be
invoked only under the following circumstances:
(a) When one or some of the assets in the block are sold for consideration more than the value of the
block.
(b) When all the assets are transferred for a consideration more than the value of the block.
(c) When all the assets are transferred for a consideration less than the value of the block.
Since in the first two cases, the sale consideration is more than the written down value of the block, the
computation would result in short term capital gains.
In the third case, since the written down value exceeds the sale consideration, the resultant figure would
be a short term capital loss.
In the given case, capital gains will not arise as the block of asset continues to exist, and some of the
assets are sold for a price which is lesser than the written down value of the block.
(iii) If the three machines are sold in June, 2019 for ` 21,00,000, then short term capital gains would arise,
since the sale consideration is more than the aggregate of the written down value of the block at the
beginning of the year and the additions made during the year.
FINAL DT SATC 21B.7
Particulars ` `
Sale consideration 21,00,000
Less:
W.D.V. of the machines as on 1.4.2019 8,50,000
Purchase of new plant during the year 8,50,000 17,00,000
Short term capital gains 4,00,000
14.
(1) Compensation received is ` 11 lakh: Computation of Capital gains
Written down value of the block on 1/4/19 5,00,000
Add: Asset acquired during the year 3,00,000
8,00,000
Less: Sum received from the insurance company - ` 11 Lakh Maximum 8,00,000
WDV for Depreciation NIL
Note : In case (i) and (ii), both, i.e. whether the block is fully destroyed or partly destroyed by fire, there will ,
be STCG of ` 3,00,000, since the sum received is more than the WDV of the block.
If compensation received is ` 6 lakh:

(i) If the block is fully destroyed: The difference between WDV of ` 8 lakh and insurance money of ` 6
lakh will be short-term capital loss.
(ii) If the block is partly destroyed: There will be no capital gains. Since the block and WDV both exist
therefore, the balance WDV of ` 2 lakh will be eligible for depreciation.
15.
First block: Plant (rate of depreciation : 15%) `
Depreciated value of the block on April 1, 2019 (` 3,00,000 + ` 2,00,000 + ` 5,00,000) 10,00,000
Add : Cost of plant (falling in this block) acquired during the previous year 2019-20 (i.e., Plant D 4,28,000
: ` 4,08,000 + Plant E : ` 20,000)
14,28,000
Less : Sale consideration of plants A and C sold curing the previous year 2019 -20 (i.e., ` 14,28,000
6,00,000 +12,50,000 ; subject to a maximum of ` 14,28,000)
Written down value Nil

Depreciation on first block Nil
Capital gain on sale of plants A and C

Sale consideration 18,50,000
Less : Cost of acquisition `
• Depreciated value of the block on April 1, 2019 10,00,000
• Cost of assets falling in the block acquired during the previous year 4,28,000
• Expenses on transfer 10,000 14,38,000
Short-term capital gain 412,000
Depreciation on other assets will be determined as under :

Second Third
block block
Name of assets Plant Building
Rate of depreciation 40% 10%
` `
Nil Nil
Add : Cost of assets purchased during 2019-20 15,00,000 2,00,000
Less : Sale consideration of assets transferred during the year — —
Written down value 15,00,000 2,00,000
Depreciation (*50% of 40% of ` 15,00,000, as Plant F is purchased during the
previous year and put to use for less than 180 days] 3,00,000 20,000

FINAL DT SATC 21B.8
16.
(i) Compensation towards loss of stock: Any compensation received from the insurance company
towards loss/damage to stock in trade is to be construed as a trading receipt. Hence, ` 4,80,000 received
as insurance claim for loss of stock has to be assessed under the head “Profit and gains of business or
profession”.
Note - The assessee can claim the value of stock destroyed by fire as revenue loss, eligible for deduction
while computing income under the head “Profits and gains of business or profession”.
(ii) Compensation towards damage to machinery: The question does not mention whether the salvaged
machinery is taken over by the Insurance company or whether there was any replacement of machinery
during the year. Assuming that the salvaged machinery is taken over by the Insurance company, and
there was no fresh addition of machinery during the year, the block of machinery will cease to exist.
Therefore, ` 4,80,000 being the excess of written down value (i.e ` 10,80,000) over the insurance
compensation (i.e. ` 6,00,000) will be assessable as a short-term capital loss.
Note – If new machinery is purchased in the next year, it will constitute the new block of machinery, on
which depreciation can be claimed for that year.
(iii) Compensation towards loss of gold chain and diamond ring: Gold chain and diamond ring are capital
assets as envisaged by section 2(14). They are not “personal effects”, which alone are to be excluded. As
per section 45(1A), if any profit or gain arises in a previous year owing to receipt of insurance claim, the
same shall be chargeable to tax as capital gains. The capital gains has to be computed by reducing the
indexed cost of acquisition of jewellery from the insurance compensation of ` 2,30,000.

FINAL DT SATC 22.1
INCOME UNDER THE HEAD “PGBP”

Section 28 – CHARGING SECTION
1. Income arising to any person by way of profits and gains from the business or profession carried on by him at
any time during the previous year.
2. ANY COMPENSATION OR OTHER PAYMENT FOR:

a) Termination or modification of any agreement entered for managing the affairs of an Indian
company or the affairs in India of any other company.
b) Termination or modification of any agreement holding an agency in India relating to the business of
any other person.
c) Vesting of the management of any property or business with the Government under any law.
d) Termination or the modification of the terms and conditions, of any contract relating to his
business
3. INCOME OF TRADE OR PROFESSIONAL ASSOCIATION:

Income derived by any trade, professional or similar associations from specific services rendered by them
to their members.
4. EXPORT INCENTIVES: In case of an assessee engaged in the business of export/import:

Profits on sale of a Import Entitlement licence granted
Cash assistance received or receivable by any person against exports under any scheme of the
Government of India.
Any Customs duty or Excise duty drawback repaid or repayable against export.
5. GIFTS OR PERQUISITES FROM CLIENTS:

The value of any benefit or perquisite whether convertible into money or not, arising from business or the
exercise of any profession
6. PAYMENTS RECEIVED BY A PARTNER FROM A PARTNERSHIP FIRM:

Any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by a
partner of a firm from such firm.
7. SUMS RECEIVED UNDER A KEYMAN INSURANCE POLICY:

Any sum received by employer under a Keyman insurance policy including the sum allocated by way of bonus
on such policy.
8. Conversion of Stock in Trade into Capital Asset: [Also refer CG Notes]

Fair Market Value of inventory as on the date on which it is converted into, or treated as, a capital asset
determined in the prescribed manner;
9. Any sum received or receivable, in cash or kind, on account of any capital asset (other than land or
goodwill or financial instrument) being demolished, destroyed, discarded or transferred if the whole of the
expenditure on such capital asset has been allowed as a deduction under Section 35AD.
10. Any sum whether received or receivable, in cash or kind, under an agreement
a) for not carrying out any activity in relation to any Business or Profession; or
b) not to share 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.

FINAL DT SATC 22.2
However, the above sub-clause (a) shall not apply to any sum receivable 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”;
COMPUTATION OF INCOME FROM BUSINESS [SECTION 29]

Income under the head PGBP shall be computed in accordance with provisions contained in Sec. 30 to 43D
Net profit as per Profit & Loss Account xxx
Add: Non-allowable expenses debited to Profit & Loss Account (P&L) xxx
Add: Expenses allowable under any other head or Capital Exp./Personal Exp. xxx
Add: Income chargeable under this head but not credited to P/L xxx
Less: Expenses allowable under this head but not debited to P&L xxx
Less: Income credited to P & L A/c but not chargeable under this head xxx
Profits & Gains from Business or Profession xxx
Expenditures allowed on Cash Basis [SECTION 43B]

Deduction in respect of following expenses are allowed only if payment is made on or before the due date for
furnishing return of income u/s 139(1) of the previous year in which such liability is incurred [i.e. before
st th th
31 July/ 30 Sep/ 30 Nov]:
a) Any sum payable by way of Tax, Duty, Cess or Fee, by whatever name called, under any law for the
time being in force.
b) Interest on any loan or advances from a scheduled bank or a cooperative bank on actual payment
basis.
c) Any sum payable by the assessee as interest on any loan or borrowing from
- any public financial institution or
- a State Financial Corporation or
- a State Industrial Investment Corporation.
d) Any sum payable by the assessee as interest on any loan or borrowing from a deposit
taking non-banking financial company or systemically important non-deposit taking non-
banking financial company, in accordance with the terms and conditions of the
agreement governing such loan or borrowing,
e) Bonus or Commission (for services rendered) payable to employees.
f) Leave encashment payable to employees.
g) Any sum payable by the assessee as an employer by way of contribution to any Provident Fund or
Superannuation Fund or Gratuity Fund or any other fund for the welfare of employees.
h) Any sum payable to the Indian Railways for the use of railway assets
Note:
1. If the payment is not made before the date mentioned above, then no allowance shall be allowed in respect
of the outstanding liability. Deduction can, however, be claimed in the year of payment.
2. Section 43B is applicable only if the assessee is following mercantile system of accounting.
3. The above provisions are applicable on Employers contribution to PF, ESI etc and not employee
contributions recovered by the employer which is being paid subsequently as per respective Acts.
4. Cooperative banks excludes Primary Agriculture Credit Society or a primary co-operative agriculture
& rural development Bank
5. No deduction for interest converted into loan/advance: Any interest falling under (b), (c) & (d), which has
been converted into a loan or borrowing or advance, shall not be regarded as “actually paid” and shall
not be allowed as deductions.

FINAL DT SATC 22.3
Example:
Debit side of the profit and loss account of Mayank Ltd. shows the following expenses, which have been
due but are outstanding as on 31-3-20
Payment outstanding on 31-3-20 First payment Second payment
Particulars Amount Date Amount Date Amount
paid paid
Leave encashment expenses 65000 1-6-20 15000 25-12-20 50000
Excise duty payable 14000 10-6-20 3000 13-12-20 11000
Sales tax payable 48000 5-09-20 48000 - -
Bonus payable to employees 87000 2-5-20 30000 30-09-20 57000
Interest payable to LIC loan 75000 13-5-20 50000 10-01-21 25000
Due date for filing of return of income is 30-09-2020
Find out the previous years in which the aforesaid payments are deductible. The company maintains
books of accounts on the basis of mercantile system of accounting.
Solution
As per provision of sec. 43B following payment if made before due date of filing of return (i.e. 30/9/2020) then only
it shall be allowed.
Particulars Amount paid Deduction allowed in the previous year
2019-20 2020-21
Leave encashment expense 65,000 15,000 50,000
Excise duty payable 14,000 3,000 11,000
Sales tax payable 48,000 48,000 -
Bonus payable to employees 87,000 87,000 -
Interest payable to LIC loan 75,000 50,000 25,000
Example:
An analysis of the profit and Loss Account and the Balance Sheet of Kapil as at March 31, 2020 reveals
that the following expenses which were due, were though debited to Profit and Loss account, but have
been paid after 31-3-2020:
- Sales tax ` 50000 (` 20000 paid on 14-09-2020; and ` 30000 paid on 15-12-2020)
- Excise duty ` 120000 (` 40000 paid on 14-09-2020; ` 40000 paid on 15-12-2020; and ` 40000 paid on
24-12-2020)
- Bonus to staff ` 60000 (` 58000 paid on 10-09-2020; and ` 2000 paid on 15-12-2020)
- Employers contribution to provident fund ` 55,000 (` 25000 paid on 15-7-2020; ` 10000 paid on 30-09-
2020; and ` 20000 paid on 15-12-2020)
The due date for filing of return is 30-09-2020. In which previous years can the above payments be
claimed as a deduction?
Solution
As per Sec. 43B certain expenditure (like sales tax, excise duty, bonus to staff, etc.) are not allowed if payment is
not made before the due date of furnishing return of income. Deduction can, however, be claimed in the year of
payment.
Statement showing previous year in which deduction can be claimed.
Particulars Amount Previous year in which
deduction can be claimed
Sales tax
• Paid on 14-09-2020 20000 2019-20
• Paid on 15-12-2020 30000 2020-21
Excise duty
• Paid on 14-09-2020 40000 2019-20
• Paid on 15-12-2020 40000 2020-21
• Paid on 24-12-2020 40000 2020-21
Bonus to staff
• Paid on 10-09-2020 58000 2019-20
• Paid on 15-12-2020 2000 2020-21
Employers contribution to provident fund
• Paid on 15-07-2020 25000 2019-20
• Paid on 30-09-2020 10000 2019-20
• Paid on 15-12-2020 20000 2020-21

FINAL DT SATC 22.4
Cash payments in excess of ` 10,000 / ` 35,000 – Section 40A(3) &
40A(3A) read with Rule 6DD
1) Where the assessee incurs any expenditure, in respect of which payment or aggregate of payments made
to a person in a day otherwise than by an account payee cheque or by an account payee bank draft or
use of electronic system through bank account or through such other prescribed electronic modes
exceeds ` 10,000, such expenditure [100%] shall not be allowed as a deduction. [Section 40A(3)]
2) Further, In case of an assessee following mercantile system of accounting, if an expenditure has been
allowed as deduction in any previous year on due basis, and payment has been made in a subsequent
year otherwise than by account payee cheque or account payee bank draft or use of electronic system
through bank account or through such other prescribed electronic modes, then the payment so
made shall be deemed to be the income of the subsequent year if such payment or aggregate of
payments made to a person in a day exceeds ` 10,000.Section 40A(3A)
3) This limit of ` 10,000 has been raised to ` 35,000 in case of payment made to transport operators for
plying, hiring or leasing goods carriages.
4) Section 40A(3) & Section 40A(3A) is applicable only for computing income under PGBP and IOS.
5) The provisions regarding payments by account payee cheque or draft apply equally to payments
made for goods purchased on credit.
6) If aggregate payment in a day (otherwise than by an account payee cheque/draft) to the same person in
respect of an expenditure exceeds ` 10,000, it will be disallowed under section 40A(3), even if none of each
payment in the day exceeds ` 10,000.
7) If an assessee makes payment of two different bills (none of them exceeds ` 10,000) at the same time in
cash or by bearer cheque, section 40A(3) is not applicable even if the aggregate payment is more than `
10,000. In other words unless the amount of the bill and the amount of payment exceed ` 10,000,
section 40A(3) is not applicable.
8) Where the assessee makes payment over ` 10,000 at a time, partly by an account payee cheque and partly
in cash or bearer cheque or crossed cheque to some parties but the payment in cash (or by bearer
cheque or crossed cheque) alone at one time does not exceed ` 10,000, section 40A(3) is not attracted.
9) Provision of section 40A(3) does not apply in respect of an expenditure which is not to be claimed as
deduction u/s 30 to 37.
10) Rule 6DD: Cases where above restriction of payment mode is not applicable:
a) where the payment is made to RBI, SBI and any banking company, any co-operative bank, Land
mortgage bank, LIC, etc.
b) where the payment is made to the Government in legal tender;
c) where the payment is made by
- a credit card / a debit card.
- a bill of exchange made payable only to a bank;
- the use of electronic clearing system through a bank account;
- any letter of credit arrangements through a bank;
- a mail or telegraphic transfer through a bank;
- a book adjustment from any account in a bank to any other account in that or any other bank;
d) where the payment is made for the purchase of agricultural or forest produce;the produce of animal
husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; fish or fish products;
orthe products of horticulture or apiculture, to the cultivator, grower or producer of such articles,
produce or products;
e) where the payment is made, for the purchase of the products manufactured or processed without the
aid of power in a cottage industry, to the producer of such products;

FINAL DT SATC 22.5
f) where the payment is made in a village or town, which on the date of such payment is not served by
any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation,
in any such village or town;
g) where any payment is made to an employee of the assessee or legal heirs, on or in connection with the
retirement, retrenchment, resignation, discharge or death, on account of gratuity, retrenchment
compensation or similar terminal benefit and the aggregate of such sums payable to the employee
or his heir does not exceed ` 50,000;
h) where the payment is made by an assessee by way of salary to his employee after deducting TDS and
when such employee -
- is temporarily posted for a continuous period of fifteen days or more in a place other than his
normal place of duty or on a ship; and
- does not maintain any account in any bank at such place or ship;
i) where the payment was required to be made on a day on which the banks were closed either on
account of holiday or strike;
j) where the payment is made by any person to his agent who is required to make payment in cash for
goods or services on behalf of such person;
k) where the payment is made by an authorised dealer or a money changer against purchase of foreign
currency or travellers cheques in the normal course of his business.
l) where the payment is made by way of adjustment against the amount of any liability incurred by
the payee for any goods supplied or services rendered by the assessee to such payee;
Question: Determine the amount of disallowances in the cases given below –
1. Generally X pays salary to his employees by account payee cheques. Salary of December 2019 is,
however, paid to three employees A, B and C by bearer cheques (payment being ` 6,000, ` 10,000
and ` 10,500 respectively).
2. X Ltd. purchases goods on credit from Y Ltd. on May 6, 2019 for ` 86,000 which is paid as follows –
a) ` 5,000 in cash on May 11, 2019;
b) ` 40,000 by a bearer cheque on May 31, 2019;
c) ` 41,000 by an account payee cheque on May 16, 2019.
3. Z Ltd. purchases goods on credit from A Ltd. on May 10, 2019 for ` 6,000 and on May 30, 2019 for `
5,000. The total payment of ` 11,000 is made by a crossed cheque on June 1, 2019.
4. A Ltd. purchases goods on credit from a relative of a director on June 20, 2019 for ` 50,000 (market
value: ` 42,000). The amount is paid in cash on June 25, 2019.
5. B Ltd. purchases raw material on credit from A who holds 20% equity share capital in B Ltd. (the
amount of bill being ` 36,000, market price being ` 9,000). It is paid in cash on July 26, 2019.
Solution:
1. ` 10,500, being 100% of salary paid by bearer cheque to C, will be disallowed.
2. Nothing will be disallowed out of the payment of ` 5,000 in cash on May 11, 2019, as the payment does not
exceed ` 10,000. 100% of ` 40,000 will be disallowed. Nothing will be disallowed out of ` 41,000.
3. Though the amount of payment exceeds ` 10,000, nothing shall be disallowed. To attract disallowances,
the amount of bill as well as the amount of payment should be more than ` 10,000.
4. Out of the payment of ` 50,000, ` 8,000 (being the excess payment to a relative) shall be disallowed u/s
40A(2). As the payment is made in cash and the remaining amount exceeds ` 10,000, 100% of the balance
(i.e., ` 42,000) shall be disallowed u/s 40A(3).
5. Out of the payment of ` 36,000, ` 27,000 (being the excess payment to a person holding a substantial
interest) shall be disallowed u/s 40A(2). The remaining amount (i.e., ` 9,000) does not exceed ` 10,000.
Nothing shall be disallowed u/s 40A(3) even if the payment is made in cash.

FINAL DT SATC 22.6
ADMISSABLE DEDUCTIONS
RENT, RATES, REPAIRS AND INSURANCE FOR BUILDINGS [Section 30]
Business Use: Section 30 allows deduction in respect of the rent, rates, taxes, repairs and insurance of
buildings used by the assessee for the purpose of his business or profession.
However, where the premises are used partly for business and partly for other purposes, only a
proportionate part of the expenses attributable to that part of the premises used for purposes of business will
be allowed as a deduction.
Notional Rent: Rent paid to proprietor is disallowed but rent paid by firm to its partner for using his
premises is an allowed expenditure.
Current Repairs Vs Capital Repair: This section allows deductions in respect of expenses incurred on
account of current repairs [Revenue in Nature] to building in case where (i) the assessee is the owner of
the building or (ii) the assessee is a tenant who has undertaken to bear the cost of repairs to the premises.
But if capital Expenditure is incurred on repair:
By the owner: then, it shall be added to the cost of building & Depn. shall be allowed u/s. 32(1)(ii)
By the tenant: then, the depreciation shall be allowed as per Expln. 1 to Section 32(1).
Municipal Taxes: By virtue of section 43B, rates and taxes are deductible on cash basis.
REPAIRS AND INSURANCE OF MACHINERY, PLANT AND FURNITURE [Section 31]
Business Use of Asset: Section 31 allows deduction in respect of the expenses on current repairs (not
being capital expenditure) and insurance of machinery, plant and furniture used for the purposes of
business or profession carried on by the assessee.
Capital Expenditure incurred on repair shall be added to the cost of plant & machinery or furniture and
depreciation shall be allowed under Section 32.
Rent payable for use of above assets is not covered by section 31, but shall be allowed as deduction
Replacement of old frames for efficient functioning of machines without breakdowns, is allowable as
deduction u/s 37 and not u/s 31 because it is not current repairs, but accumulated repairs
ACTUAL COST [SECTION 43(1)]

The expression “actual cost” means the actual cost of the asset to the assessee as reduced by that portion of the
cost thereof, if any, as has been met directly or indirectly by any other person or authority.
PURCHASE PRICE xxx

Add: Interest on loan borrowed for period up to the date of put to use [Sec. 36(1)(iii)] xxx
Add: Expenses incurred for freight/insurance/loading/Unloading xxx
Add: Trial Run Expenses, if any xxx
Less: Amount met by any authority or other person by way of subsidy etc.
Section 43(1) xxx
Less: Adjustment as per explanation 1 to 13 to Sec. 43(1), if applicable xxx
ACTUAL COST TO BE ADDED IN THE RELEVANT BLOCK OF ASSETS XXX
Where an assessee incurs any expenditure for acquisition of any asset in respect which a payment (or
aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft/use
of electronic clearing system through a bank account or through such other prescribed electronic
mode, exceeds ` 10,000, such payment shall be ignored for the purposes of determination of “Actual
Cost” of such asset.
Consequently, Depreciation/Additional Depreciation under Section 32 and Deduction u/s 32AD pertaining
to such payment is not available. Moreover, such expenditure will not be considered for the purpose of
Section 50.

FINAL DT SATC 22.7
ACTUAL COST IN CERTAIN SPECIAL SITUATIONS [EXPLANATIONS TO
SECTION 43(1)]
S.No Mode of Acquisition Actual Cost
(1) Asset acquired by way of gift or inheritance. WDV to the previous owner.
(2) Building previously used for private purposes, now Actual cost of building less notional
brought into use for the business of the assessee. depreciation upto year of bringing it to
[Note: Rate of depreciation applicable in previous business use.
year of bringing the asset into business use is
applied.]
Example: Compute the amount of depreciation allowable in the following cases - Dr. Jolly purchased a
house property on 1-12-2017 for ` 10,00,000. Till 1-6-2019, the same was self -occupied as a residence. On
this date, the building was brought into use for his medical profession. Rate of depreciation on buildings
at the time of purchase of house property was 15 %.
Solution : Explanation 5 to section 43(1) provides mode of computation of actual cost when a building initially
used for personal purposes is brought into business use. The rate of depreciation to be applied is the rate in force
in the year in which building is brought into business use i.e. 10%.
Computation of the amount of depreciation allowable (amounts in `)

WDV as on 31.3.2018 10,00,000
Less: Depreciation @ (10% x 50%) of ` 10,00,000 (use for less than 180 days) 50,000
WDV as on 1.04.2018 9,50,000
Less: Depreciation (10% of ` 9,50,000) 95,000
WDV as on 1.4.2019 (Actual cost of building) 855,000
Depreciation for the current year (10% of ` 8,55,000) . 85,500
Example: A Car purchased by S on 10.08.2015 for ` 3,25,000 for personal use is brought into the business
of the assessee on 1.12.2019, when its market value is ` 1,50,000. Compute the actual cost of the car and
the amount of depreciation for the AY 2020-21 assuming the rate of depreciation to be 15%.
Answer: Computation of actual cost and depreciation [for the AY 2020-21]
Actual cost as on 1.12.2019 (in the business)

(see note) 3,25,000
Less: Depreciation
[as the asset is acquired and put to use in the business for less than
180 days, 50% of the normal depreciation is allowable]
50% x [15%x ` 3,25,000] 24,375
WDV as on 31.3.2020 (after Depreciation) 3,00,625
Note: In this case, car was purchased for personal use on 10.8.2015 for ` 3,25,000 and subsequently brought
into the business of the assessee on 1.12.2019. The 'actual cost' of car is ` 3,25,000.
TREATMENT OF EXCHANGE RATE FLUCTUATIONS IN CASE OF

PURCHASE OF AN ASSET FROM OUTSIDE INDIA [SECTION 43A]
The assessee has acquired any capital asset from abroad on credit or on deferred payment or from money
representing in foreign currency
subsequently, after the date of acquisition, there is a change in increase or reduction in the liability at
the time of making the payment towards the cost of the asset or repayment of money borrowed in any
foreign currency along with interest due to foreign exchange rate fluctuation
Such increase or reduction shall be added to or reduced from the cost of the assets.

FINAL DT SATC 22.8
EXPENDITURE ON SCIENTIFIC RESEARCH [Section 35]
Sec 35 Expenditure incurred Deduction Conditions / Remarks
(1)(i) 1. Revenue expenditure on scientific Amount of Expenditure incurred within 3 years
research incurred after commencement expenditure immediately preceding the date of
of business. incurred commencement of business is
2. Subject to conditions, Expenditure on [100%] allowed as deduction in the year of
scientific research before commencement of business to the
commencement of business by way of extent certified by the prescribed
a. Purchase of materials; or authority.
b. Salary (except perquisite) of
employees
(1)(ii) Sum paid to a Research Association, 1.50 × Sum Such association, university college
University, College or Institution whose object paid [150%] or institution must be approved and
is undertaking of scientific research notified by the CG.
150% from AY 18-19 to AY 20-21
100% from AY 21-22 Deduction is allowed even if
research is not related to business.
(1) (iia) Sum paid to a company to be used by it for 100% x Sum Such company is registered in India, is
scientific research paid approved by prescribed authority and
has the main object of 'scientific
research and development'
(1)(iii) Sum paid for Social Science or Statistical 100% x Sum Such association, university college
Research to a Research Association which paid or institution must be approved and
has as its object the undertaking of research notified by the CG.
in social science or statistical science or to a Deduction is allowed even if
University, College or Institution research is not related to business.
(2) Capital expenditure (except expenditure Amount of Pre-commencement expenditure is

on the purchase of land) on scientific expenditure allowed in the year of the
research related to business. incurred commencement of the business.
No depreciation is allowable.
Capital expenditure (except expenditure
on the purchase of land) incurred within
3 years immediately preceding the
date of commencement of business.
(2AA) Sum paid to - 1.50 x Sum Sum is paid with a specific

a. a National Laboratory; or paid [150%] direction that it shall be used for
b. a University; or scientific research undertaken
under a programme approved in
c. an Indian Institute of technology; or
this behalf by prescribed authority.
d. a specified person
150% from AY 18-19 to AY 20-21

100% from AY 21-22

FINAL DT SATC 22.9
(2AB) Expenditure (not being in nature of cost of 1.50 x expen- Such Research and development
any land or buildings) incurred on scientific diture facility is approved by prescribed
research on in-house research and incurred authority.
development facility incurred by a company [150%] Such assessee should enter into an
engaged in the business of bio- agreement with prescribed authority
technology, or, any business of for co-operation in such Research
manufacture or production of any article and development facility and audit
or thing, not being an article or thing of accounts maintained for that
specified in the list of the Eleventh facility.
Schedule No deduction shall be allowed in
[Cost of building shall be allowed u/s 35(1)(iv) respect of such sum under any
@100%] other provision of the Act.
No deduction shall be allowed in
150% from AY 18-19 to AY 20-21 this sub-section to a company app-
100% from AY 21-22 roved u/s 35(1)(iia).
Other points:
1. Deduction not to be denied even if approval withdrawn subsequently : The deduction allowable under
this section shall not be denied merely on the ground that subsequent to the payment of such sum by the
assessee-
(a) the approval granted to association, university, college, other institution referred to u/s 35(1)(ii)/ (iii), or,
the Laboratory or specified person referred to u/s 35(2AA) has been withdrawn; or
(b) the approval granted to the programme undertaken by the National Laboratory, University, Indian
Institute of Technology or specified person, has been withdrawn.
2. Actual use for scientific research during the previous year - not necessary:
Deduction under section 35(1)(iv) is available only if the asset was acquired during the previous year for the
purposes of scientific research. There is no further requirement that asset must be put to use in the relevant
previous year.
3. In case of sale of assets used for research purpose & on which deduction is allowed u/s 35, money
payable on sale will be considered as deemed income u/s 41(3) u/h PGBP to the extent deduction is
allowed. Amount in excess of Cost of such asset will be liable for Capital Gain.
4. SET OFF OF UNABSORBED CAPITAL EXPENDITURE:

The treatment for Set off and carry forward of unabsorbed scientific research capital expenditure shall be
done in the same manner as that of unabsorbed depreciation.
Question: K Bio-medicals Ltd. is engaged in the business of manufacture of bio-medical items. The
following expenses were incurred in respect of activities connected with scientific research:
Year ended Item Amount (` )

31.03.2017 Land 12,00,000
(Incurred after 01.09.2016) Building 28,00,000
31.03.2018 Plant & Machinery 7,00,000
31.03.2019 Raw materials (allowed by prescribed authority) 3,20,000
31.03.2020 Raw materials and salaries (After commencement) 2,80,000
The business was commenced on 01.09.2019. In view of availability of better model plant and machinery,
the existing plant and machinery were sold for ` 10,00,000 on 01.03.2020.
Discuss the implication of the above for the AY 2020-21 alongwith brief computation of deduction
permissible under section 35 at 150% on eligible items.

FINAL DT SATC 22.10
SOLUTION: `
Expenditure allowed
Land Not Allowed
Building 28,00,000
Plant and machinery 7,00,000
Raw materials 3,20,000
Raw materials and salaries (2,80,000 × 1.5 times) 4,20,000
[Pre-commencement expenditure is not eligible for weighted deduction of 150%]
On sale of existing P&M, ` 7,00,000 will be deemed to be business profits under section 41(3)
Short term capital gains on sale of plant and machinery
Full value of consideration 10,00,000
Less: cost of acquisition 7,00,000
Short term capital gains 3,00,000
Question: A Ltd. furnishes the following particulars for the PY 2019-20. Compute the deduction allowable
under section 35 for AY 2020-21, while computing its income under the head "PGBP":
Particulars `
1. Amount paid to Indian Institute of Science, Bangalore, for scientific research 2,00,000
2. Amount paid to IlT, Delhi for an approved scientific research programme 3,00,000
3. Amount paid to X Ltd., a company registered in India which has as its main object 6,00,000
scientific research and development, as is approved by the prescribed authority
4. Expenditure incurred on in-house research and development facility as approved
by the prescribed authority
(a) Revenue expenditure on scientific research 4,00,000
(b) Capital expenditure (including cost of acquisition of land ` 5,00,000) on scientific 8,00,000
research
Solution: Computation of deduction under section 35 for the AY 2020-21

Particulars ` Section % of weighted Amount of
deduction deduction (`
`)
Payment for scientific research
Indian Institute of Science 2,00,000 35(1)(ii) 150% 3,00,000
IIT, Delhi 3,00,000 35(2AA) 150% 4,50,000
X Ltd. 6,00,000 35(1)(iia) 100% 6,00,000
Expenditure incurred on in- house
research and development facility
Revenue expenditure 4,00,000 35(2AB) 150% 6,00,000
Capital expenditure 3,00,000 35(2AB) 150% 4,50,000
(excluding cost of acquisition
of land ` 5,00,000)
Deduction allowable u/s 35 24,00,000

FINAL DT SATC 22.11
Deduction in respect of donations for scientific research and rural
development [Section 80GGA]
1) Any assessee not having income u/h “PGBP”.
2) No Deduction for cash donations/contributions exceeding ` 10,000:
No deduction shall be allowed under this section in respect of donation of any sum exceeding ` 10,000 unless
such sum is paid by any mode other than cash.
3) 100% deduction of contribution made to:
a) Research association/University/College/Other Institution approved u/s 35(1)(ii) for scientific
research;
b) Research association/University/College/Other Institution approved u/s 35(1)(iii) for research in
social science or statistical research
c) Public Sector Company/Local Authority/Association or institution (approved by the National
Committee) for carrying out any eligible project or scheme approved under section 35AC
d) Association/Institution which undertaking any programme of rural development u/s 35CCA or
which has undertaking training of persons for implementation of such programmes.
e) National Rural Development Fund or National Urban Poverty Eradication Fund (NUPEF) set up and
notified under section 35CCA.

FINAL DT SATC 22.12
Section 35AD - DEDUCTION IN RESPECT OF EXPENDITURE ON SPECIFIED
BUSINESS
A. Specified business – Deduction u/s 35AD is available only in the case of a “specified business”:
W.e.f 01/04/2009
(1) Setting up and operating a cold chain facility
(2) setting up and operating a warehousing facility for storage of agriculture produce;
(3) laying and operating a cross-country natural gas (w.e.f.01/04/2007) or crude or petroleum oil pipeline
network for distribution, including storage facilities being an integral part of such network (only
Company)
W.e.f 01/04/2010
(4) building and operating, anywhere in India, a hotel of two-star or above category;
[Owner of Hotel is eligible for deduction even if owner transfers the operation of the hotel to
another person]
(5) building and operating, anywhere in India, a hospital with atleast 100 beds for patients;
(6) developing and building a housing project under a scheme for slum redevelopment or rehabilitation;
W.e.f 01/04/2011
(7) developing and building a housing project under a scheme for affordable housing
(8) Production of fertilizer in India
W.e.f 01/04/2012
(9) Setting up and operating an inland container depot or a container freight station notified or approved
under the Customs Act, 1962
(10) Bee-keeping and production and production of honey and beeswax; and
(11) Setting up and operating a warehousing facility for storage of sugar
W.e.f 01/04/2014
(12) Laying & Operating a slurry pipeline for the transportation of iron ore
(13) Setting up and operating a semiconductor wafer fabrication manufacturing unit, if notified
W.e.f 01/04/2017 [AY 18-19]
(14) Developing or Operating & Maintaining or Developing, Operating & Maintaining any Infrastructure
facility (Port, Airport, Rail system, Road, Highway Projects, Water Supply, Sewerage system,
Solid waste management system etc) [Approved company assessee or Govt bodies]
B. Specified business should be new business:
(1) The specified business should not be set up by splitting up, or the reconstruction, of a business already in
existence.
(2) It should not be set up by the transfer of old plant and machinery.
(a) 20% old machinery is permitted:

If the value of the transferred assets does not exceed 20% of the total value of the machinery or plant
used in the business, this condition is deemed to have been satisfied.
(b) Second-hand imported machinery is treated as new:

Any machinery or plant which was used outside India by any person (other than the assessee) shall
not be regarded as machinery or plant previously used for any purpose, if the following conditions
are fulfilled-
(i) Such machinery or plant was never used in India.
(ii) Such machinery or plant is imported into India from any other Country.
(iii) No deduction on account of depreciation in respect of such machinery or plant has been allowed
to any assessee previously.
FINAL DT SATC 22.13
C. Audit of the books of account – Books of account of the assessee should be audited.
D. AMOUNT OF DEDUCTION:
1. 100% of capital expenditure is deductible.
2. Any expenditure in respect which payment (or aggregate of payments made to a person in a
day), otherwise than by an account payee cheque/draft/use of electronic clearing system through
a bank account or through such other prescribed electronic mode, exceeds ` 10,000, no
deduction shall be allowed in respect of such payment under section 35AD.
3. Expenditure incurred on the acquisition of any land or goodwill or financial instrument is not
eligible for any deduction u/s 35AD.
4. Expenditure incurred prior to the commencement of operation, wholly and exclusively, for the purpose of
any specified business, shall be allowed as deduction during the previous year in which the assessee
commences the operation of his specified business, if the amount is capitalized in the books of
account of the assessee on the date of commencement of operation.
CONSEQUENCES OF CLAIMING DEDUCTION U/S 35AD :

(i) If deduction is claimed and allowed u/s 35AD, the assessee shall not be allowed any deduction in respect
of the specified business under Section 10AA or under the provisions of Chapter VIA [u/s 80IA to
80RRB] for the same or any other assessment year.
(ii) Any loss computed in respect of the specified business u/s 35AD shall not to be set off except
against profits and gains, if any, of other specified business u/s 73A (whether or not eligible for deduction
u/s 35AD). To the extent the loss is unabsorbed, the same will be carried forward for set off against
profits and gains from any specified business in the following assessment year and so on (no time-limit
for carry forward such loss).
(iii) Any sum received or receivable on account of any capital asset, in respect of which deduction has
been allowed u/s 35AD, being demolished, destroyed, discarded, or transferred shall be treated as
income of the assessee and chargeable to income tax under the head “Profits and gains of business or
profession”.
(iv) Section 35AD(7A) provides that any asset in respect of which a deduction is claimed and allowed under
section 35AD shall be used only for the specified business for a period of 8 years beginning with the
previous year in which such asset is acquired or constructed.
(v) Sub-section (7B) has been inserted to provide that if such asset is used for any purpose other than the
specified business, the total amount of deduction so claimed and allowed in any previous year in respect
of such asset, as reduced by the amount of depreciation allowable in accordance with the provisions
of section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be income
of the assessee chargeable under the head “Profits and gains of business or profession” of the previous
year in which the asset is so used.
(vi) However, the deeming provision under sub-section (7B) shall not be applicable to a Sick
company.

FINAL DT SATC 22.14
Example:
ABC Ltd. is a company having two units – Unit A carries on specified business of setting up and
operating a warehousing facility for storage of sugar; Unit B carries on non-specified business of
operating a warehousing facility for storage of edible oil. Unit A commenced operations on 1.4.2018 and it
claimed deduction of ` 100 lacs incurred on purchase of two buildings for ` 50 lacs each (for operating a
warehousing facility for storage of sugar) under section 35AD for A.Y. 2019-20. However, in February,
2020, Unit A transferred one of its buildings to Unit B. Examine the tax implications of such transfer in the
hands of ABC Ltd.
Solution:
Since the capital asset, in respect of which deduction of ` 50 lacs was claimed under section 35AD, has been
transferred by Unit A carrying on specified business to Unit B carrying on non-specified business in the P.Y. 2019-
20, the deeming provision under section 35AD(7B) is attracted during the A.Y. 2020-21.
Particulars `
Deduction allowed under section 35AD for A.Y. 2019-20 50,00,000
Less: Depreciation allowable u/s 32 for A.Y. 2019-20 [10% of ` 50 lacs] 5,00,000
Deemed income under section 35AD(7B) 45,00,000
# Actual Cost of the Building for Depreciation purpose shall be 45 Lakhs now in AY 20-21
Example: On April 1, 2019, X Ltd. commences the operation of a warehousing facility in Andhra Pradesh
for storage of Sugar. The following information is available from the records of company –
Expenses incurred prior to April 1, 2019 `
Purchase of land for warehouse 50,00,000
Construction cost of warehouse 8,00,000
Purchase of know-how for warehouse 10,00,000
Salary to staff 78,000
These expenses are capitalized on March 31, 2019.
Expenses incurred during PY 2019-20.
Purchase of old plant and machinery (from domestic market) 2,00,000
Purchase of old plant and machinery (from Germany) 4,00,000
Purchase of new plant and machinery 9,00,000
Purchase of goodwill 3,50,000
Profit and loss account for the year PY 2019-20
` `
Depreciation of building (@ 5%) 3,40,000 Amount collected from persons
Depreciation of machinery (@ 23.333%) 3,50,000 using warehouse 78,00,000
Cost of know-how (amount written off) 10,00,000
Other operating expenses 7,51,000
Donation to a political party 10,000
Net Profit 53,49,000
78,00,000 78,00,000
Out of other operating expenses, a payment of ` 40,000 is made in cash. Other operating expenses are
deductible u/s 37. Find out the taxable income of X Ltd. for the AY 2020-21 on the assumption that X Ltd.
has the following income from other sources – income from the business of commission agency: `
20,15,000 (computed under the provision of the Income-tax Act) and dividend from a foreign company
(Holding – 15%): ` 50,000
Solution: Amount deductible u/s 35AD.

Expenditure incurred prior to the commencement of operation of operation (to the extent these are
capitalized)
Purchase of land (not qualified for deduction) Nil
Purchase of know-how 10,00,000
Salary to staff 78,000
Expenditure incurred during the previous year

Construction cost or warehouse 60,00,000
Purchase of machinery (` 2,00,000 + ` 4,00,000 + ` 9,00,000) 15,00,000
Amount deductible u/s 35AD 93,78,000
FINAL DT SATC 22.15
Computation of income from warehouse
Net profit as per profit and loss account 53,49,000
Add: Depreciation of building (not deductible as cost of building is eligible for deduction u/s 35AD) 3,40,000
Add: Depreciation of machinery (not deductible as cost of machinery is qualified for deduction u/s 35AD) 3,50,000
Add: Cost of Know-how (not deductible as deduction is available u/s 35AD) 10,00,000
Add: Amount paid in cash (operating expenses) 40,000
Add: Donation to political party 10,000
Less: Deduction u/s 35AD (-)93,78,000
Loss from warehouse (-)22,89,000
Computation of Income ` `
Commission agency business 20,15,000
Warehouse Business (-)22,89,000
Business income (Set off not permissible) 20,15,000
Income from other sources (dividend from foreign company) 50,000

Gross total income 20,65,000
Less: Deduction u/s 80GGB (donation to a political party) 10,000
Net income 20,55,000

Notes:
1. Second hand imported machinery is taken as new machinery. The business of operating warehouse is
formed by using new machinery of ` 13,00,000 and old machinery of ` 2,00,000. Value of old plant and
machinery does not exceed 20% of the total value of plant & machinery. Other conditions of section
35AD are satisfied X Ltd. is, therefore, eligible for deduction u/s 35AD.
2. Loss from operating warehouse (by virtue section 73A) can be set off only against profit and gains, if any, of
any other business specified u/s 35AD. In this case, X Ltd. does not have any other specified business.
Loss will be carried forward (without any time-limit) for being set off against income from operating
warehouse or any other specified business u/s 35AD.
Example: XYZ Ltd. commenced operations of the business of laying and operating a cross-country
natural gas pipeline network for distribution on 1st April, 2019. The company incurred capital expenditure
of ` 32 lakh during the period January to March, 2019 exclusively for the above business, and capitalized
the same in its books of account as on 1st April, 2019.
Further, during the financial year 2019-20, it incurred capital expenditure of ` 95 lakh (out of which ` 60
lakh was for acquisition of land) exclusively for the above business. Compute the deduction under
section 35AD for the AY 2020-21, assuming that XYZ Ltd. has fulfilled all the conditions specified in
section 35AD.
Answer:
The amount of deduction allowable under section 35AD for AY 2020-21 would be:
Particulars `
Capital expenditure incurred during the PY 2019-20 (excluding the

expenditure incurred on acquisition of land) = ` 95 lakh – ` 60 lakh 35 lakh
Capital expenditure incurred prior to 1.4.2019 (i.e., prior to commencement

of business) and capitalized in the books of account as on 1.4.2019 32 lakh
Total deduction under section 35AD for AY 2020-21 67 lakh

FINAL DT SATC 22.16
Contributions for Rural Development Program[Section 35CCA]
1. This section allows a deduction of the following expenditure incurred by the assessee during the
previous year:
a) Payment to an association or institution, having the objective of undertaking programmes of rural

development. Such payment must be used for carrying out any programme of rural development
approved by the prescribed authority.
b) Payment to an association or institution having as its object the training of persons for implementing
rural development programme.
c) Payment to a National Rural Development Fund set up and notified by the Central Government.
d) Payments made to “National Urban Poverty Eradication Fund” (NUPEF) set up and notified by the
Central Government.
2. Certificate: The deduction shall not be allowed in respect of expenditure by way of payment of any sum to
any association or institution as referred in (a) & (b) above, unless the assessee furnishes a certificate from
such association or institution in the prescribed manner.
3. Deduction for the sum paid shall not be denied if the approval granted to above
programme/association/institution has been withdrawn subsequent to the payment by the assessee.
Weighted deduction for exp. on notified Agriculture Extension Project [Sec 35CCC]
Where an assessee incurs any expenditure (not being expenditure in the nature of cost of any land or
building)on any notified agriculture extension project in accordance with the prescribed guidelines, then, such
assessee can claim a weighted deduction of 150% of such expenditure.
Deduction will be restricted to 100% w.e.f. AY 21-22
Weighted deduction for expenditure on notified Skill Development Project [Sec 35CCD]
Wherea company incurs any expenditure (not being expenditure in the nature of cost of any land or
building) on any notified skill development project, then such company can claim a weighted deduction of
150% of such expenditure.
Deduction will be restricted to 100% w.e.f. AY 21-22
Question:bABC Limited is a company engaged in the business of biotechnology. The net profit of the
company for the financial year ended 31-03-2020 is ` 15,25,890 after debiting the following items:
S. No. Particulars `
(1) Purchase price of the raw material used for the purpose of in-house research and
development 1,80,000
(2) Purchase price of assets used for in-house research and development wrongly debited
to profit and loss account:
(a) Land 5,00,000
(b) Building 3,00,000
(3) Expenditure incurred on notified agricultural extension project 1,50,000
(4) Expenditure on notified skill development project:
(a) Purchase of land 2,00,000
(b) Expenditure on training for skill development 2,50,000
(5) Expenditure incurred on advertisement in the souvenir published by a political party 75,000
Compute the income under the head “Profit and gains of business or profession” for the A.Y. 2020-21 of
ABC Ltd.

FINAL DT SATC 22.17
Solution: Computation of income under the head “Profits and business or profession” for the A.Y. 2020-21:
Particulars ` `
Net profit as per Profit and Loss A/c 15,25,890
Add: Item debited to P&L A/c, but to be disallowed –
Purchase price of land used in in-house research and development [WN-1] 5,00,000
Purchase price of building used in in-house research and development [WN -2] -
Expenditure incurred on notified agricultural extension project [WN -3] 1,50,000
Expenditure incurred on purchase of land for notified skill development project
[WN-4] 2,00,000
Expenditure incurred on training for skill development for notified skill [WN-5] 2,50,000
Expenditure incurred on advertisement in the souvenir publication by a political
party [WN-6] 75,000 11,75,000
27,00,890
Less: Raw material used for in-house research and development [WN-7] 90,000
Expenditure incurred on notified agricultural extension project [WN-3] 2,25,000
Expenditure incurred on training for skill development in a notified skill
development project [WN-5] 3,75,000 6,90,000
Profit and gains from business 20,10,890
Working Notes:
(1) Purchase price of land is not allowed as deduction under section 35(2AB).
(2) Cost of building, being capital expenditure, 100% deduction shall be allowed under section 35(1)(iv) read
with section 35(2).
(3) This expenditure qualifies for 150% deduction under section 35CCC.
(4) Purchase of land does not qualify for deduction under section 35CCD.
(5) This expenditure qualifies for 150% deduction under section 35CCD.
(6) The expenditure incurred on advertisement in the souvenir published by a political party is disallowed as
per section 37(2B) while computing income under the head “Profit and Gains of Business or Profession”
but the same would be allowed as deduction under sections 80GGB from the gross total income of the
company.
(7) The expenditure incurred on raw material qualifies for 150% deduction under section 35(2AB). Since, it is
already debited to P&L A/c, hence balance 50% is allowed.

FINAL DT SATC 22.18
AMORTISATION OF PRELIMINARY EXPENSES [Section 35D]
(a) Section 35D provides for the amortisation of preliminary expenses incurred by Indian companies and other
resident non-corporate taxpayers for the establishment of business concerns or the expansion of the
business of existing concerns.
(b) This section applies in the case of new companies, to expenses incurred before the commencement of the
business or in the case of extension of an existing undertaking, to expenses incurred till the extension is
completed or till the setting up a new unit.
(c) Such preliminary expenditure incurred shall be amortised over a period of 5 successive PYs beginning
with the PY in which the business commences or, the PY in which the extension of the undertaking is
completed or new unit commences production.
(d) Eligible expenses - The following expenditure are eligible for amortisation:
(1) Expenditure in connection with–

(a) the preparation of feasibility report / project report;
(b) conducting market survey or any other business survey;
(c) engineering services relating to the business;
(d) legal charges for drafting any agreement between the assessee and any other person for any
purpose relating to the setting up to conduct the business of assessee.
Provided the above work must be carried out by the assessee himself or by a concern which is
for the time being approved in this behalf by the Board.
(2) Where the assessee is a company, in addition to the above, expenditure incurred:
(a) by way of legal charges for drafting the MOA/AOA of the company and on its printing;
(b) by way of fees for registering the company under the Companies Act;
(c) in connection with the issue, for public subscription, of the shares in or debentures of the company,
being underwriting commission, brokerage and charges for drafting, printing and advertisement of
the prospectus;
(e) Maximum Expenditure allowed to be amortized:
In case of Indian Company Higher of the following:

(a) 5% of the Capital Employed, or
(b) 5% of the Cost of project.
Other Assessee 5% of the cost of the project
(f) ‘Cost of the project’ means: Actual cost of the fixed assets shown in the books as on the last day of the
previous year.
(g) “Capital Employed” means: Issued share capital + Debentures + Long-term borrowings (7 years or
more) as on the last day of the previous year
(h) AUDIT: Audit of accounts by a Chartered Accountant is necessary for claiming deduction u/s 35D.
Important Note:
Expenditure on issue of shares which is not covered by section 35D is not allowable as revenue expenditure.
Therefore expenses incurred on –
- Issue of Right shares
- Fees paid to ROC for enhancement of authorized share capital
- Issue of shares to public
Will not be ALLOWED IF IT IS NOT COVERED BY SECTION 35D.
HOWEVER EXPENDITURE INCURRED ON ISSUE OF BONUS SHARES IS ALLOWABLE AS REVENUE

EXPENDITURE.
Discount on issue of debentures & premium on redemption of debentures can be claimed as deduction
proportionately during the period of life of debentures.

FINAL DT SATC 22.19
Example: X Ltd. is incorporated in Bangalore on September 6, 2019. It commences production on March
15, 2020. The following expenses are incurred by the company before commencement of business:
a. Expenses on incorporation, issue of shares, etc. : ` 82,000
b. Preparation of feasibility report, project report and conducting market survey (the work is completed by the
taxpayer itself): ` 1,50,000.
c. Engineering services (work is carried on by a concern which is not approved by the Board): ` 1,50,000.
Determine the amount of deduction u/s 35D assuming the following figures of fixed assets and capital on
March 31, 2020 (i.e., the last day of the year in which the taxpayer starts production) –
` In lakhs
Cost of fixed asset 45
Share capital 50
Debentures 12
Long-term borrowing from a financial institution (repayable for not less than 7 years) 8
Solution:
`
Cost of project 45,00,000
Capital employed (i.e., ` 50lakhs + ` 12 lakhs + ` 8 lakhs) 70,00,000
Maximum qualifying expenditure [i.e., 5% of ` 45 lakhs or ` 70 lakhs, whichever is higher] (a) 3,50,000
Qualifying expenditure
Expenditure on incorporation 82,000
Preparation of feasibility report, project report and conducting market survey 1,50,000
Total (b) 2,32,000
Amount eligible for amortisation [(a) or (b), whichever is lower] 2,32,000
Amount deductible in 5 years for the assessment years 2020-21 to 2024-25 46,400
Note: Expenditure on engineering services in this case is not qualified for deduction u/s 35D. These
expenses may be capitalized by the tax payer to claim depreciation.
AMORTISATION OF EXPENSES FOR AMALGAMATION/DEMERGER [Section 35DD]

An Indian company, incurred expenditure wholly and exclusively for the purpose of amalgamation or demerger,
shall be allowed a deduction equal to one-fifth of such expenditure for 5 successive previous years beginning
with the previous year in which amalgamation or demerger takes place.
AMORTISATION OF EXPENDITURE INCURRED UNDER VOLUNTARY RETIREMENT

SCHEME [Section 35DDA]
a) This Section applies to an assessee who has incurred expenditure in any previous year in the form of
payment to any employee in connection with his voluntary retirement [VRS Payment]
b) The amount of deduction allowable is one-fifth of the amount paid for that previous year, and the
balance in four equal installments in the four immediately succeeding previous years.
c) In case of Amalgamation/Demerger (Transferee must be Indian Company) or Business Reorganisation being
succession of business [Section 47(xiii)/47(xiiib)/47(xiv)] during the intervening period of the said 5 years, the
benefit of deduction will be available to the “New Company/LLP” for the balance period including the
year in which such amalgamation/demerger/reorganisation or succession takes place.

FINAL DT SATC 22.20
ALLOWABLE DEDUCTION IN COMPUTING PGBP
PREMIUM PAID FOR INSURANCE OF STOCK IN TRADE [Section 36(1)(i)]
If insurance policy has been taken out against risk, damage or destruction of the stock of the business or
profession, the premium paid is deductible.
PREMIUM PAID BY EMPLOYER FOR HEALTH INSURANCE OF EMPLOYEES [SECTION 36(1)(ib)] -

A deduction is allowed to an employer in respect of premium paid by him by any mode of payment other than
cash to effect or to keep in force an insurance on the health of his employees in accordance with a scheme
framed by (i) the GIC and approved by the CG; or (ii) any other insurer and approved by the IRDA.
BONUS & COMMISSION [Section 36(1)(ii)]

Deduction is allowed in respect of the sum paid to the employees as bonus or commission (Other than in lieu of
profit or dividend).
Note:
1. Deduction is subject to the provisions of Section 43B & 40A(2).
2. Voluntary payments are deductible if it is for service rendered.
3. Any bonus exceeding the statutory amount is allowed if such excess payment has been made on account of
commercial expediency.
INTEREST ON BORROWED CAPITAL [Section 36(1)(iii)]

Amount of interest paid in respect of capital borrowed for the purposes of business or profession shall be allowed
as deduction.
Conditions:
1. The assessee must have borrowed money
2. The money so borrowed must have been used for business or profession
3. The assessee must have incurred interest on borrowed amount.
Other Points:
1. Capital may be borrowed either to incur revenue expenditure or to incur capital expenditure.
2. Interest in respect of capital borrowed for acquisition of new asset for extension of existing business or
profession (whether capitalised in the books of account or not) for any period beginning from the date on
which the capital was borrowed for acquisition of the asset till the date on which such asset was first put
to use, shall not be allowed as deduction. The same is however eligible for capitalization and shall
be added to the Actual Cost.
3. Interest on own capital is not deductible. Interest to member in case of AOP is not deductible.
However, Interest to partner’s are deductible.
4. Deduction of interest is subject to Section 43B & Section 40(a)(i)& 40(a)(ia)
5. Interest on money borrowed for payment of Income tax or interest on late payment of advance tax or for
late filling of return is not deductible.
6. Interest paid by the assessee on money borrowed for payment of dividends is an allowable deduction.
DEDUCTIBILITY OF DISCOUNT ON ZERO COUPON BONDs [Sec 36(1)(iiia)]

Section 36(1)(iiia) provides deduction for the discount on ZCB on pro rata basis having regard to the
period of life of the bond.
Example: C ltd. (an infrastructure company) issued ZCB on 1/8/19 @ ` 45 (face value ` 100) redeemable at
par after 125 months. Public subscribed for 50,000 bonds, find amount allowed as deduction u/s
36(1)(iiia).
Solution Deduction allowed u/s 36(1)(iiia)

Total amount of discount 50000*(` 100 - ` 45) ` 2750000
Period of life of the bond 125 months
Cost per month ` 2750000/125 months ` 22000
No. of months in the PY 2019-20 for which the bonds remains Period from 01/08/2019 to 8 months
outstanding 31/03/2020
Amount allowed as deduction in the PY 2019-20 ` 22000 * 8 months ` 176000

FINAL DT SATC 22.21
Section 36(1)(iva) – Deduction of expenses in the nature of Employer’s contribution
towards a pension scheme as referred in Section 80CCD
Section 36(1)(iva) provides that any sum paid by the assessee as an employer by way of contribution towards a
pension scheme, as referred to in section 80CCD on account of an employee to the extent it does not exceed
10% of the salary of the employee in the previous year, shall be allowed as deduction.
[“Salary” means Basic Salary + DA (forming part of retirement benefits)].
Example: X Ltd. contributes 20% of basic salary to the account of each employee under a pension scheme
referred to in section 80CCD. Dearness Allowance is 40% of basic salary and it forms part of pay of the
employees. Compute the amount of deduction allowable under section 36(1)(iva), if the basic salary of the
employees aggregate to ` 10 lakh. Would disallowance under section 40A(9) be attracted, and if so, to what
extent?
Computation of deduction allowable under section 36(1)(iva) and disallowance under section 40A(9)
Basic Salary 10,00,000
Dearness Allowance@40% of basic salary [DA forms part of pay] 4,00,000
Salary for the purpose of section 36(1)(iva) (Basic Salary + DA) 14,00,000
Actual contribution (20% of basic salary i.e. 20% of ` 10 lakh) 2,00,000

Less: Permissible deduction under Section 36(1)(iva)
(10% of basic salary plus dearness pay = 10% of ` 14,00,000 = ` 1,40,000) 1,40,000
Excess contribution disallowed under Section 40A(9) 60,000
Allowance for Animals [Section 36(1)(vi)]

This clause grants an allowance in respect of animals which have died or become permanently useless.
The amount of the allowance is the difference between the actual cost of the animals and the price
realized on the sale of the animals themselves or their carcasses.
The allowance under the clause would thus recoup to the assessee the entire capital expenditure in
respect of animal.
DEDUCTIONS IN RESPECT OF BAD DEBTS [Section 36(1)(vii) and sub-section (2)]

1) If the amount of any bad debt or part thereof is written off as irrecoverable in the accounts of the assessee
for the previous year, the same will be allowed as deduction
2) Provisions for bad debt are not allowed as deduction.
3) There must be a debt and the debt must be incidental to the Business or profession of the assessee.
4) No such deduction shall be allowed unless

a) such debt or part thereof has been taken into account in computing the income of the assessee
of the previous year in which the amount of such debt or part thereof is written off or of an earlier
previous year, or
b) represents money lent in the ordinary course of the business of banking or money-lending which is
carried on by the assessee.
5) Bad debt is not allowed as deduction to the assessee who maintains accounts on cash basis.
6) Successor of Business:
The Successor to the business is entitled to deduction in respect of the debt incurred by the predecessor if
the business is not dissolved and the identity of business after succession remains the same. Deduction for
bad debt is allowed business wise and not the assessee-wise.

FINAL DT SATC 22.22
7) Recovery of a bad debt subsequently [Section 41(4)]
If a deduction has been allowed in respect of a bad debt under section 36, and subsequently the amount
recovered in respect of such debt is more than the amount due after the allowance had been made, the
excess shall be deemed to be the profits and gains of business or profession and will be chargeable as
income of the previous year in which it is recovered, whether or not the business or profession in respect
of which the deduction has been allowed is in existence at the time.
Example:
X, a trader, sells goods on credit to Y (outstanding balance on April 1, 2019: ` 40,000 and total bills issued
during 2019-20: ` 60,000. Out of ` 1,00,000, he recovers only ` 10,000 from Y during 2019-20. On March 31,
2020, he writes off ` 32,000 as bed debt. However, on December 19, 2020, X receives from Y as full and
final payment (a) ` 15,000, or (b) ` 55,000, or (c) ` 70,000. Find out the tax consequences for different
assessment years.
Solution:
AY 2020-21 During the previous year 2019-20, X writes off ` 32,000 as bad debt. It is, therefore, deductible for
the AY 2020-21.
AY 2021-22: Tax treatment, when recovery is made during the previous year 2020-21, will be as follows:
Amount of debt as on April 1, 2020 Amount recovered as full and Deduction/Income

(i.e., ` 1 lakhs – ` 10,000 – ` 32,000 final payment
being the amount written off)
(1) (2) (2) – (1)
` ` `
a) 58,000 15,000 (-) 43,000
b) 58,000 55,000 (-) 3,000
c) 58,000 70,000 12,000 [Sec 41(4)]
In situation (a) ` 43,000 is deductible as bad debts if he writes off ` 43,000 in his books of account as bad debt
during the previous year 2020-21. Likewise, in situation (b) ` 3,000 is deductible as bad debts if X writes off `
3,000 in his books of account for the year ending March 31, 2021. In situation (c), however, ` 12,000, being the
excess recovery, is taxable as business income by virtue of section 41(4) for the previous year 2020-21
[irrespective of the fact whether the business is in existence during the previous year 2020-21 or not].
EXPENSES ON FAMILY PLANNING [Section 36(1)(ix)] – ADMISSABLE ONLY TO COMPANIES
• Revenue Expenditure: Expenditure of revenue in nature incurred by a company for the purpose of
promoting family planning amongst its employees will be fully allowed as a deduction.
• Capital Expenditure: Capital Expenditure will be allowed in 5 years in equal installments commencing
from the PY in which it is incurred.
DEDUCTION OF BANKING CASH TRANSACTION TAX PAID [Section 36(1)(xiii)]
Any amount of Banking Cash Transaction Tax paid by assessee during the previous year on the taxable baking
transactions entered shall be allowed as deduction.
DEDUCTION OF SECURITIES TRANSACTION TAX PAID [Section 36(1)(xv)]
The amount of STT paid by the assessee during the year in respect of taxable securities transactions entered into
in the course of business shall be allowed as deduction.[In CG, benefit of STT is not available to investor]
DEDUCTION OF COMMODITIES TRANSACTION TAX PAID [Section 36(1)(xvi)]
The amount of CTT paid by the assessee during the year in respect of taxable commodities transactions entered
into in the course of business shall be allowed as deduction , if the income arising from such taxable commodities
transactions is included in the income computed under the head “Profits and gains of business or profession”.

FINAL DT SATC 22.23
Residuary Expenses [Section 37]
Revenue expenditure incurred for purposes of carrying on the business, profession or vocation:
• This is a residuary section under which only business expenditure is allowable but not the business
losses, e.g., those arising out of embezzlement, theft, destruction of assets, misappropriation by
employees etc. (Business Losses are allowable under section 29 as losses incidental to the business).
• The deduction is limited only to the amount actually expended and does not extend to a reserve created
against a contingent liability.
Conditions for allowance:

a) The expenditure should not be of the nature described in sections 30 to 36.
b) It should have been incurred by the assessee in the accounting year.
c) It should be in respect of a business carried on by the assessee the profits of which are being computed
and assessed.
d) It must have been incurred after the business was set up.
e) It should not be in the nature of any personal expenses of the assessee.
f) It should have been laid out or expended wholly and exclusively for the purposes of such business.
g) It should not be in the nature of capital expenditure.
h) The expenditure should not have been incurred by the assessee for any purpose which is an offence or is
prohibited by law.
Allowable Expenditure u/s 37 under specific instructions of CBDT:

a) Diwali and Muharat Expenses.
b) Telephone Deposit paid under Tatkal Telephone Deposit Scheme
c) Expenditure on Fluorescent Tubes including wiring and fitting expenditure - Initial expenditure is of capital
nature but all replacement expenditure should be treated as revenue nature.
d) Insurance Premium paid on account of loss of profits.
e) Lagan or mahamai contribution collection by the Trade Association from their Members, on the business
transactions.
f) Annual Listing Fees paid to Stock Exchange.
g) Commitment Charges paid by Borrower to Lender.
h) Training Expenditure.
i) Expenditure incurred by business concern on civil defence measures.
j) Professional Tax paid.
LOSSES ALLOWABLE AS DEDUCTION:

a) Loss on account of embezzlement, in the previous year in which embezzlement is discovered.
b) Loss caused by forfeiture of Security Deposits given at the time of submission of tenders for supply of
goods.
c) Loss of Stock-in-Trade by fire and other natural calamities, or due to negligence of the employees or due to
enemy action, or in transit.
d) Loss on account of robbery or theft, provided it is in the course of business and incidental to the trade
whichever trade it is.
e) Loss caused by non-recovery of advances made in course of business, provided it is a Trading Loss
f) Loss caused on account of fluctuations in exchange rate, at the time of remitting the money for purchase of
raw material,
g) Loss caused due to breach of contract for delivery of goods by either party.

FINAL DT SATC 22.24
LOSSES NOT ALLOWABLE AS DEDUCTION:
1) Loss relating to any business or profession discontinued before the commencement of the previous year.
2) Violation of law is not a normal incident of trade and an expense incurred by way of penalty for infraction of
laws is not deductible.
3) Loss incurred due to damage, destruction, etc. of capital assets.
4) Loss which is not incidental to the carrying on of the business of the assessee
5) Loss due to sale of securities held as Investments.
6) Loss caused by forfeiture of advances given for purchase of Capital Assets.
7) Anticipated losses of subsequent years cannot be allowed as a deduction in the current year.
DEDUCTIBILITY OF PENALTIES & INTEREST UNDER VARIOUS LAWS

1. Penalty for infraction of any law: Not deductible
Exception:
a) If penalty is in nature of compensation – Allowable as deduction
b) Penalty for breach of Contract – Allowable as deduction since there is no infraction of any law.
2. Interest paid under any other law – Allowable as a deduction if interest is compensatory in nature
– If interest is in nature of penalty then no deduction is allowable.
Note: Penal interest paid to bank is allowable as deduction since penal interest is payable as per the
agreement between banker and borrower. There is no infraction of law.
3. Interest paid under Income-tax Act – Not allowable as deduction
4. Interest on loan taken to pay the income-tax is not allowable as deduction.
ALLOWABILITY OF CERTAIN EXPENSES

1. Dividend and Dividend distribution tax u/s 115O is not allowed as deduction.
2. Income tax, surcharge & education cess is not allowable as deduction.
3. Provision for unascertained liability is not allowable as deduction.
4. Prior period expenses are not allowable as deduction, but they are allowable if liability to pay crystallized
during the previous year. (Ex: Increased salary is paid in current year under increased pay commission
policy).
Advertisements in Publication of political parties – SECTION 37(2B)

Section 37(2B) disallows any deduction on account of expenditure incurred on advertisement in any souvenir,
brochure, tract or the like published by any political party, whether it is registered with the Election Commission of
India or not, made by any person carrying on business or profession in computing the profits and gains of the
business or profession.
However, a deduction for the same or/and similar expenditure is allowed under Section 80GGB and
80GGC.
Deduction to Indian Companies for Donation to Political Parties etc [Section 80GGB]
Indian Company is allowed to claim 100% deduction for any sum contributed in the previous year to any political
party or to Electoral Trust.
Deduction to Any Person for Donation to Political Parties etc [Section 80GGC]
100% Deduction from GTI is allowed to any person(Except Indian Company, Local Authority and any
Artificial Judicial Authority wholly or partially funded by government) for any sum contributed in the previous
year to any Political Party or Electoral Trust.
[Contribution u/s 80GGB & 80GGC must be made in mode other than cash]

FINAL DT SATC 22.25
Example:
During the P.Y. 2019-20, ABC Ltd., an Indian company,
(1) contributed a sum of ` 2 lakh to an electoral trust; and
(2) incurred expenditure of ` 25,000 on advertisement in a brochure of a political party.
Is the company eligible for deduction in respect of such contribution/expenditure, assuming that the
contribution was made by cheque? If so, what is the quantum of deduction?
Solution
An Indian company is eligible for deduction under section 80GGB in respect of any sum contributed by it in the
previous year to any political party or an electoral trust. Further, the word “contribute” in section 80GGB has the
meaning assigned to it in Companies Act, and accordingly, it includes the amount of expenditure incurred on
advertisement in a brochure of a political party.
Therefore, ABC Ltd. is eligible for a deduction of ` 2,25,000 under section 80GGB in respect of sum of ` 2 lakh
contributed to an electoral trust and ` 25,000 incurred by it on advertisement in a brochure of a political party.
It may be noted that there is a specific disallowance under section 37(2B) in respect of expenditure incurred on
advertisement in a brochure of a political party. Therefore, the expenditure of ` 25,000 would be disallowed while
computing business income/gross total income. However, the said expenditure incurred by an Indian company is
allowable as a deduction from gross total income under section 80GGB.
Disallowance of CSR expenditure
(i) For the purposes of Section 37(1), any expenditure incurred by an assessee on the activities relating
to Corporate Social Responsibility referred to in Section 135 of the Companies Act, 2013 shall not be
deemed to have been incurred for the purpose of business and hence, shall not be allowed as
deduction under section 37.
(ii) The rationale behind the disallowance is that CSR expenditure, being an application of income, is not incurred
wholly and exclusively for the purposes of carrying on business.
(iii) However, CSR expenditure, which is of the nature described in sections 30 to 36, shall be allowed as
deduction under those sections subject to fulfillment of conditions, if any, specified therein.

FINAL DT SATC 22.26
INADMISSIBLE DEDUCTIONS [SECTION 40]
Section 40(a)(i)–Non-compliance of provisions of TDS where payment is made to Non-
Resident or to any person outside India
No Deduction will be allowed where any Interest, Royalty, Fees for technical services or other sum
chargeable under this Act, which is payable, -
(i) outside India;
(ii) in India to a Non-Resident, not being a Company or to a Foreign Company,
on which tax is deductible at source and such tax has not been deducted or, after deduction, has not
been paid on or before the due date specified in section 139(1).
However, it is 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 Section 139(1),
such sum shall be allowed as a deduction in computing the income of the previous year in which such tax
has been paid.
In case, assessee fails to deduct the whole or any part of tax on any such sum but is not
deemed as assessee in default under the first proviso to section 201(1) by reason that such
payee –
i. has furnished his return of income under section 139;
ii. has taken into account such sum for computing income in such return of income; and
iii. has paid the tax due on the income declared by him in such return of income, and the
payer furnishes a certificate to this effect from an accountant in such form as may be
prescribed,
it would be deemed that the assessee has deducted and paid the tax on such sum on the
date on which return of income has been furnished by the payee.
Note: Since the date of furnishing the return of income by the payee is taken to be the date
on which the payer has deducted tax at source and paid the same, such
expenditure/payment in respect of which the payer has failed to deduct tax at source shall
be disallowed under section 40(a)(i) in the year in which the said expenditure is incurred.
However, such expenditure will be allowed as deduction in the subsequent year in which
the return of income is furnished by the payee, since tax is deemed to have been deducted
and paid by the payer in that year.
Example:
Date on which TDS Actual Date of Time limit as per Date of Payment Previous year
should have been Deduction section 200(1) of TDS in which
deducted deductible
26.06.2019 26.06.2019 07.07.2019 07.07.2019 2019-2020
26.07.2019 26.07.2019 07.08.2019 02.09.2019 2019-2020
31.03.2020 31.03.2020 30.04.2020 30.04.2020 2019-2020
31.03.2020 31.03.2020 30.04.2020 30.12.2020 2020-2021
16.05.2019 16.05.2019 07.06.2019 Not Deposited Not Deductible
10.06.2019 20.04.2020 07.07.2019 20.07.2022 2022-2023

FINAL DT SATC 22.27
Section 40(a)(ia) – Non-compliance of provisions of TDS where payment is
made to Resident in India
30% of any sum payable (paid or payable during the PY) to a Resident on which tax is deductible at
source, shall be disallowed if-
(i) such tax has not been deducted; or
(ii) such tax, after deduction, has not been paid on or before the due date specified in section 139(1).
Tax Points:
1) However, it is 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 Section 139(1),
30% of such sum shall be allowed as a deduction in computing the income of the previous year in which
such tax has been paid.
2) If tax has not been deducted & the deductor is able to establish that the payee has furnished the return of
income by including such income in his return and paid tax due on income declared by him in such return of
income, it shall be deemed that the assessee has deducted and paid tax on such income on the date of
furnishing return of income by the resident payee
Example:
XYZ Ltd. made the following payments in the month of March 2020 to residents without deduction of tax
at source. What would be the tax consequence for A.Y. 2020-21, assuming that the resident payees in all
the cases mentioned below, have not paid the tax, if any, which was required to be deducted by XYZ Ltd.?
Particulars Amount in `
Salary to its employees 15,00,000
Non-compete fees to Mr. X 70,000
Directors’ remuneration 25,000
Would your answer change if XYZ Ltd. has deducted tax on the above in April, 2020 from subsequent
payments made to these persons and remitted the same in July, 2020?
Answer
Non-deduction of tax at source on any payment on which tax is deductible as per the provisions of Chapter
XVII-B would attract disallowance under section 40(a)(ia). Therefore, non-deduction of tax at source on salary
payment on which tax is deductible under section 192 and non-compete fees and directors’ remuneration on
which tax is deductible under section 194J, would attract disallowance@30% of sum paid under section
40(a)(ia). Therefore, the amount to be disallowed under section 40(a)(ia) while computing business income for
A.Y.2020-21 is as follows –
Particulars Amount Disallowance
paid u/s 40(a)(ia) @
30% of sum paid
(1) Salary [tax is deductible under section 192] 15,00,000 4,50,000
(2) Non-compete fees to Mr. X [tax is deductible under section 194J] 70,000 21,000
(3) Directors’ remuneration
[tax is deductible under section 194J without any threshold limit] 25,000 7,500
Disallowance under section 40(a)(ia) 4,78,500

If the tax is deducted and paid in the next year i.e., P.Y.2020-21, the amount of ` 4,78,500 would be allowed
as deduction while computing the business income of A.Y. 2021-22.
Section 40(a)(iii)
Any sum which is chargeable under the head ‘Salaries’ shall be disallowed if it is payable outside India or
to a non-resident in India and if the tax has not been paid thereon nor deducted there from within the time
prescribed under the Act.
[Once paid without deduction of TDS, deduction can never be claimed even if tax is later deducted and
paid]
Section 40(a)(v)– Any Tax on the value of perquisite provided to the employee paid by the employer u/s
10(10CC), shall not be allowed as deduction.

FINAL DT SATC 22.28
EXPENSES OR PAYMENTS NOT DEDUCTIBLE IN
CERTAIN CIRCUMSTANCES [SECTION 40A]
Excess Payments to Relatives and Associates – Section 40A(2)
A. Where the assessee incurs any expenditure in respect of which a payment has been or is to be made to
Specified Person, so much of the expenditure as is considered to be excessive or unreasonable (having
regard to FMV of goods, services / Legitimate needs of business) shall be disallowed by the Assessing
Officer.
B. Specified person means:
For the Assessee Specified Person means

An Individual Relative
A person in whose business/profession the individual has substantial interest
A Company Any director of the company, partner of the firm, or member of the association or
/Firm/AOPs/HUF family, or any relative of such director, partner or member
A person in whose business/profession the assessee or above individuals have
substantial interest
Any Assessee - An individual who has a substantial interest in the business or profession
or any relative of such individual
- a Company, Firm, AOPs or HUF having a substantial interest in the
business or profession of the assessee or any director, partner or
member of such Company, Firm, AOPs or HUF, or any relative of such
director, partner or member, or any other company carrying on business
or profession in which the first mentioned company has substantial
interest
- a Company, Firm, AOPs or HUF of which a director, partner or member,
as the case may be, has a substantial interest in the business or
profession of the assessee; or any director, partner or member of such
company, firm, association or family or any relative of such director, partner
or member;
C. The word “relative” as defined in the section 2(41) of the Act, means, in relation to individual, the spouse,
brother or sister or any lineal ascendant or descendant of that individual.
D. A person shall be deemed to have a substantial interest in a business or profession if:

- in a case where the business or profession is carried on by a company, such person is, at any
time during the previous year, the beneficial owner of equity shares carrying not less than 20% of
the voting power and
- in any other case such person is, at any time during the previous year, beneficially entitled to not
less than 20% the profits of such business or profession.
E. Amount disallowed under section 40A(2) is however taxable as income in the hands of recipient.

FINAL DT SATC 22.29
SECTION 41 – DEEMED INCOME/PROFITS CHARGEABLE TO TAX
EXCEPTION TO THE RULE THAT INCOME FROM BUSINESS CAN BE ASSESSED ONLY IF THE
BUSINESS IS CARRIED ON DURING THE PREVIOUS YEAR:
Section 41(1): Recovery against any deduction
A. Conditions:
1. Where an allowance or deduction is allowed in any assessment year in respect of loss,
expenditure or trading liability incurred by the assessee and
2. subsequently during any previous year such assessee has obtained, whether in cash or in any
other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in
respect of such trading liability by way of remission or cessation thereof,
B. Treatment: the amount obtained or benefit accrued shall be deemed to be profits and gains of business
or profession and accordingly chargeable to income-tax as the income of that previous year.
C. Tax Points: Where such benefit has been obtained by the successor in business, such benefit shall be
taxable in the hands of successor.
Section 41(2) – Balancing Charges
Section 41(3) –Any amount realised on transfer of an asset used for scientific research is taxable as business
income to the extent of deduction allowed u/s 35 in the year in which the transfer takes place.
Section 41(4) –Any amount recovered by the assessee against bad debt earlier allowed as deduction shall be
taxed as income in the year in which it is received.
Section 41(4A) - The withdrawal from special reserve created and maintained under section 36(1)(viii) will be
deemed to be profits and gains of business and charged accordingly in the year of withdrawal. Even if the
business is closed, it will be deemed to be in existence for this purpose.
Section 41(5)- Adjustment of loss - Generally, loss of a business cannot be carried forward after 8 years.
An exception is, however, provided by section 41(5), This exception is applicable if the following
condition are satisfied:
Condition 1 The business or profession is discontinued.

Condition 2 Loss of such business or profession pertaining to the year in which it is discontinued could
not be set-off against any other income.
Condition 3 Such business is not speculation business.
Condition 4 After discontinued of such business or profession, there is a receipt which is deemed as
business income under section 41(1), (3), (4) or (4A).
The unabsorbed loss pertaining to the year in which business/profession was discontinued is permitted
to be set off against notional business income under section 41(1), (3), (4) or (4A) even after 8 years. It can
be set off even if the return of the loss is not submitted in time.
Ques: A business (not being a speculation business) is discontinued on December 10, 1988. At the time
there is unadjusted business loss of ` 35,000 (i.e., ` 10,000 of the previous year 1987-88 and ` 25,000
pertaining to the period commencing on April 1, 1988 and ending on December 10, 1988). On May 20,
2019, the assessee recovers a debt of ` 48,000 from a debtor which was allowed as bad debt in 1987-88.
Find out the notional profit chargeable to tax for the previous year 2019-20 under section 41.
Solution:
Recovery of bad debt earlier allowed as bad debt [chargeable to tax under Section 41(4)
In spite of the fact that the business was discontinued on December 10, 1987] 48,000
Less: Unabsorbed business loss of the previous year in which the business was discontinued
(i.e., April 1, 1988 to December 10, 1988) by virtue of section 41(5) 25,000
Business income chargeable to tax for the assessment year 2020-21 23,000

FINAL DT SATC 22.30
Recovery after discontinuance of Business or Profession [Sec. 176]:
Any sum received after the discontinuance of the business or profession is deemed to be business or
profession income of the recipient and charged to tax in the year of receipt.
CONTRIBUTIONS TO PROVIDENT AND OTHER FUNDS

CONTRIBUTION TO THE EMPLOYEES’ PROVIDENT AND OTHER FUNDS ARE ALLOWABLE SUBJECT TO
THE FOLLOWING CONDITIONS: [36(1)(iv) & (v)]
(i) In case of Provident or a superannuation or a Gratuity Fund, it should be one recognised or approved under
the Income-tax Act.
(ii) The amount contributed should be periodic payment and not an adhoc payment to start the fund.
(iii) The fund should be for exclusive benefit of the employees.
The nature of the benefit available to the employees from the fund is not material; it may be pension, gratuity or
provident fund.
Provisions of Section 43B will be applicable while allowing deduction.
AMOUNT RECEIVED BY ASSESSEE AS CONTRIBUTION FROM HIS EMPLOYEES TOWARDS THEIR

WELFARE FUND TO BE ALLOWED ONLY IF SUCH AMOUNT IS CREDITED ON OR BEFORE DUE DATE:
Section 36(1)(va) and Section 57 provide that deduction in respect of any sum received by the taxpayer as
contribution from his employees towards any welfare fund of such employees [Such sum is income u/s 2(24)] will
be 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. [Within 15 days of the close of every month. No Grace Period]”
DISALLOWANCE OF PROVISION FOR GRATUITY – SECTION 40A(7)
Section 40A(7) provides any provision for Gratuity made by the assessee is not allowed deduction.
However, no such disallowance would be made if

(a) it is made towards contribution to an approved gratuity fund or,
(b) for the purpose of making payment of any gratuity that has become payable
[However, the deduction allowed shall be subject to the provisions of Section 43B]
CONTRIBUTIONS BY EMPLOYERS TO FUNDS, TRUST ETC. [SECTIONS 40A (9) TO (11)]
No deduction will be allowed where the assessee pays in his capacity as an employer, any sum towards setting
up or formation of or as contribution to any fund, trust, company, association of persons, body of individuals,
society etc. other than funds covered by sections 36(1)(iv), 36(1)(iva) and 36(1)(v), then the deduction will
not be denied.

FINAL DT SATC 22.31
MAINTENANCE OF BOOKS OF ACCOUNTS [SECTION 44AA&
Rule 6F]
A. In case of Specified Professionals: [Subject to Section 44ADA]
(i) Every person carrying on the specified profession shall keep and maintain the specified books of
account:
a) if his gross receipts exceed ` 1,50,000 in each of the 3 years immediately preceding the previous
year; or
b) if, where the profession has been newly set up in the previous year, his gross receipts are likely to
exceed ` 1,50,000 in that year.
(ii) Specified Professions are:
(a) Legal (b) Accountancy (c) Company Secretary

(d) Medical (e) Engineering (f) Architectural
(g) Information Technology (h) Interior Decorator (i) Film Artist
(j) Technical Consultancy (k) Authorised Representative
(iii) Specified Books of Accounts:
a) a Cash Book;
b) a journal, if mercantile basis is being followed.
c) a ledger;
d) Carbon copies of bills and receipts issued where sums exceeds ` 25;
e) Original bills for expenditure exceeding ` 50.
f) In case of a person carrying on medical profession, he will be required to maintain the
following in addition to the list given above:
I. a Daily Cash Register in Form 3C.

II. Inventory records of drugs, medicines and other consumable accessories used for his
profession.
B. In case of Other Profession or Business:
Every taxpayer carrying on any business or profession (other than the professions specified above) must
maintain the books of account prescribed by the CBDT in the following circumstances:
I. in cases where the income from the business or profession exceeds ` 1,20,000 or the total sales
turnover or gross receipts, as the case may be, in the business or profession exceed ` 10,00,000 in any
one of three years immediately preceding the accounting year; or
For an Individual/HUF assessee, the above limit is ` 250,000 & ` 25,00,000.
II. in cases where the business or profession is newly set up in any previous year, if his income from
business or profession is likely to exceed ` 1,20,000 or his total sales turnover or gross receipts, as the
case may be, in the business or profession are likely to exceed ` 10,00,000 during the previous year
For an Individual/HUF assessee, the above limit is ` 250,000 & ` 25,00,000.
III. in cases deemed profit u/s 44AE or 44BB or 44BBB and the assessee has claimed that his income is
lower than the profits or gains so deemed to be the profits and gains of his business.
IV. Where the provisions of Section 44AD(4) are applicable & Income exceeds the maximum amount
which is not chargeable to income-tax in any PY

FINAL DT SATC 22.32
COMPULSORY AUDIT OF ACCOUNTS [SECTION 44AB]
1. Applicability: It is obligatory in the following cases for a person carrying on business or profession to get his
accounts audited:
a) Business: if the total sales, turnover or gross receipts in business exceeds ` 1 Crores in any
previous year; or
Section 44AB is amended to exclude the eligible person covered in Section 44AD
b) Profession: if the gross receipts in profession exceeds ` 50 lakh in any previous year; or
c) Business covered u/s 44AE/44BB/44BBB: if the assessee claims that his income is lower than the
profits and gains computed on a presumptive basis.
d) Profession covered u/s 44ADA: If he claims that his income is lower than the profits and gains
computed on a presumptive basis and his income exceeds the basic exemption limit.
e) Business where Section 44AD(4) is applicable:
Where the provisions of Section 44AD(4) are applicable & Income exceeds the maximum
amount which is not chargeable to income-tax in any PY
2. Report & Form: The Assessee is required to get his accounts of such previous year audited by a Chartered
Accountant before the specified date and report thereof is furnished in prescribed forms.
Specified Date:
(a) Where the assessee has under taken any international transaction as per Section 92B or specified
th
domestic transaction as per section 92BA: 30 November of the relevant AY
(b) In any other case: 30thSeptember of the relevant AY
3. Consequence for non-compliance:

Section 271B provides for penal action for not getting the accounts audited and for not filing the audit report
by the specified date. Penalty being lower of the following:
(a) ½ percent of turnover or gross receipt; or
(b) ` 150,000.
4. This Section does not apply to a person who derives income of the nature referred to in sections 44B and
44BBA
Section 44AB makes it obligatory for every person carrying on business to get his accounts of any
previous year audited if his total sales, turnover or gross receipts exceed ` 1 Cr. However, if an
eligible person opts for presumptive taxation scheme as per section 44AD(1), he shall not be
required to get his accounts audited if the total turnover or gross receipts of the relevant previous
year does not exceed ` 2 Cr.
The CBDT has clarified that the higher threshold for non-audit of accounts has been given
only to assessees opting for presumptive taxation scheme under section 44AD.

FINAL DT SATC 22.33
PRESUMPTIVE INCOME IN CASE OF SPECIFIC BUSINESS OR
PROFESSION [Section 44AD/Section 44AE]
44AD 44AE
Eligible Assessee Resident Individual/HUF/Firm, but not Any Assessee
a LLP&
has not claimed deduction u/s 10AA or
other Income Based Deduction under
chapter VIA
Eligible Business Any business except the business of Business of Plying, hiring or leasing of
Section 44AE; & Good carriage where the Assessee is
owning not more than 10 Goods
whose turnover/gross receipts does not Carriage at any time during the previous
exceed ` 2 Crores year.
Amount of 8% of total turnover or gross receipts In case of HEAVY GOODS VEHICLE
Presumptive Income or higher sum (Gross Vehicle Weight exceeds 12000
kilograms)
[6% in case payment is received by
account payee cheque/draft/use of
` 1,000 per ton of gross vehicle weight
electronic clearing system through a
or unladen weight, as the case may be,
bank account or through such other for every month or part of a month
prescribed electronic modes AND during which the heavy goods vehicle is
payment is received during the year or owned by the assessee in the previous
before the due date of ROI] year
OTHER THAN HEAVY GOODS VEHICLE:
` 7,500 for every month or part of a month
[For each vehicle owned by Assessee-

Hire Purchase/installment]
“A higher income can also be declared

as per books”
Provisions of Advance Advance tax is required to be paid by Applicable

Tax 15th March – 100% in 1 installment)
Effect if the assessee If Section 44AD(4) is applicable, he An assessee can declare his income lower
declares lower will have to: than the prescribed, he will have to:
Income:
a. Maintain books of account and other
a. Maintain books of account and other
documents as required u/s 44AA if
documents as required u/s 44AA and
his total income exceeds the
maximum exemption limit; and
b. Get his accounts audited and furnish a
report of such audit as prescribed u/s
b. Get his accounts audited and furnish
44AB
a report of such audit as prescribed
u/s 44AB if his total income
exceeds the maximum exemption
limit. [Section 44AD(5)]
Common Note:
1. Deduction u/s 30 to 38: The assessee will be deemed to have been allowed the deductions under
sections 30 to 38. No further Deduction is allowed.
2. Deduction u/s 40(b) for assessee covered u/s 44AE: Where the assessee is a firm, the salary and
interest paid to its partners shall be deducted from the income computed above subject to the conditions
and limits specified in clause (b) of section 40. [No Such Deduction from AY 17-18 for assessee
covered u/s 44AD & 44ADA]

FINAL DT SATC 22.34
3. Depreciation: Depreciation is deemed to have been allowed. The WDV of asset will be calculated, as if
depreciation has been allowed.
4. Section 44AD & 44AEoverrides Section 28 to 43C but does not override Chapter VI & Chapter VIA:
Therefore, the set off of current year losses & brought forward losses and deductions under chapter VIA are
available against the income deemed under this section. However, current year and brought forward
depreciation cannot be set off against the deemed income since that is governed by section 32.
5. The provisions of Section 44AD is not applicable in following cases:
a. A person carrying on specified profession as referred to in Section 44AA;
b. A person earning income in the nature of commission or brokerage; or
c. A person carrying on any Agency Business.
6. Where an eligible assessee declares profit for any PY as per this section and he declares profit for any of
the 5 consecutive AYs relevant to the PY succeeding such PY not as per Section 44AD, he shall not
be eligible to claim the benefit of the provisions of this section for 5 AYs subsequent to the AY
relevant to the PY in which the profit has not been declared as per the Sec 44AD [Sec 44AD (4)]
7. An eligible assessee to whom the provisions of Section 44AD(4) are applicable and whose total income
exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and
maintain such books of account and other documents as required under section 44AA and get them
audited and furnish a report of such audit as required under section 44AB. [Sec 44AD (5)]
Example:
Let us consider the following particulars relating to a resident individual, Mr. A, being an eligible assessee
whose gross receipts do not exceed ` 2 crore in any of the assessment years between AY 2020-21 to AY
2022-23
Particulars AY 2020-21 AY 2021-22 AY 2022-23
Gross receipts (Cash Sales) 1,80,00,000 1,90,00,000 2,00,00,000
Income offered for taxation 14,40,000 15,20,000 12,00,000
% of gross receipts 8% 8% 6%
Offered income as per presumptive Yes Yes No

taxation scheme u/s 44AD
In the above case, Mr. A, an eligible assessee, opts for presumptive taxation under section 44AD for AY 2020-
21 and AY 2021-22 and offers income of ` 14.40 lakh and ` 15.20 lakh on gross receipts of ` 1.80 crore and `
1.90 crore, respectively. However, for AY 22-23, he offers income of only ` 12 lakh on turnover of ` 2 crore,
which amounts to 6% of his gross receipts. He maintains books of account under section 44AA and gets the
same audited under section 44AB.
Since he has not offered income in accordance with the provisions of section 44AD(1) for five consecutive
assessment years, after AY 2020-21, he will not be eligible to claim the benefit of section 44AD for next five
assessment years succeeding AY 2022-23 i.e., from AY 2023-24 to 2027-28.

FINAL DT SATC 22.35
Example:
Mr. Praveen engaged in retail trade, reports a turnover of ` 1,98,50,000 for the financial year 2019-20. His
income from the said business as per books of account is ` 13,20,000 computed as per the provisions of
Chapter IV-D “Profits and gains from business or Profession” of the Income-tax Act, 1961. Retail trade is
the only source of income for Mr. Praveen. A.Y. 2019-20 was the first year for which he declared his
business income in accordance with the provisions of presumptive taxation under section 44AD.
i. Is Mr. Praveen also eligible to opt for presumptive determination of his income chargeable to tax for
the assessment year 2020-21?
ii. If so, determine his income from retail trade as per the applicable presumptive provision assuming
that whole of the turnover represents cash receipts.
iii. In case Mr. Praveen does not opt for presumptive taxation of income from retail trade, what are his
obligations under the Income-tax Act, 1961?
iv. What is the due date for filing his return of income under both the options?
Solution:
i. Yes. Since his total turnover for the F.Y. 2019-20 is below ` 200 lakhs, he is eligible to opt for presumptive
taxation scheme under section 44AD in respect of his retail trade business.
ii. His income from retail trade, applying the presumptive tax provisions under section 44AD, would be
` 15,88,000, being 8% of ` 1,98,50,000.
iii. Mr. Praveen had declared profit for the previous year 2018-19 in accordance with the presumptive
provisions and if he does not opt for presumptive provisions for any of the five consecutive assessment
years i.e., A.Y. 2020-21 to A.Y. 2024-25, he would not be eligible to claim the benefit of presumptive
taxation for five assessment years subsequent to the assessment year relevant to the previous year in
which the profit has not been declared in accordance the presumptive provisions i.e. if he does not opt for
presumptive taxation in say P.Y. 2019-20, then he would not be eligible to claim the benefit of presumptive
taxation for A.Y. 2021-22 to A.Y. 2025-26.
Consequently, Mr. Praveen is required to maintain the books of accounts and get them audited under
section 44AB, since his income exceeds the basic exemption limit.
iv. In case he opts for the presumptive taxation scheme under section 44AD, the due date would be 31st July,
2020. In case he does not opt for presumptive taxation scheme, he is required to get his books of account
audited, in which case the due date for filing of return of income would be 30th September, 2020.
PRESUMPTIVE INCOME IN CASE OF NOTIFIED PROFESSIONALS

SECTION 44ADA
Eligible Assessee Resident Assessee engaged in Notified Profession as per Section 44AA
Eligible profession Total Gross receipts does not exceed ` 50 Lakhs
Amount of Presumptive 50% of gross receipts or higher sum

Income
Effect if the assessee a. Maintain books of account and other documents as required u/s 44AA if his
declares lower Income: total income exceeds the maximum exemption limit; and
b. Get his accounts audited and furnish a report of such audit as prescribed u/s
44AB if his total income exceeds the maximum exemption limit.
Common Note:
1. Deduction u/s 30 to 38: The assessee will be deemed to have been allowed the deductions under
sections 30 to 38. No further Deduction is allowed.
2. Depreciation: Depreciation is deemed to have been allowed. The WDV of asset will be calculated, as if
depreciation has been allowed.

FINAL DT SATC 22.36
3. Section 44ADA overrides Section 28 to 43C but does not override Chapter VI & Chapter VIA:
Therefore, the set off of current year losses & brought forward losses and deductions under chapter VIA are
available against the income deemed under this section. However, current year and brought forward
depreciation cannot be set off against the deemed income since that is governed by section 32.
Note: Advance Tax provisions are applicable (similar to Section 44AD)

Advance tax is payable to the extent of the whole amount of such advance tax during each financial year
on or before the 15th March (only 1 installment of 100%)
Computation of income under the head "Profits and gains of business or profession" for
transfer of immovable property in certain cases [Sec. 43CA]
1. Section 43CA provides that where the consideration for the transfer of an asset (other than capital asset),
being land or building or both, is less than the stamp duty value, the SDV shall be deemed to be the full value
of the consideration for the purposes of computing income under the head "Profits and gains of business or
profession".
Following proviso shall be inserted in sub-section (1) of section 43CA by the Finance Act, 2018, w.e.f.
1-4-2018:
Provided that where the value adopted or assessed or assessable by the authority for the purpose of
payment of stamp duty does not exceed 105% of the consideration received or accruing as a result of
the transfer, the consideration so received or accruing as a result of the transfer shall, for the
purposes of computing profits and gains from transfer of such asset, be deemed to be the full value
of the consideration.
2. When date of agreement and date of registration are not same:

SDV may be taken as on the date of the agreement for transfer and not as on the date of registration for such
transfer if amount of consideration (or a part thereof) for the transfer has been received by way of an
account payee cheque or an account payee bank draft or by use of electronic clearing system through
a bank account or through such other prescribed electronic modes on or before the date of the
agreement.
3. Can an assessee challenge stamp duty valuation – Yes. In that case, VO will be appointed.
Example:
Mr. Hari, a property dealer, sold a building in the course of his business to his friend Rajesh, who is a
dealer in automobile spare parts, for ` 90 lakh on 1.1.2020, when the stamp duty value was ` 150 lakh.
The agreement was, however, entered into on 1.7.2019 when the stamp duty value was ` 140 lakh. Mr.
Hari had received a down payment of ` 15 lakh by cheque from Rajesh on the date of agreement. Discuss
the tax implications in the hands of Hari and Rajesh, assuming that Mr. Hari has purchased the building
th
for ` 75 lakh on 12 July 2018.
Would your answer be different if Hari was a share broker instead of a property dealer.
Answer
Case 1: Tax implications if Mr. Hari is a property dealer
In the hands of Mr, Hari In the hands of Mr. Rajesh

In the hands of Hari, the provisions of section 43CA Since Mr. Rajesh is a dealer in automobile
would be attracted. Therefore, ` 65 lakh, being the spare parts, the building purchased would be a
difference between the stamp duty value on the date capital asset in his hands. The provisions of
of agreement (i.e., ` 140 lakh) and the purchase section 56(2)(x) would be attracted in the hands
price (i.e., ` 75 lakh), would be chargeable as of Mr. Rajesh who has received immovable
business income in the hands of Mr. Hari. property, being a capital asset, for inadequate
consideration. Therefore, ` 50 lakh, being the
difference between the stamp duty value of the
property (i.e. `140 lakh) and the actual
consideration (i.e. ` 90 lakh) would be taxable
under section 56(2)(x) in the hands of Mr.
Rajesh.
FINAL DT SATC 22.37
Case 2: Tax implications if Mr. Hari is a stock broker
In the hands of Mr, Hari In the hands of Mr. Rajesh

In case Mr. Hari is a stock broker and not a property There would be no difference in the taxability in
dealer, the building would represent his capital asset the hands of Mr. Rajesh, whether Mr. Hari is a
and not stock-in-trade. In such a case, the provisions property dealer or a stock broker.
of section 50C would be attracted in the hands of Mr.
Hariand ` 65 lakh, being the difference between the Therefore, the provisions of section 56(2)(x)
stamp duty value on the date of registration (i.e., ` would be attracted in the hands of Mr. Rajesh
140 lakh) and the purchase price (i.e., ` 75 lakh) who has received immovable property, being a
would be chargeable as short-term capital gains. capital asset, for inadequate consideration.
It may be noted that under section 50C, there is an Therefore, ` 50 lakh, being the difference
option to adopt the stamp duty value on the date between the stamp duty value of the property
of agreement, if the date of agreement is different (i.e. ` 140 lakh) and the actual consideration (i.e.
from the date of registration and part of the ` 90 lakh) would be taxable under section
consideration has been received on or before the 56(2)(x) in the hands of Mr. Rajesh.
date of agreement otherwise than by way of cash.

FINAL DT SATC 22.38

FINAL DT SATC 22.39
CLASS NOTES

FINAL DT SATC 22.40
DEDUCTION IN RELATION TO TEA/COFFEE/RUBBER DEVELOPMENT
ACCOUNT [Section 33AB] / SITE RESTORATION FUND [Section 33ABA]/
Particulars Tea, Coffee & Rubber Development A/c Site Restoration Fund
[Section 33AB] [Section 33ABA]
Business Growing &Manufacturing Tea or Coffee or Prospecting for or
Rubber in India extraction/production of petroleum or
natural gas or both in India as per
agreement with CG
A/c in which (i) Special Account with NABARD; or (i) Special account opened with SBI;
amounts to be (ii) Deposit account (framed as per scheme of or
deposited Board) (ii) Site Restoration Account, opened
in accordance with relevant
scheme
Time Limit for Before the expiry of six months from the end Before the end of the Previous Year
Deposit of the previous year or before the due date of
furnishing ROI, whichever is earlier
Amount of Lower of the following: Lower of the following:

Deduction (i) Amount Deposited or, (i) Amount Deposited or,
(ii) 40% of the profits of such business before (ii) 20% of the profits of such
deduction u/s 33AB business before deduction u/s
33ABA
Where any amount, which is withdrawn from account as per scheme, is not so utilised within that previous
year, the unutilised amount shall be deemed to be profits and gains and chargeable to income-tax as the
income of that previous year.
Question: X Ltd. is engaged in the business of growing and manufacturing tea in India. During the
previous year 2018-19, it deposits ` 100 lakhs in the “special account” and claims the same as deduction
u/s 33AB (i.e., 40% of the business profit: ` 250 lakhs). During 2019-20, the company withdraws ` 35 lakhs
from the “special account” which is utilized as follows –
a. ` 25 lakhs on December 31, 2019 for the purpose of the scheme framed by the Tea Board; and
b. ` 4 lakhs for other purpose on January 27, 2020.
c. 6 lakhs is not utilized up to 31 March, 2020.
Find out the amount chargeable to tax for the AY 2020-21.
Question: Business profit of T Ltd. a tea growing and manufacturing company, is ` 120 lakhs (before
deduction u/s 33AB for the AY 2020-21. It deposits ` 50 lakhs with NABARD for claiming deduction under
section 33AB. It wants to claim set-off of brought forwards business loss of ` 40 lakhs. Find out the
taxable income of T Ltd. for the AY 2020-21.
Answer:
Computation of Taxable Income of T Ltd. for Assessment Year 2020-21
(`
` In Lakhs)
Profit before deduction u/s 33AB 120
Less: Deduction u/s 33AB 48
(40% of ` 120 lakhs or deposit of ` 50 lakhs with NABARD, whichever is lower)
Balance 72
Non-agriculture income as per Rule (40% of ` 72 lakhs) 28.8
Less: Brought forward business loss of ` 40 lakhs will be adjusted and balance ` 11.2 lakhs will 28.8
be carried forward
Net Income Nil

FINAL DT SATC 22.41
Expenditure for obtaining licence to operate telecommunication services
[Section 35ABB]:
1. Where any capital expenditure has been incurred for acquiring any right to operate telecommunication
services and for which payment has actually been made (paid basis) to obtain a licence, a deduction will
be allowed in equal annual installments over the relevant previous years.
2. “Relevant previous years” means:

(ii) If the payment is made before the commencement of the business: the previous years beginning
with the previous year in which such business commenced;
(iii) In any other case: the previous years beginning with the previous year in which the licence fee is
actually paid,
and the subsequent previous year or years during which the licence shall be in force.
3. Where such licence is transferred in full, any loss (Sales < WDV) shall be allowed as business loss [Full]
in respect of the previous year in which the licence is transferred.
4. Where a part of the licence is transferred in a previous year and Sales consideration < WDV, than balance
shall be allowed as deduction during the remaining number of PYs.
5. Where the whole or any part of the license is transferred and Sales Consideration > WDV, then amount
to the extent of deduction already allowed in PYs shall be treated as PGBP.
Capital Gain Treatment: The excess of sale consideration over Original Cost is taxable as CG u/s 45.
Example: X Ltd., a company providing telecommunication service, obtains a telecom license on April 20,
2019 for a period of 10 years which ends on March 31, 2029 (license fee being ` 18 lakhs). Find out the
amount of deduction u/s 35ABB if –
a. The entire amount is paid on May 6, 2019; or
b. The entire amount is paid on April 1, 2020; or
c. The entire amount is paid in three equal installments on April 30, 2019, April 30, 2020 and April 30, 2021.
Expenditure for obtaining right to use Spectrum for Telecommunication

Services [Section 35ABA]:
W.e.f. AY 17-18, Where any capital expenditure has been incurred for acquiring any right to use Spectrum
for Telecommunication Services and for which payment has actually been made (paid basis) to obtain
such right, a deduction will be allowed in equal annual installments over the relevant previous years.

FINAL DT SATC 22.42
Special provision for bad and doubtful debts in cases of Banks etc [Section 36(1) (viia)]
Amount deductible in respect of provision for bad and doubtful debts.
In the case of a scheduled In case of public financial In the case of a

bank [other than a foreign institution, State financial foreign bank
bank] and a non-scheduled corporation, State
bank & Co-operative Bank industrial investment
corporation
FA 16:
Non Banking Financial
Corporation [NBFC] also
Total income
(computed before 8.5% of such income 5% of such income 5% of such
this deduction and income
amount deductible
u/s 80C to 80U)
Aggregate average
advances by rural 10% of such advances -
branches -
Example: XY Ltd., a public financial institution, is eligible for claiming deduction u/s 36(1)(viia). Its
business income (before claiming this deduction) for the previous year 2019-20 is ` 160 lakhs. Provision
for bad and doubtful debts account has an opening balance of ` 1 lakhs on April 1, 2019. XY Ltd. wants to
write off ` 14 lakhs during 2019-20 on account of bad debts. Compute the amount of deduction u/s
36(1)(vii)/(viia). What are the formalities the taxpayer is required to complete?
Solution: The amount of bad debt, i.e., ` 14 lakhs should be debited to “Provision for bad and doubtful debt”
account as follows –
Provision for bad and doubtful debt account
(` In lakhs) (` In
lakhs)
March 31, 2020 To debtor a/c 14 April 1, 2019 By balance b/d 1
(being bad debt the tax payer wants to write March 31, 2020 By P & L a/c
off) [being deduction eligible u/s
36(1)(viia)], i.e., 5% of ` 160lakhs] 8
March 31, 2020 By P & L a/c
[being deduction u/s 36(1)(vii)] 5
Total 14 14
The following conclusion, one can draw –
1. The amount of deduction u/s 36 is as follows –
a. provision for bad and doubtful debts u/s 36(1)(viia): ` 8 lakhs (being 5% of ` 160 Lakhs);
b. bad debts u/s 36(1)(vii): ` 5 lakhs.
2. The amount of bad debt (i.e., ` 14 lakhs) should be debited to the provision for bad and doubtful debts
account and only if such amount is more than the credit balance in the provision for bad and doubtful
debts account (i.e., ` 1 lakhs + ` 8 lakhs), the excess is eligible for deduction u/s 36(1)(vii).
Example:
The following are the particulars in respect of a scheduled bank incorporated in India -
Particulars ` in lakh
(i) Provision for bad and doubtful debts under section 36(1)(viia) upto A.Y. 2019-20 100
(ii) Gross Total Income of A.Y. 2020-21 [before deduction under section 36(1)(viia)] 800
(iii) Aggregate average advances made by rural branches of the bank 300
(iv) Bad debts written off (for the first time) in the books of account (in respect of urban 210
advances only) during the previous year 2019-20
Compute the deduction allowable under section 36(1)(vii) for the A.Y. 2020-21.

FINAL DT SATC 22.43
Answer
Particulars ` in lakh
Bad debts written off (for the first time) in the books of account 210
Less: Credit balance in the “Provision for bad and doubtful debts” under
section 36(1)(viia) as on 31.3.2020
(i) Provision for bad and doubtful debts under section 36(1)(viia) upto AY 100
2019-20
(ii) Current year provision for bad and doubtful debts under section 36(1)(viia)
[8.5% of ` 800 lakhs + 10% of ` 300 lakhs] 98 198
Deduction under section 36(1)(vii) in respect of bad debts written off for 12
AY 2020-21

FINAL DT SATC 22.44
Method of Accounting [Section 145]
1. Income chargeable under the head "Profits and gains of business or profession" or "Income from other
sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or
mercantile system of accounting regularly employed by the assessee.
2. The Central Government may notify in the Official Gazette from time to time Income Computation and
Disclosure Standards (ICDSs) to be followed by any class of assessees or in respect of any class of
income.
3. Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the
assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by
the assessee, or income has not been computed in accordance with the standards notified under sub-section
(2), the Assessing Officer may make an assessment in the manner provided in section 144.
Method of accounting in certain cases [Section 145A]

For the purpose of determining the income chargeable under the head "Profits and gains of business or
profession",—
i. the valuation of inventory shall be made at lower of actual cost or net realisable value computed in
accordance with the income computation and disclosure standards notified under sub-section (2) of section
145;
ii. the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include
the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the
assessee to bring the goods or services to the place of its location and condition as on the date of
valuation;
iii. the inventory being securities not listed on a recognised stock exchange, or listed but not quoted on
a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially
recognised in accordance with notified ICDSs;
iv. the inventory being securities other than those referred to in clause (iii), shall be valued at lower of
actual cost or net realisable value in accordance with the notified ICDSs
Provided that the inventory being securities held by a scheduled bank or public financial institution shall be
valued in accordance with the notified ICDSs after taking into account the extant guidelines issued by the Reserve
Bank of India in this regard:
Provided further that the comparison of actual cost and net realisable value of securities shall be made
category-wise.
Taxability of certain income [Section 145B]

1. Notwithstanding anything to the contrary contained in Section 145, the interest received by an assessee
on any compensation or on enhanced compensation, as the case may be, shall be deemed to be the
income of the previous year in which it is received.
2. Any claim for escalation of price in a contract or export incentives shall be deemed to be the income of
the previous year in which reasonable certainty of its realisation is achieved.
3. The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income
of the previous year in which it is received, if not charged to income-tax in any earlier previous year.
Income as referred in Section 2(24)(xviii)

Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement (by whatever name called) by the Central Government or a State
Government or any authority or body or agency in cash or kind to the assessee other than-
a. the subsidy or grant or reimbursement which is taken into account for determination of the actual
cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or
b. the subsidy or grant by the Central Government for the purpose of the corpus of a trust or
institution established by the Central Government or a State Government, as the case may be;
FINAL DT SATC 22.45
Deduction in respect of Marked to Market loss
Section 36(1)(xviii)
“Marked to Market loss or other expected loss as computed in accordance with the ICDSs notified under
Section 145(2)” shall be allowed as deduction in computing the income referred to in Section 28.
Section 40A(13)
No deduction or allowance shall be allowed in respect of any marked to market loss or other expected loss,
except as allowable under clause (xviii) of sub-section (1) of section 36.
Section 43AA: Taxation of Foreign Exchange Fluctuation:

1. Subject to the provisions of Section 43A, any gain or loss arising on account of any change in foreign
exchange rates shall be treated as income or loss, as the case may be, and such gain or loss shall be
computed in accordance with the ICDSs notified under sub-section (2) of section 145.
2. For the purposes of sub-section (1), gain or loss arising on account of the effects of change in foreign
exchange rates shall be in respect of all foreign currency transactions, including those relating to—
i. Monetary items and Non-monetary items;
ii. Translation of Financial statements of foreign operations;
iii. Forward exchange contracts;
iv. Foreign Currency translation reserves.
Section 43CB: Computation of Income from Construction and Service Contracts.
1. The profits and gains arising from a Construction Contract or a Contract for Providing Services shall be
determined on the basis of Percentage of Completion Method in accordance with the income computation
and disclosure standards notified under sub-section (2) of section 145:
Provided that profits and gains arising from a Contract for providing services,—
i. with duration of not more than ninety days shall be determined on the basis of project completion
method;
ii. involving indeterminate number of acts over a specific period of time shall be determined on the
basis of straight line method.
2. For the purposes of percentage of completion method, project completion method or straight line
method referred to in sub-section (1)-
i. the contract revenue shall include retention money;
ii. the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or
capital gains.

FINAL DT SATC 22.46
Special Provision in case of income of Public Financial Institutions, Public companies etc.
[Section 43D]
1. In the case of
- a public financial institution or
- a scheduled bank or
- a co-operative bank other than primary agricultural credit society or a primary cooperative
- agricultural and rural development bank or
- a State financial corporation or
- a State industrial investment corporation or
- a deposit taking non-banking financial company or
- systemically important non-deposit taking non-banking financial company
the income by way of interest on such categories of bad and doubtful debts, as may be prescribed
having regard to the guidelines issued by the Reserve Bank of India in relation to such debts,
2. In the case of a public company, the income by way of interest in relation to such categories of
bad and doubtful debts as may be prescribed having regard to the guidelines issued by the
National Housing Bank established under the National Housing Bank Act, 1987 in relation to
such debts,
shall be chargeable to tax in the previous year in which it is credited to the profit and loss
account by the said institutions or public company for that year or in the previous in which it is
actually received by it, whichever is earlier.
Amortisation of expenses for prospecting and development of certain minerals [Section 35E]
A. Eligible assessee:
This provision applies only to expenditure incurred by an Indian company or other resident non-
corporate taxpayer. In order to qualify for amortisation, the assessee should be engaged in any
operations relating to prospecting for or the extraction or production of any mineral.
B. Eligible expenses:
The nature and kind of expenditure qualifying for amortisation are-
i. It must have been incurred during the year of commercial production and any one or more of
the four years immediately preceding that year,
ii. It must be incurred wholly and exclusively on any operations relating to the prospecting for any
mineral or group of certain minerals listed in the Seventh Schedule of the Income-tax Act, 1961
or on the development of a mine or other natural deposit of any mineral or group of associated
minerals.
C. Expenditure not allowed for deduction
Any portion of the expenditure which is met directly or indirectly by any other persons or authority
and the sale, salvage, compensation or insurance moneys realised by the assessee in respect of
any property or rights brought into existence as a result of the expenditure should be excluded
from the amount of expenditure qualifying for amortisation.
Further, specific provision has been made to the effect that the following items of expenses
do not qualify for amortisation at all viz.:
a. Expenditure incurred on the acquisition of the site of the source of any minerals or group of
associated minerals stated above or of any right in or over such site;
b. Expenditure on the acquisition of the deposits of minerals or group of associated minerals
referred to above or to any rights in or over such deposits; or
c. Expenditure of a capital nature in respect of any building, machinery, plant or furniture for
which depreciation allowance is permissible under section 32.
FINAL DT SATC 22.47
D. Amount of deduction
The assessee will be allowed for each of ten relevant previous years, a deduction of an amount
equal to one-tenth of the aggregate amount of the qualifying expenditure.
Thus, the deduction to be allowed for any relevant previous year is

i. one-tenth of the expenditure or
ii. such amount as will reduce to nil the income of the previous year arising from the commercial
exploration of any minerals or other natural deposit of the mineral or minerals in a group of
associated minerals in respect of which the expenditure was incurred,
whichever figure is less.
The amount of the deduction admissible in respect of any relevant previous year to the extent to
which it remains unallowed, shall be carried forward and added to the installment relating to the
previous year next following and shall be deemed to be a part of the installment and so on, for ten
previous years beginning from the year of commercial production.
E. Meaning of certain terms:
Term Meaning
Operation relating to Any operation undertaken for the purpose of exploiting, locating or
prospecting proving deposits of any minerals and includes any such operation
which proves to be infructuous or abortive.
Year of commercial The previous year in which as a result of any operation relating to
production prospecting or commercial production of any material or one or more
of the minerals in a group of associated minerals specified in Part A or
Part B, respectively, of the Seventh Schedule to Act actually
commences.
Relevant previous Ten previous years beginning with the year of commercial production
year
F. Audit of accounts:
The provisions with regard to audit of accounts relating to the qualifying expenditure are similar to
those applicable for amortisation of preliminary expenses discussed earlier.
G. Special provisions for amalgamation or demerger:

In the case of amalgamation, such deduction would continue to be admissible to the amalgamated
company as if the amalgamation had not taken place.
Likewise, in case of demerger where such deduction can be availed of by the resulting company as
if the demerger had not taken place.
Further, no deduction will be admissible to the amalgamating/ demerged company in the year of
amalgamation/ demergers.
H. No other deduction allowed in respect of the expenditure for which deduction is claimed
under this section:
Where a deduction is claimed and allowed on account of amortisation of the expenses under
section 35E in any year in respect of any expenditure, the expenditure in respect of which
deduction is so allowed shall not again qualify for deduction from the profits and gains under any
other provisions of the Act for the same or any other assessment year.

FINAL DT SATC 22.48
CLASS NOTES

FINAL DT SATC 22A.1
Problems under the head “PGBP”
1. A car purchased by Dr. Suman on 10.08.2017 for ` 5,25,000 for personal use is brought into professional use
on 1.07.2019 by him, when its market value was ` 2,50,000. Compute the actual cost of the car and the
amount of depreciation for the assessment year 2020-21 assuming the rate of depreciation to be 15%.
2. Mr. Praveen Kumar has furnished the following particulars relating to payments made towards
scientific research for the year ended 31.3.2020:
Particulars ` (in lacs)
(i) Payments made to K Research Ltd. 20
(ii) Payment made to LMN College 15
(iii) Payment made to OPQ College 10
(iv) Payment made to National Laboratory 8
(v) Machinery purchased for in-house scientific research 25
(vi) Salaries to research staff engaged in in-house scientific research 12
Note: K Research Ltd. and LMN College are approved research institutions and these payments are to be
used for the purposes of scientific research.
Compute the amount of deduction available under section 35 of the Income-tax Act, 1961 while
arriving at the business income of the assessee.
3. Win Limited commenced the business of operating a three star hotel in Tirupati on 1-4-2019. It
furnishes you the following information:
(a) Cost of land (acquired in June 2017) ` 60 lakhs
(b) Cost of construction of hotel building
Financial year 2017-18 ` 30 lakhs
Financial year 2018-19 ` 150 lakhs
(c) Plant and Machineries (all new) acquired during financial year 2018-19 ` 30 lakhs [All the above
expenditures were capitalized in the books of the company]. Net profit before depreciation for the financial
year 2019-20 ` 80 lakhs
Determine the amount eligible for deduction under section 35AD of the Income-tax Act, 1961, for the
assessment year 2020-21.
4. MNP Ltd. commenced operations of the business of a new four-star hotel in Chennai on 1.4.2019. The
company incurred capital expenditure of ` 40 lakh during the period January, 2019 to March, 2019 exclusively
for the above business, and capitalized the same in its books of account as on 1st April, 2019. Further, during
the previous year 2019-20, it incurred capital expenditure of ` 2.5 crore (out of which `1 crore was for
acquisition of land) exclusively for the above business. Compute the income under the head “Profits and
gains of business or profession” for the assessment year 2020-21, assuming that MNP Ltd. has fulfilled
all the conditions specified for claim of deduction under section 35AD and has not claimed any deduction
under Chapter VI-A under the heading “C. – Deductions in respect of certain incomes”.
The profits from the business of running this hotel (before claiming deducting under section 35AD) for the
assessment year 2020-21 is ` 80 lakhs. Assume that the company also has another existing business of
running a four-star hotel in Kanpur, which commenced operations 10 years back, the profits from which was `
130 lakhs for assessment year 2020-21. Would MNO Ltd. be entitled to deduction under section 35AD if
it transfers the operation of the hotel in Chennai to PQR Ltd, while continuing to own the said hotel?
5. Briefly discuss about the provisions relating to deductibility of interest on capital borrowed for the purpose of
business or profession.
6. Comment on the allowability of the following claim made by the assessee: Mr. Achal, a hotelier, claimed
expenditure on replacement of Linen and carpets in his hotel as revenue expenditure.
7. What are the conditions to be satisfied for the allowability of expenditure under section 37 of the Income-tax
Act, 1961?

FINAL DT SATC 22A.2
8. State with reasons, for the following sub-divisions, whether the following statements are true or false
having regard to the provisions of the Income-tax Act, 1961:
(i) For a dealer in shares and securities, securities transaction tax paid in a recognized stock exchange is
permissible business expenditure.
(ii) Where a person follows mercantile system of accounting, an expenditure of ` 25,000 has been allowed
on accrual basis and in a later year, in respect of the said expenditure, assessee makes the payment of `
25,000 through a cheque crossed "& Co.”, disallowance of ` 25,000 under section 40A(3) can be made in
the year of payment.
(iii) It is mandatory for an assessee to claim depreciation under section 32 of the Income-tax Act, 1961.
(iv) The medi-claim premium paid to GIC by Mr. Lomesh for his employees, by a draft, on 27.12.2019 is a
deductible expenditure under section 36.
(v) Under section 35DDA, amortization of expenditure incurred under eligible Voluntary Retirement Scheme
at the time of retirement alone, can be done.
(vi) An existing assessee engaged in trading activities, can claim additional depreciation under Section
32(1)(iia) in respect of new plant acquired and installed in the trading concern, where the increase in
value of such plant as compared to the approved base year is more than 10%.
9. State with reasons the allowability of the following expenses under the Income-tax Act, 1961 while
computing income from business or profession for the Assessment Year 2020-21:
(i) Provision made on the basis of actuarial valuation for payment of gratuity ` 5,00,000. However, no
payment on account of gratuity was made before due date of filing return.
(ii) Purchase of oil seeds of ` 50,000 in cash from a farmer on a banking day.
(iii) Tax on non-monetary perquisite provided to an employee ` 20,000.
(iv) Payment of ` 50,000 by using credit card for fire insurance.
(v) Salary payment of ` 3,00,000 outside India by a company without deduction of tax.
(vi) Custom Duty deposited in cash ` 50,000 with State Bank of India.
(vii) Payment made in cash ` 30,000 to a transporter in a day for carriage of goods
10. Ramji Ltd., engaged in manufacture of medicines (pharmaceuticals), furnishes the following
information for the year ended 31.03.2020:
(i) Municipal tax relating to office building ` 51,000 not paid till 30.09.2020.
(ii) Patent acquired for ` 20,00,000 on 01.09.2019 and used from the same month.
(iii) Capital expenditure on scientific research ` 10,00,000, which includes cost of, land ` 2,00,000.
(iv) Amount due from customer X outstanding for more than 3 years written off as bad debt in the books `
5,00,000.
(v) Income tax paid ` 90,000 by the company in respect of non-monetary perquisites provided to its
employees.
(vi) Provident fund contribution of employees ` 5,50,000 remitted in July 2020.
(vii) Expenditure towards advertisement in souvenir of a political party ` 1,50,000.
(viii) Refund of GST ` 75,000 received during the year, which was claimed as expenditure in an earlier year.
State with reasons the taxability or deductibility of the items given above under the Income-tax Act,
1961.
Note: Computation of total income is not required.
11. Answer the following with reference to the provisions of the Income-tax Act, 1961:
(a) Bad debt claim disallowed in an earlier assessment year, recovered subsequently. Is the sum recovered
chargeable to tax?
(b) Tax deducted at source on salary paid to employees not remitted till the ‘due date’ for filing the return
prescribed in section 139. Is the expenditure to be disallowed under section 40(a)(ia)?
(c) X Co. Ltd. paid ` 120 lakhs as compensation as per approved Voluntary Retirement Scheme (VRS)
during the financial year 2019-20. How much is deductible under section 35DDA for the assessment year
2020-21?
(d) Bad debt of ` 50,000 written off and allowed in the financial year 2017-18 recovered in the financial year
2019-20.

FINAL DT SATC 22A.3
12. State with reasons, whether the following statements are true or false, with regard to the provisions of
the Income-tax Act, 1961:
(a) Payment made in respect of a business expenditure incurred on 16th February, 2020 for ` 25,000 through
a cheque duly crossed as "& Co." is hit by the provisions of section 40A(3).
(b)
(i) It is a condition precedent to write off in the books of account, the amount due from debtor to claim
deduction for bad debt.
(ii) Failure to deduct tax at source in accordance with the provisions of Chapter XVII-B, inter alia, from
the amounts payable to a resident as rent or royalty, will result in disallowance while computing the
business income where the resident payee has not paid the tax due on such income.
13. Write short notes on:
(i) [Taxation of Firm Chapter] - Restrictions on deductions allowable to the partnership firm in respect of
salary and interest to its partners under section 40(b) of the Income-tax Act, 1961.
(ii) [Setoff of losses Chapter] - Carry forward and set off of unabsorbed depreciation.
(iii) Additional depreciation.
14. During the financial year 2019-20, the following payments/expenditure were made/incurred by Mr.
Yuvan Raja, a resident individual (whose turnover during the year ended 31.3.2019 was ` 99 lacs) :
(i) Interest of ` 12,000 was paid to Rehman & Co., a resident partnership firm, without deduction of tax at
source;
(ii) Interest of ` 4,000 was paid as interest to Mr. R.D. Burman, a non-resident, without deduction of tax at
source;
(iii) ` 6,00,000 was paid as salary to a resident individual without deduction of tax at source;
(iv) Commission of ` 25,000 was paid to Mr. Vidyasagar on 2.7.2019. Without deduction of tax at source.
Briefly discuss whether any disallowance arises under the provisions of section 40(a)(i)/40(a)(ia) of
the Income-tax Act, 1961. [After TDS Chapter]
15. M/s. Arora Ltd., submits the following details of expenditure pertaining to the financial year 2019-20:
(i) Payment of professional fees to Mr. Mani ` 50,000. Tax was not deducted at source.
(ii) Interior works done by Mr. Hari for ` 2,00,000 on a contract basis. Payment made in the month of March
2020. Tax deducted in March 2020 was paid on 30.06.2020.
(iii) Factory Rent paid to Mr. Rao ` 15,00,000. Tax deducted at source and paid on 01.10.2020.
(iv) Interest paid on Fixed Deposits ` 2,00,000. Tax deducted on 31.12.2019 and paid on 28.09.2020.
Examine the above with reference to allowability of the same in the assessment year 2020-21 under
the Income-tax Act, 1961. You answer must be with reference to section 40(a) read with relevant tax
deduction at source provisions. Assume that the due date of filing the return of income is 30.09.2020.
[After TDS Chapter]
16. Vinod is a person carrying on profession as film artist. His gross receipts from profession are as
under: `
Financial year 2017-18 1,15,000
What is his obligation regarding maintenance of books of accounts for each Assessment Year under
section 44AA of Income-tax Act, 1961?
17. Ramamurthy had 4 non heavy goods vehicles as on 1.4.2019. He acquired 7 non-heavy goods vehicles on
27.6.2019. He sold 2 non-heavy goods vehicles on 31.5.2019. He has brought forward business loss of `
50,000 relating to assessment year 2016-17 of a discontinued business. Assuming that he opts for
presumptive taxation of income as per section 44AE, compute his total income chargeable to tax for
the assessment year 2020-21.

FINAL DT SATC 22A.4
18. Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April, 2019, he owns 10 trucks
(all non heavy goods vehicles). On 2nd May, 2019, he sold one of the non-heavy goods vehicles and
purchased an another non heavy goods vehicle on 6th May, 2019. This new vehicle could however be put to
use only on 15th June, 2019.
Compute the total income of Mr. Sukhvinder for the AY 2020-21, taking note of the following data
Particulars ` `
Freight charges collected 8,70,000
Less : Operational expenses 6,25,000
Depreciation as per section 32 1,85,000
Other office expenses 15,000 8,25,000
Net Profit 45,000
Other business and non- business income 70,000
19. X Ltd. follows mercantile system of accounting. After negotiations with the bank, interest of ` 4 lakhs
(including interest of ` 1.2 lakhs pertaining to year ended 31.03.2020 has been converted into loan. Can the
interest of ` 1.2 lakhs so capitalized be claimed as business expenditure?
20. List Eight items of expenses which otherwise are deductible shall be disallowed, unless payments are
actually made within the due date for furnishing the return of income under Section 139(1). When can the
deduction be claimed, if paid after the said date?
21. Mr. Gupta is having a trading business and his Trading and Profit & Loss Account for the financial
year 2019-20 is as under:
Particulars Amount (` ) Particulars Amount (` )
To Opening stock 1,00,000 By Sales 70,00,000
To Purchase 49,00,000 By Closing stock 50,000
To Gross profit 20,50,000
Total 70,50,000 Total 70,50,000
Salary to employees (Including 5,00,000 By Gross Profit b/d 20,50,000
Contribution to PF)
Donation to Prime Minister Relief Fund 1,00,000
Provision for bad debts 50,000
Bonus to employees 50,000
Interest on bank loan 50,000
Family planning expenditure incurred on 20,000
employees
Depreciation 30,000
Income-tax 1,00,000
To Net profit 11,50,000
20,50,000 Total 20,50,000
Other information:
(a) Depreciation allowable ` 40,000 as per Income-tax Rules, 1962.
(b) No deduction of tax at source on payment of interest on bank loan has been made.
(c) Payment of bonus to workers made in the month of October, 2019 on the occasion of Diwali festival.
(d) Out of salary, ` 25,000 pertains to his contributions to recognized provident fund which was deposited
after the due date of filing return of income. Further, employees contribution of ` 25,000 was also
deposited after the due date of filing return of income.
Calculate gross total income of Mr. Gupta for the Assessment Year 2020-21.

FINAL DT SATC 22A.5
22. Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit & Loss
Account for the year ended 31.03.2020.
Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2020
Particulars ` Particulars `
To Opening Stock 71,000 By Sales 32,00,000
To Purchase of Raw Materials 16,99,000 By Closing stock 2,00,000
To Manufacturing Wages & Expenses 5,70,000
To Gross Profit 10,60,000
34,00,000 34,00,000
To Administrative charges 3,26,000 By Gross Profit 10,60,000
To State VAT penalty 5,000 By Dividend from
To State VAT paid 1,10,000 domestic companies 15,000
To General Expenses 54,000 By Income from agriculture (net) 1,80,000
To Interest to Bank 60,000
(On machinery term loan)
To Depreciation 2,00,000
To Net Profit 5,00,000
12,55,000 12,55,000
Following are the further information relating to the financial year 2019-20:
(i) Administrative charges include ` 46,000 paid as commission to brother of the assessee. The
commission amount at the market rate is ` 36,000.
(ii) The assessee paid ` 33,000 in cash to a transport carrier on 29.12.2019. This amount is included in
manufacturing expenses (Assume that the provisions relating to TDS are not applicable to this
payment.)
(iii) A sum of ` 4,000 per month was paid as salary to a staff throughout the year and this has not been
recorded in the books of account. [Use alternative view in exam] – Also refer IOS Chapter
(iv) Bank term loan interest actually paid upto 31.03.2020 was ` 20,000 and the balance was paid in
October 2020.
(v) Housing loan principal repaid during the year was ` 50,000 and it relates to residential property
occupied by him. Interest on housing loan was ` 23,000. Housing loan was taken from Canara Bank.
These amounts were not dealt with in the profit and loss account given above.
(vi) Depreciation allowable under the Act is to be computed on the basis of following information:
Plant & Machinery (Depreciation rate @ 15%) `
Opening WDV (as on 01.04.2019) 12,00,000
Additions during the year (used for more than 180 days) 2,00,000
Total additions during the year 4,00,000
Note: Ignore additional depreciation under section 32(1)(iia)
Compute the total income of Mr. Raju for the assessment year 2020-21.
Note: Ignore application of section 14A for disallowance of expenditures in respect of any exempt
income.
23. Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss Account for the
year ended 31st March, 2020: Trading and Profit and Loss Account for the year ended 31.03.2020
To Opening stock 90,000 By Sales 12,11,500
To Purchases 10,04,000 By Income from UTI 2,400
To Gross Profit 3,06,000 By Closing stock 1,86,100
14,00,000 14,00,000
To Salary 60,000 By Gross profit b/d 3,06,000
To Rent and rates 36,000
To Interest on loan 15,000
To Depreciation 1,05,000
To Printing & stationery 23,200
To Postage & telegram 1,640
To Loss on sale of shares 8,100
(Short term)
To Other general expenses 7,060
To Net Profit 50,000
3,06,000 3,06,000

FINAL DT SATC 22A.6
Additional Information:
(i) It was found that some stocks were omitted to be included in both the Opening and Closing Stock, the
values of which were:
Opening stock ` 9,000
Closing stock ` 18,000
(ii) Salary includes ` 10,000 paid to his brother, which is unreasonable to the extent of ` 2,000.
(iii) The whole amount of printing and stationery was paid in cash by way of one-time payment.
(iv) The depreciation provided in the Profit and Loss Account ` 1,05,000 was based on the following
information :The written down value of plant and machinery is ` 4,20,000 as on 01.04.2019. A new plant
falling under the same block of depreciation was bought on 1.7.2019 for ` 70,000. Two old plants were
sold on 1.10.2019 for ` 50,000.
(v) Rent and rates includes GST liability of ` 3,400 paid on 7.4.2020.
(vi) Other general expenses include ` 2,000 paid as donation to a Public Charitable Trust.
You are required to advise Mr. Sivam whether he can offer his business income under section 44AD
i.e. presumptive taxation.
24. Following is the profit and loss account of Mr. Q for the year ended 31-03-2020:
To Repairs on Building 1,81,000 By Gross Profit 6,01,000
To Amount paid to IIT, Mumbai for an By I.T. Refund 8,100
approved scientific research 1,00,000 By Interest on Company Deposits 6,400
programme
To Interest 1,10,000
To Travelling 1,30,550
6,15,500 6,15,500
Following additional information is furnished:
(1) Repairs on building includes ` 1,00,000 being cost of building a new toilet.
(2) Interest payments include ` 50,000 on which tax has not been deducted and penalty for contravention of
Central GST Act of ` 24,000.
Compute the income chargeable under the head "Profits and gains of Business or Profession" of Mr.
Q for the year ended 31-03-2020 ignoring depreciation.
25. Following is the profit and loss account of Mr. A for the year ended 31.3.2020:
To Repairs on building 1,30,000 By Gross profit 6,01,000
To Advertisement 51,000 By Income Tax Refund 4,500
To Amount paid to Scientific By Interest from company deposits 6,400
Research Association 1,00,000 By Dividends 3,600
approved u/s 35
To Interest 1,10,000
To Traveling 1,30,000
6,15,500 6,15,500
Following additional information is furnished:
(1) Repairs on building includes ` 95,000 being cost of raising a compound wall for the own business
premises.
(2) Interest payments include interest of ` 12,000 payable outside India to a non-resident Indian on which tax
has not been deducted and penalty of ` 24,000 for contravention of Central GST Act.
Compute the income chargeable under the head ‘Profits and gains of business or profession’ of
Mr. A for the year ended 31.3.2020 ignoring depreciation.
26. Briefly explain the term "substantial interest". State three situations in which the same assumes importance.

FINAL DT SATC 22A.7
27. Raghav Industries Ltd. furnishes you the following information for the year ended 31-03-2020:
(a) Scientific research expenditure related to its business ` 2,40,000 fully revenue in nature.
(b) Building acquired for scientific research (including cost of land ` 5,00,000) in June 2019 for ` 12,00,000.
(c) Amount paid to Indian Institute of Science, Bangalore for scientific research ` 50,000.
(d) Demerger expenses incurred in financial year 2019-20 ` 5,00,000.
(e) Contribution to the account of employees as per pension scheme referred to in section 80CCD amounted
to ` 30,00,000. Amount above 10% of the salary of employees is ` 7,00,000.
(f) Amount recovered from employees towards provident fund contribution ` 12,00,000 of which amount
remitted upto the end of the year was ` 7,00,000 and the balance was remitted before the 'due date' for
filing the return prescribed in Section 139(1).
(g) Tax on non-monetary perquisites provided to the employees, borne by the employer ` 4,50,000.
(h) Gain due to change in the rate of exchange of foreign currency ` 1,00,000 related to import of machinery.
The machinery was acquired two years ago and put to regular use since then.
Explain in brief how the above said items would be dealt with for the A.Y. 2020-21.
Note: Computation of total income not required.
28. Advise an assessee on the admissibility or otherwise on the following aspects giving reasons in
respect of its business income :
(i) Brokerage paid for raising loan for the business.
(ii) Cost of erecting medical unit annexed to the factory for emergency treatment of the employees.
(iii) Compensation paid to an employee for the premature termination of his services.
(iv) Travelling expenses of a director, who went to Japan for negotiating the purchase of a new heavy
machinery, which was to be installed during next year.
(v) Lump sum consideration of ` 5 lakh paid for acquiring know-how.
29. State, with reasons in brief, whether following receipts/expenses are capital or revenue in nature -
(i) Ankit Ltd. received ` 3 lakh as compensation from Bhushan Ltd. for premature termination of a contract of
agency;
(ii) GST collected from the buyer of goods;
(iii) Pretty Ltd., instead of receiving royalty year by year, received it in advance in lumpsum;
(iv) Payment of ` 60,000 as compensation for cancellation of a contract for the purchase of machinery with a
view to avoid an unnecessary expenditure;
(v) An employee director of a company was paid ` 1.5 lakh as a lumpsum consideration for not resigning
from the directorship.
30. Jardine Ltd. is an existing Indian Company, engaged in developing and providing computer software
services which sets up a new industrial unit. It incurs the following expenditure in connection with the
new unit:
`
Preparation of project report 4,00,000
Market Survey 5,00,000
Legal and other charges for issue of additional capital
required for the new unit 2,00,000
Total 11,00,000
The following further data is given :
Cost of project 30,00,000
Capital employed in the new unit 40,00,000
What is the deduction admissible to the company under section 35D for AY 2020-21?
31. In the financial year 2017-18, RK Ltd. had prepared a Voluntary Retirement Scheme for its employees in
accordance with which it paid ` 10 lakhs, ` 15 lakhs and ` 5 lakhs to its employees in the financial years
2017-18, 2018-19 and 2019-20 respectively. Compute the amount of deduction admissible u/s 35DDA to
RK Ltd. in AY 2020-21.

FINAL DT SATC 22A.8
32. Following is the Profit & Loss account of Mr. A a dealer in shares and securities for the year ended on
31.3.2020 (amounts in ` )
To Trading Expenses 62,60,000 By Sales 72,54,000

To Administrative Exp. 1,05,000 By Interest on FD with bank 16,500
To Financial Expenses 48,265 By Dividend from Indian Co 64,360
To Demat & delivery charges 4,350 By Interest on I.T. Refund (A.Y.2008-09) 230
To Securities transaction tax 5,500
To Net Profit before depreciation 9,11,975
73,35,090 73,35,090
Compute total income.
33. Computation of taxable income: Ram, who is 28 years of age, is a businessman in Delhi. On the basis
of the following profit and loss account for the financial year 2019-20, compute his taxable income :
Opening stock 20,700 Sales 1,500,000

Purchases 1,000,000 Closing stock 25,200
Household expenses 10,000
Income-tax for the financial year 2010-11 30,000
Interest on capital 8,400
Depreciation on furniture 12,000
Reserve for bad debts 1,200
Salaries and wages 60,000
Rent and rates 25,000
Net profit 357,900
1,525,200 1,525,200
Other relevant particulars are as follows:

(i) Opening stock and closing stock have consistently been valued at 10% below cost price.
(ii) Household expenses include a contribution of ` 1,500 towards public provident fund.
(iii) Amount of depreciation on furniture as per income-tax provisions is ` 10,000.
34. Mrs. Thakur carries on a textile manufacturing business. Her Profit and Loss Account for the year
ending 31st March 2020 is as follows (amounts in ` ) :
To Office Expenses 8,500 By Gross Profit 106,000
To Sundry Expenses 7,500 By Misc. Receipts 6,000
To Staff Welfare Expenses 750 By Income tax Refund 20,000
To Legal Expenses 5,000 By Bad debts recovered 4,500
To Salaries 17,000 By Gift from Mr. Thakur 10,000
To Outstanding liability for Excise duty 7,500
To Bonus to staff 6,000
To Depreciation 4,000
To Contribution to Approved provident fund 7,000
To Audit fees 32,500
To Net profit 50,750
Total 146,500 Total 146,500
Notes:
(1) Depreciation as per Income-tax Act comes to ` 2,700.
(2) Bonus payable under the Payment of Bonus Act, 1965 amounts to ` 2,500.
(3) Sundry expenses include ` 1,500 paid as donation to her son's school for their annual function.
(4) Office expenses include a capital expenditure of ` 5,000 on additional furniture purchased on 1.12.2019.
No depreciation has been provided for in the books.
(5) Liability for excise duty was paid as follows :
On 13.4.2020 ` 3,500 On 2.5.2020 ` 1,000 On 30.7.2020 ` 1,800; The return was filed on 31.7.2020
(last date for filing).
(6) No tax has been deducted at source on the audit fees of ` 32,500.
(7) Bad debts recovered were allowed as deduction in an earlier assessment.
You are required to compute Mrs. Thakur's business income.

FINAL DT SATC 22A.9
35. Shri Nagesh's Profit and loss A/c for the year ended 31st March 2020 is as under (Amount in ` ) :
Opening Stock 40,000 Sales 540,000

Purchases 205,000 Closing Stock 60,000
Royalty 26,000 Commission 8,000
Wages 95,000 Interest from customers 2,000
Factory expense 45,000 Dividends 5,000
Rent rates and taxes 3,000 Contribution by employees towards RPF 2,100
Sundry expenses 5,300 Profit on sale of building 16,500
Salaries and bonus 9,500
Contribution to RPF 2,100
Legal expenses 1,800
Provision for depreciation 1,500
Travelling expenses 4,000
Repairs 5,800
Entertainment expenses 14,400
Rural development expenses 1,000
Advertisement expenses 4,900
Miscellaneous expenses 2,800
Net profits 166,500
633600 633600
Other information:
(1) Opening and closing stock valued at 20% below cost price. Market price was higher than cost price.
(2) A sum of ` 1,500 paid on the accident of an employee is included in the factory expenses.
(3) Allowable depreciation is ` 1,800
(4) Advertisement expenses include ` 3,000 for advertisement in souvenir published by political party.
(5) Rural development expenses include `1,000 paid to an approved institution for carrying out an
approved rural development programme. The approval was withdrawn after payment of such sum.
(6) Sundry expenses ` 1,000 and contribution to recognised provident fund are unpaid.
Determine his taxable profits of business.
36. Mr. Rameshwar is registered Medical practitioner. He keeps his book on cash basis and his
summarised cash account for year ended 31 March 2020 is as under (amounts in `)
To Balance b/d 2,700 By costs of medicines 20,000

To loan from Bank 6,000 By surgical equipments 6,000
To sale of medicines 30,500 By motor car purchased 12000
To consultation fees 10,000 By car expenses 1,800
To visiting fees 8,000 By salaries 1,200
To interest on investments 9,000 By rent on dispensary 1,200
To dividend on shares 7,200 By General expenses 600
To sale of building 15,000 By personal expenses 3,600
To sale of furniture 5,000 By Life insurance premium 2,000
By Interest on bank loan for 360
investment
By insurance of property 400
By Fixed Deposit in Bank 30,000
By balance c/d 14,240
93,400 93,400
Compute his Income from profession taking into account the following further information:
(1) 1/3rd of the motorcar expenses is in respect of his personal use.
(2) The original cost of the building was ` 20,000 and written down value of furniture as on 1st April 2019
was ` 4,000. There was no other asset in this block.
(3) The rate of depreciation on motorcar and on surgical equipments is 15%. An old car was purchased in
May 2019 while the surgical equipments were purchased in Dec. 2019.
(4) Outstanding consultancy fees and outstanding salaries are ` 20,000 and ` 1,000 respectively. Further,
medicines valuing ` 5,000 were sold to Mr. Babu on credit.

FINAL DT SATC 22A.10
37. Shri Mohit Jain, a resident assessee, has given the following Profit and Loss Account for the year
ended 31st March 2020: (All amount in ` )
To Office Salaries 26,000 By Gross profit 299,400

To Staff welfare Expenses 12,000 By Sundry receipts 8,800
To General expenses 13,000
To Bad debts 6,000
To Advance tax 800
To Fire insurance 8,000
To Advertisement expenses 22,000
To Interest on Mohit's capital and loan 7,200
To Expenditure incurred on acquisition of copyright 5,600
on 1-2-2020 (it is put to use on the same day).
To Lump sum consideration for acquiring know- 24,000
how incurred on 5-3-2020 (it is put to use on April
1, 2020)
To Depreciation on other business assets 12,000
To Provision for income-tax 4,000
To Contribution to a political party 2,000
To Net profit 165,600
308,200 308,200
Other information:
(1) Salary to staff includes salary paid to a relative, which is unreasonable to the extent of ` 4,800.
(2) Depreciation on other assets according to income-tax provision comes to ` 19,200.
(3) Provision for income tax is excessive to the extent of ` 1,200.
(4) General expenses include an expenditure of ` 3,560 for arranging a long-term loan.
(5) During the previous year 2019-20, the following payments are made:
(a) ` 14,000 paid on 5-5-2019 on account of outstanding customs duty of previous year 2018-19; and
(b) ` 10,000 paid on 3-1-2020 on account of outstanding CGST of the previous year 2018-19.
Find out the business income of Mr. Mohit Jain for the AY 2020-21. Due date of filing return of income
is July 31, 2019 for AY 2019-20 and July 31, 2020 for AY 2020-21.
38. Alpha Ltd. a manufacturing company, which maintains accounts under mercantile system, has disclosed a net
profit of ` 12.50 lakhs for the year ending 31st March 2020. You are required to compute the taxable
income of the company for the assessment year 2019-20 after considering the following information,
duly explaining the reasons for each item of adjustment:
(a) Advertisement expenditure includes the sum of ` 60,000/- paid in cash to the sister concern of a
director, the market value of which is ` 52,000/-.
(b) Legal charges include a sum of ` 45,000/- paid to a consultant for framing a scheme of amalgamation
duly approved by the Central Government.
(c) Repairs of plant and machinery include ` 1.80 lakhs towards replacement of worn out parts.
(d) A sum of ` 6,000/- on account of liability foregone by a creditor has been taken to general reserve. The
same was charged to the Revenue Account in the assessment year 2006-07.
(e) Sale proceeds of import entitlements amounting to ` 1 lakh has been credited to Profit and Loss A/c,
which company claims as capital receipt not chargeable to Income tax.
(f) Being also engaged in the biotechnology business, the company incurred the following expenditure on
in-house research and development as approved by prescribed authority: -
a) Research equipments purchased ` 1,50,000/-
b) Remuneration paid to scientists ` 50,000/-
The Total amount of ` 2,00,000/- is debited to Profit and Loss A/c.

39. [Also refer Agriculture Chapter] - The following is the profit and loss account for year ended 31st
March, 2020 of Western Sugar Mills of which Shri Daga is the owner:
` `
To Manufacturing expenses 7,01,000 By Sale of Sugar and molasses 11,62,300
To Excise duty 92,795 By Rent from agricultural land 950
To Establishment charges 49,200 By Revenue from fisheries 4,000
To Fine paid to excise dept 2,000 By Sale proceeds from Sugar canes 6,05,055
To Salary and wages 1,21,445 By Profit on sale of motor truck 3,230
To General charges 16,750
To Interest on bank loan 21,000
To Daga's remuneration 38,750
To Depreciation 91,000
To Income-tax 25,000
To Cultivation expenses 4,37,500
To Net profit 1,79,095
17,75,535 17,75,535
Compute the income from business of Shri Daga from the Sugar Mill for the AY 2020-21 after taking
the following information into consideration:
a) Sale proceeds of cane include ` 5,32,000 on account of cane produced and consumed in the factory and
debited to manufacturing expenses, the average market price of such cane being ` 6,00,000.
b) The motor truck sold during the year for ` 7,230 was purchased in the past for ` 19,000. Depreciation
claimed in respect thereof in past assessment was ` 15,000.
c) General charges include —
i) ` 2,000 being the legal expenses incurred in defending a suit regarding the company's title to certain
agricultural lands and
ii) ` 10,000 paid to Shri Daga's son who is an employee in the Sugar Mill for a trip to Hawai to study
modern methods of manufacture.
d) Depreciation in respect of all assets has been ascertained at ` 50,000 as per Income-tax Rules.
40. [Also refer Agriculture Chapter] - Mr. Tenzingh is engaged in composite business of growing and curing
(further processing) coffee in Coorg, Karnataka. The whole of coffee grown in his plantation is cured.
Relevant information pertaining to the year ended 31.3.2020 are given below:
Particulars `
WDV of car as on 1.4.2019 3,00,000
WDV of machinery as on 1.4.2019 (15% rate) 15,00,000
Expenses incurred for growing coffee 3,10,000
Expenditure for curing coffee 3,00,000
Sale value of cured coffee 22,00,000
Besides being used for agricultural operations, the car is also used for personal use; disallowance for
personal use may be taken at 20%. The expenses incurred for car running and maintenance are ` 50,000.
The machines were used in coffee curing business operations.
Compute the income arising from the above activities for the assessment year 2020-21. Show the
WDV of the assets as on 31.3.2020.

Class Notes

FINAL DT SATC 22B.1
PGBP - SOLUTION
1. As per section 43(1), the expression “actual cost” would mean the actual cost of asset to the assessee.
The purchase price of ` 5,25,000 is, therefore, the actual cost of the car to Dr. Suman. Market value (i.e. `
2,50,000) on the date when the asset is brought into professional use is not relevant.
Therefore, amount of depreciation on car as per section 32 for the A.Y. 2020-21 would be ` 78,750, being `
5,25,000 x 15%.
Note: Explanation 5 to section 43(1) providing for reduction of notional depreciation from the date of
acquisition of asset for personal use to determine actual cost of the asset is applicable only in case of building
which is initially acquired for personal use and later brought into professional use. It is not applicable in
respect of other assets.
2.
Computation of deduction allowable under section 35
Particulars Amount Section % of weighted Amount of
(` In lacs) deduction deduction
(` in lacs)
Payment for scientific research
K Research Ltd. [See Note 3] 20 35(1)(ii) 150% 30.00
LMN College 15 35(1)(ii) 150% 22.50
OPQ College [See Note 1] 10 - Nil Nil
National Laboratory [See Note 4] 8 35(2AA) 150% 12.00
In-house research [See Note 2]
Capital expenditure 25 35(1)(iv) 100% 25.00
r.w. 35(2)
Revenue expenditure 12 35(1)(i) 100% 12.00
Deduction allowable under section 35 101.50
Notes :-
1. Payment to OPQ College: Since the note in the question below item (iii) clearly mentions that only K
Research Ltd. and LMN College (mentioned in item (i) and (ii), respectively) are approved research
institutions, it is a logical conclusion that OPQ College mentioned in item (iii) is not an approved research
institution. Therefore, payment to OPQ College would not qualify for deduction under section 35.
2. Deduction for in-house research and development: Only company assessees are entitled to weighted
deduction@150% under section 35(2AB) in respect of in-house research and development expenditure
incurred. However, in this case, the assessee is an individual. Therefore, he would be entitled to
deduction@100% of the revenue expenditure incurred under section 35(1)(i) and 100% of the capital
expenditure incurred under section 35(1)(iv) read with section 35(2), assuming that such expenditure is
laid out or expended on scientific research related to his business.
3. Payment to K Research Ltd. (Alternative Answer) : Any sum paid to a company registered in India
which has as its main object scientific research, as is approved by the prescribed authority, qualifies for a
deduction of 100% under section 35(1)(iia). Therefore, it is also possible to take a view that payment of `
20 lakhs to K Research Ltd. qualifies for a deduction of 100% under section 35(1)(iia) since K Research
Ltd. is a company. The weighted deduction under section 35(1)(iia) would be ` 20 lacs (i.e., 100% of `
20 lacs), in which case, the total deduction under section 35 would be ` 96.50 lacs.
4. Payment to National Laboratory: The percentage of weighted deduction under section 35(2AA) in
respect of amount paid to National Laboratory is 150%.
3. Under section 35AD, 100% of the capital expenditure incurred during the previous year, wholly and
exclusively for the specified business, which includes the business of building and operating a hotel of two-
star or above category anywhere in India which commences its operations on or after 1.4.2011, would be
allowed as deduction from the business income.
However, expenditure incurred on acquisition of any land, goodwill or financial instrument would not be
eligible for deduction.
Further, the expenditure incurred, wholly and exclusively, for the purpose of specified business prior to
commencement of operation would be allowed as deduction during the previous year in which the assessee
commences operation of his specified business. A condition has been inserted that such amount incurred
FINAL DT SATC 22B.2
prior to commencement should be capitalized in the books of account of the assessee on the date of
commencement of its operations.
Accordingly, the deduction under section 35AD for the A.Y. 2020-21 in the case of Win Ltd. would be
calculated as follows, assuming that the expenditures were capitalised in the books of the company on
1.4.2019, being the date of commencement of operations-
Particulars `
Cost of land (not eligible for deduction under section 35AD) Nil
Cost of construction of hotel building (` 30 lakhs + ` 150 lakhs) 180
Cost of plant and machinery 30
Deduction under section 35AD 210
Note:-
(1) For A.Y.2020-21, the loss from specified business of operating a three star hotel would be ` 130 lakhs
(i.e. ` 210 lakhs – ` 80 lakhs). As per section 73A, any loss computed in respect of the specified business
referred to in section 35AD shall be set off only against profits and gains, if any, of any other specified
business. The unabsorbed loss, if any, will be carried forward for set off against profits and gains of any
specified business in the following assessment year.
(2) Since the entire cost of plant and machinery and building qualifies for deduction under section 35AD, the
same does not qualify for deduction under section 32.
4. Computation of income under the head “Profit and gains of business or profession” of
MNP Ltd. for A.Y. 2020-21
Particulars ` (in lakh) ` (in lakh)
Profits from the specified business of new four-star hotel in Chennai 80
(before providing deduction under section 35AD)
Less: Deduction under section 35AD

Capital expenditure incurred during the P.Y. 2019-20 (excluding the 150
expenditure incurred on acquisition of land) = ` 250 lakh – ` 100 lakh
(See Notes 1 & 2 below)
Capital expenditure incurred during January 2019 to March 2019 (i.e.,

prior to commencement of business) and capitalized in the books of
account as on 1.4.2019 (See Note 3 below) 40
Total deduction under section 35AD for A.Y. 2020-21 190
Income from the specified business of new hotel in Chennai (110)
Profit from the existing business of running a four-star hotel in
Kanpur (See Note 4 below) 130
Net profit from business after set-off of loss of specified business against 20
profits of another specified business under section 73
Notes:
(1) According to the provisions of section 35AD, an assessee shall be allowed a deduction in respect of
100% of the capital expenditure incurred wholly and exclusively for the purpose of the specified business
which, inter alia, includes the business in the nature of building and operating a new hotel of two-star or
above category, anywhere in India.
Therefore, the newly commenced four-star hotel business of MNP Ltd qualifies for deduction under
section 35AD, since It has fulfilled all the conditions for claim of deduction under that section.
(2) The expenditure on acquisition of land, however, does not qualify for deduction under section 35AD.
(3) The capital expenditure incurred prior to commencement of specified business shall be allowed as
deduction under section 35AD(1) in the year of commencement of specified business, if the same is
capitalized in the books of accounts of the assessee on the date of commencement of its operations.
Therefore, the expenditure of ` 40 lakh is allowable as deduction in A.Y. 2020-21, since it has been
capitalized in the books of accounts of MNP Ltd. as on 1.4.2019.
(4) As per section 73A, the loss computed under section 35AD in respect of a specified business can be set
off against the profit of another specified business. Building and operating a hotel of two-star and above
category, anywhere in India, is a specified business, therefore, the loss from the business of new four-star
hotel in Chennai can be set-off against the income of the existing four-star hotel in Kanpur.
FINAL DT SATC 22B.3
(5) Section 35AD(6A) provides that where the assessee, MNO Ltd., builds a hotel of two-star or above
category as classified by the Central Government and subsequently, while continuing to own the hotel,
transfers the operation of the said hotel to another person, the assessee shall be deemed to be carrying
on the specified business of building and operating a hotel. Therefore, in this case, MNO Ltd. would be
eligible to claim investment linked deduction under section 35AD even if it transfers the operation of the
Chennai hotel to PQR Ltd.
5. Under section 36(1)(iii), deduction is allowed in respect of interest on capital borrowed for the purposes of
business or profession while computing income under the head “Profits and gains of business or profession”.
Further, Explanation 8 to section 43(1) clarifies that interest relatable to a period after the asset is first put to
use cannot be capitalized. Interest in respect of capital borrowed for any period from the date of borrowing to
the date on which the asset was first put to use should, however, be capitalized in the case of extension of
existing business or profession. The proviso to section 36(1)(iii) provides that no deduction shall be allowed in
respect of any amount of interest paid, in respect of capital borrowed for acquisition of a new asset or for
extension of existing business or profession (whether capitalized in the books of account or not) for any period
beginning from the date on which the capital was borrowed for acquisition of the asset, till the date on which
such asset was first put to use.
6. The expenditure on replacement of linen and carpets in a hotel are in the nature of expenses incurred for the
business and are allowable as revenue expenses under section 37(1).
7.
(a) The following conditions are to be fulfilled for the allowability of expenditure under section 37 -
(1) The expenditure should not be of the nature described in section 30 to 36;
(2) It should not be in the nature of personal expenditure of the assessee;
(3) It should have been incurred by the assessee during the previous year;
(4) The expenditure should have been laid out or expended wholly or exclusively for the purposes of the
business or profession;
(5) It should not be in the nature of a capital expenditure; It should not have been incurred for any
propose which is an offence or which is prohibited by law.
(b) No deduction is allowable for expenditure incurred by the assessee on advertisement in any souvenir,
brochure, tract pamphlet or the like published by a political party [Section 37(2B)]
(c) As per Explanation 2 to Section 37(1), any expenditure incurred by the assessee on the activities relating
to Corporate Social Responsibility referred to in Section 135 of the Companies Act, 2013 shall not be
deemed to be an expenditure incurred for the purpose of business or profession. Hence, such
expenditure shall be disallowed while computing total income.
8.
(i) True : Section 36(1)(xv) allows a deduction of the amount of securities transaction tax paid by the
assessee in respect of taxable securities transactions entered into in the course of business during the
previous year as deduction from the business income of a dealer in shares and securities.
(ii) True : As per section 40A(3), in the case of an assessee following mercantile system of accounting, if an
expenditure has been allowed as deduction in any previous year on due basis, and payment exceeding `
10,000 has been made in the subsequent year otherwise than by account payee cheque or account
payee bank draft, then the payment so made shall be deemed to be the income of the subsequent year in
which such payment has been made.
(iii) True : According to the Explanation 5 to section 32(1), allowance of depreciation is mandatory. Therefore,
depreciation has to be provided mandatorily while calculating income from business / profession whether
or not the assessee has claimed the same while computing his total income.
(iv) True : Section 36(1)(ib) provides deduction in respect of premium paid by an employer to keep in force an
insurance on the health of his employees under a scheme framed in this behalf by GIC or any other
insurer. The medical insurance premium can be paid by any mode other than cash, to be eligible for
deduction under section 36(1)(ib).
(v) False : Expenditure incurred in making payment to the employee in connection with his voluntary
retirement either in the year of retirement or in any subsequent year, will be entitled to deduction in 5
equal annual installments beginning from the year in which each payment is made to the employee.
FINAL DT SATC 22B.4
(vi) False : Additional depreciation can be claimed only in respect of eligible plant and machinery acquired
and installed by an assessee engaged in the business of manufacture or production of any article or thing
or in the business of generation or generation and distribution of power. In this case, the assessee is
engaged in trading activities and the new plant has been acquired and installed in a trading concern.
Hence, the assessee will not be entitled to claim additional depreciation under section 32(1)(iia).
9.
(i) Not allowable as deduction
As per section 40A(7), no deduction is allowed in computing business income in respect of any provision
made by the assessee in his books of account for the payment of gratuity to his employees except in the
following two cases:
(1) where any provision is made for the purpose of payment of sum by way of contribution towards an
approved gratuity fund or;
(2) where any provision is made for the purpose of making any payment on account of gratuity that has
become payable during the previous year.
Therefore, in the present case, the provision made on the basis of actuarial valuation for payment of
gratuity has to be disallowed under section 40A(7), since, no payment has been actually made on
account of gratuity.
Note: It is assumed that such provision is not for the purpose of contribution towards an approved
gratuity fund.
(ii) Allowable as deduction

As per Rule 6DD, in case the payment is made for purchase of agricultural produce directly to the
cultivator, grower or producer of such agricultural produce, no disallowance under section 40A(3) is
attracted even though the cash payment for the expense exceeds ` 10,000.
Therefore, in the given case, disallowance under section 40A(3) is not attracted since, cash payment for
purchase of oil seeds is made directly to the farmer.
(iii) Not allowable as deduction

As per section 40(a)(v), income-tax of ` 20,000 paid by the employer in respect of non monetary
perquisites provided to its employees, which is exempt in the hands of the employee under section
10(10CC), is not deductible while computing business income.
(iv) Allowable as deduction

Payment for fire insurance is allowable as deduction under section 36(1). Since payment by credit card is
covered under Rule 6DD, which contains the exceptions to section 40A(3), disallowance under section
40A(3) is not attracted in this case.
(v) Not allowable as deduction

Disallowance under section 40(a)(iii) is attracted in respect of salary payment of ` 2,00,000 outside India
by a company without deduction of tax at source.
(vi) Allowable as deduction As per Rule 6DD, if the payment is made to the Government and, under the
rules framed by it, such payment is required to be made in legal tender, no disallowance under section
40A(3) is attracted even though the cash payment for the expense exceeds ` 10,000.
Therefore, in the given case, no disallowance under section 40A(3) is attracted since payment of Custom
Duty is covered by the above mentioned exception contained in Rule 6DD.
(vii) Allowable as deduction

The limit for attracting disallowance under section 40A(3) for payment otherwise than by way of account
payee cheque or account payee bank draft is ` 35,000 in case of payment made for plying, hiring or
leasing goods carriage. Therefore, in the present case, disallowance under section 40A(3) is not attracted
for payment of ` 30,000 made in cash to a transporter for carriage of goods.
10.
(i) As per section 43B, municipal tax is not deductible for A.Y. 2020-21 since it is not paid on or before
30.09.2020, being the due date of filing the return for A.Y. 2020-21.
Note – It is assumed that the company has not undertaken any international transaction during the year,
and therefore does not have to file a transfer pricing report under section 92E. Therefore, the due date of
filing of return of the company would be 30th September, 2020.
(ii) Patent is an intangible asset eligible for depreciation@25%. Since it has been acquired and put to use for
more than 180 days during the previous year 2019-20, full depreciation of ` 5,00,000 (i.e. 25% of `
20,00,000) is allowable as deduction under section 32.
FINAL DT SATC 22B.5
(iii) Weighted deduction@150% is available under section 35(2AB) in respect of expenditure incurred by a
company on scientific research on in-house research and development facility as approved by the
prescribed authority. However, cost of land is not eligible for deduction. Deduction under section 35(2AB)
= 150% of ` 8 lakhs = ` 12,00,000.
Note: It is presumed that the in-house research and development facility is approved by the prescribed
authority and is hence, eligible for the weighted deducted@150% under section 35(2AB).
(iv) Bad debts i.e. ` 5,00,000 written off in the books of account as irrecoverable is deductible under section
36(1)(vii), provided the debt has been taken into account in computing the income of the company in the
current previous year or any of the earlier previous years.
(v) As per section 40(a)(v), income-tax of ` 90,000 paid by the company in respect of nonmonetary
perquisites provided to its employees, exempt in the employee’s hands under section 10(10CC), is not
deductible while computing business income of the employer– company.
(vi) The employees’ contribution to provident fund is taxable in the hands of the company since it is included
in the definition of income under section 2(24)(x). As per section 36(1)(va), provident fund contribution of
employees is deductible only if such sum is credited to the employee’s provident fund account on or
before the due date under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952. In this
case, since it is remitted after the due date under the said Act, it is not deductible.
Note: There is an alternate view that remittance of provident fund contribution of employees is deductible
even though it is remitted beyond the due date under the Employees’ Provident Fund and Miscellaneous
Provisions Act, 1952, in case the same is remitted before the due date of filing return of income in view of
the Delhi High Court decision in CIT vs. Aimil Ltd
(vii) Expenditure towards advertisement in souvenir of a political party is disallowed under section 37(2B)
while computing business income. However, the same is deductible under section 80GGB from gross
total income.
(viii) Refund of a trading liability is taxable under section 41(1), if a deduction was allowed in respect of the
same to the taxpayer in an earlier year. Since GST was claimed as expenditure in an earlier year, refund
of the same during the year would attract the provisions of section 41(1).
11.
(a) Recovery of a bad debt claim disallowed in the earlier year cannot be brought to tax under section 41(4).
Section 41(4) can be invoked only in a case where bad debts or part thereof has been allowed as
deduction earlier under section 36(1)(vii).
(b) The scope of section 40(a)(ia) has been expanded w.e.f. A.Y. 2020-21 to cover all sums in respect of
which tax is deductible under Chapter VII-B. Section 192, which requires deduction of tax at source from
salary income, forms part of Chapter VII-B. Therefore, salary payment without deduction of tax at source
would attract disallowance under section 40(a)(ia). However, only 30% of salary paid without deduction
tax at source would be disallowed under section 40(a)(ia).
(c) It is deductible in 5 equal annual instalments commencing from the previous year of payment. ` 24 lakhs,
being 1/5th of ` 120 lakhs, is deductible under section 35DDA for the A.Y.2020-21.
(d) As per section 41(4), any amount recovered by the assessee against bad debt earlier allowed as
deduction shall be taxed as income in the year in which it is received. Therefore, in this case, ` 50,000
would be taxable in the F.Y.2019-20 (A.Y.2020-21).
12.
(a) True : In order to escape the disallowance specified in section 40A(3), payment in respect of the business
expenditure ought to have been made through an account payee cheque. Payment through a cheque
crossed as “& Co.” will attract disallowance under section 40A(3).
(b)
(i) True : It is mandatory to write off the amount due from a debtor as not receivable, in order to claim
the same as bad debt under section 36(1)(vii).
(ii) True : Section 40(a)(ia) provides that failure to deduct tax at source from rent or royalty payable to a
resident, in accordance with the provisions of Chapter XVII-B, will result in disallowance of 30% of
such expenditure, where the resident payee has not paid the tax due on such income.
FINAL DT SATC 22B.6
13.
(i) In the case of a partnership firm, the deduction on account of interest and salary paid to its
partners are as subject to the following restrictions contained in section 40(b) -
(a) It should be authorised by and in accordance with the terms of the partnership deed.
(b) It should not relate to a period before the date of such deed.
(c) Remuneration should be paid to a working partner.
(d) The amounts allowable are subject to the following limits -
(1) In the case of interest

Simple interest up to 12% p.a. is allowable. This restriction is not applicable if a person is a partner in
his representative capacity in the firm and he receives interest from the firm in his individual capacity.
Similarly, the restriction is also not applicable if a person who is a partner in his individual capacity
receives interest for and on behalf of someone else from the firm in which he is a partner.
(2) In the case of salary, bonus, commission or remuneration paid by a firm to its working
partners – It should not exceed the amount specified in the table below –
For all firms
(a) On the first ` 3,00,000 of the book profit ` 1,50,000 or 90% of book
or in case of loss profit, whichever is more
(b) On the balance of the book profit @ 60%
(ii) Section 32(2) provides for carry forward of unabsorbed depreciation.

Where, in any previous year, the profits or gains chargeable are not sufficient to give full effect to the
depreciation allowance, such unabsorbed depreciation shall be added to the depreciation allowance for
the following previous year and shall be deemed to be part of that allowance.
If there is no depreciation allowance for that previous year, the unabsorbed depreciation of the earlier
previous year shall become the depreciation allowance of that year. The effect of the provisions of section
32(2) is that unabsorbed depreciation brought forward shall be deemed as the current year depreciation.
Consequently, such unabsorbed depreciation can be set-off not only against income under the head
“Profits and gains of business or profession” but also against income under any other head. Further, the
unabsorbed depreciation can be carried forward indefinitely till it is fully set off.
However, in the order of set-off losses under different heads of income, effect shall first be given to
current year depreciation, then to brought forward business losses and finally to unabsorbed depreciation.
(iii) Section 32(1)(iia) provides that in the case of any new machinery or plant (other than ships and aircraft)
acquired and installed after 31.3.2005 by an assessee engaged in the business of manufacture or
production of any article or thing or in the business of generation or generation and distribution of power,
a further sum equal to 20% of the actual cost of such machinery or plant shall be allowable as a
deduction.
The additional depreciation is available to a new machinery or plant used in the manufacture or
production of any article or thing or generation or generation and distribution of power. Additional
depreciation will be taken into consideration for computing the WDV of the relevant block of assets.
Additional depreciation is not available in respect of the following assets:

(A) any machinery or plant
(i) which has been used in India or outside India by any other person before its installation by the
assessee; or
(ii) installed in any office premises, residential accommodation including accommodation used in the
nature of guest house ; or
(iii) the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or
otherwise) in computing the income under the head “Profits and gains of business or profession”
of any one previous year.
(B) any office appliances or road transport vehicles.
FINAL DT SATC 22B.7
14. Disallowance under section 40(a)(i)/40(a)(ia) of the Income-tax Act, 1961 is attracted where the assessee fails
to deduct tax at source as is required under the Act, or having deducted tax at source, fails to remit the same
to the credit of the Central Government within the stipulated time limit.
The assessee is a resident individual, who was not subjected to tax audit during the immediately preceding
previous year i.e., P.Y.2018-19 (as his turnover was less than ` 100 lakh in that year) and the TDS obligations
have to be considered bearing this in mind.
(i) The obligation to deduct tax at source from interest paid to a resident arises under section 194A in the
case of an individual, only where he was subject to tax audit under section 44AB in the immediately
preceding previous year, i.e., P.Y.2018-19. From the data given, it is clear that he was not subject to tax
audit under section 44AB in the P.Y.2018-19. Hence, disallowance under section 40(a)(ia) is not attracted
in this case.
(ii) In the case of interest paid to a non-resident, there is obligation to deduct tax at source under section 195,
hence non-deduction of tax at source will attract disallowance under section 40(a)(i).
(iii) The scope of section 40(a)(ia) has been expanded w.e.f. A.Y. 2019-20 to cover all sums in respect of
which tax is deductible under Chapter VII-B. Section 192, which requires deduction of tax at source from
salary paid, is covered under Chapter VII-B. Therefore, disallowance under section 40(a)(ia) is attracted
for failure to deduct tax at source under section 192 from salary payment. However, only 30% of the
amount of salary paid without deduction of tax at source would be disallowed.
(iv) The obligation to deduct tax at source under section 194-H from commission paid in excess of ` 15,000
to a resident arises in the case of an individual, only where he was subject to tax audit under section
44AB in the immediately preceding previous year. From the data given, it is clear that he was not subject
to tax audit under section 44AB in the P.Y.2018-19. Hence, there is no obligation to deduct tax at source
under section 194H during the P.Y. 2019-20. Therefore, disallowance under section 40(a)(ia) is not
attracted in this case.
15. Allowability of expenses of M/s. Arora Ltd. for the A.Y. 2020-21
(i) Payment of professional fees is subject to TDS under section 194J. Since no tax is deducted at source, `
15,000, being 30% of the expenditure of ` 50,000 is disallowed under section 40(a)(ia).
(ii) Since the tax was deducted in March, 2020 and paid on or before the due date of filing the return (i.e., on
or before September 30th, 2020), the expenditure on interior works will be allowed as deduction. Hence,
disallowance under section 40(a)(ia) is not attracted.
(iii) The maximum time allowable for deposit of tax deducted at source is upto the due date of filing of return
i.e., 30th September, 2020. In this case, since tax deducted under section 194-I was paid after the due
date of filing the return, ` 4,50,000 being 30% of ` 15,00,000 is disallowed under section 40(a)(ia) for the
previous year 2019-20.
(iv) The tax deducted at source can be deposited on or before the due date of filing of return to avoid
disallowance under section 40(a)(ia). In this case, disallowance would not be attracted since tax deducted
th
during December 2019 was deposited before 30 September 2020 i.e. on 28.09.2020.
16. Section 44AA(1) requires every person carrying on any profession, notified by the Board in the Official
Gazette (in addition to the professions already specified therein), to maintain such books of account and other
documents as may enable the Assessing Officer to compute his total income in accordance with the
provisions of the Income-tax Act, 1961.
Thus, a person carrying on a notified profession shall be required to maintain specified books of
accounts:
(i) if his gross receipts in all the three years immediately preceding the relevant previous year has exceeded
` 1,50,000; or
(ii) if it is a new profession which is setup in the relevant previous year, it is likely to exceed ` 1,50,000 in
that previous year.
In the present case, Vinod is a person carrying on profession as film artist, which is a notified profession.
Since his gross receipts have not exceeded ` 1,50,000 in financial year 2017-18, the requirement under
section 44AA to compulsorily maintain the prescribed books of account is not applicable to him.
17.
Computation of total income of Mr. Ramamurthy for A.Y. 2020-21
Particulars `
Presumptive business income under section 44AE
4 non heavy goods vehicles for 2 months (4 x ` 7,500 x 2) 60,000
Balance 2 non-heavy goods vehicles for 10 months (2 x ` 7,500 x 10) 1,50,000
7 non- heavy goods vehicles for 10 months (7 x ` 7,500 x10) 5,25,000
Business Income 7,35,000
Less: Brought forward business loss of discontinued business 50,000
Total Income 6,85,000
FINAL DT SATC 22B.8
Note: The assessee is eligible for computing the income from goods carriages applying the presumptive
provisions of section 44AE, since he does not own more than 10 goods carriages at any time during the
previous year.
18. Section 44AE would apply in the case of Mr. Sukhvinder since he is engaged in the business of plying goods
carriages and owns not more than ten goods carriages at any time during the previous year.
Section 44AE provides for computation of business income of such assessees on a presumptive basis. The
income shall be deemed to be ` 7,500 from each goods carriage (as it is non-heavy goods vehicle) - for
every month or part the month during which such carriage vehicle is owned by the assessee in the previous
year or such higher sum as declared by the assessee in his return of income.
Mr. Sukhvinder’s business income calculated applying the provisions of section 44AE is ` 9,07,500 (See
Notes 1 & 2 below) and his total income would be ` 9,77,500.
However, as per section 44AE(7), Mr. Sukhvinder may claim lower profits and gains if he keeps and maintains
proper books of account as per section 44AA and gets the same audited and furnishes a report of such audit
as required under section 44AB. If he does so, then his his total income would be ` 1,15,000.
Notes :
1. Computation of total income of Mr. Sukhvinder for A.Y. 2020-21
Particulars Presumptive Where books
Income Are maintained
Income from business of plying goods carriages 9,07,500 45,000
[See Note 2 Below] 70,000 70,000
Other business and non-business income
Total Income 9,77,500 1,15,000
2. Calculation of presumptive income as per section 44AE

Type of carriage No. of Rate per Amount
Months month
9 goods carriage – held throughout the year 12 7,500 8,10,000

1 goods carriage – held upto 2nd May 2 7,500 15,000
1 goods carriage – held from 6th May 11 7,500 82,500
Total 9,07,500
19. Under section 43B, interest on term loans and advances to scheduled banks shall be allowed only in the year
of payment of such interest irrespective of the method of accounting followed by the assessee.
Explanation 3D to section 43B provides that if any interest payable by the assessee is converted into a loan,
the interest so converted and not “actually paid” shall not be deemed as actual payment, and hence would not
be allowed as deduction. Therefore, the interest of ` 1.2 lakhs converted into loan cannot be claimed as
business expenditure.
20. Section 43B provides that the following expenses shall not be allowed as deduction unless the
payments are actually made within the due date for furnishing the return of income under section
139(1):
(i) Any tax, duty, cess or fees under any law in force.
(ii) Any sum payable by the assessee as an employer by way of contribution to provident fund or
superannuation fund or gratuity fund or any other fund for the welfare of the employees;
(iii) Any bonus or commission for services rendered payable to employees;
(iv) Any interest on any loan or borrowings from any public financial institution or State financial corporation
or State industrial investment corporation;
(v) Interest on loans and advances from a scheduled bank;
(vi) Any sum payable by the assessee as interest on any loan or borrowing from a deposit taking
non-banking financial company or systemically important non-deposit taking non-banking
financial company, in accordance with the terms and conditions of the agreement governing
such loan or borrowing,
(vii) Any sum paid as an employer in lieu of earned leave at the credit of his employee.
(viii) Any sum payable to the Indian Railways for the use of railway assets
In case the payment is made after the due date of filing of return of income, deduction can be claimed only in
the year of actual payment.
FINAL DT SATC 22B.9
21.
Computation of Gross Total Income of Mr. Gupta for the A.Y. 2020-21
Particulars ` `
Income from Business or profession
Net profit as per Profit and Loss Account 11,50,000
Add : Expenses not deductible

Donation to Prime Minister Relief Fund (Refer Note -1) 1,00,000
Provision for bad debts (Refer Note-2) 50,000
Family planning expenditure incurred on employees (Refer Note -3) 20,000
Depreciation as per Profit and Loss Account 30,000
Income-tax (Refer Note -4) 1,00,000
Employer’s contribution to recognized provident fund (Note-5) 25,000 3,25,000
Less : Expense allowed 14,75,000

Depreciation as per Income- tax Rules, 1962 40,000
14,35,000
Add : Employee’s contribution included in income as per Section 2(24)(x) 25,000
(Refer Note-6)
Business Income / Gross Total Income 14,60,000
Notes:-
(1) Donation to Prime Minister Relief Fund is not allowed as deduction from the business income. It is
allowed as deduction under section 80G from the gross total income.
(2) Provisions for bad debts is allowable as deduction under section 36(1)(viia) (subject to the limits
specified therein) only in case of banks, public financial institutions, State Financial Corporation and
State Industrial Investment Corporation. Therefore, it is not allowable as deduction in the case of Mr.
Gupta.
(3) Expenditure on family planning is allowed as deduction under section 36(1)(ix) only to a company
assessee. Therefore, such expenditure is not allowable as deduction in the hands of Mr. Gupta.
(4) Income-tax paid is not allowed as deduction as per the provisions of section 40(a)(ii).
(5) Since, Mr. Gupta’s contribution to recognized provident fund is deposited after the due date of filing
return of income, the same is disallowed as per provisions of section 43B.
(6) Employee’s contribution is includible in the income of the employer by virtue of Section 2(24)(x). The
deduction for the same is not provided for as it was deposited after the due date. It has been assumed
that it has not been already debited in the given profit and loss account.
(7) TDS provisions under section 194A are not attracted in respect of payment of interest on bank loan.
Therefore, disallowance under section 40(a)(ia) is not attracted in this case.
(8) Since, the payment of bonus is made in October 2018, hence, no disallowance is attracted.
22.
Computation of total income of Mr. Raju for the A.Y. 2020-21
Particulars ` `
Profits and gains of business or profession
Add: Excess commission paid to brother disallowed under section 10,000

40A(2)
Disallowance under section 40A(3) is not attracted since the limit for Nil
one time cash payment is ` 35,000 in respect of payment to
transport operators. Therefore, amount of ` 33,000 paid in cash to a
transport carrier is allowable as deduction.
Salary paid to staff not recorded in the books (Assuming that the 48,000
expenditure is in the nature of unexplained expenditure and hence,
is deemed to be income as per section 69C and would be taxable @
30% under section 115BBE – no deduction allowable in respect of
such expenditure) [See Note 1 below]
Bank term loan interest paid after the due date of filing of return 40,000
under section 139(1) – disallowed as per section 43B
State VAT penalty paid disallowed [See Note 2 below] 5,000

Depreciation debited to profit and loss account 2,00,000 3,03,000
8,03,000
FINAL DT SATC 22B.10
Less: Dividend from domestic companies [Exempt under section 15,000
10(34)]
Income from agriculture [Exempt under section 10(1)] 1,80,000
Depreciation under the Income-tax Act, 1961 (As per working note) 2,25,000 4,20,000
3,83,000
Income from house property
Annual value of self-occupied property Nil
Less: Deduction under section 24(b) – interest on housing loan 23,000 (23,000)
Gross Total Income 3,60,000
Less: Deduction under section 80C in respect of Principal
repayment of housing loan 50,000
Working Note:
Computation of depreciation under the Income-tax Act, 1961
Particulars `
Depreciation@15% on ` 14 lakh (Opening WDV of ` 12 lakh plus assets purchased 2,10,000

during the year and used for more than 180 days ` 2 lakh) 15,000
Depreciation @7.5% on ` 2 lakh (Cost of assets used for less than 180 days) 2,25,000
Notes (Alternate views):

1. It is also possible to take a view that the salary not recorded in the books of account was an erroneous
omission and that the assessee has offered satisfactory explanation for the same. In such a case, the
same should not be added back as unexplained expenditure, but would be allowable as deduction while
computing profits and gains of business and profession.
2. Where the imposition of penalty is not for delay in payment of sales tax or VAT but for contravention of
provisions of the Sales Tax Act (or VAT Act), the levy is not compensatory and therefore, not deductible.
However, if the levy is compensatory in nature, it would be fully allowable. Where it is a composite levy,
the portion which is compensatory is allowable and that portion which is penal is to be disallowed. Since
the question only mentions “State VAT penalty paid” and the reason for levy of penalty is not given, it has
been assumed that the levy is not compensatory and therefore, not deductible. It is also possible to
assume that such levy is compensatory in nature and hence, allowable as deduction. In such a case, the
total income would be ` 3,05,000.
23.
Computation of business income of Mr. Sivam for the A.Y. 2020-21
Particulars ` `
Net Profit as per profit and loss account 50,000
Add: Inadmissible expenses / losses
Under valuation of closing stock 18,000
Salary paid to brother – unreasonable [Section 40A(2)] 2,000
Printing and stationery paid in cash [Section 40A(3)] 23,200
Depreciation (considered separately) 1,05,000
Short term capital loss on shares 8,100
Donation to public charitable trust 2,000 1,58,300
2,08,300
Less: Deductions items:
Under valuation of opening stock 9,000
Income from UTI [Exempt under section 10(35)] 2,400 11,400
Business income before depreciation 1,96,900
Less: Depreciation (See Note 1) 66,000
1,30,900
Computation of business income as per section 44AD -

As per section 44AD, the business income would be 8% of turnover i.e. 12,11,500 x 8 /100= ` 96,920
The business income under section 44AD is ` 96,920.
As the business income under section 44AD is lower than the business income as per the normal provisions
of the Act, it is advisable for Mr. Sivam to offer his business income under section 44AD.
Notes:
1. Calculation of depreciation
Particulars `
WDV of the block of plant & machinery as on 1.4.2019 4,20,000
Add : Cost of new plant & machinery 70,000
4,90,000
Less : Sale proceeds of assets sold 50,000
4,40,000
WDV of the block of plant & machinery as on 31.3.2020 Depreciation @ 15% 66,000
(No additional depreciation is allowable as the assessee is not engaged in
manufacture or production of any article.)
2. Since GST liability has been paid before the due date of filing return of income under section 139(1), the
same is deductible.
24.
Computation of income under the head “Profits and gains of business or profession” of
Mr. Q for the A.Y. 2020-21
Particulars ` `
Net profit as per profit and loss account 93,950
Add: Expenses not allowable
Expenses on building a new toilet – Capital expenditure, hence 1,00,000
not allowable as per section 37(1).
Interest payable on which tax has not been deducted at source 15,000
[disallowed under section 40(a)] [See Note 1]
Penalty for contravention of Central GST Act [Penalty paid for 24,000
violation or infringement of any law is not allowable as deduction
under section 37(1)]
Payment to IIT, Mumbai for scientific research programme (to be 1,00,000 2,39,000
treated separately) 3,32,950
Less: Income not forming part of business income

Interest from company deposits (chargeable under the head 6,400
“Income from other sources”)(See Note 2 below)
Income-tax refund (not an income chargeable to tax) 8,100 14,500
Less: Weighted deduction@150% under section 35(2AA) for payment to 3,18,450
IIT for an approved scientific research program. 1,50,000
Profit and gains of business or profession 1,68,450
Note –
1. Section 40(a)(ia) provides for disallowance of 30% of any sum paid, on which tax is deductible under
Chapter XVII-B, but the same has not been deducted. Hence, ` 15,000 being 30% of ` 50,000 has to be
added back while computing business income.
2. Interest on company deposits may also be treated as business income presuming that the interest has
been earned by Mr. Q out of available temporary surplus funds which are not immediately required for his
business purposes but nevertheless meant only for Mr. Q’s business activities. In such a case, income
under the head “Profit and gains of business or profession” would be ` 1,24,850.
25.
Profits and gains of business or profession of Mr. A for the year ended 31.3.2020
Particulars ` `
Net profit as per profit and loss account 94,500
(a) Expenses on raising compound wall – capital expenditure, 95,000
hence disallowed
12,000
(b) Interest payable outside India to a non-resident, as tax has not
been deducted at source [Section 40(a)(i)]
24,000
(c) Penalty for contravention of CGST Act [Penalty paid for violation
or infringement of any law is not allowable as deduction under
section 37(1)]
1,00,000 2,31,000
(d) Contribution for scientific research (to be treated separately)
3,25,500
Less: Income not forming part of business income
(a) Interest from company deposits 6,400
(b) Dividend 3,600
(c) Income-tax refund 4,500 14,500
Less: Deduction under section 35 for scientific research 3,11,000
[See Note below]
1,50,000
Profit and gains of business or profession 1,61,000
Note: Contribution to approved scientific research association qualifies for deduction @ 150% under section
35(1)(ii).
26. As per Explanation to section 40A(2), a person shall be deemed to have a substantial interest in a business or
profession, if, -
(1) in case where the business or profession is carried on by a company, such person who, at any time
during the previous year, is the beneficial owner of shares (not being shares entitled to a fixed rate of
dividend, whether with or without a right to participate in profits), carrying not less than 20% of the voting
power.
(2) In any other case, such person who, at any time during the previous year, is beneficially entitled to not
less than 20% of the profits of such business or profession.
Following are the situations under which the substantial interest assumes importance -
(a) Taxability of deemed dividend under section 2(22)(e);
(b) Disallowance of excessive or unreasonable expenditure under section 40A(2) to an individual who has a
substantial interest in the business or profession of the assessee, and
(c) Clubbing of salary income of spouse, under section 64(1)(ii) in respect of remuneration received by the
spouse from a concern in which the individual has a substantial interest.
27.
(a) The entire revenue expenditure of ` 2,40,000 on scientific research related to the business of the
company qualifies for deduction under section 35(1)(i).
Note – If Raghav Industries Ltd. is a company engaged in the business of biotechnology or in any
business of manufacture or production of any article or thing, not being an article or thing specified in the
list of the Eleventh Schedule, it would be entitled to a weighted deduction of ` 3,60,000 (150% of `
2,40,000, being the revenue expenditure on scientific research related to its business) under section
35(2AB), if the in-house research and development facility is approved by the prescribed authority and the
company has entered into an agreement with the prescribed authority for cooperation in such research
and development facility and for audit of accounts maintained for that facility.
(b) As per section 35(1)(iv) read with section 35(2), if any capital expenditure (other than expenditure on
acquisition of land) is incurred on scientific research related to the business carried on by the assessee,
the whole of such capital expenditure is allowable as deduction in the previous year in which it is incurred.
Therefore, ` 7,00,000 (i.e. ` 12,00,000 – ` 5,00,000, being the cost of land) is allowable as deduction for
the A.Y.2020-21. It is assumed that the scientific research is related to the business of Raghav Industries
Ltd.
(c) The amount of ` 50,000 paid to Indian Institute of Science, Bangalore, for scientific research qualifies for
a weighted deduction@150% of the sum paid as per section 35(1)(ii). Therefore, Raghav Industries Ltd.
would be entitled to a deduction of ` 75,000 (i.e., 150% of ` 50,000) for the A.Y.2020-21.
(d) As per section 35DD, one-fifth of the expenditure incurred on demerger would be allowable as deduction
for five successive previous years beginning from previous year 2018-19. Therefore, in the previous year
2019-20, ` 1,00,000, being one-fifth of ` 5,00,000 would be allowable as deduction.
(e) The employer’s contribution to the account of an employee under a pension scheme referred to in section
80CCD, upto 10% of salary of the employee in the previous year, is allowable as deduction under section
36(1)(iva) while computing business income. Disallowance under section 40A(9) would be attracted only
in respect of the amount in excess of 10% of salary. Accordingly, ` 23 lakhs would be allowed as
deduction and ` 7 lakhs would be disallowed.
(f) As per section 2(24)(x), the amount of provident fund contribution recovered from employees i.e. ` 12
lakhs would be taxable as income of Raghav Industries Ltd.
However, the company can claim deduction under section 36(1)(va) of amount credited to the account of
the employee in the provident fund before the due date under the relevant Act.
If ` 7 lakhs has been remitted before the said due date, the same is allowable as deduction. If it has not
been so remitted, then the same is not allowable as deduction. The deduction would be restricted to the
amount remitted before the due date. The balance ` 5 lakhs remitted after the due date under the said
Act but before the due date of filing the return is not allowable as deduction.
(g) The tax of ` 4,50,000 borne by the employer on non-monetary perquisites provided to the employees is
disallowed under section 40(a)(v).
(h) As per section 43A, the gain of ` 1,00,000, arising at the time of making payment in respect of an
imported machinery, due to change in rate of exchange of foreign currency, has to be reduced from the
actual cost of machinery, and depreciation would be computed on such reduced cost.
28. Answer:
(i) Allowable, being business expenditure,
(ii) Capital expenditure eligible for depreciation
(iii) Allowable, if it is incurred on account of commercial expediency,
(iv) Capital expenditure. It will form part of actual cost of machinery
(v) Capital expenditure eligible for depreciation @ 25%.
29. Answer:
(i) Capital receipt but chargeable to tax as business income, specifically covered by section 28;
(ii) Revenue receipt, as the same is received in the course of business;
(iii) Revenue receipt, though chargeable to tax as per system of accounting (mercantile or cash) followed by
the assessee;
(iv) Capital expenditure, as the same is incurred on capital account;
(v) Revenue expenditure for the company; Taxable as 'Salaries' in the hands of the employee-director.
30. Answer: Computation of Deduction u/s 35D for AY 2020-21 [ Discuss the provisions of 35D]
Amount qualifying for deduction is
5% of the cost of the project [5% × 30,00,000] = ` 1,50,000, or
5% of the capital employed in the new unit i.e. 5% ` 40,00,000 = ` 2,00,000.
Whichever is beneficial to the company.
Therefore, the higher of the above two is ` 2,00,000 which is the qualifying amount.
Net qualifying amount - It is the lower of the following two.
a) Gross qualifying amount ` 2,00,000 or.
b) Actual amount of preliminary expenses i.e. ` 11,00,000.
The lower of these two being ` 2,00,000 is the net qualifying amount.
Amount deductible for AY 20-21: - 1/5th of the net qualifying amount i.e. 1/5 ` 2,00,000 = ` 40,000.
31. Answer: Each part payment made to employees in connection their voluntary retirement is deductible in five
equal installments beginning from the year in which such part payment is made to the employees. The
following table shows the deduction available u/s 35DDA to RK Ltd. in various financial years –
Financial Year 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24

Payment of ` 10 lakhs in 2017-18 2 2 2 2 2
Payment of ` 15 lakhs in 2018-19 3 3 3 3 3
Payment of ` 5 lakhs in 2019-20 1 1 1, 1 1
Total (`
` lakhs) 2 5 6 6 6 4 1
Thus, the amount of deduction allowable u/s 35DDA to RK Ltd. in assessment year 2020-21 is ` 6 lakhs.
32. Answer:
Net profit as per profit and loss account 911975
Less : (i) Interest on FD with bank - Taxable as Income from other sources 16500
(ii) Dividend from Indian Co. - Exempt 64360
(iii) Interest on I.T. Refund - Taxable as Income from other sources 230
Profits and gains of business or profession 830885
Add: Income from other sources (Interest on FD and IT Refund) 16730
Total Income 847615
Rounded off- 847620
Note: Securities transaction tax is an allowable expenditure.
33. Answer: Computation of taxable income of Mr. Ram
Net profit as per Profit and Loss A/c 357,900
Add: Not allowable (Household Exp. + Income-tax + Interest on capital + Reserve 49,600
for Bad debts) – 10000 + 30000 + 8400 + 1200
Add : Excess Depreciation debited to P&L A/c (12000 - 10000) 2,000
Add: Undervaluation of closing stock (25,200 x 1/9) (assuming that NRV exceeds cost) 2,800
Less : Undervaluation of opening stock (20,700 x 1/9) (assuming that NRV exceeds cost) -2,300
Gross Total Income 410,000
Less : Deduction u/s 80C for contribution to PPF 1,500
Total income 408,500
34. Answer: Computation of business income of Mrs. Thakur for A.Y. 2020-21 (Amounts in ` )
Net Profit as per Profit & Loss Account for the year ended 31.3.2020 50,750
Add: Expenses not admissible under the Income-tax Act:
Donation paid to son's school 1,500
Capital expenditure (Furniture) 5,000
Depreciation as per books of account (considered separately) 4,000
Excise duty unpaid after 31-7-2020 1,200
(7,500 - 3,500 - 1,000 - 1,800)
30% of Audit fees (being fees for professional services, on which TDS not made) 9,750 21,450
72,200
Less: Amounts not taxable under the Income-tax Act:
Gift from husband 10,000
Income-tax refund 20,000 30,000
42,200
Less: Depreciation under Income-tax Act:

On items already included 2,700
On new furniture (5,000 × 10% ×1/2) (used for less than 180 days) 250 2,950
Profits and gains from business 39,250
35. Answer: Computation of Income from Business (amounts in `)

Net profit as per Profit and Loss Account 1,66,500
Add: (1) Advertisement in a souvenir of political party 3,000
(2) Contribution to RPF (outstanding) 2,100
(3) Under valuation of closing stock [{(60000 x 100) / 80} - 60000] 15,000 20,100
Less : (1) Dividend (Exempt) 5,000
(2) Profit on sale of building (not taxable under this head) 16,500
(3) Under valuation of opening stock [{(40000 x 100) / 80} - 40000] 10,000
(4) Extra Depreciation allowable (1,800 -1,500) 300 31,800
Taxable Profits 1,54,800
36. Answer: Computation of taxable income from Business (amounts in ` )

Gross earnings: Sale of medicines 30,500
Consultation fees 10,000
Visiting fees 8,000 48,500
Less: Allowable expenses viz. Cost of medicines 20,000
Car expenses (1800 × 2 ÷ 3) 1,200
Salaries 1,200
Rent of dispensary 1,200
General Expenses 600
Depreciation allowed Motor car (12000 x 15%) x 2/3 1,200
Surgical equipment (15% × 50% x 6000) 450 25,850
22,650
Note : Since the assessee maintains accounts as per cash basis, therefore, outstanding consultancy fees,
outstanding salaries and sale of medicines on credit will not be considered.
37. Answer: Computation of Income from Business for the Assessment Year 2020-21 (all amounts in ` )
Profit as per Profit and Loss Account 165,600
Add: Advance tax 800
Salary to staff (salary paid to relative to the extent it is treated as excessive) 4,800
Interest on Mohit's capital and loan 7,200
Expenditure on acquisition of copy right (being capital expenditure) 5,600
Expenditure for acquiring know how (capital expenditure, no depreciation will be 24,000
allowed thereon as the same was not put to use during the previous year)
Depreciation 12,000
Provision for Income tax 4,000
Contribution to political party 2,000 60,400
Less: Depreciation as per Income tax 19,200

Depreciation on copyright (5600 x 25% x 1/2) (used for less than 180 days) 700
Outstanding CGST paid during the previous year 10,000 29900
Income from Business 1,96,100
Note : Expenses for arranging a long-term loan are covered by the term 'interest' and are, therefore,
allowable as deduction. Further, since outstanding customs duty of previous year 2018-19 was paid before
due date of furnishing return of income for that year, therefore, the same had been allowed in that year.
However, outstanding sales tax of previous year 2018-19 paid after such due date but during the previous
year 2019-20 will be allowed during the previous year 2019-20.
38. Assessee: Alpha Ltd. Assessment Year 2020-21 (amounts in `)

Net Profit as per Profit and Loss Account 1,250,000
Add: Expenses disallowed or considered separately: -
Excessive payment to relatives u/s 40A(2) [60,000 - 52,000] 8,000
Cash payment in excess of ` 10,000 (whole of ` 52,000) 52,000
Legal expenses 45,000
Scientific research expenses 200,000 305,000
15,55,000
Add: Amount foregone by the creditor is taxable u/s 41(1) 6,000
15,61,000
Less: Admissible expenditure: -
1/5th of amalgamation expenditure of ` 45,000 u/s 35DD 9,000
In-house Research expenses u/s 35(2AB) (150% of 2,00,000) 3,00,000 3,09,000
Taxable Income 12,52,000
Notes:
(a) Cost of replacement of worn out part of machineries is revenue expenses. Since cost of replacement is
included in Repairs, no adjustment is required.
(b) Sale of import entitlements is chargeable as business income under section 28(iiia). Since it is already
credited to profit and loss account, no adjustment is required.
Computation of Income from business of Shri Daga

[for the assessment year 2020-21]
` `
Net profit as per profit & loss account 1,79,095
Less: Items of income credited to Profit & Loss account but are
not taxable under the head "Profit & gains of business of profession"
Rent from agricultural land 950
Revenue from fisheries 4,000
Sale proceeds from canes 6,05,055
Profit on sale of Motor Truck 3,230 (-) 6,13,235
(-) 4,34,140
Fine paid to excise department (see working note 1) 2000
Legal Expenses incurred on defending suit [Capitalised] 2000
Daga's Remuneration (see working note 2) 38,750
Depreciation (considered separately) 91,000
Income tax 25,000
Cultivate on expenses (see working note 3) 4,37,500 (+) 5,96,250
1,62,110
Less: Expenses allowable u/s 28 to 44D but not debited to p&l
Depreciation's per Income-tax Rules 50,000
Manufacturing expenses on cane produced and consumed
in the factory (see working note 4) 68,000 1,18,000
Income from business 44,110
Working Notes:
1. Fine paid to excise department. It is presumed that fine is paid for infringement of central excise law.
2. Salary paid to the proprietor of the firm is not allowable.
3. Cultivate on expenses: Since the agricultural income on account of sale proceeds of cane has been
taken out from the normal business receipts, any expenditure incurred towards this account (i.e. to earn
agricultural income) is also not allowable.
4. Manufacturing expenses: If any item is produced in the factory, the income from which is considered
separately, and the same item is used in normal business, the fair market value of the item produced has
to be charged as expenditure in the normal business. Therefore, the average market price of the cane
produced and consumed in the factory is allowable as business expenditure. The expenses is under
charged by ` 68,000 [i.e. ` 6,00,000 -` ` 5,32,000].
39. Where an assessee is engaged in the composite business of growing and curing of coffee, the income will be
segregated between agricultural income and business income, as per Rule 7B of the Income-tax Rules, 1962.
As per the above Rule, income derived from sale of coffee grown and cured by the seller in India shall be
computed as if it were income derived from business, and 25% of such income shall be deemed to be income
liable to tax. The balance 75% will be treated as agricultural income.
Particulars ` ` `
Sale value of cured coffee 22,00,000
Less: Expenses for growing coffee 3,10,000
Car expenses (80% of ` 50,000) 40,000
Depreciation on car (80% of 15% of ` 3,00,000) 36,000
Total costs of agricultural operations 3,86,000
Expenditure for coffee curing operations 3,00,000

Add: Depreciation on machinery (15% of 15,00,000) (See Note 2,25,000
below) 5,25,000
Total cost of the curing operations
9,11,000
Total cost of composite operations 12,89,000
Total profits from composite activities 3,22,250
Amount regarded as business income (25% of above) 9,66,750
Amount treated as agricultural income (75% of above)
Computation of value of depreciable assets as on 31.3.2020
Particulars ` ` `
Car Opening value as on 1.4.2019 3,00,000
Depreciation thereon at 15% 45,000
Less: Disallowance @20% for personal use 9,000
Depreciation actually allowed 36,000
Closing value as on 31.3.2020 2,64,000
Machinery Opening value as on 1.4.2019 15,00,000

Less: Depreciation @ 15% 2,25,000
Closing value as on 31.3.2020 12,75,000
Explanation 7 to section 43(6) provides that in cases of ‘composite income’, for the purpose of computing
written down value of assets acquired before the previous year, the total amount of depreciation shall be
computed as if the entire composite income of the assessee (and not just 25%) is chargeable under the head
“Profits and gains of business or profession”. The depreciation so computed shall be deemed to have been
“actually allowed” to the assessee.
FINAL DT SATC 22C.1
Practical Questions – Set B
1. Will the provision of Section 40A(3) be attracted in the following cases:
(i) R purchases goods worth ` 17,000 from G against one bill but makes payment of ` 8,000 & ` 9,000 at
different times on the same date.
(ii) R makes a payment of ` 40,000 as donation by cheque to National Defence Fund.
(iii) R makes a purchase of goods of ` 65,000 and makes payment of ` 55,000 by account payee cheque
and ` 10,000 in cash.
(iv) R makes a purchase of goods of ` 48,000 on 14.2.2020 and makes the payment as under:
(I) ` 30,000 by account payee cheque on 15.2.2020,
(II) ` 9,000 in cash on 15.2.2020,
(III) ` 9,000 in cash on 16.2.2020.
(v) R purchases a building for ` 10,00,000 and makes the payment in cash.
(vi) R, a dealer in real estate purchases buildings for ` 10,00,000 and makes the payment by crossed
cheque.
[PAST CMA QUESTION]
Solution:
(i) Section 40A(3) shall be applicable and ` 17,000 shall be disallowed.
(ii) Section 40A(3) shall not be applicable. As donation is not allowable as deduction under section 30 to 37 but
allowable under section 80G from GTI.
(iii) Section 40A(3) is not applicable.
(iv) Section 40A(3) is not applicable.
(v) No, section 40A(3) is not applicable for purchase of a capital asset. However, as per Section 43(1), this
payment (as made in cash) will not form part of Actual Cost for the asset.
(vi) Entire ` 10,00,000 shall be disallowed as payment is not by account payee cheque.
2. Mr. Alok a senior citizen, owns a property consisting of two blocks of identical size. The first block is used
for business purposes. The other block has been let out from 1.4.2019 to his cousin for ` 30,000 p.m. The
cost of construction of each block is ` 6 lacs (fully met from bank loan), rate of interest on bank loan is
10% p.a. The construction was completed on 31.3.2019. During the year ended 31.3.2020, he had to pay a
penal interest of ` 5,000 in respect of each block on account of delayed payments to the bank for the
borrowings. The normal interest paid by him in respect of each block was ` 62,000. Principal repayment
for each block was ` 33,000. An identical block in the same neighbourhood fetches a rent of ` 35,000 per
month. Municipal Tax paid in respect of each block was ` 15,000.
The income from business prior to adjustment towards depreciation on any asset is ` 3,20,000. He follows
Mercantile System of Accounting. Depreciation on equipments used for business is ` 40,000.
On 23.2.2020, he sold shares of B Ltd., a listed share in BSE for ` 2,50,000. The share had been purchased
10 months back for ` 1,90,000. Security transaction tax paid may be taken as ` 250. Brought forward
business loss of a business discontinued on 12.1.2013 is ` 1,00,000. This loss has been determined in
pursuance of a return of income fled in time and the current year is the seventh year.
The following payments were affected by him during the year:
• LIP of ` 24,000 on his life and ` 15,000 for his son aged 22, engaged as a software engineer and
drawing salary of ` 25,000 per month.
• Mediclaim premium of ` 8,000 for himself & ` 5,000 for above son. The premiums were paid by
cheque.
You are required to compute the Total Income for the Assessment Year 2020-21. The various heads of
income should be properly shown. Ignore the interest on bank loan for the period prior to 1.4.2019, as the
bank had waived it. [PAST CMA QUESTION]
Solution:
Computation of Total Income of Mr. Ashok for A.Y. 2020-21
Particulars Amount ` Amount ` Amount `
(1) Income from House Property (Let out)
Gross Annual Value (being Fair rent) 4,20,000
Less: Municipal Tax 15,000
Net Annual Value (NAV) 4,05,000
Less: Deduction:-
u/s 24(a) Standard Deduction (30% of NAV) 1,21,500
u/s 24(b) Interest on loan 62,000 1,83,500 2,21,500
FINAL DT SATC 22C.2
(2) Profits and Gains of Business or Profession

Net Profit before depreciation 3,20,000
Less: Expenditure allowed but not debited in P & L Account
Depreciation on equipment 40,000
Depreciation on building i.e. 10% of ` 5,00,000 60,000 1,00,000
Profits and Gains of Business or Profession of current year 2,20,000
Less: Brought forward losses set off u/s 72 1,00,000 1,20,000
(3) Capital Gains
Consideration for Transfer 2,50,000
Less: Cost of acquisition (1,90,000)
Short Term Capital Gains 60,000
Less: Deduction u/s
80C: LIC Premium paid 39,000
Repayment of bank loan 33,000 72,000
80D: Medical insurance premium 8,000 80,000
Notes :
1. Penal interest is not allowed u/s 24(b)
2. It has been assumed that interest, municipal tax on property used for business have already being charged
while computing ―Business Income Before Depreciation i.e. ` 3,20,000.
3. STT is not allowed as expenditure on transfer.
3. Mr. Vishnu carries on his own business. An analysis of his trading and profit & loss for the year ended 31-
3-2020 revealed the following information:
(1) The net profit was ` 11,20,000.
(2) The following incomes were credited in the profit and loss account :
(i) Dividend from UTI: ` 22,000.
(ii) Interest on debentures: ` 17,500.
(iii) Winnings from races: ` 15,000.
(3) It was found that some stocks were omitted to be included in both the opening and closing stocks, the
value of which were: Opening stock: ` 8,000. Closing stock: ` 12,000.
(4) ` 1,00,000 was debited in the profit and loss account, being contribution to a University approved and
notified under Section 35(1)(ii).
(5) Salary includes ` 20,000 paid to his brother which is excess, as compared to market standards, to the
extent of ` 2,500.
(6) Advertisement expenses include 15 gift packets of dry fruits costing ` 1,000 per packet presented to
important customers rs
(7) Total expenses on car was ` 78,000. The car was used both for business and personal purposes. ¾th
is for business purposes.
(8) Miscellaneous expenses included ` 30,000 paid to Road travel Co., a goods transport operator in cash
on 31-1-2020 for distribution of the company's product to the warehouses.
(9) Depreciation debited in the books was ` 55,000. Depreciation allowed as per Income-tax Rules, 1962
was ` 50,000.
(10)Drawings ` 10,000.
(11)Investment in NSC ` 15,000.
Compute the total income of Mr. Vishnu for the A.Y 2020-21. PAST CMA QUESTION
Solution: Computation of total income of Mr. Vishnu for the A.Y. 2020-21
Particulars `
Profits and gains of business or profession (Working Note 1) 10,71,500
Income from other sources (Working Note 2) 32,500
Less: Deduction under Section 80C (Investment in NSC) 15,000

FINAL DT SATC 22C.3
Working Notes:
1. Computation of profits and gains of business or profession
Particulars ` `
Add: Expenses debited to profit and loss account but not allowable as
deduction
Salary paid to brother disallowed to the extent considered unreasonable 2,500
[Section 40A(2)]
Motor car expenses attributable to personal use not allowable (` 78,000 x ¼) 19,500
Depreciation debited in the books of account 55,000
Drawings (not allowable since it is personal in nature) [Note (iii)] 10,000
Investment in NSC [See Note(iii)] 15,000 1,02,000
12,22,000
Add: Under statement of closing stock 12,000
12,34,000
Less: Under statement of opening stock 8,000
12,26,000
Less: Contribution to a University approved and notified under Section 35(1)(ii) is
eligible for weighted deduction @ 150%. Since only the actual contribution
(100%) has been debited to profit and loss account, the additional 50% has to
be deducted. 50,000
11,76,000
Less: Incomes credited to profit and loss account but not taxable as business
income
Income from UTI [Exempt under Section 10(35)] 22,000
Interest on debentures (taxable under the head "Income from other sources") 17,500
Winnings from races (taxable under the head "Income from other sources') 15,000 54,500
11,21,500
Less: Depreciation allowable under the Income-tax Rules, 1962 50,000
10,71,500
Notes:
(i) Advertisement expenses of revenue nature, namely, gift of dry fruits to important customers, is incurred wholly
and exclusively for business purposes. Hence, the same is allowable as deduction under Section 37.
(ii) Disallowance under Section 40A(3) is not attracted in respect of cash payment of ` 30,000 to Road Travel
Co., a goods transport operator, since, in case of payment made for plying, hiring or leasing goods carriages,
an increased limit of ` 35,000 is applicable (i.e. payment of upto ` 35,000 can be made in cash without
attracting disallowance under Section 40A(3)).
(iii) Since drawings and investment in NSC have been given effect to in the profit and loss account, the same
have to be added back to arrive at the business income.
2. Computation of "Income from other sources"

Particulars `
Interest on debentures 17,500
Winnings from races 15,000
32,500
Note:
The following assumptions have been made in the above solution:
1. The figures of interest on debentures and winnings from races represent the gross income (i.e., amount
received plus tax deducted at source).
2. As per the question, depreciation as per Income-tax Rules, 1962 is ` 50,000. It has been assumed that, in
the said figure of ` 50,000, only the proportional depreciation (i.e., 75% for business purposes) has
been included in respect of motor car.
4. Examine the taxability or allowability or otherwise in the following cases while computing income under
the head "Profits and Gains from Business or Profession" to be declared in the return of income for the
assessment year 2020-21:
(i) Amount received towards power subsidy with a stipulation that the same is to be adjusted in the
electricity bills.
(ii) Donations received by a person in the course of carrying on vocation, from his followers.
(iii) Profit derived by an assessee engaged in carrying the business as dealers in shares, on exchange of
the shares held as stock in trade of one company with the shares of other company. [CA-FINAL]]

FINAL DT SATC 22C.4
Answer
Taxability of the following receipts/income while computing income under the head “Profits and gains of
business or profession”
(i) Power subsidy received by the assessee is revenue in nature as it goes towards reduction of the electricity
bills. Therefore, the subsidy is taxable as business income.
(ii) Donations received by a person from his followers in the course of carrying on vocation for the furtherance of
the objects of his vocation were receipts arising from the carrying on of his vocation and not casual or non-
recurring receipts. The Supreme Court, in Dr. K. George Thomas vs. CIT (1985) 156 ITR 412, held that such
donations are taxable as a business income as there is a direct nexus between the vocation carried on by the
assessee and the receipt of such donation.
(iii) The difference between the price of shares of the first company and the market value of shares of the new
company on the date of such exchange has to be treated as profit derived by the dealer in shares (on
exchange of shares held as stock-in-trade of first company with the shares of the new company) in the normal
course of his business, and hence such profit is taxable as business income.
5.
(A) Explain in brief, the treatment as to their taxability and/or allowability, under the provisions of the
Income-tax Act, 1961, for the assessment year 2020-21, in the following cases:
(i) S Ltd. receives a sum of ` 10 lakhs from K Ltd. on 3rd January, 2020 for agreeing not to carry on
any business relating to computer software in India for the next three years.
(ii) P Ltd. paid ` 50 lakhs as sales commission for the year ended 31.03.2020, without deducting tax at
source, to Mr. Rodrigues (non-resident) who acted as his agent for booking orders, from various
customers who are outside India.
(B) Can the following transactions be covered under section 43B for disallowance?
(i) A bank guarantee given by a company towards disputed tax liabilities.
(ii) Interest payable to GST Department but not paid before filing of return. [CA-FINAL]]
Answer
(A)
(i) As per section 28, any sum received under an agreement for not carrying out any activity in relation to any
business (i.e., non-compete fee) is chargeable to income-tax under the head “Profits and gains of
business or profession”.
Accordingly, ` 10 lakhs received by S Ltd. from K Ltd. for agreeing not to carry on any business relating to
computer software in India for the next three years is chargeable to income-tax under the head “Profits
and gains of business or profession”.
The amount shall be allowed as deduction to K Ltd. provided adequate tax has been deducted at source
under section 194J on the payment so made to S Ltd.
(ii) A foreign agent of an Indian exporter operates in his own country and no part of his income accrues or
arises in India. His commission is usually remitted directly to him and is, therefore, not received by him or
on his behalf in India. The commission paid to the non-resident agent for services rendered outside India
is, thus, not chargeable to tax in India.
Since commission income for booking orders by non-resident who remains outside India is not subject to
tax in India, consequently, disallowance under section 40(a)(i) is not attracted in respect of payment of
commission to such non-resident outside India even though tax has not been deducted at source. If the
amount of ` 50 lakhs was remitted to Mr. Rodrigues outside India in foreign currency, then disallowance
under section 40(a)(i) would not be attracted for non-deduction of tax at source.
However, since the question states that P Ltd. paid ` 50 lakhs as sales commission, it is possible to infer
that the payment is made in India (as it is made in Indian currency), in which case, the income would be
taxable in the hands of the non-resident. Consequently, disallowance under section 40(a)(i) for non-
deduction of tax at source would be attracted.
(B)
(i) For claiming deduction of any expense listed under section 43B, the requirement stipulated in that section
is the actual payment and not deemed payment. Furnishing of bank guarantee cannot be equated with
actual payment. Actual payment requires that money must flow from the assessee to the public
exchequer as such as specified in section 43B. Therefore, deduction of an expense covered under
section 43B cannot be claimed by merely furnishing a bank guarantee [CIT v. McDowell & Co Ltd (2009)
314 ITR 167 (SC)]
(ii) The amount of interest payable is part of the GST and, therefore, the provisions of section 43B are
attracted in respect of such interest also. Therefore, interest payable to GST department, which is not
paid before the due date of filing of return of income, would attract disallowance under section 43B.
FINAL DT SATC 22C.5
6. Can the second proviso to section 32(1) be applied to restrict the additional depreciation under section
32(1)(iia) to 50%, if the new plant and machinery was put to use for less than 180 days during the previous
year? PAST CMA QUESTION
Solution:
Relevant Judicial Case: MM Forgings Ltd. v. ACIT (2012) 349 ITR 0673 (Mad.)
In this case, the Assessing Officer, by applying the second proviso to section 32(1), restricted the allowability of
depreciation to 50% of the amount of additional depreciation computed under section 32(1)(iia), since the new
plant and machinery was put to use for less than 180 days during the previous year. The assessee argued that he
has satisfied all the conditions stipulated under section 32(1)(iia), and therefore, the depreciation under section
32(1)(iia) should not be restricted to 50% by resorting to the second proviso to section 32(1).
The Commissioner (Appeals) and Appellate Tribunal, however, affirmed the action of the Assessing Officer.
On appeal, the Madras High Court observed that clause (iia) was inserted by the Finance Act, 2002, with
effect from April 1, 2003, in the second proviso to section 32(1). Therefore, it was imperative that on and
after April 1, 2003, the claim of the assessee made under section 32(1)(iia) had to be necessarily allowable
by applying the second proviso to section 32(1).
As per the second proviso to section 32(1), which specifically mentions that where an asset referred to in, inter
alia, clause (iia) of section 32(1) is acquired by the assessee during the previous year and is put to use for the
purpose of business or profession for a period of less than 180 days in that previous year, the deduction in respect
of such asset shall be restricted to 50% of the amount calculated at the prescribed percentage under section
32(1)(iia).
The Madras High Court held that if an asset is acquired on or after 1.04.2003, it was mandatory that the claim of
the assessee made under section 32(1)(iia) had to be necessarily assessed by applying the second proviso to
section 32(1).
Since there is a statutory stipulation restricting the allowability of depreciation to 50% of the amount computed
under section 32(1)(iia), where the asset is put to-use for less than 180 days, the amount of depreciation allowable
has to be restricted to 50% of the amount computed under section 32(1)(iia). The High Court, accordingly,
affirmed the order of the Tribunal.
7. The business profit of T Ltd., a tea growing and manufacturing company, is ` 120 lacs (before deduction
under section 33AB) for the assessment year 2020-21. It deposits ` 50 lacs with NABARD for claiming
deduction under section 33AB. It wants to claim set-off of brought forward business loss of ` 40 lacs. Find
out the taxable income of T Ltd. for the assessment year 2020-21 [CA-FINAL]]

FINAL DT SATC 22C.6
Answer
An assessee, engaged in growing and manufacturing tea in India, is entitled to a deduction under section 33AB, in
respect of the amount deposited by the assessee to an account maintained with NABARD as per scheme
approved by Tea Board, to the extent of lower of the following two amounts –
(i) Amount deposited to the account maintained with NABARD within 6 months from the end of the previous year
or before the due date for filing the return of income, whichever is earlier;
(ii) 40% of profits of such business computed under the head “Profits and Gains of Business or Profession”
before making any deduction under this section.
The above deduction will be allowed before setting off brought forward business loss under section 72.
Computation of taxable income of T Ltd. for the A.Y. 2020-21

Particulars ` (in lacs) ` (in lacs)
Profit before deduction under section 33AB 120.00
Less: Deduction under section 33AB for deposit to the account
with NABARD being lower of the following amounts:
Amount deposited with NABARD 50
40% of business profit i.e., 40% of ` 120 lacs 48 48.00
72.00
Less: 60% of ` 72 lacs, being agricultural income as per Rule 8 43.20
28.80
Less: Set of brought forward loss under section 72 28.80
Taxable business income Nil
Total Income Nil
Note - The balance business loss of ` 11.20 lacs (i.e., ` 40 lacs – ` 28.80 lacs) can be carried forward to the next
year, assuming that the time limit of 8 years for carry forward of business loss has not expired.
8. Raja Ltd., made a provision on 31.3.2020 of ` 85,500 against a bill of supplier of raw material by charging
the amount to profit and loss account and claimed deduction thereof while computing the income
chargeable to tax for A.Y. 2020-21. The amount of ` 40,000 not paid to the party till 31.3.2020 was paid in
cash on 11.6.2020. The Assessing Officer issued show cause notice to the company to rectify the
computation of income for the A.Y. 2020-21 on account of payment made in cash on 11.6.2020. Can the
Assessing Officer do so? [CA-FINAL]]
Answer
Section 40A(3A) provides that where an allowance has been made in the assessment for any year in respect of
any liability for any expenditure incurred by the assessee and subsequently, during any previous year, the
assessee makes any payment in respect of such liability in a sum exceeding ` 10,000 otherwise than by an
account payee cheque drawn on a bank or by an account payee bank draft, the payment so made shall be
deemed to be profits and gains of business or profession of the subsequent year.
Section 40A(3A) is attracted in this case since the company has made a cash payment of ` 40,000 in respect of a
liability incurred and allowed earlier. Accordingly, ` 40,000, will be added in the computation of income for the
A.Y.2021-22 (considering that the payment was made on 11.6.2020).
The action of the Assessing Officer to issue show cause notice to rectify the computation of income of earlier
assessment year is not valid. The payment would go to increase the assessable income of the assessee for the
previous year relevant to the assessment year in which such payment is made.
9. GP Ltd. was incorporated on 31.12.2018 for manufacture of tyres and tubes for motor vehicles. The
manufacturing unit was set up on 30.4.2019 in Delhi. The company commenced its manufacturing
operations on 1.5.2019. The total cost of the plant and machinery installed in the unit is ` 100 crores. The
said plant and machinery included second hand plant and machinery bought for ` 10 crores and new
plant and machinery for scientific research relating to the business of the assessee acquired at a cost of `
10 crores.
Compute the amount of deduction allowable under section 32 of the Income-tax Act, 1961 in respect of the
assessment year 2020-21. Furnish explanations in support of your computation. [CA-FINAL]]

FINAL DT SATC 22C.7
Answer
Computation of depreciation allowable for the A.Y. 2020-21 in the hands of GP Ltd.
Total cost of plant and machinery 100.00
Less: Used for Scientific Research (Note 1) 10.00
90.00
Normal Depreciation @ 15% on ` 90 crores 13.50
Additional Depreciation:
Cost of plant and machinery 100.00
Less: Second hand plant and machinery (Note 2) ` 10.00
Plant and machinery used for scientific research, the
whole of the actual cost of which is allowable as
deduction under section 35(2)(ia) (Note 2) ` 10.00 20.00
80.00
Additional Depreciation@20% 16.00
Depreciation allowable for A.Y.2020-21 29.50
Notes:
(1) As per section 35(2)(iv), no depreciation shall be allowed in respect of plant and machinery purchased for
scientific research relating to assessee’s business, since the entire expenditure is deductible under section
35.
acquired and installed after 31.3.2005 by an assessee engaged in the business of manufacture or production
of any article or thing or engaged in the business of generation or generation and distribution of power, at the
rate of 20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia, –
(i) any machinery or plant which, before its installation by the assessee, was used either within or outside
(ii) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of
depreciation or otherwise) in computing the income chargeable under the head “Profit and gains of
business or profession” of any one previous year.
In view of the above provisions, additional depreciation cannot be claimed in respect of –
(i) Second hand plant and machinery; and
(ii) New plant and machinery purchased for scientific research relating to assessee’s business in respect of
which the whole of the capital expenditure can be claimed as deduction under section 35(1)(iv) read with
section 35(2)(ia).
10. XYZ Ltd. incurred expenditure amounting to ` 3,00,000 in connection with the issue of rights shares and `
2,00,000 in connection with the issue of bonus shares during the year ending 31.3.2020. The company
seeks your opinion in the matter of eligibility for deduction of the expenditure incurred from its business
profits for the assessment year 2020-21. [CA-FINAL]]
Answer
The Supreme Court has, in Brooke Bond India Ltd. v. CIT (1997) 225 ITR 798 (SC), held that expenditure
incurred by a company in connection with issue of shares with a view to increase its share capital is
directly related to the expansion of its capital base and, therefore, constitutes a capital expenditure. The
issue of rights shares results in expansion of the capital base of XYZ Ltd. Hence, expenditure of ` 3,00,000
incurred by the company in connection with the issue of rights shares is a capital expenditure and is not
allowable as a business expenditure.
On the other hand, the issue of bonus shares does not result in inflow of fresh funds or increase in the capital
employed. It is merely capitalization of reserves. The issue of bonus shares does not expand the capital base of
the company. The total funds available with the company and its capital structure will remain the same on issue of
bonus shares. The Supreme Court, in CIT v. General Insurance Corporation (2006) 286 ITR 232, considered
this effect of issue of bonus shares and ruled that expenditure incurred in connection with the issue of
bonus shares was allowable as revenue expenditure. Hence, the expenditure amounting to ` 2,00,000
incurred in connection with the issue of bonus shares is deductible from its business profits for the assessment
year 2020-21.
11. A company engaged in textile manufacturing, debited to its Profit & Loss Account a sum of ` 6,00,000,
being the interest on loan of ` 60,00,000 taken for financing its expansion scheme. The plant and
machinery purchased for the project with the loan were not received during the year and those were still
in transit at the end of the year. A sum of ` 60,000 was paid to a broker who arranged the loan. Discuss
the admissibility or otherwise of the interest and brokerage on borrowing. [CA-FINAL]]
FINAL DT SATC 22C.8
Answer
Interest paid in respect of capital borrowed for the purposes of business or profession is admissible under section
36(1)(iii). However, the proviso to section 36(1)(iii) says that interest paid in respect of capital borrowed for
acquiring an asset (whether capitalized in the books of account or not) for any period beginning from the date on
which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use will
not be allowed as deduction.
In this case, the asset (plant & machinery) was not put to use till the end of the previous year. Therefore, interest
of ` 6,00,000 will not be allowed as a deduction. However, the cost of the asset shall be increased by the amount
of interest and depreciation shall be admissible on the enhanced cost of ` 66,00,000, once the asset is put to use.
As regards the brokerage of ` 60,000 paid to a broker for arranging the loan there are two possible views
–
The first view is that since the definition of the term “interest” under section 2(28A) includes service fee or other
charges in respect of moneys borrowed, “brokerage” can be considered to fall under the scope of the term “other
charges” and is therefore covered by the definition “interest”. Hence, brokerage of ` 60,000 for arranging the loan
will be treated in the same way as interest and capitalized with the cost of the asset.
The alternate view is based on the High Court decision in C. Moolchand v. CIT (1956) 29 ITR 449 (Hyd.),
where it was held that brokerage or commission paid to an agent for arranging a loan for the purpose of business
is not allowable as deduction under section 36(1)(iii), but allowable under section 37(1). As per this view, `
60,000 paid to broker for arranging the loan is allowable under section 37(1).
12. A company had an inventory of closing stock on 31.3.2020, the cost of manufacture of which was ` 100
lacs. The goods were liable for GST. Since the GST was eligible for deduction only on actual payment, the
company valued the closing stock at cost viz. ` 100 lacs. Discuss the position from the taxation point of
view. [CA-FINAL]]
Answer
Under section 145A, the valuation of inventory has to be carried out by including the amount of tax, duty actually
paid or incurred by the assessee to bring the goods to the place of its location and condition on the date of
valuation. Therefore, GST should be included in the valuation of closing stock as on 31.3.2020 and the
deduction of such GST shall be available as per the provisions of section 43B.
13. The WDV of Plant and Machinery on 01-04-2019 of X Ltd. engaged in manufacturing of PVC granules is `
1,000 lacs. Company purchased additional plant and machinery for ` 800 lacs on 18.04.2019 inclusive of a
second-hand machine imported from China of ` 200 lacs to increase its installed capacity of production
from 1000 TPA to 1500 TPA. The production from new machine was taken w.e.f. 1.12.2019. Workout, by
giving reasons, the amount of allowable depreciation. [CA-FINAL]]
Answer
Provisions of section 32(1)(iia) specify that the assessee engaged in the business of manufacture or production of
any article or thing or engaged in the business of generation of generation and distribution of power is entitled for
an additional depreciation @ 20% of the actual cost of such plant & machinery acquired and installed.
It is further stated in the proviso to section 32(1)(iia) that the additional depreciation shall not be available in
respect of those plant & machinery which, before its installation by the assessee, were used either within India or
outside India by any other person. The depreciation allowable will be as under:-

Depreciation on WDV of machinery as on 1st April, 2019 - ` 1000 lacs @ 15% 150
Depreciation on plant & machinery purchased on 18th April but actual
production commenced w.e.f. 1st December. Depreciation will be restricted to
50% of the normal depreciation i.e. 50% of (` 800 lacs x 15%) 60
Additional depreciation @ 20% of the actual cost of new plant & machinery.
This depreciation is also to be restricted to 50% since production has
commenced only on 1st December.
50% of (20% of ` 600 lacs) 60
Total Depreciation 270
Note - Increase in capacity is not a condition or relevant factor for the purpose of getting additional /
accelerated depreciation. Balance 50% AD will be available in next AY.

FINAL DT SATC 22C.9
14. By virtue of an agreement entered into on 1.9.2019 between X Ltd. and Y Ltd., X Ltd. Agrees not to carry
on any business relating to computer software in India for the next 3 years, for which Y Ltd. agrees to pay
a sum of ` 12,00,000 to X Ltd. The said amount was paid on 1st December, 2019. Indicate treatment of such
receipt in the hands of X Ltd. for the A.Y. 2020-21. [CA-FINAL]]
Answer
As per section 28(va), the following sums received or receivable, in cash or kind under an agreement shall be
taxable as income from business: (a) any sum for not carrying out any activity in relation to any business or
profession; or (b) any sum for 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.
The instant case clearly falls within the ambit of section 28(va)(a). As such, the receipt of ` 12,00,000 is
chargeable to tax as business income in the hands of X Ltd.
15. M/s. PR and M/s. ST are firms with common partners carrying on different businesses. M/s. PR had taken
a loan from M/s. ST for the purpose of its business. Interest on the loan for the year ending 31.3.2020
worked out to ` 20,000. M/s. PR deducted tax of ` 2,000 on interest and paid the balance sum of ` 18,000 in
cash to M/s. ST on 31.3.2020. Tax deducted was remitted to the credit of the Central Government on
1.12.2020. How will you treat the interest paid while computing the total income of M/s. PR for the
assessment year 2020-21? [CA-FINAL]]
Answer
Section 40(a)(ia) provides that 30% of any sum payable to resident shall not be allowed as deduction in computing
business income, if tax deductible at source has not been deducted thereon or if deducted, has not been paid on
or before the prescribed time. The time limit for remitting the amount of tax deducted at source is upto the ‘due
date’ for filing the return prescribed under section 139(1) i.e. 30th September, 2020.
Thus, the remittance on 1.12.2020 i.e., after the due date of filing of return, would attract disallowance of ` 6,000
(30% of ` 20,000) under section 40(a)(ia). The fact that M/s PR & M/s ST are firms with common partners is
not relevant in this context.
16. Write short notes on the following:

Conditions for allowing deduction of bad-debts under Income Tax Act. PAST CMA QUESTION)
Answer: Following are the conditions for allowing bad debts as deduction:
1. There must be a debt; unless there is an admitted debt, it cannot be allowed as bad debt when the amount
becomes irrecoverable
2. It must be incidental to the business or profession of the assessee. In other words, debt not connected with
business/profession carried on by the assessee or not arising out of the operation of his business or
profession.
3. The debt must have been taken into account in computing assessable income of the previous year or earlier
year. This is not relevant if bad debt represents money lent in the ordinary course of money lending or
banking business.
17. For claiming deduction of bad debts, under section 36(1)(vii) of the Income-tax Act, 1961, is it necessary
for the assessee to establish that the debt had, in fact, become irrecoverable?
PAST CMA QUESTION
Answer:
Provision of Laws: In order to claim deduction of bad debt u/s 36(1)(vii) of Income Tax Act, the following points
must be satisfied:
There must be a debt
Debt must be incidental to the business or profession of the assessee.
Debt must have been taken into account in computing assessable income.
Debt must have been written off in the Books of Account of the assessee.
However, w.e.f. 1st April, 1989, the condition for claim of deduction under section 36(1)(vii) of income tax act is
that the bad debts should be written off as irrecoverable in the accounts of the assessee for the previous year.
Therefore, there is presently no requirement to prove that the debt has actually become irrecoverable.
Fact of case and Decision: A similar fact to the present issue come up before Hon'ble Apex Court in case of
T.R.F. Ltd. vs. CIT (2010) 323 ITR 397 (SC) and it was held that in order to obtain deduction in relation to bad

FINAL DT SATC 22C.10
debts under section 36(1)(vii), it is not necessary for the assessee to establish that the debt, in fact, has
become irrecoverable. It is enough if the bad debts are written off as irrecoverable in the accounts of the
assessee for the relevant previous year.
18. What would be your advice regarding admissibility of the following items of expenditure in computing the
business income:
(i) Travelling expenses include a sum of ` 15,000 incurred by a Director in travelling abroad for
negotiating purchase of plant & machinery.
(ii) Amount payable as damages to Govt, on account of shortfall in export target.
(iii) Overdraft from bank for payment of income tax; interest charged by the bank is ` 20,000.
(iv) Payment of interest of ` 40,000 on monies borrowed from bank for payment of dividends to
shareholders.
(v) ` 12,000 paid for shifting of business from the original site to the present place which is more
advantageously located.
(vi) Retrenchment compensation of ` 4 lakhs paid to the workmen on the closure of one of the units.
(vii) Fees paid to the Registrar of Companies for bringing about a change in the Memorandum and
Articles of Association in regard to issue of Equity,
[Past CMA Questions]
Answer:
(i) Traveling expenses incurred by the Director for negotiating the purchase of Plant &, Machinery is a capital
expenditure, and hence to be disallowed.
(ii) The payment is not for any infraction of law but for failure to reach a target undertaken by the company being
payment made wholly in the course of business, it is deductible.
(iii) Interest on overdraft taken to pay income tax is not allowable u/s 36(1)(iii)
(iv) Interest on borrowings utilized for payment of dividend is allowable u/s 36(1)(iii).
(v) Shifting expense of business premises resulting in an expenditure of enduring benefit is a capital expenditure
and is not allowable,
(vi) Retrenchment compensation payable to workmen on the total closure of a business cannot be allowed
as deduction as the expenses are not incurred for the purpose of carrying on of its business. When,
however the tax payer close one of its units and continues to carry on the same business as before, the
compensation will be admissible u/s 37(1).
(vii) Fee paid to Registrar of Companies for bringing about change in Memorandum & Articles of Association is a
capital expenditure, where it relates to issue of equity shares. Where alterations are warranted by the
changes made in the Companies Act, the expenses are allowable.
19. Briefly discuss in 3-4 sentences about the validity of the fallowing statements:
The gross turnover of Mr. X is ` 190 lacs and that of his minor child whose income is clubbed in his
hands, ` 15 lacs. The AO contends that Mr X is liable to tax audit under Section 44AB of the Income Tax
Act, 1961. (2 marks) [Past CMA Questions]
Answer:
The given statement is incorrect. In reckoning the turnover of the purpose of applicability of section 44AB, the
turnover of the person concerned alone is important. The clubbing provisions of section 64(1) apply only to the
income of a minor (with exemption). The turnover of the minor child is not to be included in this regard.
Since, the turnover of Mr. X is below ` 200 lakhs he is not subject to tax audit u/s 44AB.
20. M/s. Slow Movers Ltd. have obtained a term loan from Bihar State Financial Corporation. The company
maintains books of account on mercantile basis,
They have made provision of ` 3,00,000 in their books of account towards interest payable to the Bihar
State Financial Corporation for 2019-20. However actual payments were made as follows:
(i) ` 40,000 on 10-4-2019, (ii) ` 55,000 on 5-1-2020, (iii) ` 35,000 on 21-9-2020, (iv) ` 65,000 on 14-12-2020, (v)
` 25,000 on 25-7-2021, (vi) ` 60,000 on 2-4-2022, (vii) ` 20,000 — requested for waiver to Financial
Corporation on 3-4-2022.
State how much payment will be allowed as deduction for Income Tax and in which Assessment Year's.
[Past CMA Questions]

Answer:
As per section 43B, in case of provisions made in the P&L for certain deductible expenses, the deduction is made
only the basis of actual payment made during the same financial period e. g, sales tax, excise duty, interest on
institutional borrowing etc, however, if such payments relating to a particular previous year is made within the due
date for submission of ITR for the relative previous year. The deduction is allowed as if made within previous year
itself. Hence, the deductibility of the provisions made in respect of each payment as follows:
SL Deductible in
1. ` 40,000 on 10-04-2019 (paid in FY 2019-20) AY 2020-21
2. ` 55,000 on 05-01-2020 (paid in FY 2019-20) AY 2020-21
3. ` 35,000 on 21-09-2020 AY 2019-20
(related to previous year 2019-20 but paid before return is due)
4. ` 65,000 on 14-12-2020 (paid in FY 2020-21) AY 2021-22
5. ` 25,000 on 25-07-2021 (paid in FY 2021-22) AY 2022-23
6. ` 60,000 on 02-04-2022 (paid in FY 2022-23) AY 2023-24
7. ` 20,000 interest waiver requested not deductible in any year
21. The assessee Mr, Jaydev, wrote off the amount due to him from Dhruv for the goods supplied four years
back in the course of business. His claim for deduction of bad debts is resisted by the Revenue on the
ground that the assessee has to still show that the impugned debt had turned bad and that mere writing
off the bad debt is not sufficient. Is the said contention correct [Past CMA Questions]
Answer:
As per section 36(1)(vii), subject to the provisions of sub section (2) the assessee is entitled to claim deduction of
the amount of any bad debt or part thereof which is written off as irrevocable in the accounts of the assessee for
the previous year. It was well established that subsequent to the amendment, the consequences are mainly three:
(a) The assessee cannot arbitrarily, irrationally or malafide treat a good debt as bad and write it off in his account.
(b) Where the assessee has acted Bonafide and reasonable, the assessing officer cannot substitute his own
subjective judgment but must accept the assessee's decision as to the quality of the debt.
(c) The assessee is not obliged to write off and claim the debt in the very year in which it becomes bad. He can
write it off and claim it in a subsequent year in which the debt continues to remain bad.
In the given situation the assessee has considered the financial-position of the debtor and has arrived at the
decision that the debt is not recoverable. So, it cannot be said that the assessee acted in an irrational or malafide
manner. It is the assessee's decision which is important and the AO cannot sit in judgment over the same. What
is important is the write off. The assessee came to the conclusion that the debt is not recoverable and wrote it off
during the current assessment yum This is sufficient to claim the deduction u/s 36(1)(vii) even assuming that the
debtor has turned bad in the earlier year, the assessee can write it off in the current year and the same as bad.
22. M/s. Ashok & Co: has acquired a plant and machinery of ` 30.5 lakhs on dated 14th November, 2018,
which was installed on dated 20th December, 2019 & put to commercial use since then. There is no other
plant and machinery in the sold block. While computing business income, they have claimed depreciation
of ` 4.575 lakhs @ 15% under section 32(1) of Income Tax Act for the previous year 2019-20 even if the
plant was used for less than 180 days. is M/s. Ashok & Co. correct in their claim for the previous year
2019-20 (Asst. Year 2020-21)? [Past Year Questions]
Answer:
Section 32 provides that any plant & machinery acquired and put to used for the purpose of business or
profession for less than 180 days during the previous year in which it is acquired, depreciation there on shall be
allowed @ 50% of the depreciation allowed according to the percentage prescribed in respect of block of asset
comprising such asset.
The above provision is applicable only in the year in which the asset is acquired & not in subsequent year. In case
of Ashok & Co. plant & machinery was acquired on 14th November 2018 (during previous year 2018-19) and
installed and put to use from 20th December 2019 (during previous year 2019-20) which is less than 180 days.
The restriction is not applicable as acquisition and use are not in the same previous year. So depreciation
@ 15% that is the normal rate for plant and machinery is applicable. Depreciation claim of ` 4.575 lakhs
(` 30.50 lakhs *15%) as claimed is correct.

23. The Profit & Loss Account of Mr. A. Basu for the previous year 2019-20 is given below: .
Cost of goods sold 16,00,000 Sales 34,70,000
Salaries 9,00,000 Rent of staff quarters 3,00,000
Rent of business premises, owned by 2,50,000 Sale price of Machinery
the assessee block on 31.03.2020 5,00,000
Repairs and renewals 1,40,000
Income Tax paid 60,000
Excise Duty paid 1,00,000
Sales Tax payable 2,00,000
Legal expenses 3,00,000
Municipal taxes payable for staff quarters 10,000
Provision for bad debts 60,000
Contingency reserve 1,00,000
Employers contribution to recognized fund 50,000
Net profit 5,00.000
42.70.000 42.70,000
Additional information:
(i) Salaries include:
(a) ` 3,20,000 was paid outside India to an employee, "resident" in India but neither tax was deducted nor tax
has been paid thereon,
(b) ` 90,000 was paid in India to an employee ''resident" in India but neither tax deducted therefrom nor paid
thereon.
(ii) Excise Duty of ` 50,000 for the AY 2019-20 was paid on 1st January, 2020, but it was not included in the
profit & loss A/c.
(iii) Sales Tax amounting ` 1,30,000 was paid on 30th May, 2020 and the balance was proposed to be paid on
1st August, 2020, the due date of furnishing return of income is 31st July, 2020.
(iv) Repairs/renewals include remodeling and renovation of revenue nature costing ` 80,000. The balance is
capital expenditure,
(v) Legal expenses include:
(a) Lawyer fee of ` 50,000 paid by single bearer cheque to K, nephew of the proprietor. The Assessing
Officer disallowed a sum of ` 10,000, being found in excess of the desired qualifications;
(b) Gift of ` 1,20,000, made to wife, a tax-adviser, but disallowed by the A.O.
(vi) Employers contribution include:
(a) ` 30,000 credited to their account on due date under Provident Fund rules;
(b) ` 20,000 not credited .to their account and proposed to be credited in October, 2020.
(vii) Commission receipts of ` 2,00,000 have not been credited to the profit and loss account as their recovery
seems to be doubtful,
(viii) WDV of machinery on 01.04.2019 was ` 6,50,000.
(ix) WDV of business premises and staff quarters as on 01.04.2019: ` 10,00,000 and ` 30,00,000 respectively.
Depreciation @ 10% on business premises and @ 5% on staff quarters. Compute taxable profits for the
previous year 2019-20 (A.Y. 2020-21). Ignore 44AD [Past CMA Questions]
24. The assessee, Mr. Janak is a partner in a firm Vimal & Co. The assessee had borrowed funds on interest
at the rate of 15% per annum. These funds were utilized for lending moneys to the aforesaid firm. No
interest was charged on this loan. Discuss whether any disallowance is required under any of the
provisions of the Income Tax Act, 1961, in computing the total income of the assessee.
PAST CMA QUESTION
Answer: Disallowance of interest applying section 14A
The assessee had borrowed funds, paying interest at 15% p.a., which is normally a deductible expenditure under
section 36(1)(iii), While computing the business income of the assessee.
The assessee is a partner in the firm, to which interest-free funds have been advanced. The share income from
the partnership firm is assessable as business income, which is exempt under section 10(2A).
Since the interest expenditure incurred, to the extent to which the funds have been untilized for making the
interest-free loan to this firm, is in relation to the income which does not form part of the total income, section 14A
is clearly attracted.
Consequently, proportionate interest payment will be disallowed from the interest payment under section 36(1)(iii)
read with sec. 14A, while computing the business income of the assessee. The Kerala High Court has taken
such a view in CIT vs. Popular Vehicles & Services Ltd. 228 CTR (Ker) 436.

Answer:
Mr. A. Basu
Computation of Business Profits for Assessment Year 2020-21
Particulars ` `
Net Profit as per profits & loss a/c 5,00,000
Add: Inadmissible Expense:
(i) Rent of the business premises owned by the assessee 2,50,000
(ii) Remodelling and renovation being repairs of capital nature 60,000
(iii) Income tax paid 60,000
(iv) Sales tax remaining unpaid up to date of furnishing return of income 70,000
(v) Legal expenses includes:
(a) gift made to wife 1,20,000
(b) fees paid to lawyer (Excess) 10,000
(c) Fees paid other than by crossed a/c payee cheque 40,000
(vi) Salaries paid outside to a resident employee without TDS 3,20,000
(vii) Salaries paid in India to a resident employee without TDS below taxable -
limit
(viii) Municipal tax payable for staff quarters (Section 43B) 10,000
(ix) Provision for bad debts 60,000
(x) Reserve 1,00,000
(xi) Employers contribution credited to their account after due date 20,000
(xii) Commission receipts which have accrued during the 2,00,000 13,20,000
year not credited to P&L
18,20,000
Less:
(i) Excise duty allowable on payment 50,000
(ii) Sale price of machine, being capital receipts 5,00,000
(iii) Depreciation
(a) Staff quarters 5% of 30,00,000 1,50,000
(b) Business Premises 10% of 10,00,000 1,00,000 8,00,000
Taxable business profits 10,20,000
Working Note:
Sale of machinery block: Sale of Machinery Block results into short term capital loss of 1,50,000 (` 6,50,000 - `
5,00,000) under section 50.
No capital loss, whether short term or long term, can be set-off against any income. It is to be carried forward for
next 8 assessment year.
25. Janak Pharma Ltd. Delhi, a manufacturer of pharmaceuticals, started in April, 2019 requests you to
compute the depreciation allowable u/s 32 of the Income-tax Act, 1961 for the assessment year 2020-21:
Particular ` in crores)
(`
Items installed in May 2019:
New machinery 84
Cold chamber 22
Items installed December 2019:
Lorries for transporting goods within factory 4
Cranes 3
Computers installed in office premises 1
Currency counting machine for wages payment 1
Is any other allowance available while computing the business income? Also compute the WDV of the
various blocks of assets. PAST CMA QUESTION

Solution:
Computation of depreciation for the Assessment Year 2020-21 (Rsin crores)
Particulars ` `
Block 1: Plant and machinery (15% rate),
used for more than 180 days:
New machinery 84
Cold chamber 22
106
Normal Depreciation at 15% 15.9
Additional depreciation at 20% 21.2
Used for less than 180 days: (Rate of Depreciation = 50% of 15% i.e.7.5%)
Lorries for transporting goods within factory 3
Cranes 4
Currency counting machine for wages payment 1
8
Normal Depreciation at 7.5% 0.6
Additional depreciation at 10% on above plant and machinery 0.8
Total allowable depreciation is (15.9+21.2+0.6+0.8) 38.5
WDV of the block as on 31-03-2019 is (106 + 8 – 38.5) 75.5
Block 3: (Computers at 40%), used for less than 180 days: 1
Computers installed in office premises
Normal Depreciation at 20% 0.2
Total allowable depreciation 0.2
WDV of the block as on 31-03-2020 is (1- 0.3) 0.8
Notes: Additional depreciation is not available for

Road transport vehicles
Plant installed in office premises
[Lorries for transporting goods within factory are not road transport vehicles]
Computers installed in office premises
Currency counting machine for wages payment are not office equipments.
26. M/s. ABC & co. is a partnership firm consisting of three partners Mr. A, Mr. B & Mr. C. It is engaged in civil
construction. The turnover of the business (cash sales) for the year ending 31st March, 2020 amounted to
` 95 lakhs. Following additional information is available.
• Maintenance charges of ` 68,000 paid to contractor on which tax has not been deducted at source and
deposited so far.
• Bad debt written off in the books of accounts are ` 92,000.
• Interest @ 12% is provided to partner C on his capital of ` 5 lakhs as per partnership deed.
• The firm carried forward business loss of ` 50,000 and unabsorbed depreciation of ` 1,20,000 which is carried
forward from assessment year 2019-20.
• The firm preferred and opted for presumptive taxation under section 44AD for the assessment year 2020-21.
• The firm has not paid any advance tax during the previous year 2019 -20.
(i) Compute Net Income of the firm from business.
(ii) What would be the liability of the firm for levy of interest u/s 234B & 234C for failure on their part to pay
advance tax? PAST CMA QUESTION
Answer:
(i) Computation of Income from Business of M/s ABC & Co for the Assessment Year 2020-21
Income from business as per section 44AD (8% of ` 95 lakhs) 7,60,000
Less: Interest to partner – deduction is not permitted NIL
Gross Business income 7,60,000
Less:
Brought forward business loss 50,000
Unabsorbed depreciation (unabsorbed depreciation of the previous year becomes
depreciation allowance for the current year.
No separate deduction is allowed in respect of depreciation under section 44AD when opted Nil
for presumptive taxes)
Net Income 7,10,000

Note: Maintenance charges of ` 68,000 paid to contractor on which tax has not been deducted at source and
deposited so far and Bad debt written off in the books of accounts of ` 92,000 will not be adjusted or looked into
as the assessee has opted for presumptive tax under section 44AD.
(ii) Liability to interest under ss. 234B and 234C

If the assessee opts for determination of business income under section 44AD, he is now required to pay 100%
th
advance tax by 15 march (only one installment). Since firm is failed to pay advance tax, he is liable for interest
under Section 234B (1%p.m. from 1st April till the payment of Tax) & 234C (1% p.m. for 1 month).
27. Koteeswara Power Projects is a power generating unit on 01.04.2017, it purchased a plant of ` 50,00,000
eligible for depreciation @ 15% on SLM Compute balancing charge or terminal depreciation assuming the
plant is sold on 21.4.2019 for: `
1. 8,50,000
2. 32,00,000
3. 45,00,000
4. 52,00,000 PAST CMA QUESTION
Answer Computation of Terminal depreciation or balancing Charge, Capital Gain :

Particulars A B C D
WDV as on 1.4.2019 35,00,000 35,00,000 35,00,000 35,00,000
Less : Sale proceeds 8,50,000 32,00,000 45,00,000 52,00,000
Balance 26,50,000 3,00,000 Nil Nil
Terminal Depreciation 26,50,000 3,00,000 Nil Nil
Balancing Charge Nil Nil 10,00,000 15,00,000
Short term capital Gain Nil Nil Nil 2,00,000
Computation of Depreciation :
Original Cost 50,00,000
Less : Depreciation (PY17-18) 7,50,000
WDV as on 1.4.2018 42,50,000
Less : Depreciation
For the year 2018-19 7,50,000
WDV as on 1.4.2019 35,00,000
28. As a Tax Consultant how would you advise your client on the following issues on allowability or
disallowbility of expenses in the computation of income for filing of return under income tax act related to
the financial year 2019-20 (Asst. Year 2020-21)
(i) Union Bank of India after considering the financial health of the company waived ` 5,00,000 of unpaid
interest for the financial year 2018-19. The said amount was taken as expenses during the financial
year 2018-19 now credited to P&L during financial year 2019-20.
(ii) A company was generating electricity privately for its factory. Later, as it incurred expense for electric
lines which were laid from the trunk road to the factory. It paid ` 50 lakhs to the State Electricity Board
as its contribution for this purpose. The ownership of the power-line was to vest with the State
Electricity Board.
(iii) Profit and loss account for the financial year 2019-20, debited with an amount of ` 75,000 as interest
on the unpaid purchase price of an asset which was put to use from 1st September, 2019. This interest
is pertaining to the period September, 2019 to March 2020.
(iv) An amount of ` 2,50,000 of debtor has been written off as Bad debt in the books of accounts and
claimed deductions u/s 36(1)(vii) in the said return of income filed u/s 139. The Assessing Officer
made disallowances for deductions of bad debts on the ground that the debt has not been established
to have become irrecoverable and bad in the previous year 2019-20.
PAST CMA QUESTION
Answer
(i) Interest related to financial year 2018-19 waived by Union Bank of India would not have allowed as
expenditure previously under section 43B which resulted increase in taxable income to that extent. Interest
waived is credited to profit and loss account following the accounting principle. But such Interest waiver
credited to profit and loss account requires exclusion from the Net profit while computing business income.
(ii) The new electric power lines were laid to run the factory efficiently but the ownership of the powerlines was
vested with the State Electricity Board for which benefit of depreciation u/s 32 cannot be taken. So
contribution of ` 50 lakhs paid to the State Electricity Board shall be allowable as revenue expenditure
(iii) Interest of ` 75,000/- on unpaid purchase price in respect of capital asset which was put to use from 1st Sept
2019 that is for the period after the asset put to use. It is deductible u/s 36 or 37 of income tax act. Since the
amount debited to profit and loss account, it does not require any adjustment.
(iv) Due to amendment made, it is not necessary for the assessee to establish that debt, in fact has become
irrecoverable. It is enough if bad debt is written off as irrecoverable in the accounts of the assessee. It is
correctly treated in the return. - TRF Ltd. vs. CIT (2010) (SC).
29. Is it true that where a person draws from his own stock-in-trade for personal use, the profit computed by
considering the market value of such stock should be offered for income-tax? [Past CMA Questions]
Answer
No this statement is not true.
The Supreme Court in CIT v. Kikabhai Premchand(1953) 24 ITR 506 held that when a person draws from his own
stock-in-trade for personal use, there can be no taxable profit as in this case the vendor and the vendee are not
different. To constitute a sale there should be one buyer and seller. The buyer and seller has to be different entity
to constitute a proper sale.
30. Can expenditure incurred on alteration of a dam to ensure adequate supply of water for the smelter plant
owned by the assessee be allowed as revenue expenditure? PAST CMA QUESTION
Answer:
Fact of the case
The assessee company owned a super smelter plant which requires large quantity of water for its day-to-day
operation, in the absence of which it would not be able to function. The assessee, therefore, incurred expenditure
for alteration of the dam (constructed by the State Government) to ensure sharing of the water with the State
Government without having any right or ownership in the dam or water. The assessee’s share of water is also
determined by the State Government. The assessee claimed the expenditure as deduction under section 37,
which was disallowed by the Assessing Officer on the ground that it was of capital nature. The Tribunal, however,
was of the view that since the object and effect of the expenditure incurred by the assessee is to facilitate its trade
operation and enable the management to conduct business more efficiently and profitably, the expenditure is
revenue in nature and hence, allowable as deduction.
Decision of the case

The High Court in the case of CIT vs. Hindustan Zinc Ltd. (2010) 322 ITR 478 (Raj.) observed that the expenditure
incurred by the assessee for commercial expediency relates to carrying on of business. The expenditure is of such
nature which a prudent businessman may incur for the purpose of his business. The operational expenses
incurred by the assessee solely intended for the furtherance of the enterprise can by no means be treated
as expenditure of capital nature.
31. Whether addition made by AO of notional interest which was not in existence is correct? [5]
PAST CMA QUESTION
Solution:
CIT vs. M/s. Sahara India Mutual Benefit Co. Ltd. (Allahabad High Court)
In the instant case, M/s. Sahara India is the collecting agent not only of the assessee but also of various other
companies. As per MoU, the assessee charges interest from M/s. Sahara India where delay in transmission of
funds exceeds two months. From the record, it appears that the assessee has charged interest on the balance of
` 13,80,08,484/- and no interest was paid on the balance of ` 6,49,86,400/-, as the same did not exceed two
months. When the parties have agreed not to charge the interest, as per the condition laid down in the MoU i.e. “if
the remittance is within the less than two months”, then the AO cannot compel to do so. Needless to mention that
yardstick will have to be applied from the businessman‘s point of view and certainly not according to the AO, as
per the ratio laid down in the case of Voltamp Transformers (P) Ltd. vs. CIT, (1981) 129 ITR 105 (Guj); CIT vs.
Walchand & Co., 65 ITR 381 (SC).
It is only the assessee, who knows the commercial and business relations and the situation thereof and
department is not supposed to interfere as per the ratio laid down in the case of Kewal Chand vs. CIT, 183 ITR
207, 211 (Cal).
In the instant case, the addition was made by the AO on notional interest which was not in the existence. So, the
first appellate authority as well as the Tribunal have rightly deleted. In the light of above discussion and by
considering the totality of the facts and circumstances of the case, there find no reason to interfere with impugned
orders passed by the Tribunal. The same are hereby sustained along with reasons mentioned therein. The
answer to the substantial questions of law are in favour of the assessee and against the department.

32. Can business contracts, business information, etc., acquired by the assessee as part of the slump sale be
described as ‘goodwill’, be classified as an intangible asset to be entitled for depreciation under section
32(1)(ii)? [5] PAST CMA QUESTION
Solution:
Areva T and D India Ltd. vs. DCIT (2012) 345 ITR 421 (Delhi)
In the present case, a transferor under a transfer by way of slump sale, transferred its on going business unit to
the assessee company. On perusal of the sale consideration, it was found that some part of it was attributable to
the tangible assets and the balance payment was made by the assessee company for acquisition of various
business and commercial rights categorized under the separate head, namely, “goodwill” in the books of account
of the assessee. These business and commercial rights comprised the following: business claims, business
information, business records, contracts, skilled employees, know-how. The assessee company claimed
depreciation under section 32 on the excess amount paid which was classified as “goodwill” under the category of
intangible assets.
The Assessing Officer accepted the allocation of the slump sale between tangible and intangible assets
(described as Goodwill). However, he claimed that depreciation in terms of section 32(1)(ii) is not allowable on
goodwill. He further contended that the assessee has failed to prove that such payment can be categorized under
“other business or commercial right of similar nature” as mentioned in section 32(1)(ii) to qualify for depreciation.
The assessee argued that any right which is obtained for carrying on the business effectively, is likely to come
within the sweep of the meaning of intangible asset. Therefore, the present case shall qualify for claiming
depreciation since business claims, business information, etc, are in the nature of “any other business or
commercial rights”. However, the Revenue argued that, the business or commercial rights acquired by the
assessee would not fall within the definition of intangible assets under section 32.
The Delhi High Court observed that where there are general words following particular and specific words, the
meaning of the latter words shall be confined to things of the same kind. The Court applied this principle for
interpreting the expression “business or commercial rights of similar nature” specified in section 32(1)(ii). It is seen
that such rights need not be the same as the description of “know-how, patents, trademarks, licenses or
franchises” but must be of similar nature as the specified assets. The use of these general words after the
specified intangible assets in section 32(1)(ii) clearly demonstrates that the Legislature did not intend to
provide for depreciation only in respect of specified intangible assets but also to other categories of
intangible assets, which were neither feasible nor possible to exhaustively enumerate.
Further, it was observed that the above mentioned intangible assets are invaluable assets, which are required for
carrying on the business acquired by the assessee without any interruption. In the absence of the aforesaid
intangible assets, the assessee would have had to commence business from scratch and go through the gestation
period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee has got a
running business. The aforesaid intangible assets are, therefore comparable to a license to carry on the
existing business of the transferor. Therefore, the High Court held that the specified intangible assets
acquired under the slump sale agreement by the assessee are in the nature of intangible asset under the
category “other business or commercial rights of similar nature” specified in section 32(1)(ii) and are
accordingly eligible for depreciation under section 32(1)(ii).
33. Is the commission paid to doctors by a diagnostic centre for referring patients for diagnosis be allowed as
a business expenditure under section 37 or would it be treated as illegal and against public policy to
attract disallowance? PAST CMA QUESTION
Solution:
The Punjab and Haryana High Court in the case of CIT vs. Kap Scan and Diagnostic Centre P. Ltd. (2012) 344
ITR 476 (P&H) held that the argument of the assessee that giving commission to the private doctors for referring
the patients for various medical tests was a trade practice which could not be termed to be illegal and therefore,
the same cannot be disallowed under section 37(1), is not acceptable.
Applying the rationale and considering the purpose of Explanation to section 37(1), the assessee would not be
entitled to deduction of payments made in contravention of law. Similarly, payments which are opposed to public
policy being in the nature of unlawful consideration cannot also be claimed as deduction. The assessee cannot
take a plea that businessmen are entitled to conduct their business even contrary to law and claim deduction of
certain payments as business expenditure, notwithstanding that such payments are illegal or opposed to public
policy or have pernicious consequences to the society as a whole.
As per the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, no physician
shall give, solicit, receive, or offer to give, solicit or receive, any gift, gratuity, commission or bonus in
consideration of a return for referring any patient for medical treatment. The demanding as well as paying of such
commission is bad in law. It is not a fair practice and is opposed to public policy and should be discouraged.
Thus, the High Court held that commission paid to doctors for referring patients for diagnosis is not
allowable as business expenditure.

FINAL DT SATC 23.1
MISC. PROVISIONS - IMP

Income – Section 2(24):
According to the definition given by Section 2(24), Income includes-
a) profits and gains of business or profession ;
b) dividend ;
c) voluntary contributions received by a Charitable Trust/Religious Trust or University/Educational Institution or
Hospital
d) the value of any perquisite of profit in lieu of salary taxable u/s 17 and any special allowance or benefit,
specifically granted either to meet personal expenses or for performance of duties of an office or an employment
of profit.
e) the value of any benefit or perquisite, whether convertible into money or not, received by a director or any of his
relatives including the sums paid by the company which otherwise would have been payable by those persons;
f) the value of any benefit or perquisite, whether convertible into money or not, obtained by a representative
assessee or by any person on whose behalf or for whose benefit any income is received by the representative
assessee, including any sum paid by the representative assessee, which would otherwise have been payable by
the beneficiary;
g) any sum chargeable to tax under sub-clauses (ii),(iii),(iiia),(iiib),(iiic),(iv),(v),(va) of Sec 28, Sec, 41 or Sec. 59;
h) FA 18: the fair market value of inventory referred to in clause (via) of section 28
i) any capital gains chargeable under Section 45;
j) the profits and gains of business of insurance carried on by a mutual insurance company or by a co-
operative society, computed in accordance with Section 44;
k) The profits and gains of any business of banking (including providing credit facilities) carried on by a co-
operative society with its members;
l) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of
any sort or from gambling or betting of any form or nature whatsoever ;
m) any sum received by the assessee from his employees towards welfare fund contributions such as Provident
Fund, Superannuation Fund etc.
n) any sum received under a Keyman insurance policy including the sum allocated by way of bonus.
o) any sum referred to in Section 56(2)(vii)/(viia)/(viib)/(x).
p) any sum of money referred to in clause (ix) of sub-section (2) of section 56.
q) FA 18: any compensation or other payment referred to in clause (xi) of sub-section (2) of section 56
r) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession
or reimbursement (by whatever name called) by the Central Government or a State Government or any
authority or body or agency in cash or kind to the assessee other than
(i) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of
the asset in accordance with the provisions of Explanation 10 to Section 43(1) or

FINAL DT SATC 23.2
(ii) FA16: the subsidy or grant by the CG for the purpose of the corpus of a trust or institute
established by the CG or a SG, as the case may be.
It may be noted that the above mentioned definition merely describes certain receipts as being income. This does not
define the term income itself. Judicial pronouncements, however, have held that the term income is of widest
connotation. Therefore, any other receipts that fall within the natural meaning of the term may also be included
for this purpose.
Restrictions on Allowability of Expenditure [Section 14A]
A. As per section 14A, expenditure incurred in relation to any exempt income is not allowed as a deduction
while computing income under any of the five heads of income [Sub-section (1)].
B. The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does
not form part of the total income under this Act in accordance with such method as may be prescribed19, if the
Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim
of the assessee in respect of such expenditure in relation to income which does not form part of the total income
under this Act.
C. Rule 8D: Method for determining amount of expenditure in relation to income not includible in total
income:
1. Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not
satisfied with-
(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred,
in relation to income which does not form part of the total income under the Act for such previous year, he
shall determine the amount of expenditure in relation to such income in accordance with the provisions of
sub-rule (2).
2. [W.e.f. 02/06/2016] - The expenditure in relation to income which does not form part of the total
income shall be the aggregate of following amounts, namely:—
(i) the amount of expenditure directly relating to income which does not form part of total income;
and
(ii) an amount equal to one per cent of the annual average of the monthly average of the
opening and closing balances of the value of investment, income from which does not or shall
not form part of total income :
Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure
claimed by the assessee.

FINAL DT SATC 23.3
Class Notes

FINAL DT SATC 23.4
Class Notes

FINAL DT SATC 24.1
MINIMUM ALTERNATE TAX (MAT)

1. [Section 115JB(1)] - Notwithstanding anything contained in any other provision of this Act,
where in the case of an assessee, being a company, the income-tax, payable on the total income
as computed under this Act in respect of any previous year relevant to the assessment year
commencing on or after the 1st day of April, 2012, is less than 18.5% of its book profit, such
book profit shall be deemed to be the total income of the assessee and the tax payable by the
assessee on such total income shall be the amount of income-tax at the rate of 18.5%.
Following proviso shall be inserted in sub-section (1) of section 115JB by the Taxation Laws
(Amendment) Act, w.e.f. 1-4-2020 (AY 2020-21):
Provided that for the previous year relevant to the assessment year commencing on or after
the 1st day of April, 2020, the provisions of this sub-section shall have effect as if for the
words "18.5%", occurring at both the places, the words "15%" had been substituted.
2. Every assessee,-
a. being a company, other than a company referred to in clause (b), shall, for the purposes of this
section, prepare its statement of profit and loss for the relevant previous year in accordance
with the provisions of Schedule III to the Companies Act, 2013; or
b. being a company, to which the second proviso to sub-section (1) of section 129 of the
Companies Act, 2013 is applicable, shall, for the purposes of this section, prepare its
statement of profit and loss for the relevant previous year in accordance with the provisions
of the Act governing such company:
Provided that while preparing the annual accounts including statement of profit and loss,—
i. the accounting policies;
ii. the accounting standards adopted for preparing such accounts including statement of profit
and loss;
iii. the method and rates adopted for calculating the depreciation,
shall be the same as have been adopted for the purpose of preparing such accounts including
statement of profit and loss and laid before the company at its annual general meeting in
accordance with the provisions of section 129 of the Companies Act, 2013.
Further, where the company has adopted or adopts the financial year under the Companies Act,
2013, which is different from the previous year under this Act,-
i. the accounting policies;
ii. the accounting standards adopted for preparing such accounts including statement of profit
and loss;
iii. the method and rates adopted for calculating the depreciation,
shall correspond to the accounting policies, accounting standards and the method and rates for
calculating the depreciation which have been adopted for preparing such accounts including
statement of profit and loss for such financial year or part of such financial year falling within
the relevant previous year.

FINAL DT SATC 24.2
Class Notes

FINAL DT SATC 24.3
3. Explanation 1 to Section 115JB(2):
"Book Profit" means the Profit as shown in the “Statement of Profit and loss”, as increased
by:
a) the amount of income-tax (including DDT / Interest / Surcharge / Cess but not STT / CTT /
Penalty / Wealth Tax) paid or payable, and the provision therefore; or
b) the amounts carried to any reserves (Say Reserve u/s 10AA), by whatever name called
other than a reserve specified under section 33AC (Reserve for shipping company); or
c) the amount or amounts set aside to provisions made for meeting liabilities, other than
ascertained liabilities; or
Provision for warranty is allowed as deduction if it is made on scientific basis [SC –
Rotork Controls India (p.) Ltd.]
Provision for gratuity made as per actuary is an ascertained liability, hence it will not
be added back.
Provision for leave encashment made on scientific basis is an ascertained liability
[SC – Bharat Earth Movers]
d) the amount by way of provision for losses of subsidiary companies (Even actual losses
also); or
e) the amount or amounts of dividends paid or proposed; or
f) the amount or amounts of expenditure relatable to any income to which section 10 or

section 11 or section 12 apply,
• Income u/s 10AA are liable for MAT. Hence, related expenditure will not added back.
g) the amount or amounts of expenditure relatable to, income, being share of the assessee in
the income of an AOPs or BOIs, on which no income-tax is payable in accordance with the
provisions of section 86;
h) the amount or amounts of expenditure relatable to income accruing or arising to an assessee,

being a foreign company, from,—
(A) the capital gains arising on transactions in securities; or
(B) the interest, royalty or fees for technical services chargeable to tax at the rate or rates
specified in Chapter XII,
if the income-tax payable thereon in accordance with the provisions of this Act, other than the
provisions of this Chapter, is at a rate less than the rate specified in sub-section (1);

FINAL DT SATC 24.4
Class Notes

FINAL DT SATC 24.5
i) the amount representing
 notional loss on transfer of a capital asset, being share of a special purpose
vehicle to a business trust in exchange of units allotted by the trust or
 notional loss resulting from any change in carrying amount of said units or
 the amount of loss on transfer of units referred to in clause (xvii) of section 47
j) the amount or amounts of expenditure relatable to income by way of royalty in respect of

patent chargeable to tax under Section 115BBF;
k) the amount of depreciation, if any, is debited to the “Statement of Profit and loss”,
l) the amount of deferred tax and the provision created therefore
m) any amount set aside as provision for diminution in the value of any asset
• Provision for bad & doubtful debts as it amounts to provision for diminution in value of
assets, namely debtors
• Provision for diminution in value of any investment or asset as per AS-13/AS-28
n) the amount standing in revaluation reserve relating to revalued assets on the retirement
or disposal of such asset
o) the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by
taking into account the cost of the shares exchanged with units referred to in the said clause
or the carrying amount of the shares at the time of exchange where such shares are carried
at a value other than the cost through “Statement of Profit and loss”, as the case may be
if any amount referred to in clause (a) to (m) is debited to the “Statement of Profit and
loss” or if any amount referred to in clause (n) is not credited to “Statement of Profit and
loss”

FINAL DT SATC 24.6
Class Notes

FINAL DT SATC 24.7
and as reduced by:
i. The amount withdrawn from any reserve or provision, if any such amount is credited to
the “Statement of Profit and loss”;
Provided that where this section is applicable to an assessee in any previous year, the
amount withdrawn from reserves created or provisions made in a previous year shall not
be reduced from the book profits unless the book profit of such year has been
increased by those reserves or provisions (out of which the said amount was withdrawn)
or,
ii. Incomes exempt under any of the provisions of section 10 or section 11 or section 12, if
any such income is credited to the “Statement of Profit and loss”; or
iii. The amount of depreciation debited to “Statement of Profit and loss” excluding the
depreciation on account of revaluation of assets; or
iv. The amount withdrawn from revaluation reserve and credited to “Statement of Profit
and loss”, to the extent it does not exceed the amount of depreciation on account of
revaluation of assets; or
v. the amount of income, being the share of the assessee in the income of an AOPs or BOIs,
on which no income-tax is payable in accordance with the provisions of section 86, if any,
such amount is credited to the “Statement of Profit and loss”
vi. the amount of income accruing or arising to assessee, being a foreign company, from,—
(A) the capital gains arising on transactions in securities; or
(B) the interest, royalty or fees for technical services chargeable to tax at the rate or rates
specified in Chapter XII,
if such income is credited to the “Statement of Profit and loss” and the income-tax
payable thereon in accordance with the provisions of this Act, other than the provisions of
this Chapter, is at a rate less than the rate specified in sub-section (1)
vii. the amount representing,—

(A) notional gain on transfer of a capital asset, being share of a special purpose
vehicle to a business trust in exchange of units allotted by that trust referred to in
clause (xvii) of section 47; or
(B) notional gain resulting from any change in carrying amount of said units; or
(C) gain on transfer of units referred to in clause (xvii) of section 47,
if any, credited to the “Statement of Profit and loss”; or

FINAL DT SATC 24.8
Class Notes

FINAL DT SATC 24.9
viii. the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed
by taking into account the cost of the shares exchanged with units referred to in the said
clause or the carrying amount of the shares at the time of exchange where such shares are
carried at a value other than the cost through “Statement of Profit and loss”, as the case
may be;
ix. the amount of income by way of royalty in respect of patent chargeable to tax under Section
115BBF;
x. the aggregate amount of unabsorbed depreciation and loss brought forward

a) in case of a company against whom an application for corporate insolvency
resolution process has been admitted by the Adjudicating Authority under
section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code,
2016.
b) in case of a company, and its subsidiary and the subsidiary of such
subsidiary, where, the Tribunal, on an application moved by the Central
Government under section 241 of the Companies Act, 2013 has suspended the
Board of Directors of such company and has appointed new directors who are
nominated by the Central Government under section 242 of the said Act.
[Added by Finance (No. 2) Act, 2019]
xi. The amount of loss brought forward or unabsorbed depreciation, whichever is less as per
books of account in case of a company other than the company referred above (point x).
xii. The amount of profits of sick industrial company during the years in which such
company has become sick industrial company under the provisions of Sick Industrial
Companies (Special Provision)Act, 1985.
xiii. The amount of deferred tax, if any such amount is credited to the “Statement of Profit
and loss”

FINAL DT SATC 24.10
Class Notes

FINAL DT SATC 24.11
4. Non Applicability of MAT to Foreign Company [W.r.e.f. AY 2001-02]
(a) If foreign company is a Resident of a Country with which India has a DTAA under
Section 90, it should not have a Permanent Establishment in India in accordance with the
DTAA
(b) If foreign company is a Resident of a Country with which India does not have an
agreement under Section 90, It is not required to seek registration under any law for the time
being in force relating to companies.
5. The provisions of Section 115JB shall not be applicable and shall be deemed never to have
been applicable to an assessee, being a foreign company, where its total income comprises
solely of profits and gains from business referred to in section 44B or section
44BB or section 44BBA or section 44BBB and such income has been offered to tax at the
rates specified in those sections.
6. The provisions of this section shall not apply to any income accruing or arising to a company
from life insurance business referred to in section 115B.
7. The provisions of this section shall not apply to a person who has exercised the option
referred to under section 115BAA or section 115BAB.
[inserted by the Taxation Laws (Amendment) Act, 2019, w.e.f. AY 2020-21]
8. Units of SEZ and developers of SEZ shall be liable to MAT w.e.f. AY 2012-13.
9. In case of a Company, being a unit located in International Financial Services Centre and deriving
is income solely in convertible foreign exchange, the minimum alternate tax shall be chargeable
at the rate of 9%.
10. Although, the assessee is liable to pay tax @15% (plus surcharge if applicable) of the book profits
if its total income computed as per Income-tax Act is less but it is entitled to determine unabsorbed
depreciation under section 32(2), business loss under section 72(1), speculation loss under section
73 and capital loss under section 74 and loss under section 74A and shall be allowed to carry
forward such unabsorbed depreciation or losses to the subsequent years(s) for claiming set off as
per the normal provisions of Income-tax Act.
11. A report in prescribed form from an accountant as defined in the section 288 shall be furnished
along with the return of income.
12. As per section 115JB(5), save as otherwise provided in section 115JB, all other provisions of the
Income tax Act shall apply to such companies. Hence, all other provisions relating to advance
tax, interest under sections 234A, 234B and 234C penalty, etc. shall apply to such companies also.
13. A company registered under section 8 of the companies Act, whose income is exempt under
principles of mutuality cannot be brought within the purview of section 115JB.

FINAL DT SATC 24.12
14. The tribunals decision in case of Sutlej Cotton Mills vs. CIT and Sipani Automobiles vs. DCIT to the
effect that profit on sale of assets need not form part of book profits now stand superseded by the
decision of Bombay High Court in CIT vs. Veekaylal Investment Co. Pvt. Ltd (2001) 249 ITR
597 (Bom). The Bombay High Court observed as under:
Since capital gain has to be considered in computation of income, it cannot fail to be reckoned in
computation of books profits as well, since in its view ‘in the circumstances one fails to understand
as to how in computing book profits under the Companies Act, the assessee company cannot
consider capital gain for computing book profits under section 115J (now 115JB) of the Act.
The High Court also felt, it would be inappropriate to directly transfer such amounts to capital
reserves and that they are required to be shown vide clauses (2)(b) and 3(xii) of Part II of Schedule
VI of the Companies Act. Capital profit credited to profit and loss account is part of book
profit, even if it is exempt under section 54EC.
On the above analogy, loss on sale of car/truck debited to Profit and Loss Account cannot be
added back [Asian Diet Products vs. CIT (2007) 162 Taxman 210 (Del)(Mag)].

FINAL DT SATC 24.13
SECTION 115JAA - Tax credit in respect of tax paid on deemed income relating to
certain companies
1. Where any amount of tax is paid under sub-section (1) of section 115JB by an assessee, being a
company, then, credit in respect of tax so paid shall be allowed to him in accordance with
the provisions of this section.
2. The tax credit to be allowed under this section shall be the difference of the tax paid for any
assessment year under sub-section (1) of section 115JB and the amount of tax payable by the
assessee on his total income computed in accordance with the other provisions of this Act
3. No interest shall be payable on the tax credit allowed under this section.
4. IMP: Where the amount of tax credit in respect of any income-tax paid in any country or specified
territory outside India, under section 90 or section 90A or section 91, allowed against the tax
payable under the provisions of sub-section (1) of section 115JB exceeds the amount of such tax
credit admissible against the tax payable by the assessee on its income in accordance with the
other provisions of this Act, then, while computing the amount of credit under this sub-
section, such excess amount shall be ignored.
5. The amount of tax credit determined under this section shall be carried forward and set off in
accordance with the provisions of this section but such carry forward shall not be allowed beyond
the 15th assessment year immediately succeeding the assessment year in which tax credit
becomes allowable.
6. The tax credit shall be allowed set-off in a year when tax becomes payable on the total income
computed in accordance with the provisions of this Act other than section 115JB.
7. Set off in respect of brought forward tax credit shall be allowed for any assessment year to the
extent of the difference between the tax on his total income and the tax which would have been
payable under the provisions of sub-section (1) of section 115JB for that assessment year.
8. Where as a result of an order under sub-section (1) or sub-section (3) of section 143, section
144, section 147, section 154, section 155, sub-section (4) of section 245D, section 250, section
254, section 260, section 262, section 263 or section 264, the amount of tax payable under this Act
is reduced or increased, as the case may be, the amount of tax credit allowed under this section
shall also be increased or reduced accordingly.
9. In case of conversion of a private company or unlisted public company into a limited liability
partnership under the Limited Liability Partnership Act, 2008, the provisions of this section shall
not apply to the successor limited liability partnership.
10. The Provisions of this section shall not apply to a person who has exercised the option
under section 115BAA [inserted by the Taxation Laws (Amendment) Act, 2019, w.e.f. AY
2020-21]

FINAL DT SATC 24.14
Class Notes

FINAL DT SATC 24.15
Class Notes

FINAL DT SATC 24.16
Class Notes

FINAL DT SATC 24A.1
Practical Questions – SET A

1. D Ltd., a closely-held Indian company, is engaged in the business of manufacture of chemical goods
(value of plant and machinery owned by the company is ` 55 lakh). The following information for the
financial year 2019-20 are given:
`
Sale proceeds of goods (domestic sale) 25,00,000
Sale proceeds of goods (export sale) 7,00,000
Amount withdrawn from general reserve (reserve was created
in 1996-97 by debiting P&L A/c) 2,00,000
Amount withdrawn from revaluation reserve 1,50,000
Total 35,50,000
Less: Expenses
Depreciation (normal) 6,16,000
Depreciation (extra depreciation because of revaluation) 2,70,000
Salary and wages 2,10,000
Wealth tax 10,000
Income-tax 3,50,000
Outstanding customs duty (not paid as yet) 17,500
Proposed dividend 60,000
Consultation fees paid to tax expert 21,000
Other expenses 1,39,000
For tax purposes the company wants to claim the following:

—Deduction under section 80-IB (30 per cent of ` 18,56,500).
—Depreciation under section 32 (` 5,36,000)
The company wants to set off the following losses/allowances:

For tax purposes For accounting
purposes
` `
Brought forward loss of PY 2018-19 14,80,000 4,00,000
Unabsorbed depreciation — 70,000
Compute the net income and tax liability of D Ltd. for the assessment year 2020-21 assuming that D Ltd. has
a (deemed) long-term capital gain of ` 60,000 which is not credited in Statement of Profit & Loss Account.
Solution:
Computation of Total Income & Tax Liability (as per normal provision) `
Profit as per Statement of Profit & Loss Account 18,56,500

Add :
Excess depreciation [i.e., ` 6,16,000 + ` 2,70,000 - ` 5,36,000] 3,50,000
Wealth tax 10,000
Income tax 3,50,000
Customs duty which is not paid 17,500
Total 26,44,000
Less: Amount withdrawn from reserve (i.e., ` 2,00,000 + ` 1,50,000) 3,50,000
Business income 22,94,000
Less: Unabsorbed loss 14,80,000
Long-term capital gain 60,000
Less : Deductions under section 80-IB [30% of ` 8,14,000] 2,44,200
Net Income (rounded off) 6,29,800
Tax liability (under normal provisions)

[20% of ` 60,000 + 30% of ` 5,69,800, plus 4% of tax as cess] 1,90,258

FINAL DT SATC 24A.2
Computation of Book profit
Net Profit as per Statement of Profit & Loss Account 18,56,500
Add:
Depreciation (i.e. ` 6,16,000 + ` 2,70,000) 8,86,000
Wealth tax Nil
Income-tax 3,50,000
Less: Amount withdrawn from general reserve (–) 2,00,000
Unabsorbed depreciation (–) 70,000
Depreciation (normal) (–) 6,16,000
Amount withdrawn from revaluation reserve to the extent
it does not exceed extra depreciation because of revaluation (–) 1,50,000
Book profit 21,16,500
Tax liability (15.60% of book profit i.e. 21,16,500) 3,30,174
D Ltd. will pay ` 3,30,174 as tax for the AY 2020-21 as per section 115JB. Tax credit is however,
available in respect excess tax [i.e., ` 1,39,916 = 3,30,174 – 1,90,258] u/s 115JB.
2. The Statement of Profit & Loss Account of Fortuna Industries Ltd. for the previous year 2019-20,
shows a Profit as per Statement of Profit & Loss Account of ` 80 Lakhs after accounting for the
following items:
(i) Depreciation of ` 24 Lakhs, was charged in the Profit and Loss Account. This amount included additional
depreciation of ` 4 Lakhs on revalued assets. The amount of depreciation chargeable under Section 32 of
the Income Tax Act, 1961, amounted to ` 18 Lakhs.
(ii) Interest of ` 6 lakhs due to a financial institution, was not paid before the due date of filling return of
income.
(iii) Provision for doubtful debts was made at ` 1 lakh.
(iv) Provision for unascertained liabilities amounted to ` 2 lakhs.
(v) ` 5 lakhs was transferred to the General Reserve.
(vi) Net Agricultural Income amounted to ` 16 lakhs.
(vii) ` 3 lakhs was withdrawn from reserve created during the financial year 2015-16.
(Book profit was increased by the amount transferred to such reserve in Assessment year 2016-17.)
Compute Minimum Alternate Tax under Section 115JB of the Income Tax Act, 1961 for the AY 2020-21.
(RTP J-14)
Solution:
Computation of Book Profit under Section 115JB of the Income tax Act, 1961
Assessee: Fortuna Industries Limited
Assessment Year: 2020-21 Previous Year: 2019-20 Particulars ` `

Add: Profit to be increased by the following amounts as per Explanation
1 to section 115JB
Transfer to general reserve 5,00,000
Provision for unascertained liabilities 2,00,000
Provision for doubtful debts 1,00,000
Depreciation charged in the Profit and Loss Account 24,00,000 32,00,000
(including the depreciation charged on revalued assets)
1,12,00,000
Less: Profit to be reduced by the following amounts as per Explanation
1 to Section 115JB
Amount transferred from reserve and credited to profit and loss account 3,00,000
[since the book profit was increased by the amount transferred to such
reserve in the Assessment Year 2016–17]
Depreciation (Without Revaluation) 20,00,000
Net Agricultural Income [Exempt under section 10 (1)] 16,00,000 39,00,000
Book Profit for computation of MAT under section 115JB 73,00,000

FINAL DT SATC 24A.3
Computation of Minimum Alternate Tax (MAT) under Section 115JB of the Income Tax Act, 1961
Particulars ` `
15% of book profit (15% of ` 73,00,000) 10,95,000
Add: Health & Education cess @ 4% 43,800
Minimum Alternate Tax payable under Section 115JB 11,38,800
Note – Explanation 1 to Section 115JB does not require adjustment of interest not paid before due date of
filling return of income, while computing book profit.
3. The Statement of Profit & Loss of Alpha Limited, a domestic company for the year ended 31st March,
2020 discloses a net profit of ` 120 lacs after debiting/crediting the following items:
(i) Provision for doubtful debts ` 2.40 lacs
(ii) Provision for income tax ` 18 lacs
(iii) Provision for deferred tax ` 9 lacs
(iv) Depreciation ` 15 lacs
(including depreciation on revaluation of assets ` 3 lacs.)
(v) Profit from export in unit set up in Special Economic Zone ` 22 lacs (eligible for deduction under section
10AA)
(vi) Provision for loss of subsidiary company ` 20 lacs
(vii) Profit on sale of land held as capital asset for 10 years ` 10 lacs
The Company has informed you that the entire capital gain on sale of land was invested in bonds of
Rural Electrification Corporation Limited within six months from the date of sale. Details of brought
forward losses and unabsorbed depreciation as per books of the company:
Previous Year Brought forward loss (` ` in lacs) Unabsorbed depreciation (` ` in lacs)

2016-17 - 4
2017-18 2 3
2018-19 8 2
Compute “book profit” u/s 115JB of the Income- tax Act, 1961 for the AY 2020-21.
(D-14 (2012) – 10 Marks)
Solution:
Computation of “Book Profit” of Alpha Limited for AY 2020-21
Particulars ` in lacs ` in lacs
Profit as per Statement of Profit & loss 120
Add: Provision for doubtful debts 2.40
Provision for income tax 18
Provision for deferred tax 9
Depreciation 15
Provision for loss of subsidiary company 20 64.40
184.40
Less:
Depreciation (excluding depreciation on revaluation) 12
Lower of brought forward loss or unabsorbed depreciation as per Books 9 21
Book profit 163.40
Notes:
1. Profit from export in unit set up in Special Economic Zone though eligible for deduction under section
10AA for computation of total income is not eligible for deduction in computing "book profit" for
determination of minimum alternate tax.
2. Investment in bonds of Rural Electrification Corporation Limited entitles the assessee company to claim
exemption of capital gain in computation of total income. But in computation of "book profit" under section
115JB, capital gain cannot be excluded nor exemption under section 54F can be claimed.

FINAL DT SATC 24A.4
4. Ram Ltd., a closely held Indian company, is engaged in the business of manufacture of paints in
India. A Statement of Profit & Loss Account for the year ending 31.3.2020 is given below:
Profit and Loss Account (Figures in lakhs)

Salary and wages 7.50 Sales 48.00
Postage and Telegrams 0.40 Amount withdrawn from 3.00
Travelling and Conveyance 0.50 General Reserve
Depreciation 5.00
Income-tax 4.00
Wealth tax 0.10
Excise duty due 1.00
Provisions for future losses 0.60
Proposed dividend 0.80
Loss of subsidiary company 0.50
Audit fee 0.25
Director remuneration 8.00
Deferred tax liability 1.35
Net profit 21.00
Total 51.00 51.00
Additional information
1. The excise duty due on 31.3.2020 was paid on 2.12.2020.
2. Custom duty of ` 1,20,000 which was due on 31.3.2018 was paid during the financial year 2019-20.
3. Depreciation as per income tax is ` 11.43 lakhs.
4. The company wants of set off the following losses/allowances:
For Tax purposes For accounting purposes

Brought forward loss of AY 2019-20 12,00,000 10,00,000
Unabsorbed depreciation 3,00,000 3,00,000
Compute the total income of the assessee and the tax liability for the AY 2020-21. (PTP-1-D-14)
Solution:
Computation of taxable income or R Ltd. as per normal provisions
` `
Add: Amount disallowed
Income-tax 4,00,000
Wealth tax 10,000
Outstanding excise duty 1,00,000
Provision for future losses 60,000
Loss of subsidiary company 50,000
Deferred tax liability 1,35,000
Depreciation for separate consideration 5,00,000 13,35,000
34,35,000
Less: Depreciation as per income-tax 11,43,000

Amount withdrawn from General Reserve 3,00,000
Custom duty of 2017-18 paid 1,20,000 15,63,000
18,72,000
Less: B/f business loss and unabsorbed depreciation (fully set off) 15,00,000
Less: Deduction under Chapter VIA Nil
Total income 3,72,000

FINAL DT SATC 24A.5
Book profit under section 115JB
Net profit as per Statement of Profit & Loss Account 21,00,000
Add: Income-tax 4,00,000
Provision for future losses 60,000
Loss of subsidiary company 50,000
Deferred tax liability 1,35,000
Depreciation 5,00,000 12,25,000
33,25,000
Less: Depreciation (same amount as there is no revaluation) 5,00,000

Amount withdrawn from general reserve 3,00,000
Unabsorbed depreciation (Business loss or unabsorbed
depreciation as per books whichever is less) 3,00,000 11,00,000
Book profit 22,25,000
Computation of tax liability

Total income computed 3,72,000
Tax on total income @ 31.2% (30% + surcharge Nil + HEC@4%) 1,16,064
Tax @ 15.60% (15% + surcharge Nil + HEC @ 4%)

on ` 22,25,000 as per provisions of section 115JB 3,51,000
Tax payable for assessment year 2020-21 is ` 3,51,000.
5. From the following information, determine the tax liability of KMD Ltd., domestic company, for the AY
2020-21 and 2021-22.
S. No. Assessment year Book-profits(`

`) Total income (`
`)
1. 2020-21 2,90,000 1,35,000
2. 2021-22 3,00,000 2,00,000
Answer: Surcharge is not considered assuming, Net Income less than ` 1 crore
A.Y. Book- Total Tax on Tax on Total Tax Credit = Tax Payable Tax
profit Income Book-Profit Income @ Tax on Book after tax credit
(`) (`) (`) 31.2% Profits credit set off, balance
rounded off (–) Tax on if any (`) (`)
u/s 288B Total
(`) Income(`)
@ 15.60% @ 31.2% on
2020-21 2,90,000 1,35,000 on 2,90,000 1,35,000 =
= 45,240 42,120 3,120 45,240 3,120
@ 15.60% @ 31.2% on 59,280
2021-22 3,00,000 2,00,000 on 3,00,000 2,00,000 = — [62,400 – NIL
= 46,800 62,400 3,120]
Note: Tax Payable is rounded off to the nearest multiple of ` 10 (Sec. 288B)

FINAL DT SATC 24A.6
6. Can interest under sections 234B and 234C of the Income-tax Act, 1961 be levied where a company is
assessed on the basis of book profits under section 115JB?
[Dec-13, 5 Marks]
Answer:
Provision of Law: Section 234C is applicable if an assessee has not paid advance tax or understated
installments of advance tax and calculated by taking into account 31st March of the previous year. Whereas
Section 234B is applicable if an assessee who is liable to pay advance tax, has failed to pay such tax or who
had paid advance tax but the amount of advance tax paid by him is less than 90% of assessed tax and period
of interest payable is from 1st April of assessment year till the date of determination of income u/s 143(1) or till
such regular assessment.
According to section 207, tax shall be payable in advance during any financial year, in accordance with the
provisions of sections 208 to 219 (both inclusive), in respect of the total income of the assessee which would
be chargeable to tax for the assessment year immediately following that financial year. Under section
115JB(1) of income tax act, where the tax payable on total income is less than 15% of "book profit" of a
company, the "book profit" would be deemed to be the total income and tax would be payable at the rate of
15%. Since in such cases, the book profit is deemed to be the total income, therefore, as per the provisions of
section 207, tax shall be payable in advance in respect of such book profit (which is deemed to be the total
income) also.
Fact of the Case & Decision: A similar issue was decided by Hon'ble Supreme Court in case of Joint CIT
vs. Rolta India Ltd. (2011) )330 ITR 470 (SC). On this issue, it was observed that there is a specific provision
in Section 115JB(5) providing that all other provisions of the Income-tax Act, 1961 shall apply to every
assessee, being a company, mentioned in that section.
Section 115JB is a self-contained code pertaining to MAT, and by virtue of sub-section (5) thereof, the liability
for payment of advance tax would be attracted. Therefore, if a company defaults in payment of advance tax in
respect of tax payable under section 115JB, it would be liable to pay interest under sections 234B and 234C
of Income Tax Act. Therefore, interest under sections 234B and 234C shall be payable on failure to pay
advance tax in respect of tax payable under section 115JB.
7. XYZ Limited's Statement of Profit & Loss Account for the year ended 31st March, 2020 shows a net
profit of ` 75 lakhs after debiting / crediting the following items:
(i) Depreciation ` 24 lakhs (including ` 4 lakhs on revaluation).
(ii) Interest to financial institution not paid before due date of filing return of income ` 6 lakhs.
(iii) Provision for doubtful debts ` 1 lakh.
(iv) Provision for unascertained liabilities ` 2 lakhs.
(v) Transfer to General Reserve ` 5 lakhs.
(vi) Net Agricultural Income ` 16 lakhs
(vii) Amount withdrawn from Reserve created during 2015-16 ` 3 lakhs.
(Book profit was increased by the amount transferred to such reserve in Assessment Year 2016-17)
Other Information:
Brought forward loss and unabsorbed depreciation as per books are ` 12 lakhs and ` 10 lakhs,
respectively. Compute MAT under section 115JB for AY 2020-21.
Answer Computation of Book Profit of XYZ Limited under section 115JB
Particulars ` `
Add: Profit to be increased by the following amounts
as per Explanation 1 to section 115JB
Transfer to General Reserve 5,00,000
Provision for unascertained liabilities 2,00,000
Provision for doubtful debts 1,00,000
Depreciation 24,00,000 32,00,000
1,07,00,000
Less: Profit to be reduced by the following amounts as per Explanation 1 to section 115JB
Amount transferred from reserve and credited to profit and loss
account [since the book profit was increased by the amount
transferred to such reserve in the assessment year 2016-17] 3,00,000
Depreciation (excluding revaluation) 20,00,000

FINAL DT SATC 24A.7
Net Agricultural Income [Exempt under section 10(1)] 16,00,000
Loss brought forward (` 12 lakhs) or unabsorbed depreciation
(` 10 lakhs) as per books, whichever is less 10,00,000 49,00,000
Book Profit for computation of MAT under section 115JB 58,00,000
Computation of Minimum Alternate Tax (MAT) under section 115JB

Particulars ` `
15% of book profit (15% of ` 58 lakh) 8,70,000
Minimum Alternate Tax payable under section 115JB 9,04,800
Note - Explanation 1 to section 115JB does not require adjustment of interest not paid before due date of
filing return of income, while computing book profit.
8. ABC Limited has claimed exemption on the income from long-term capital gains under section 54EC
by investing in bonds of National Highway Authority of India within the prescribed time. In the
computation of "book profit" under section 115JB, the company claimed exclusion of long-term
capital gains because of exemption available on it by virtue of section 54EC. The Assessing Officer
reckoned the book profit including long-term capital gains for the purpose of levy of minimum
alternate tax payable under section 115JB. Is the action of the Assessing Officer justified in law?
Answer:
The issue under consideration in this case is whether long-term capital gain exempted by virtue of section
54EC can be included in the book profit computed under section 115JB for levy of minimum alternate tax.
It may be noted that minimum alternate tax (MAT) is attracted under section 115JB, on account of tax on total
income being less than 15% of book profit. Chapter XII-B is a self contained code for computation of book
profit. The net profit as per the profit and loss account for the relevant previous year prepared in accordance
with the provisions of Parts II of Schedule VI to the Companies Act, 1956, as increased/reduced by the
specified adjustments provided for in Explanation 1 to section 115JB would be the book profit for levy of MAT
under section 115JB.
Therefore, if an assessee has claimed exemption under section 54EC by investing in bonds of National
Highways Authority of India within the prescribed time, the long term capital gains so exempt would still be
taken into account for computing book profit under section 115JB for levy of MAT, since Explanation 1 to
section 115JB does not provide for such deduction.
As long as long-term capital gains are part of the profits included in the profit and loss account prepared in
accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956, capital gains
cannot be excluded unless provided under Explanation 1 to section 115JB. It was so held by the Kerala High
Court in N. J. Jose and Co. (P.) Ltd. v. ACIT (2010) 321 ITR 0132. Therefore, the action of the Assessing
Officer is justified in law.
9. Examine the following statements in the context of the provisions contained in the various Chapters
of the Income-tax Act, 1961:
(i) “The provisions of section 115JB are not applicable in case of foreign companies”.
(ii) “The provisions of dividend distribution tax are also applicable to an undertaking or enterprise
engaged in developing, operating and maintaining a Special Economic Zone (SEZ)”.
Answer
(i) “The provisions of section 115JB are not applicable in case of foreign companies” - The statement is not
correct since there is no provision in section 115JB restricting its applicability to only domestic companies
and therefore, section 115JB is applicable to both domestic and foreign companies. The provisions of
section 115JB are applicable in the case of an assessee, being a company, where 15% of its book profit
exceeds the tax payable on the total income computed under the normal provisions of the Act. Therefore,
the provisions of section 115JB would be attracted both in the case of a domestic as well as a foreign
company, if the tax payable on its total income is less than 15% of its book profit.

FINAL DT SATC 24A.8
However, section 115JB will not be applicable to following foreign company:
a. If foreign company is a Resident of a Country with which India has a DTAA under Section
90, it should not have a Permanent Establishment in India in accordance with the DTAA
b. If foreign company is a Resident of a Country with which India does not have an
agreement under Section 90, It is not required to seek registration under any law for the time
being in force relating to companies.
(ii) The statement is correct.

The Finance Act, 2011 has introduced a sunset clause to remove the exemption in respect of dividend
distribution tax in case of an undertaking or an enterprise engaged in developing, operating and
maintaining an SEZ for dividends declared, distributed or paid on or after 1st June, 2011. Therefore, the
statement given in the question is correct in respect of dividend declared, distributed or paid on or after
1st June, 2011.
10. The profit of ABP Ltd. as per Statement of Profit & Loss Account for the previous year 2019-20 is ` 100
lacs after debiting/crediting the following items:
(i) Provision for income-tax : ` 15 lacs
(ii) Provision for deferred tax : ` 8 lacs
(iii) Proposed Dividend : ` 20 lacs
(iv) Depreciation debited to Statement of Profit & Loss Account is ` 12 lacs. This includes
depreciation on revaluation of asset to the tune of ` 2 lacs.
(v) Profit from unit established in Special Economic Zone : ` 30 lacs
(vi) Provision for permanent diminution in value of investments : ` 2 lacs
Brought forward losses and unabsorbed depreciation as per books of the company are as follows:
Previous year Brought forward loss Unabsorbed Depreciation
(`
` in lacs) (`
` in lacs)
2016-17 2 5
2017-18 - 3
2018-19 10 2
Compute book profit of the company under section 115JB for Assessment Year 2020-21.
Answer
Computation of book profit of ABP Ltd. under section 115JB for A.Y. 2020-21
Profit as per Statement of Profit & Loss Account 100
Add: Net profit to be increased by the following amounts as per
Explanation 1 to section 115JB
Provision for income tax 15
Provision for deferred tax 8
Proposed dividend 20
Depreciation 12
Provision for diminution in value of investment 2 57
157
Less: Net profit to be reduced by the following amounts as per
Explanation 1 to section 115JB
Depreciation (excluding depreciation on revaluation of assets) 10
Lower of brought forward loss or unabsorbed depreciation, as per books
(on overall basis) 10 20
Book Profit 137
Note - A sunset clause has been inserted by the Finance Act, 2011 to remove MAT exemption to SEZ units
and developers with effect from A.Y. 2012-13. Therefore, profit from unit established in SEZ cannot be
excluded for computation of book profit.

FINAL DT SATC 24A.9
11. ABC (P) Ltd. made a provision of ` 30 lacs for doubtful debts by debit to Statement of Profit & Loss
Account. The Assessing Officer, while computing book profit under section 115JB, wants to add back
the provision. Is the Assessing Officer justified in making such addition for computing book profit?
Answer
Explanation 1 below section 115JB(2) has been amended to provide that the profit as per Statement of Profit
& Loss Account should also be increased by, inter alia, the amount set aside as provision for diminution in
the value of any asset, if the same has been debited to Statement of Profit & Loss Account, for computing
the book profit.
Therefore, the Assessing Officer is justified in adding back the provision of ` 30 lacs for doubtful debts while
computing book profit.
12. The net profit as per the Statement of Profit & Loss Account of XYZ Ltd., a resident company, for the
year ended 31.3.2020 is ` 190 lacs arrived at after making the following adjustments:
Particulars ` ( in lacs)
(i) Depreciation on assets 100
(ii) Reserve for currency exchange fluctuation 50
(iii) Provision for tax 40
(iv) Proposed dividend 120
Following further information are also provided by company:

(a) Net profit includes ` 10 lacs, being dividend received from a subsidiary company.
(b) Provision for tax includes ` 16 lacs of tax payable on distribution of profit and of ` 2 lacs of
interest payable on income-tax.
(c) Depreciation includes ` 40 lacs towards revaluation of assets.
(d) Amount of ` 50 lacs credited to P & L account was drawn from revaluation reserve.
(e) Balance of profit and loss account shown in balance sheet at the asset side as at 31.3.2019 was `
30 lacs representing unabsorbed depreciation.
Compute the income of the company for the year ended 31.3.2020 liable to tax under MAT.
Answer
Computation of income of XYZ Ltd. liable to tax under MAT for the year ended 31.3.2020
Particulars ` `
Profit as per Statement of Profit & Loss Account 1,90,00,000
Add : Increased by the following
amounts as per Explanation 1 to section 115JB
Depreciation 1,00,00,000
Reserve for currency exchange fluctuation, since the
amount carried to any reserve, by whatever name called,
has to be added back 50,00,000
Provision for tax (See Note below) 40,00,000
Proposed dividend 1,20,00,000 3,10,00,000
5,00,00,000
Less : Decreased by the following
amounts as per Explanation 1 to section 115JB
Depreciation other than depreciation on revaluation of
assets (` 100 lacs - ` 40 lacs) 60,00,000
Withdrawal from revaluation reserve restricted to the extent
of depreciation on account of revaluation of assets (` 50
lacs or ` 40 lacs, whichever is less) 40,00,000
Unabsorbed depreciation or brought forward business loss,
whichever is less, as per the books of account (` 30 lacs or Nil) NIL
Dividend income [since the same is exempt under section 10(34)] 10,00,000 1,10,00,000
Income liable to tax under MAT 3,90,00,000
Note – For the purpose of section 115JB, book profit means the net profit as per the Statement of Profit &
Loss Account prepared in accordance with Schedule III to the Companies Act, 2013, as adjusted by certain
additions/deductions as specified. One of the adjustments is to add back income-tax paid or payable, and the
provision therefore. Explanation 2 after sub- section (2) of section 115JB clarifies that income-tax includes,
inter alia, dividend distribution tax / tax on distributed income and interest. Therefore, the entire provision of `
40 lacs for income-tax has to be added back for computing book profit for levy of MAT.

13. Hyper Ltd., engaged in diversified activities, earned a profit of ` 14,25,000 after debit/credit of the
following items to its Statement of Profit & Loss Account for the year ended on 31.3.2020:
(a) Items debited to Statement of Profit & Loss Account `

Provision for loss of subsidiary 70,000
Provision for sales tax demand (paid before due date) 75,000
Provision for wealth-tax demand 90,000
Provision for income-tax demand 1,05,000
Penalty 15,000
Depreciation 3,60,000
Interest on deposit credited to buyers on 31.3.2020 for advance received
from them, on which TDS was deposited on 31.7.2020 90,000
(b) Items credited to Statement of Profit & Loss Account

Long term capital gain on sale of equity shares on which securities
transaction tax was paid 3,60,000
Income from units of UTI 75,000
The company provides the following additional information:

(i) Depreciation includes ` 1,50,000 on account of revaluation of fixed assets.
(ii) Depreciation allowable as per Income-tax Rules is ` 2,80,000.
(iii) Brought forward Business Loss/Unabsorbed Depreciation:
F.Y. Amount as per books Amount as per Income-tax
Loss Depreciation Loss Depreciation
2016-17 2,50,000 3,00,000 2,00,000 2,50,000
2017-18 Nil 2,70,000 1,00,000 1,80,000
2018-19 3,50,000 3,15,000 1,20,000 2,10,000
You are required to:

(i) compute the total income of the company for the assessment year 2020-21 giving the reasons for
treatment of items and
(ii) examine the applicability of section 115JB of the Income-tax Act, 1961, and compute book profit
and the tax credit to be carried forward.
Answer
Computation of total income of M/s Hyper Ltd. for the AY 2020-21
Particulars ` `
Add: Items disallowed /considered separately
Provision for loss of subsidiary [since it is not wholly and
exclusively for the purpose of business of the assessee] 70,000
Provision for wealth-tax [disallowed under section 40(a)(iia)] 90,000
Provision for sales tax [is fully allowable since the sales tax has
been paid before the due date] -
Provision for income-tax [disallowed under section 40(a)(ii)] 1,05,000
Penalty 15,000
Interest on deposit credited on 31.3.2020 and tax deposited on
31.7.2020 [allowed under section 40(a)(ia) as paid before due
date of filing return of income under section 139(1)] Nil
Depreciation debited to profit and loss account [only depreciation
calculated as per the Income-tax Rules, 1962 is allowable as deduction] 3,60,000 6,40,000
20,65,000
Less: Items credited but not includible under business
income or are exempt under the provisions of the Act
Long-term capital gain on sale of equity shares on which
securities transaction tax was paid, since it is not a business income. 3,60,000
Income from UTI, since it is not a business income. 75,000 4,35,000
16,30,000
Less: Depreciation (allowable as per the Income-tax Rules, 1962) 2,80,000
13,50,000

Less: Set-off of brought forward business loss and unabsorbed depreciation
Brought forward business loss under section 72 4,20,000
Brought forward depreciation under section 32 6,40,000 10,60,000
Income from business 2,90,000
Income from Other Sources

Income from units of UTI 75,000
Less: Exempt under section 10(35) 75,000 Nil
Tax payable @ 30% 87,000

Add: H & Education cess @ 4% 3,480
Tax Payable as per the Income-tax Act, 1961 90,480
Computation of Book Profit under section 115JB

Particulars ` `
Add: Profit to be increased by the following amounts as
Per Explanation 1 to section 115JB
Provision for loss of subsidiary 70,000
Provision for income-tax 1,05,000
Depreciation debited to profit and loss account 3,60,000 5,35,000
19,60,000
Less: Profit to be reduced by the following amounts as
Per Explanation 1 to section 115JB
Depreciation debited to profit and loss account (excluding
depreciation on account of revaluation of fixed assets)
(i.e. ` 3,60,000 – ` 1,50,000) 2,10,000
Income from UTI [since it is an income exempt u/s 10(35)] 75,000
Brought forward business loss or unabsorbed deprecation as per
books of account, whichever is less, taken on cumulative basis 6,00,000 8,85,000
Book Profit 10,75,000

15% of book profit 1,61,250
1,67,700
In case of a company, it has been provided that where income-tax payable on total income computed as per
the provisions of the Act is less than 15% of book profit, the book profit shall be deemed as the total income
and the tax payable on such total income shall be 15% thereof plus health & education cess @ 4%
Accordingly, in this case, since income-tax payable on total income computed as per the provisions of the Act
is less than 15% of book profit, the book profit of ` 10,75,000 is deemed to be the total income and income-
tax is payable @ 15% thereof plus health & education cess @ 4%. The tax liability, therefore, works out to be
` 1,67,700.
Section 115JAA provides that where tax is paid in any assessment year in relation to the deemed income
under section 115JB(1), the excess of tax so paid, over and above the tax payable under the other provisions
of the Income-tax Act, 1961, will be allowed as tax credit in the subsequent years.
The tax credit is, therefore, the difference between the tax paid under section 115JB(1) and the tax payable
on the total income computed in accordance with the other provisions of the Act. This tax credit is allowed to
be carried forward for 15 assessment years succeeding the assessment year in which the credit became
allowable.
Such credit is allowed to be set off against the tax payable on the total income in an assessment year in which
the tax is computed in accordance with the provisions of the Act, other than section 115JB, to the extent of
excess of such tax payable over the tax payable on book profits in that year.
Particulars `
Tax on book profit under section 115JB 1,67,700
Less: Tax on total income computed as per the other provisions of the Act 90,480
Tax credit to be carried forward under section 115JAA 77,220

14. A domestic company is liable to pay minimum alternate tax under section 115JB for the Assessment
Year 2020-21. While computing book profit under section 115JB the company claims provision for
deferred tax charged to Statement of Profit & Loss Account in accordance with Accounting Standard-
22 of the Institute of Chartered Accountants of India, which is sought to be disallowed by the
Assessing Officer. Is the action of the Assessing Officer valid in law?
Answer:
Explanation 1 to section 115JB provides that the amount of deferred tax and any provision therefore, is to be
added to the net profit of the company. Similarly, any amount credited to Statement of Profit & Loss
Account being the amount of deferred tax is to be reduced / deducted for computing the book profit under
section 115JB. Therefore, the action of the Assessing Officer is valid in law.
15. The net profits of XYZ Ltd. for the year ended 31st March, 2020, after debiting/crediting the following
items, were ` 9 Lacs:
(a) The company had taken on lease an old building for the purposes of locating its business. Due to
old age of the building, it was demolished and a new building put up, which was used for
purposes of XYZ’s business from September, 2019. The cost of the new building ` 10 Lacs was
written off as revenue expenditure. The lessor permitted the company to have an extension of the
lease by another twenty years.
(b) ` 1 Lac was paid as an annual fee for technical services to a foreign collaborator under an
agreement approved by the Government.
(c) The company collected ` 3 Lacs from its customers by way of sales tax in the year 2014-15 and
had remitted it to the State Government in due time. On the levy being challenged in the High
Court, the Court held the collection as illegal and the State Government in February, 2020
refunded the amount to the company.
(d) Land development charges of ` 1.5 Lacs were paid to the State Industrial Development
Corporation on allotment of a commercial plot.
(e) A criminal case was filed against a Director of the company, in his official capacity. The company
spent legal expenses of ` 50,000 defending him in the proceedings. The Director was acquitted of
the charges at the end.
(f) The company issued in the year bonus shares to its shareholders and for that purpose fees of `
1.5 Lacs were paid to the Registrar of Companies. These have been written off in the accounts as
revenue expenses.
(g) The company paid ` 70,000 as interest on deposits to some of the non-resident buyers on
advances received from them. No tax at source was deducted on the payment.
(h) Overdraft interest of ` 40,000 was paid to the company’s bank to enable the company to pay its
income tax dues.
(i) The opening and closing stocks of the year were ` 90,000 and ` 1,17,000 respectively and were
undervalued by 10% on cost.
(j) Some investments were held by the company (not as stock in trade), which had to be depreciated
by ` 4.8 Lacs due to a directive from the Government.
The balance on 1st April, 2019 to the Statement of Profit & Loss Account, shown separately in the
Balance Sheet, was a debit of ` 2 Lacs.

The company had the following claims brought forward from the prior years:
Business losses relating to

Assessment year 2010-11 ` 8 Lacs
Long-term losses under the head capital gains -

Unabsorbed depreciation
(Both as per income-tax records and books of account of the company) ` 12.50 Lacs
You are required to :

(a) Calculate the total income of XYZ Ltd. for the assessment year 2020-21 [Your answer should
clearly indicate the reasons for the treatment of the individual items given above.]
(b) Examine the applicability of section 115JB of the Income-tax Act, 1961 to the company for the
same assessment year.
Answer
(a) Computation of total income of XYZ Ltd. for the A.Y. 2020-21
Particulars ` `
Add :Cost of the new building – written off is a capital
expenditure – disallowed (Notes 1 & 2) 10,00,000
Land development charges paid to State Industrial
Development Corporation is a capital expenditure –
hence disallowed (Note 5) 1,50,000
Fees paid to ROC for issuing bonus shares is revenue
expenditure – hence allowed. [CIT v. General Insurance
Corpn (2006) 156 Taxman 96 (SC)] (Note 7) Nil
Interest on deposit to non-resident buyers without
deduction of tax at source – disallowed under section
40(a)(i) (Note 8) 70,000
Interest to bank on overdraft for payment of income tax
dues – disallowed as per Supreme Court’s
decision in East India Pharmaceutical Works Ltd. v.
CIT (1997) 224 ITR 627 (Note 9) 40,000
Depreciation on investments not held as stock-in trade
(Note 11) 4,80,000
Under valuation of stock (` 1,17,000 - ` 90,000) х
10/90 (Note 10) 3,000 17,43,000
26,43,000
Less: Depreciation on building @10% on ` 10 Lacs (Notes 1 & 2) 1,00,000
Less: Set-off of business loss and unabsorbed depreciation
Business loss of A.Y. 2010-11 cannot be set-off
against business income of the current year, since
business loss can be carried forward for a maximum
period of 8 years only. -
Business loss of A.Y. 2016-17 4,00,000
Long-term capital loss of A.Y. 2017-18 cannot be setoff
against business income since as per section 74,
long-term capital loss can be set-off only against
long-term capital gains. -
Unabsorbed depreciation 12,50,000 16,50,000
(b) Tax on total income as computed under the Income-tax Act, 1961
Particulars `
Tax on total income of ` 8.93 Lacs 2,67,900
Add: Health & Education cess@ 4% 10,716
Tax on total income 2,78,616

Computation of tax as per section 115JB
Particulars `
Add: Decrease in value of investment not eligible for deduction if the
amount is set aside by way of provision for diminution in value of asset 4,80,000
13,80,000
Less: Business loss of ` 2 Lacs (as per books of account as on
01.04.2018), since it is lower than the unabsorbed depreciation of ` 12.50 Lacs 2,00,000
Book Profit 11,80,000
15% of book profit 1,77,000
Add: Education cess @ 4% 7,080
1,84,080
Since the income-tax payable on the total income of the company computed under the Income-tax
Act, 1961 is not less than 15% of its book profit, section 115JB will not apply for A.Y. 2020-21.
Notes:
1. As per Explanation 1 to section 32(1), where an assessee carries on business or profession in a
building which is not owned by him but in respect of which he holds a lease or other right of
occupancy, depreciation is to be allowed on account of any capital expenditure incurred by the
assessee on construction of any structure for improvement/ renovation of the building as if the
structure is a building owned by the assessee. Therefore, depreciation is allowable on the capital
expenditure of ` 10 Lacs incurred by XYZ Ltd. towards the cost of the new building put up after
demolition of the old building.
2. The rate of depreciation on buildings is 10%. Since it is put to use for more than 180 days during the
previous year 2019-20, full depreciation is allowable.
3. Payment of annual fees for technical services to a foreign collaborator is an allowable business
expense and has been correctly charged to profit and loss account. Therefore, no adjustment is
required.
4. Sales tax refund from the Government has to be treated as a revenue receipt. Since it has been
correctly credited to profit and loss account, no adjustment is required.
5. Land development charges paid to SIDC on allotment of a commercial plot is a capital expenditure
6. Section 37(1) does not make any distinction between expenditure incurred in civil litigation and that
incurred in criminal litigation. If the expenditure is bona fide incurred wholly and exclusively for the
purpose of the business, it is allowable as deduction. [CIT v. Birla Cotton Spinning & Weaving Mills
Ltd. (1971) 82 ITR 166 (SC)]. Therefore, in this case, since legal expenses were incurred by the
company for defending the Director in a criminal case filed against him in his official capacity,
it is allowable as deduction.
7. Fees paid to Registrar of Companies for enhancement of authorised capital to issue bonus shares is
deductible since it is related to issue of bonus shares. Alternatively, if it is a mere increase in
authorized capital then such expenditure is a capital expenditure and not deductible under section
37(1)[Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 792 (SC)].
8. Since no tax has been deducted at source on payment of interest to non-residents, interest paid will
not be allowed as a deduction as per section 40(a)(i).
9. Interest paid to bank on overdraft for payment of income-tax dues is not an expenditure incurred
wholly and exclusively for the purpose of business and is hence, not deductible under section 37(1)
as per the Supreme Court’s decision in East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR
627.
10. The under valuation of both opening and closing stocks will have an impact on the profits for the year
and accordingly, the difference in valuation of stock has to be credited to profit and loss account to
the extent of 10% of cost.
11. Value of investment written down is on capital account and hence not allowed, even if such
write down was on a directive from the Government. Clause (i) of Explanation 1 to section 115JB
provides for increasing the net profit if any amount is set aside as provision for diminution in the value
of any asset. Though it is stated as written off in the question, it is assumed that the charge to
profit and loss account is by way of provision to meet possible loss in future and accordingly
adjusted in the solution while computing book profit.

16. The accounts of a public company have been prepared in accordance with provisions of Schedule III
to the Companies Act, 2013 and its Statement of Profit & Loss Account laid before the Annual General
Meeting for the previous year ending 31st March, 2020 shows a Profit of ` 15 Lacs. The following
information relevant for the purpose of computing its assessable income has been extracted from a
scrutiny of the Statement of Profit & Loss Account:
Credits in Statement of Profit & Loss Account `

(1) Profit from a new industrial undertaking qualifying for deduction under section 80-IA (Net)
17,00,000
(2) Long-term capital gains 3,00,000
Debits in Statement of Profit & Loss Account

(1) Depreciation relating to 2018-19 brought forward 10,00,000
(2) Business loss relating to 2018-19 brought forward 12,00,000
(3) Current year depreciation 10,00,000
(4) Penalty for infraction of law 1,00,000
(5) Provision for sales-tax 3,00,000
(6) Dividend proposed 2,00,000
Depreciation admissible under the Income-tax Rules, 1962 for the previous year is ` 19,50,000. The
capital gain has been invested in specified assets under section 54EC.
Sales tax provided in the accounts has been remitted before the due date. There is no loss or
unabsorbed depreciation to be carried forward and adjusted as per income-tax assessment.
You are required to compute the total tax liability of the company for the assessment year 2020-21.
Note: Assessee Company is not required to comply with Indian Accounting Standards.
Answer
The impact of the provisions of section 115JB has to be ascertained and for this purpose the income-tax on
the total income as computed under the Income-tax Act, 1961 has to be compared with 15% of the book
profits ascertained under section 115JB.
Computation of total income under the Income-tax Act, 1961

Particulars ` `
Add : Expenses not allowable:
Unabsorbed Depreciation 10,00,000
Business Loss brought forward 12,00,000
Penalty – not an admissible deduction 1,00,000
Proposed dividend 2,00,000 35,00,000
50,00,000
Less : Expenses deductible:
Depreciation as per Income-tax Rules, 1962 19,50,000
30,50,000
Less : LTCG to be considered under the respective head 3,00,000
Profit and Gains from business 27,50,000
Capital Gains 3,00,000
Less :Exemption under section 54EC (See Note 5) 3,00,000 Nil
GTI 27,50,000
Less :Deduction under section 80-IA 17,00,000
Tax payable @ 31.2% = ` 3,27,600

Computation of Book Profit under section 115JB
Particulars ` `
Profit as per Statement of Profit & Loss Account (See Note 6) 37,00,000
Add: Proposed dividend 2,00,000
49,00,000
Less: Unabsorbed depreciation, since, it is lower than brought
forward business loss (See Note 4) 10,00,000
Depreciation 10,00,000 20,00,000
Book profit under section 115JB 29,00,000
Tax at 15% of ` 29,00,000 = ` 4,35,000 plus HEC @ 4%. The tax liability is ` 4,52,400.
Since tax payable on income computed as per the provisions of the Income-tax Act, 1961 is less than 15% of
the book profit, the book profit of ` 29 Lacs would be deemed to be the total income and tax is payable
@15% thereon plus cess. The total tax liability would be ` 4,52,400.
Notes:
(1) Income from new industrial undertaking qualifying for deduction under section 80-IA will not be reduced
in computing book profit under section 115JB.
(2) It is assumed that sales tax dues paid on or before the due date for filing return of Income. For computing
the book profits, since provision for sales-tax is an ascertained liability, it is not to be added.
(3) Book profit includes capital gains [CIT v. Veekely Investment Co Ltd. (2001) 249 ITR 597]
(4) Brought forward depreciation or business loss, whichever is less is deductible while computing book
profit under section 115JB.
(5) Capital gains are not chargeable to tax as the assessee has invested the gain in specified assets
mentioned in section 54EC.
(6) Please note that the debit entries pertaining to unabsorbed depreciation and brought forward business
loss are not in consonance with Schedule III to the Companies Act, 1956. These items are part of the
balance sheet under “Reserves and Surplus” on the liabilities side or “Profit & Loss Account” (as the case
may be) on the assets side. In order to rectify the treatment in the books of account, the following
adjustments should be made:
`
Add : Debits incorrectly made:
Unabsorbed depreciation 10,00,000
Brought forward business loss 12,00,000
Net Profit as per Schedule III 37,00,000
17. Fun India Limited has a carried forward credit of ` 2 lacs under section 115JAA of the Income-tax Act,
1961 from assessment year 2019-20. In the A.Y. 2020-21, the company's total income and book profit
under section 115JB are ` 5 lacs and ` 7 lacs, respectively. Compute the tax payable by the company
for assessment year 2020-21 and the amount to be carried forward under section 115JAA.
Answer According to section 115JAA, the tax credit to be allowed under the section is the difference between
the minimum alternate tax paid under section 115JB and the tax payable by the assessee on his total income
computed as per the other provisions of the Income-tax Act, 1961.
The amount of tax credit determined as aforesaid can be carried forward for 15 assessment years. The
brought forward tax credit shall be allowed to be set off in any assessment year to the extent of the difference
between the tax on total income and minimum alternate tax which would have been payable under section
115JB for that assessment year.
Computation of tax payable by Fun India Limited for A.Y. 2020-21 and MAT credit to
be carried forward to A.Y. 2021-22
Particulars `
A. Total income 5,00,000
B. Book profit 7,00,000
C. Tax on A (31.2% of ` 5,00,000) 1,56,000
D. Tax on B (15.60% of ` 7,00,000) 1,09,200
E. Difference between C and D 46,800
F. Tax credit brought forward from assessment year 2019-20 2,00,000
G. MAT credit set-off (Being lower of E and F) 46,800
H. Tax payable for A.Y.2020-21 (C - G) 1,09,200
I. MAT credit to be carried forward to A.Y. 2021-22 (F - G) 1,53,200

FINAL DT SATC 25.1
Assessment of Mutual Association

No person can trade with himself and make an assessable profit. To constitute a mutual association, a number of
persons associate together to subscribe money for a fund for the purpose of its being spent upon a particular
object, and the balance, if any, being returned to the subscribers and proportionately distributed among them.
This balance is that part of the fund which is not absorbed by the particular object of the subscriptions. This
surplus is not assessable to income-tax since it arises out of the mutual dealings.
The basis for exemption of the income of the mutual association are as follows:
(1) Common identity of contributors and participators
The essence of mutuality lies in the return of what one has contributed to a common fund, and, unless there
is complete identity between the contributors and the participators in a common fund, the principle of
mutuality would not be attracted.
However, the criterion that the contributors to the common fund and participators in the surplus must be an
identical body does not mean that each member should participate in the surplus or get back from the
surplus precisely what he has paid. What is required is that the members as a class should contribute to
the common fund and as a class they must be able to participate in the surplus.
(2) The treatment of the assessee, though incorporated, as a mere entity for the convenience of the
members
If there is a common identity of contributors and participators, the particular form which the association
takes is immaterial. Incorporation as a company or as a registered society is a convenient medium for
enabling the members to conduct a mutual concern.
Even a company assessee can claim exemption on the basis of mutuality principle where its
memorandum and articles of association provided that the funds of the company should be utilized solely for
the promotion of its objects and that no portion of the income or property shall be paid or transferred directly
or indirectly, by way of dividends, bonus to any member or former member.
(3) The impossibility of the contributors deriving profit from the contribution made by themselves to a
fund which could only be expended or returned to themselves
A mutual association is an association of persons who agree to contribute funds for some common purpose
mutually beneficial and receive back the surplus left out of these funds in the same capacity in which they
have made the contributions. This capacity as contributors and recipients remains the same. They contribute
not with an idea to trade but with an idea of rendering mutual help.
The mutuality principle which is true in the case of an individual is equally true in respect of bodies of
individuals, such as,
(a) a members’ club,
(b) a co-operative society,
(c) a mutual benefit fund etc
The aforesaid general observation that mutual activities of a mutual concern do not return taxable income
is, however, subject to the following four exceptions expressly provided in the Act:
(1) Income accruing to a life or non-life mutual insurance concern from the business of such insurance is
liable to tax [Section 2(24)].
(2) Income derived by a trade, professional or similar association from specific services performed for
its members are chargeable to tax [Section 2(24) read with Section 28].
(3) Income of insurance business carried on by a co-operative society is taxable in all cases (even if it is
a mutual concern) [Section 2(24)].
(4) The profits from a credit facilities carried on by a co-operative society with its members [Section
2(24)].

FINAL DT SATC 25.2
Trade and Professional Association
Trade and professional association means an association of traders or professionals for the protection or
advancement of their common interest.
Income arising to such trade or professional associations shall be taxable only when such income arises from
performing specific services to members. If any entrance fee is taken by these associations,
that fee shall not be taxable.
[Note: It may however be noted that income derived by a social club/resident welfare association, etc. shall
be exempt even if the specific services are rendered by it to its members as these are not trade,
professional or similar association]
Any income derived by a trade, professional or similar association for rendering specific services to its
members is taxable under Section 28(iii). But any surplus of other receipts over the expenses from mutual
activities of such association is not chargeable to tax as it is of mutual character. Since excess of such
surplus is not taxable, if there is any deficiency instead of the surplus, it should normally not be allowed to
be set off against taxable income of such association.
Section 44A provides a special advantage where such deficiency shall be allowed to be set off from the
assessable income of such association subject to the following conditions being satisfied:
(i) The assessee is a trade, professional or similar association
(ii) Such association should not distribute any part of its income to its members except as grants to
any association or institution affiliated to it.
If the above conditions are satisfied, the amount of any deficiency will be allowed from the assessable
income of such association to the extent of 50% of the assessable income, as arrived at before allowing this
deduction.
The aforesaid deduction will be allowed first from the income of such association chargeable under the head
profits and gains from business or profession and the balance amount, if any, from the assessable
income of the association under any other head.
Deficiency means the excess of expenditure (other than capital expenditure or not being expenditure
deductible in computing the income under any other provisions of the Act) incurred for the advancement
of the common interest of the members of the association concerned, over receipts from its members.
Such receipts will not include any remuneration for rendering any specific services to the members of such
association.

FINAL DT SATC 25.3
Clubs:
1. The consensus of judicial opinion is that any surplus accruing to a members’ club from the
subscriptions and charges for various conveniences paid by members is not income or profit at
all, nor can a social club be deemed to trade as far as its dealings with its own members are
concerned. The position would be the same even though the club may be incorporated as a
company or registered as a society.
2. Members’ club are, without doubt, cent per cent mutual associations. They are co-operative
bodies whereby the members raise funds by way of entrance fees and periodical subscriptions
in order to provide themselves with social, sporting or similar other amenities.
3. One among the popular activities of such a club is the providing of refreshments to the
members for a charge to cover the cost of preparation, overheads and service. If such
refreshments be served to non-members, it would only be on the basis of such non-
members being guests of the member who pays for himself and his guest.
4. In the case of CIT vs. Bankipur Club Ltd., the Supreme Court has held that the receipt for
various facilities extended by the club to members as part of the usual privileges, advantages
and conveniences, attached to the membership of the club, could not be said to be a trading
activity. The surplus of excess of receipts over the expenditure as a result of mutual
arrangement could not be said to be “Income” for the purpose of Income Tax Act.
5. If assessee-company is running a recreation club for its members, the income earned from
the members is exempt on the principle of mutuality.
6. But a club is taxable on the profit derived from subscriptions and charges paid by non-
members and on the income derived from its capital assets. Where a club is an incorporated
company carrying on business it may be taxable on the money received from its members as
well as non-members in the course of its business.
7. However, if the club is not a member’s club but is a proprietary club i.e. if the club is owned by
an outsider and not by the members themselves, the proprietor would be taxable on the profits
earned by running the club. The position would not in any way be affected by the fact that the
proprietor is a limited company and some of the shareholders are members of the club.

FINAL DT SATC 25.4
CLASS NOTES

FINAL DT SATC 25A.1
Assessment of Mutual Association - Questions

1. Compute the taxable income of a Chamber of Commerce from the following data.
1` 2` 3`
Gross receipts for specific services rendered to members 2,60,000 2,60,000 2,60,000
Expenses incurred in connection with the above 60,000 1,10,000 2,00,000
Interest on bank deposits 40,000 40,000 80,000
Receipt from members 2,00,000 3,00,000 2,60,000
Expenditure incurred on members 1,50,000 4,10,000 3,50,000
Solution:
Profit and gains of business and profession
Net income from rendering specific services 2,00,000 1,50,000 60,000
(Gross receipts-Expenses)
Less: --- 95,000 60,000
Deficiency set off (maximum to the extent of 50% of total
assessable income before set off of deficiency i.e. ` 1,90,000 and
` 1,40,000 in case of 2 and 3 respectively)
(A) PGBP 2,00,000 55,000 Nil
Interest on bank deposit under other heads 40,000 40,000 80,000
Less: Deficiency although allowable upto 50% of total assessable 10,000
income which could not be set off against business income
(B) IOS 40,000 40,000 70,000
Gross Total Income (A + B) 2,40,000 95,000 70,000
Less: Deduction under sections 80C to 80U Nil Nil Nil
Total Income 2,40,000 95,000 70,000
Note:-
1. Surplus of `50,000 under case 1 is not taxable as it is from mutual activity.
2. Deficiency under case 2 and 3 would not have been allowed but for the benefit given under section 44A.
3. Assessable income in case of 2 and 3 is as under:
Case 2 ` Case 3 `
Surplus from specific services 1,50,000 60,000
Interest income 40,000 80,000
TOTAL 1,90,000 1,40,000
Less: Under section 80C to 80U Nil Nil
Income 1,90,000 1,40,000
4. In case 3, 50% of the assessable income is ` 70,000 (i.e. 50% of ` 1,40,000) but first it will be set off from
business income which in this case is ` 60,000 and the balance shall be set off from other income.
2.
(a) Compute the taxable income of Chamber of Commerce from the following data:
Particular 1 (`) 2 (`) 3 (`)

Gross receipts for specified services rendered to members 2,00,000 2,00,000 2,00,000
Expenses incurred in connection with the above 50,000 1,00,000 1,50,000
Expenditure incurred on members 1,40,000 4,50,000 3,60,000
(b) Will your answer be different if the above particulars are of a social club?

FINAL DT SATC 25A.2
Solution:
(a) Statement showing computation of taxable income:
Particular 1 (`) 2 (`) 3 (`)
Net income from rendering specific services 1,50,000 1,00,000 50,000
(Gross receipts – Expenses)
Less:
Deficiency set off [maximum to the extent of 50% of total
assessable income before set off of deficiency (as per notes)] — 70,000 50,000
Business Income (A) 1,50,000 30,000 Nil

Interest on bank deposit under other heads 40,000 40,000 60,000
Less: Deficiency although allowable upto 50% of total
assessable income which could not be set off against — — 5,000
business income
Other Income (B) 40,000 40,000 55,000
Gross Total Income (A)+(B) 1,90,000 70,000 55,000
Less: Deduction u/s 80C to 80U Nil Nil Nil
Total Income 1,90,000 70,000 55,000
Note 1: Surplus of ` 60,000 under Case 1 is not taxable as it is from Mutual Activity.
Note 2: Deficiency under case 2 and 3 would not allowed but for the benefit given u/s 44A.
Note 3: Assessable income in case of 2 and 3 is as under:
Particular Case 2 (`) Case 3 (`)

Surplus from specified services 1,00,000 50,000
Interest income 40,000 60,000
1,40,000 1,10,000
Less: Deduction u/s 80C to 80U Nil Nil Nil
1,40,000 1,10,000
Note 4:
In case 3, 50% of the assessable income is ` 55,000 (i.e. 50% of ` 1,10,000) but it will be set off from
business income which in this case is ` 50,000 and the balance shall be set off from the other income.
(b) In the case of social club neither surplus from members nor surplus on account of specific
services rendered to it members is taxable. Further, if there is any deficiency from mutual activity,
it cannot be set off as provisions of section 44A are applicable only in case of trade, professional
or similar association.
Therefore, income of a club will be calculated as under:

Particular 1 (`) 2 (`) 3 (`)
Gross receipts for specified services rendered to members 2,00,000 2,00,000 2,00,000
4,00,000 5,00,000 4,50,000
Less: Expenses 1,90,000 5,50,000 4,10,000
Surplus/ (Deficiency) 2,10,000 (50,000) 40,000
The above surplus is exempt and deficiency is not allowed to be set off.
Computation of Total Income:

Particular 1 (`) 2 (`) 3 (`)
Gross Total Income 40,000 40,000 60,000
Less: Deduction Nil Nil Nil
40,000 40,000 60,000

FINAL DT SATC 25A.3
3. Whether the transfer fee realised by a co-operative society from its members when the members
intended to transfer the flats to any other person, member or otherwise, is liable to tax under section
4 of the Income Tax Act?
Solution: The transfer fee is not liable to tax provided the co-operative society does not carry on any
business, and the transfer fee is meant for the benefit of the members of the co-operative society
4. A co-operative society bought text books at a discount from the Government and sold them at profit
to various persons including its members. The society claimed that the profit earned by the sales to
its members was not taxable on ground of mutuality. Whether the claim of the society is in order?
Solution: The participators in the profit are members; but the contributors to such profit are non-
members who are the buyers of the books. There is no identity between the contributors and the
participants. Therefore, the profits derived from the sales to the members is not exempt but taxable
5. Whether the principle of mutuality is applicable to income from rent received from house property?
Solution: The principle may not apply where the use of residential accommodation is not confined to
members. In such cases, the rent is taxable under the head ‘Income from house property’. Even if the
income is treated as business income, it would not be exempt, because only some of the members
occupy the accommodation, and there is no identity between the contributors and the participants.
In the case of the Presidency Club Ltd. vs. CIT, the Madras High Court accepted the claim for exemption on
the basis of mutuality, where the guests of members were allowed the use of the premises. In the case of
CIT vs. Bankipur Club Ltd., where the income from the guest houses was received from the members of
the club for their use and the use of their guests, principle of mutuality was accepted.
6. Does mutuality get lost, if a mutual association has different classes of members with different
corresponding rights?
Solution: Principle of mutuality does not get destroyed merely because a club has different classes of
members with different rights with entrance fees and subscriptions being different for each such
class depending upon their rights to participation in the affairs of the club with some classes of membership
not having right to vote. The assessee in this case was held entitled to exemption.
7. Explain the incidence of taxation on mutual concerns.

Answer
The concept of “mutuality” means that the contributors and beneficiaries are identical. Since one
cannot make profit by dealing with oneself, there is no taxable profit involved wherever such concept applies.
A mutual concern or association stands on the same principle. All the contributors to the common fund are
entitled to participate in the surplus and all the participants to the surplus are contributors in the case of a
mutual concern. The excess of income over expenditure in a year shall supplement the common fund
for future utilization to the benefit of the contributors and the excess of expenditure over income shall
be absorbed by the common fund.
Generally the surplus derived by a mutual concern is not chargeable to tax. Therefore, a trade, professional
or similar association which functions on the principle of mutuality concept is not chargeable to tax, if
there is any surplus on account of subscriptions, membership fees, entrance fees etc., exceeding the
expenditure incurred.
However, the following additional points need to be taken into consideration-
(i) Where a mutual concern carries on the business of insurance, the profits there from are chargeable to
tax. Section 44 provides that the profits for this purpose have to be computed in accordance with
the method prescribed in the Rules contained in the First Schedule (not in syllabus).
(ii) In the case of trade, professional or similar associations, the income derived from specific services
performed for its members is chargeable to tax u/s 28(iii). However, if there is a loss on account of
expenditure exceeding the subscription etc. from members, such shortfall shall be absorbed by the
income chargeable to tax u/s 28(iii). This set off as per section 44A cannot exceed 50% of the total
income of such associations as computed before allowing the set off.
FINAL DT SATC 25A.4
(iii) In the case of a mutual concern, if income is derived both from mutual activity as well as from non-mutual
activity, the exemption applies only to the income from the mutual activity.
The income attributable to the non-mutual activity will be liable to tax.
8. Would interest earned on fixed deposits made by a social club with its corporate members satisfy the
principle of mutuality to escape taxability? [PTP-SET 1 (2014)]
Answer: CIT vs. Secunderabad Club Picket (2012) 340 ITR 121 (A.P.)
Fact of the case: The assessee is a social and recreational club. It is a mutual association and a non-profit
making concern. The assessee was in receipt of monthly subscriptions, admission/entrance fee and
payments made by its members for use of club facilities. It earned interest from the fixed deposit made by it
with certain banks and financial institutions, which were also its corporate members. The assessee filed its
return claiming this interest to be exempt on the contention that the interest was earned from its
members and, therefore, the same was not taxable. The assessee further contended that if a person
carries on an activity, which is also trade, in such a way that they and the customers are the same persons,
no profits are yielded by such trade for tax purpose and therefore, principle of mutuality would apply.
However, in this case, the Assessing Officer denied such exemption on the ground that neither the assessee
deposited the amounts with the banks and financial institutions, treating them as corporate members, nor the
banks and financial institutions accepted the same in the capacity of members of the club. The banks and
the financial institutions treated the club at par with their other customers and offered them the same
interest as offered to the general public.
Decision of the case:

The same issues have been addressed in the case of CIT vs. Secunderabad Club Picket (2012) 340 ITR 121
(A.P.) wherein the Andhra Pradesh High Court following the judgement of the Supreme Court in Bankipur
Club Ltd (1997) 226 ITR 97, concluded that certain factors need to be considered to arrive at a conclusion as
to what point the relationship of mutuality ends and that of trading begins. If the object of the assessee
claiming to be a ‘mutual concern‘ is to carry on a business and the same consideration is realized
both from the members and from non-members by giving similar facilities to them, then, the resultant
surplus would be an income liable to tax.
The High Court, considering, inter alia, the above mentioned facts, held that the principle of mutuality ends
the moment the club deposits the amount with its corporate members, being banks and financial
institutions, with the sole aim of earning interest on the deposits. Also, the corporate members, i.e. the
banks and financial institutions, have treated the club as a regular customer, accepting deposits in the normal
course of business.
There is nothing to show that the interest on fixed deposits have been provided as a facility to the club. The
social relationship and social activities of the club have nothing to do with its deposits with corporate
members. Therefore, the said interest income is not exempt on the principle of mutuality.

FINAL DT SATC 26.1
ASSESSMENT OF CO-OPERATIVE SOCIETIES

Cooperative society is a society registered under the Cooperative Societies Act, 1912, or under any other law for
the time being in force in any State for registration of co-operative societies.
The deduction provided to various co-operative societies under section 80P are as under:
(A) Where 100% deduction is allowed

In the case of the following co-operative societies, full deduction is allowable in respect of following
incomes:
(I) Profits attributable to certain specified activities [Section 80P(2)(a)]: 100% of the profits, included in
Gross Total Income, attributable to any one or more of the following activities are deductible:
(i) carrying on the business of banking or providing credit facilities to its members; or
(1) W.e.f. assessment year 2007-08, the exemption shall not be available to co-operative banks
other than a primary agricultural credit society or a primary co-operative agricultural and
rural development bank. However, deduction shall still be available to a cooperative society
which is engaged in the business of providing credit facilities to its members.
(2) Regional Rural Banks are not eligible to take deduction under section 8OP.
(ii) a cottage industry; or
(iii) the marketing of the agricultural produce grown by its members; or
The activity of marketing of agricultural produce of its members, referred to in Section 80P, must be
confined to the direct produce from agriculture and not to anything manufactured or
processed out of it.
For instance, paddy is an agricultural produce. If a co-operative society undertakes the sale of paddy
grown by its members, the profits derived there from will gain exemption under this section. But if the
society undertakes the sale of rice processed out of such paddy, the exemption is not
attracted
(iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for
the purpose of supplying them to its members; or
(v) the processing, without the aid of power, of the agricultural produce of its members; or
(vi) the collective disposal of the labour of its members; or
(vii)fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or
marketing of fish or the purchase of materials and equipment in connection therewith for the purpose
of supplying them to its members.
(II) Profits of certain primary co-operative societies [Section 80P(2)(b)]:
100% of the profits, included in Gross Total Income are deductible in the case of a co-operative society,
being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its
members to
(i) a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds,
fruits, or vegetables, as the case may be; or
(ii) the Government or a local authority; or
(iii) a Government company as defined in section 2(45) of the Companies Act, 2013 or a statutory
corporation (being a company or corporation engaged in supplying milk, oilseeds, fruits or
vegetables, as the case may be, to the public).

FINAL DT SATC 26.2
Where district societies like the assessee collected milk from primary societies at village or taluk level and
thereafter processed the milk and supplied it to the affiliated federal societies, it was held that the
assessee was one step above the primary co-operative societies. The assessee was a federal
cooperative society not only collecting and supplying milk but also processing the milk.
The processing activities carried on by the assessee did not match the expression “being a primary
society engaged in supplying the milk” used under section 80P(2)(b) of the Act.
Therefore, the assessee was not entitled to deduction under section 8OP of the Act [Asstt. CIT vs.
Salem District Co-op. Milk Producers Union Ltd (2009) 313 ITR (AT) 43 (Chennai)].
(III) Income from investment with other co-operative societies [Section 80P(2)(d)]:
100% of the profits, included in Gross Total Income are deductible in respect of any income by way of
interest or dividends derived by the co-operative society from its investments with any other co-
operative society.
(IV) Income from letting of ‘godowns or warehouse’ [Section 80P(2)(e)]: 100% of the profits, included in
Gross Total Income are deductible in respect of any income derived by the co-operative society from the
letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities.
(B) Where deduction is allowed to a limited extent
In the following cases, the co-operative societies are entitled to deduction to a limited extent:
(1) Co-operative society engaged in other activities [Section 80P(2)(c)]:
In the case of a co-operative society engaged in activities, other than those specified above, either
independently of, or in addition to, all or any of the activities so specified, the profits and gains attributable
to such other activities up to the limits indicated below are deductible.
(i) where such co-operative society is a consumers’ cooperative society - ` 1,00,000;

(ii) in any other case - ` 50,000.
(2) Entire income by way of interest on securities or income from house property if gross total
income of a co-operative society (other than specified co-operative society) does not exceed `
20,000 [Section 80P(2)(f)]:
100% of the income from interest on securities or income from house property shall be allowed as
deduction in case of a co-operative society not being—
(i) a housing society or
(ii) an urban consumer society, or
(iii) a society carrying on transport business, or
(iv) a society engaged in the performance of any manufacturing operation with the aid of power provided
its gross total income does not exceed ` 20,000.

FINAL DT SATC 26.3
Steps in Computing Tax Liability of Cooperative Societies
Steps
Step- I : Compute GTI, ignoring income exempt from tax u/s. 10 to 13A
Step-II : Deduct permissible deductions u/s 80G, 80GGA, 80GGC, 80JJA, 80JJAA, 80P etc. as
applicable.
Step-III: Apply the tax rates for the relevant Assessment Year to arrive at the tax incidence.
Tax Rates:
Income Range Rates of tax

1. Where the total income does not exceed ` 10% of the total income
10,000
2. Where the total income exceeds ` 10,000 but ` 1,000 plus 20% of the amount by total income
which the does not exceed ` 20,000 exceeds ` 10,000
3. Where the total income exceeds ` 20,000 ` 3,000 plus 30%, of the amount by which the total
income exceeds ` 20,000
Surcharge:
However, the tax payable by every cooperative society shall be increased by surcharge @ 12% if total income
exceeds ` 1 crore and health & education cess @4%.
Marginal Relief:
The total amount payable as income tax and surcharge on total income exceeding ` 1 crore shall not exceed the
total amount payable as income tax on a total income of ` 1 crore by more than the amount of income that
exceeds ` 1 crore.
AMT:
However, from the Assessment Year 2013-14, tax payable cannot be less than 18.5% of “Adjusted Total
Income” in some specified cases.

FINAL DT SATC 26.4
CLASS NOTES

FINAL DT SATC 26A.1
QUESTIONS ON ASSESSMENT OF COOPERATIVE SOCIETIES
1. A co-operative society, engaged in the business of banking, seeks your opinion by the matter of
eligibility of deduction under Section 8OP on the following items of income earned by it during the
year ended 31-3-2020.
(i) Interest on investment in Government securities made out of statutory reserves
(ii) Hire charges of safe deposit lockers.
Solution:
No deduction is allowed under Sec. 80P to any cooperative bank. However, a primary agricultural credit
society or primary co-operative agricultural & rural development bank is eligible for deduction.
2. Heritage Co-operative Society, which is engaged in processing agricultural produce of its members,
without the aid of power and its marketing, furnishes the following particulars, determine its net
income for the assessment year 2020-21:
Income from processing of agricultural produce: ` 19,000; income from marketing agricultural
produce: ` 2,000; dividends from another co-operative society: ` 50,000; income from letting of
godowns: ` 20,000; and income from agency business: ` 95,000.
Solution:
Statement showing calculation of Net Income of Heritage Co-operative Society for the Assessment
Year 2020-21
` `
Income from letting of godowns 20,000
Business income:
from processing 19,000
from marketing 2,000
from agency 95,000 1,16,000
IOS: Dividend income 50,000
Less: deductions u/s 80P in respect of income from
a. processing of agricultural produce 19,000
b. marketing of agricultural produce 2,000
c. agency business [Sec. 80P(2)(c)] [maximum of ` 50,000] 50,000
d. dividend 50,000
e. letting of Godowns 20,000 1,41,000
Net Income 45,000
3. Transfer fees are received by a cooperative housing society from its incoming and outgoing
members. Are such transfer fees liable to tax in the hands of the cooperative society?
Answer
The issue under consideration is whether the transfer fees received by a co-operative housing society from its
incoming and outgoing members is taxable or exempt on the principle of mutuality.
On this issue, the High Court, in Sind Co-operative Housing Society v. ITO (2009) 317 ITR 47, observed that
under the bye-laws of the society, charging of transfer fees had no element of trading or commerciality.
Both the incoming and outgoing members have to contribute to the common fund of the assessee. The
amount paid was to be exclusively used for the benefit of the members as a class.
The High Court, therefore, held that transfer fees received by a co-operative housing society, whether from
outgoing or from incoming members, is not liable to tax on account of the principle of mutuality, since the
predominant activity of such co-operative society is maintenance of property of the society and there
is no taint of commerciality, trade or business.
Further, Section 28(iii), which provides that income derived by a trade, professional or similar association from
specific services performed for its members shall be treated as business income, can have no application
since the co-operative housing society is not a trade or professional association.
Applying the rationale of the above ruling, transfer fees received by a co-operative housing society from its
incoming and outgoing members would not be liable to tax in the hands of the co-operative society.

FINAL DT SATC 26A.2
4. The assessee, Pandey Co-operative Housing Society, is a registered co-operative housing society,
formed with the objective of maintaining the property owned by it, to effect repairs and maintenance
of the common property of the members, and to confer to the members, the usual rights and
privileges. For the assessment year 2020-21, the assessee has received ` 3 lacs as transfer fees from
the transferor members and like amount from the transferees, who at the time of transfer, were not
members of the society. Discuss the eligibility to tax the aforesaid receipts in the hands of the
assessee.
Answer
Transfer fees received by a co-operative housing society, whether from outgoing or from incoming members,
is not liable to tax on the ground of principle of mutuality where the predominant activity of such co-
operative society is maintenance of property of the society. It was so held by the Bombay High Court in Sind
Co-op Housing Society v. ITO (2009) 317 ITR 47.
Further, Section 28(iii), which provides that income derived by a trade, professional or similar association from
specific services performed for its members shall be treated as business income, can have no application
since the co-operative housing society is not a trade or professional association.
Therefore, ` 3 lacs received as transfer fees by Pandey Co-operative Housing Society from its
transferor members and its transferees, is not chargeable to tax.
5. PQR Co-operative Bank, a co-operative society, having its area of operation confined to Gubbi Taluk
and the principal object of which is to provide for long-term credit for agricultural and rural
development activities, has received the following amounts during the year ending 31.3.2020:
(i) Interest amounting to ` 1,00,000 from its members on loans advanced to them.
(ii) Interest amounting to ` 1,50,000 on deposits with other co-operative societies.
(iii) Rent amounting to ` 2,00,000 from letting out its godowns for storage of commodities.
PQR Co-operative Bank seeks your advice in the matter of taxability of the above amounts and the
eligibility for deduction, if any, in respect thereof for the AY 2020-21.
Answer
Sub-clause (viia) to section 2(24) includes within the scope of definition of income, the profits and gains of
any business of banking (including providing credit facilities) carried on by a cooperative society with
its members. Hence, the interest of ` 1,00,000 received by PQR Cooperative Bank on loans advanced to its
members constitutes its income.
Further, interest received amounting to ` 1,50,000 on deposits with other co-operative societies and rent
amounting to ` 2,00,000 received from letting out its godowns for storage of commodities also constitute the
income of the co-operative bank.
Sub-section (4) of section 80P provides that section 80P shall not apply to any co-operative bank other
than a primary agricultural credit society or a primary co-operative agricultural and rural development
bank.
Explanation to section 80P(4) defines a primary co-operative agricultural and rural development bank to
mean a society having its area of operation confined to a taluk and the principal object of which is to
provide for long-term credit for agricultural and rural development activities.
PQR Co-operative Bank is a primary co-operative agricultural and rural development bank as defined in the
said Explanation since it is a co-operative society having its area of operation confined to Gubbi Taluk and its
principal object is to provide long-term credit for agricultural and rural development activities. Therefore, it is
eligible for deduction under section 80P.
Interest of ` 1,00,000 received from members; Interest of ` 1,50,000 received from deposits with other co-
operative and Rent of ` 2,00,000 received by the bank from letting out its godowns for storage of commodities
are eligible for deduction in full under section 80P.
6. The assessee, a Co-operative Society, earned interest income out of the reserve funds, which had
been invested with SBI/RBI in compliance with statutory provisions in order to carry on banking
business and claimed deduction under Section 80P of Income-tax Act, 1961. The Assessing Officer
declined to allow the claim, but restricted its claim to that part of interest income derived from
working or circulating capital. Examine the validity of the action of Assessing Officer.

FINAL DT SATC 26A.3
Answer
No deduction under section 80P would be allowed unless the assessee is a primary agricultural credit
society or a primary co-operative agricultural and rural development bank.
Assuming the society is eligible for deduction by being a primary agricultural credit society or a primary co-
operative agricultural and rural development bank, the eligibility for deduction under section 80P vis-a-vis the
validity of the action of the Assessing Officer is to be decided.
In order to carry on the business of banking, the society had to make investments out of the reserve funds
with SBI/ RBI in compliance with statutory provisions and the same was necessary and consequently,
such investments are part of the business activities falling within the scope of section 80P(2)(a) of the
Income-tax Act, 1961.
There is nothing in the phraseology in Section 80P(2)(a)(i) which makes it applicable only to income
derived from working or circulating capital.
Thus, the action of the Assessing Officer is not correct in law and he should allow the total interest
income derived from investments made out of reserve funds under section 80P(2)(a). [CIT vs. Karnataka
State Co-operative Apex Bank (2001) 251 ITR 194 (SC)].

FINAL DT SATC 26A.4
Class Notes

FINAL DT SATC 27.1
ASSESSMENT OF HINDU UNDIVIDED FAMILY

1) Definition: HUF is not defined under the Income-tax law. However, as per Hindu law it means “a family,
which consists of all males lineally descended from a common ancestor and includes their wives and
unmarried daughters”. The head of a HUF is termed as 'Karta'.
2) Conditions for HUF: In order to be assessed as a HUF the following conditions are to be fulfilled –
a) there should be coparcenership; and
b) there should be a Joint Family Property.
3) Co-parcenership: Co-parcener refers to those members of an HUF who acquire by birth an interest in the
joint family property. Only the coparceners have a right to partition. Now, the female members have been
brought at par with the male members. Hence, now
a) daughter of a coparcener becomes a coparcener by birth in her own right in the same manner as son.
She will have the same rights and liabilities in respect of coparcenary property as of a son.
b) daughter shall be entitled to same share on partition of coparcenary property as that of the son.
c) female heir can demand the partition of a coparcenary property in the same manner as the son.
4) HUF v. Hindu Coparcenery: While-an HUF covers all members; the Hindu coparcenery is limited to male
members (viz. the common ancestor, sons, grandsons and great grandsons) and the daughters of such
coparceners. Hence, HUF is a wider body than coparcenery.
5) Exemption to the members of HUF in relation to income of HUF [Section 10(2)]: Any sum received by a
member of a Hindu Undivided Family out of the income of the family or, in the case of any impartible estate,
out of the income of the estate belonging to the family shall be exempt from tax.
6) Partition: Partition means physical or other division of property. However, physical division of income
without physical division of property producing the income is not partition. Partial partition means a
partition, which is partial as regards members or properties of HUF or both.
7) Assessment after partition [Section 171]: The law doesn't recognise any partial partition of HUF. Hence in
case of partial partition, HUF shall be assessed as if no partition had taken place. However, in case of total
partition, the assessment will be made as follows -
a) the Assessing Officer shall, after making inquiry, record the date of effect of such partition; and
b) the total income of HUF shall be assessed as that of HUF only upto the date of such partition.
8) ASSESSMENT OF HUF:
The income of a HUF is to be assessed in the hands of the HUF and not in the hands of any of its members.
This is because HUF is a separate and a distinct tax entity.
9) FOLLOWING POINTS SHALL BE CONSIDERED:
1. Remuneration to member of HUF due to investment of HUF fund:

Where joint fund is invested in a company or a firm, fees or remuneration received by any member of
HUF as a director or partner from such company or firm by virtue of such investment shall be treated
as income of the HUF.
On the other hand., where such remuneration or fees is received by virtue of service rendered
by such member (in his personal capacity) then such amount shall be taxable in hands of such
member
2. Remuneration to Karta:
Any genuine (not excessive) remuneration paid to the Karta for conducting business of the HUF is
allowed expenditure in the hands of the HUF provided such remuneration is paid under a bonafide
agreement and is in the interest of the family business.
3. Personal income of the members:

Income of the member of HUF acquired in his personal capacity shall not be taxable in the hands of
HUF.
4. Also refer Partner/Member in “Representative Capacity” & “Individual Capacity” concept in

Form/AOP as discussed in Firm/AOP Class.

FINAL DT SATC 27.2
10) Case Laws:
a. A single person, male or female, cannot constitute a Hindu Undivided Family. An individual, who has
obtained a share on partition of a joint family, has potentialities of creating a joint family; but until he
marries, he alone cannot be considered as a joint family.
b. A joint family may consist of a single male member with his wife and daughter(s) and it is not
necessary that there should be two male members to constitute a joint family
11) Prem was the Karta of HUF. He died leaving behind his major son Anand, his widow, his grandmother
and brother’s wife. Can the HUF retain its status as such or the surviving persons become co-
owners?
Solution:
Income-tax law does not require that there should be at least two male members to constitute an HUF [Gowli
Buddanna vs. CIT (SC)].
The expression “Hindu Undivided Family” under the Income-tax Act is known as “Joint Hindu Family”, under
the Hindu personal law. A ‘Joint Family’ may consist of a single male member and the widows of the
deceased male members. The property of the Hindu joint family does not cease to be an HUF property merely
because that the HUF, consist of one male member at a given point of time, exercising the proprietary rights
over the property of HUF property.
12) J (HUF) was the owner of a house property, which was being used for the purposes of a business
carried on by a partnership firm JC & Co. in which the Karta and other members of the HUF were
partners in their individual capacity. The Assessing Officer proposes to assess the annual letting
value of the said property as the HUF’s income from house property. The HUF contends that the
building was used for business purposes and, therefore, the annual letting value thereof was not
taxable in its hands as income from house property under Sec. 22. Examine the rival contention.
Solution:
Section 22 directs not to tax the annual value of a house property which is used by the owner for his business
profession, the profits of which are chargeable to tax.
In the instant case, the HUF is not using its property for its business. The Karta of the Hindu undivided family
and other members of the HUF are partners in the firm in their personal capacity. They have not joined the
partnership on behalf of the HUF. Therefore, it cannot be said that the HUF property was being used by
the HUF for its business.
Hence, the Assessing Officer is justified to tax the income of the HUF property as income from “House
Property”.

FINAL DT SATC 27.3
PRACTICAL QUESTIONS
Question 1:
X is the coparcener of a Hindu Undivided Family consisting of himself, his father and two elder brothers.
The assets of the family have not yet been partitioned. From out of the rental income of the family, X's
father sends X ` 16,000 to enable him to maintain his family. Besides the above receipt, X has received a
salary of ` 60,000 from his employer. Discuss the tax liability/ exemptions that Mr. X gets.
Solution: As per section 10(2), any sum received by a member of a HUF out of the income of the family is
exempt from tax. Hence, share in HUF income received by X is exempt from tax. However, salary of `
60,000 is taxable. The tax liability in respect thereof shall be NIL.
Question 2:
Mr. Prasad is a karta of a HUF. The family declares GTI of ` 4,00,000 for the assessment year 2020-21. The
gross total income includes taxable long-term capital gains (urban land) of ` 65,000 and short-term capital
gains of ` 35,000 which is taxable under section 111A. The details of HUF funds investment made during
the previous year 2019-20 are as follows (amounts in `):
Amount deposited in PPF in the name of members of HUF 10,000

Medical insurance premium paid by cheque:
(a) in the name of the karta 4,000
(b) in the personal name of Mr. Prasad 5,000
Contributions made to:

(a) Indra Gandhi Memorial Trust 7,000
(b) Delhi university (declared as an institution of national eminence) 3,000
(c) Zila saksharta samiti 5,000
(d) An approved charitable institution 30,000
(e) Government for the promotion of family planning 10,000
(f) Hanuman temple in the local mohalla 20,000
Compute the total income of HUF which is chargeable to tax for the AY 2020-21.
Solution: Computation of the Total Income of HUF

LTCG income 65,000
STCG income (111A) 35,000
Other income 300,000
Gross Total Income 400,000
Less : Deduction u/s 80C (PPF deposit in the name of member of HUF) 10,000
Deduction u/s 80D (Medical insurance premium paid to effect/keep in force insurance 9,000
on the health of a member viz. Karta - whether in his personal name or in his name as
Karta. Since payment is out of funds of the HUF, hence, deductible in computing total
income of the HUF)
Deduction under section 80G (See Note) 30,550
Total income 350,450
Note: Computation of deduction under section 80G

Donation to - Qualifying Sum ` % Eligible Deduction
(A) Donation without any qualifying limit:
1. Delhi university 3,000 100% 3000
2. Zila Saksharta Samiti 5,000 100% 5000
3. Indra Gandhi Memorial Trust 7,000 50% 3500
(B) Donation subject to qualifying limit of total donation of 10% of Adjusted GTI:
1. Government for the promotion of family planning. 10,000 100% 10,000
2. An approved charitable institution (While total donation is ` 18,100 50% 9,050
30,000; the qualifying amount = 10% of Adj. GTI - Donation
for family planning, which is eligible for 100% deduction)
Qualifying amount under (B) = 10% of Adj. GTI 28,100
Total Deduction u/s 80G 30,550
**Adjusted GTI = GTI - Deduction u/s 80C & 80C - LTCG - STCG referred u/s 111A 281,000

FINAL DT SATC 27.4
Question 3:
Ramesh is the karta of Ramesh (HUF) in which the other members are his wife Padma, major son Guru
and a minor daughter Gauri. The following details of this HUF, resident in India, pertaining to the year
ended 31st March, 2020 are made available to you:
(a) Rent (at ` 10,000 per month) received from a flat is ` 1,10,000. Rent of ` 10,000 for the month of March
2020 was received in April 2020 Property tax paid ` 10,000.
Bank loan of ` 10,00,000 was taken for construction of this flat, bearing interest at 10%. ` 8,000 interest is
in arrears pertaining to this year, which was paid by the HUF in May 2020 only. Principal repayment
during the year was ` 48,000.
(b) Ramesh represents the HUF in a partnership firm M/s. Ashok & Co., engaged in turmeric business. The
firm has paid interest of ` 1,80,000 to the HUF computed at 15%.
For the services rendered by Ramesh to this firm as the alone Working partner, the firm has paid him a
remuneration of ` 1,50,000, as per the provisions of the partnership deed. The "book profit" of the firm in
terms of Section 40(b) is ` 1,35,000.
(c) The HUF is also running business as narrated below:
Retail trade in food grains:
A rough account book alone is maintained. Expense bills/ vouchers are not properly maintained. The
total turnover is ` 38 lacs (in cash). The net profit as per rough account is ` 1,41,000. This has been
arrived at after considering a penalty of ` 8,000 levied by Sales-tax authorities for the misuse of "C"
Form.
(d) The HUF has received dividend of ` 90,000 from shares held in a foreign company.
(e) Tuition Tees of ` 20,000 were paid for the purpose of part-time education of Ms. Gauri in an Indian
college.
(f) The following sums have been paid by the HUF in respect of Life Insurance Premium :
Policyholder's name Insurer Premium (``) Late fee (` )
Mrs. Padma LIC 80,000 500
Guru IRDA- approved private insurer 42,000 1500
Parts of the above premiums were paid from out of agricultural income of ` 60,000 derived from
agricultural lands situated in Colombo.
You are required to compute the total income of Ramesh (HUF) for the Assessment Year 2020-21,
showing clearly the computation under proper heads of income. You are also required to indicate with
reasons, whether any item is to be considered in the hands of Ramesh (Individual).
Solution: Computation of Total Income of Ramesh (HUF)

Income from House Property : ` `
Actual rent received or receivable (` 1,10,000 + ` 10,000) 1,20,000
Less : Property tax paid -10,000
Net annual Value 1,10,000
Less: Statutory Deduction (30%) -33,000
Interest on borrowed capital (See Note 1) -1,00,000 - 23,000
Income from business and profession:
Interest received from partnership firm (See Note 2) 1,44,000
Income from Retail business u/s 44AD (See Note 3) 3,04,000 4,48,000
Income from other sources :
Dividend received from foreign company (See Note 5) 90,000
Income from agricultural land situated in Colombo (See Note 6) 60,000 1,50,000
Gross Total Income
5,75,000
Less: Deduction u/s 80C (See Note 6) (1,50,000)
Total Income ' 4,25,000
Income Taxable in the Hands of Ramesh (Karta):

It has been judicially decided by the Supreme Court that the "remuneration received by the Karta from the firm
in which HUF is a partner is taxable in the hands of the Karta if it is earned by the Karta on account of his
personal qualifications & exertions and not on account of the investment of the family funds.
Hence, in the given question, the remuneration received by Mr. Ramesh for services rendered in the
partnership firm in which Ramesh (HUF) is a partner, is taxable in his hands.
The taxable amount in the hands of Ramesh shall be amount of remuneration allowable to firm u/s
40(b). As per section 40(b), the minimum remuneration eligible for deduction is ` 1,50,000. Since, in this
case, whole of remuneration is eligible for deduction u/s 40(b), therefore, amount taxable in hands of

FINAL DT SATC 27.5
Ramesh = ` 1,50,000.
Working Notes:
1. In case of let out house property, the whole amount of interest accrued on the amount of housing loan is
allowable u/s 24(b). In the given question, the amount of interest accrued during the previous year is 10%
of ` 10,00,000 = ` 1,00,000. Hence, the full amount is allowed as deduction u/s 24(b) irrespective of
the fact that a part thereof was paid after the end of previous year.
2. As per Section 28, any amount of interest allowable as deduction in the hands of firm is taxable in the
hands of partners. However, any amount not allowed as deduction to the firm u/s 40(b) is not taxable in
the hands of partner. In the given question, the amount of interest paid is ` 1,80,000 @ 15%. Interest @
12% is allowable in the hands of the firm u/s 40(b), hence, it is taxable in the hands of Ramesh (HUF).
Taxable amount = ` 1,80,000 × 12 ÷ 15 = ` 1,44,000. The remaining amount is taxable in the hands of
the firm.
3. In case of retail trade business, the deemed profits shall be 8% of ` 38 lakhs = ` 3,04,000. Since a
rough account has been maintained, such account cannot be regarded as proper books of account.
Therefore, the HUF cannot claim that its actual profits are lower because in order to claim lower profits,
the maintenance of proper books of account and audit thereof is a pre-requisite. Therefore, income is to
be computed as per section 44AD. When income is computed under section 44AD it is deemed that all
the adjustments under section 30 to 38 have been made, hence, there is no requirement of further
disallowance of the amount of penalty levied by Sales-tax authorities.
4. The dividend income received from domestic Company only is exempt from tax u/s 10(34). Since, in the
given question, dividend is received from foreign company, it is chargeable to tax.
5. Section 10(1) exempts the income derived from agricultural land situated in India. Since, in the given
question, agricultural land is situated outside India, the income derived from it is chargeable to tax as
Income from other sources.
6. Deduction u/s 80C is computed as follows:
Nature of payment Amount Reasons for exclusion/inclusion
Principal amount of house loan 48,000 Specifically allowed on payment basis.
Tuition fees for part time - Disallowed since it is paid for part-time education.
education Also, tuition fees is allowed only in case of
individual.
LIC premium paid 122,000 Only the amount of premium is allowed as
deduction; the amount of late fees is
disallowed.
Total eligible amount 170,000
Since the maximum amount of deduction u/s 80C is ` 1,50,000, therefore, the amount of deduction allowable
in the given question shall be ` 1.5 lakh.
Question 4:
The following details of income for FY 2019-20 have been supplied by R who is Karta of HUF:
a. Profit from family business 1,44,000
b. Salary received by a member of family for looking after the family business 20,000
c. Remuneration received by Karta for working as secretary in a company 30,000
d. Municipal value of ancestral house let out 24,000
e. Local taxes of house 1,200
f. Dividend (Gross) 12,800
g. Long term capital gain 19,000
h. Long term capital gain from transfer of Investment 20,000
i. Profit from a firm in which Karta is a partner on behalf of HUF 28,000
j. Donation to recognized education institution 15,000
k. Life Insurance Premium paid 26,000
Compute the TI of the family for the AY 2020-21.
Solution: Total Income of HUF for the AY 2020-21

Income from house property:-
Annual value 24,000
Less: Local taxes of house (1,200)
Net annual value 22,800
Less: Standard deduction @ 30 % 6,840 15,960
Profit gain of business or profession -
Profit from business 1,44,000
Capital Gain –
Long term capital gain 19,000
Long term capital gain from transfer of Investment 20,000 39,000

FINAL DT SATC 27.6
Dividends Exempt
Gross Total income 1,98,960
Less: Deduction
U/s 80C 26,000
U/s 80G 50% - (Donation to a recognized education institution)
` 15,000 but limited to 10% of Adj GTI = 13,396
50% of ` 13,396 6,698 32,698
Notes: -
1. Income from long-term capital gain is assumed to be the income of HUF though specifically not mentioned in
question.
2. Profit from a firm in exempt
3. Adjusted Gross Total Income ` 1,98,960 – 39,000 (LTCG) – 26,000 (80C) = ` 1,33,960.
4. Salary to member is allowable expenses hence not added back.
Question 5:
The Karta of an HUF furnished the following particulars of the income of the HUF for the AY 2020-21:
Interest on Debentures 45,000
Interest on Govt. Securities 10,000
Dividend from UTI 6,000
Rent of House Property 20,000
Profit from an industrial undertaking 90,000
Long term Capital Gain 50,000
Agricultural income 60,000
The family paid ` 12,000 by way of insurance premium of its members and donated ` 16,000 to a recognized
charitable institution. Compute the amount of tax payable by the HUF.
Solution
Computation of income of HUF
(For the Assessment Year 2020-21)
Non-agricultural income
Annual value 20,000
Less: Standard deduction @ 30% u/s 24(a) 6,000 14,000
Income from business & profession

Profit from newly established industrial undertaking 90,000
Income from long term capital gain 50,000

Income from other sources
Interest on debentures 45,000
Interest on Govt. securities 10,000
Dividend from UTI Exempt 55,000

Less: Deductions
U/s 80C 12,000
U/s 80G – ` 16,000 donated to a charitable institution 50% of [10% of 1,47,000] 7,350 19,350
Tax on Total income excluding of LTCG (1,89,650 – 50,000) 1,39,650 NIL

Tax on long term capital gain of ` 50,000 (as unexhausted basic exemption limit is 110,350) NIL
1. No partial integrate of agricultural income with non-agricultural income as agricultural income exclusive of
LTCG is less than the exemption limit
2. Adjusted GTI is ` 209,000 (GTI) – 50,000 (LTCG) – 12,000 (80C) = ` 147,000

ICDS SATC 28.1
Income Computation and Disclosure Standards
Under section 145(1), income chargeable under the heads “Profits and gains of business or profession” or
“Income from other sources” shall be computed in accordance with either the cash or mercantile system of
accounting regularly employed by the assessee.
Section 145(2) empowers the Central Government to notify in the Official Gazette from time to time,
income computation and disclosure standards to be followed by any class of assessees or in respect of any
class of income. Non-compliance of ICDS will lead to Best Judgment Assessment u/s 144.
Accordingly, the Central Government has, vide Notification dated 31.3.2015, in exercise of the powers
conferred under section 145(2), notified 10 ICDSs to be followed by all assessees, following the
mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under
the head “Profit and gains of business or profession” or “Income from other sources”.
This notification shall come into force with effect from 1st April, 2015, and shall accordingly apply to the
A.Y. 2016-17 and subsequent assessment years.
However CG further has notified revised ICDSs w.e.f AY 17-18 (in place of Old ICDS) vide notification
dated 29.09.2016.
Newly Notified ICDSs have to be followed by all assessees (other than Individual & HUF who is not
required to get his accounts of the previous year audited as per Section 44AB) following the
mercantile system of accounting from AY 17-18 onwards.
All the notified ICDSs are applicable for computation of income chargeable under the head “Profits and
gains of business or profession” or “Income from other sources” and not for the purpose of maintenance
of books of accounts.
In the case of conflict between the provisions of the Income tax Act, 1961 and the notified ICDSs, the
provisions of the Act shall prevail to that extent.

ICDS SATC 28.2
10 ICDSs
ICDS No. Name of the ICDS ASs
ICDS – I A - Accounting Policies AS 1
ICDS – II I - Valuation of Inventories AS 2
ICDS – III C - Construction Contracts AS 7
ICDS – IV R - Revenue Recognition AS 9
ICDS – V F - Tangible Fixed Assets AS 10
ICDS – VI F - The Effects of changes in Foreign Exchange Rates AS 11
ICDS – VII G - Government Grants AS 12
ICDS – VIII S - Securities AS 13
ICDS – IX B - Borrowing Costs AS 16
ICDS – X P - Provisions, Contingent Liabilities and Contingent Assets AS 29

ICDS SATC 28.3
ICDS I: Accounting Policies
A. This Income Computation and Disclosure Standard deals with significant accounting policies.
B. The fundamental Accounting assumptions as used in this ICDS are:
1. Going Concern,
2. Consistency &
3. Accrual.
Other fundamental accounting assumptions which are conspicuous by their absence are materiality
and prudence. [In the absence of these concepts considerable time and cost will be involved
making adjustments in net profit to arrive at business income.]
C. The standard has defined accounting policy as the specific accounting principles and the methods
of applying those principles adopted by a person.
D. Accounting policies adopted by a person shall be such so as to represent a true and fair view of
the state of affairs and income of the business, profession or vocation.
For this purpose:

(i) the treatment and presentation of transactions and events shall be governed by their
substance and not merely by the legal form; and
(ii) marked to market loss or an expected loss shall not be recognised unless the recognition of
such loss is in accordance with the provisions of any other Income Computation and Disclosure
Standard.
E. An accounting policy shall not be changed without reasonable cause. The word ‘reasonable cause‘
is not defined in the ICDS
F. Disclosure of accounting policies:

i. All significant accounting policies adopted by a person shall be disclosed. Any change in an
accounting policy which has a material effect shall be disclosed (with quantum of the effect,
if ascertainable). Where such amount is not ascertainable, the fact shall be indicated.
ii. If the fundamental accounting assumptions of Going Concern, Consistency and Accrual are
followed, specific disclosure is not required. If a fundamental accounting assumption is
not followed, the fact shall be disclosed.

ICDS SATC 28.4
AS 5 vis-à-vis ICDS I - Requirement of “reasonable cause” for change in accounting policy
AS 5 which deals with changes in accounting policies, permits change in accounting policies if
adoption of different accounting policies is required by –
i. statute; or
ii. for the purpose of compliance with an accounting standard; or
iii. if such change results in a more appropriate presentation of financial statements.
ICDS I, however, states that an accounting policy should not be changed without any “reasonable
cause”.
The term “reasonable cause” has not been defined and would involve exercise of judgment by
management and tax authorities. A clarification as to the meaning and scope of “reasonable cause” would
help avoid litigation.
Question: How would non-consideration of prudence in selection and application of accounting policies
impact the computation of total income under the Income-tax Act, 1961? Give examples of non-
consideration of prudence in the Income Computation and Disclosure Standards (ICDSs).
Answer
The concept of prudence requires that provisions should be made for all known liabilities and losses
even though the amount cannot be determined with certainty and represents only a best estimate in the light
of available information.
Non-consideration of prudence in selection and application of accounting policies may have the impact of
earlier recognition of income and gains or later recognition of expenses or losses for tax computation.
Examples of non-consideration of prudence in the ICDSs:

(i) The requirement in ICDS VII on Government Grants that recognition of a Government grant shall not
be postponed beyond the date of actual receipt, even if conditions attached to the grant are not
fulfilled.
(ii) Non-recognition of expected losses on construction contracts and contract costs, recovery of which is
not probable, as an expense immediately, in ICDS III on Construction Contracts.
(iii) Non-recognition of provision for loss on onerous contracts (Delayed contracts).

ICDS SATC 28.5
ICDS II : Valuation of Inventories
A. The standard shall be applicable to the valuation of inventories.
B. However, the following shall be excluded from the purview of the standard:
(a) Work‐in‐progress arising under ‘construction contract’ including directly related service contract
which is dealt with by the ICDS on construction contracts;
(b) Work‐in‐progress which is dealt with by other ICDS;
(c) Shares, debentures and other financial instruments held as stock‐in‐trade which are dealt with
by the ICDS on securities;
(d) Producers‘ inventories of livestock, agriculture and forest products, mineral oils, ores and gases to
the extent that they are measured at net realizable value;
(e) Machinery spares, which can be used only in connection with a tangible fixed asset and their
use is expected to be irregular, shall be dealt with in accordance with the ICDS on tangible fixed
assets.
C. In accordance with the standard, valuation of inventories shall be valued at Cost or Net Realizable
Value, whichever is lower.
D. “Inventories” has been defined to mean assets held for-

Sale in the ordinary course of business;
in the process of production for such sale;
in the form of materials or supplies to be consumed in the production process or in the
rendering of services.
E. "Net Realizable Value" is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.
F. Cost of inventories:
Cost of inventories shall comprise of all costs of purchase, costs of services, costs of conversion and
other costs incurred in bringing the inventories to their present location and condition.
The costs of purchase shall consist of purchase price including duties and taxes, freight
inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates
and other similar items shall be deducted in determining the costs of purchase.
The costs of services in the case of a service provider shall consist of labour and other costs of
personnel directly engaged in providing the service including supervisory personnel and attributable
overheads.
The costs of conversion of inventories shall include costs directly related to the units of
production and a systematic allocation of fixed and variable production overheads that are
incurred in converting materials into finished goods.
ICDS SATC 28.6
Other costs shall be included in the cost of inventories only to the extent that they are incurred in
bringing the inventories to their present location and condition.
Interest and other borrowing costs shall not be included in the costs of inventories, unless
they meet the criteria for recognition of interest as a component of the cost as specified in the ICDS
on borrowing costs.
G. In determining the Cost of Inventories, the following costs shall be excluded and recognised as
expenses of the period in which they are incurred, namely:-
a. Abnormal amounts of wasted materials, labour, or other production costs;
b. Storage costs, unless those costs are necessary in the production process prior to a further
production stage;
c. Administrative overheads that do not contribute to bringing the inventories to their present location
and condition;
d. Selling costs.
H. Cost formulas:
The standard recognizes three formulae, e.g. (i) Specific Identification Method; (ii) First-in-First-
Out Method; and (iii) Weighted Average Cost.
The Cost of inventories of items that are not ordinarily interchangeable; and goods or services produced
and segregated for specific projects shall be assigned by specific identification of their individual
costs.
Where there are a large numbers of items of inventory which are ordinarily interchangeable, specific
identification of costs shall not be made. Cost of inventories shall be assigned by using the First-in
First-out (FIFO), or weighted average cost formula.
I. Techniques for the Measurement of Cost:

a) Techniques for the measurement of the cost of inventories, such as the standard cost
method or the retail method, may be used for convenience if the results approximate the actual
cost.
b) Standard costs take into account normal levels of consumption of materials and supplies, labour,
efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light
of the current conditions.
c) The retail method can be used in the retail trade for measuring inventories of large number
of rapidly changing items that have similar margins and for which it is impracticable to use
other costing methods. The cost of the inventory is determined by reducing from the sales value
of the inventory, the appropriate percentage gross margin. The percentage used takes into
consideration inventory, which has been marked down to below its original selling price. An
average percentage for each retail department is to be used.
J. The method of valuation of inventories once adopted by a person in any previous year shall not be
changed without reasonable cause.

ICDS SATC 28.7
K. Valuation of Inventory in Case of Certain Dissolutions - IMP
In case of dissolution of a partnership firm or association of person or body of individuals,
notwithstanding whether business is discontinued or not, the inventory on the date of dissolution
shall be valued at the Net Realisable Value.
L. Disclosure: The following aspects shall be disclosed:

the accounting policies adopted in measuring inventories including the cost formulae used; and
the total carrying amount of inventories and its classification appropriate to a person.
Question:
How is inventory on the date of dissolution of a firm to be valued, where the firm’s business is to
be continued by one of its partners, in a case where the dissolution has taken place on or after
1.4.2016? What was the manner in which such inventory would have been valued had the
dissolution taken place on 31.3.2016?
Answer
Under section 145(1), income chargeable under the heads “Profits and gains of business or profession”
or “Income from other sources” shall be computed in accordance with either the cash or mercantile
system of accounting regularly employed by the assessee. Section 145(2) empowers the Central
Government to notify in the Official Gazette from time to time, income computation and disclosure
standards to be followed by any class of assessees or in respect of any class of income. Accordingly,
the Central Government has, in exercise of the powers conferred under section 145(2), notified ten
income computation and disclosure standards (ICDSs) to be followed by all assesses (other than an
individual or a Hindu undivided family who is not required to get his accounts of the previous year
audited in accordance with the provisions of section 44AB), following the mercantile system of
accounting, for the purposes of computation of income chargeable to income-tax under the head “Profit
and gains of business or profession” or “Income from other sources” , from A.Y. 2017-18.
In case of dissolution of a partnership firm or association of persons or body of individuals, ICDS II on

Valuation of Inventories requires the inventory on the date of dissolution to be valued at the net
realisable value, notwithstanding whether business is discontinued or not.
This requirement in ICDS II is in deviation from the Supreme Court ruling in Shakti
Trading Co. vs. CIT (2001) 250 ITR 871, where it was held that if the firm is dissolved due to
death of a partner and the surviving partners reconstitute the firm and continue the business as
before, the firm is entitled to adopt cost or market price, whichever is lower.
Therefore, if the firm was dissolved on 31.3.2016, the valuation of inventory would be governed by the
Supreme Court ruling in Shakti Trading Company’s case. However, if the dissolution takes place on
or after 1.4.2016, it would be governed by ICDS II and the inventory has to be valued at the net
realizable value, notwithstanding whether business is discontinued or not.

ICDS SATC 28.8
ICDS III: Construction Contracts
A. “Construction contract” is a contract specifically negotiated for the construction of an asset or a
combination of assets that are closely interrelated or interdependent in terms of their design,
technology and function or their ultimate purpose or use and includes:
(i) contract for the rendering of services which are directly related to the construction of the asset,
for example, those for the services of project managers and architects;
(ii) contract for destruction or restoration of assets, and the restoration of the environment
following the demolition of assets.
B. Construction contracts are formulated in a number of ways which are classified as fixed price
contracts and cost plus contracts.
Fixed price contract is a construction contract in which the contractor agrees to a fixed contract
price, or a fixed rate per unit of output, which may be subject to cost escalation clauses.
Cost plus contract is a construction contract in which the contractor is reimbursed for allowable
or otherwise defined costs, plus a mark up on these costs or a fixed fee.
C. Combining and Segmenting Construction Contracts:

The requirements of this ICDS shall be applied separately to each construction contract except as
provided for below:
Where a contract covers a number of assets, the construction of each asset should be treated
as a separate construction contract when:
(i) separate proposals have been submitted for each asset;
(ii) each asset has been subject to separate negotiation;
(iii) the costs and revenues of each asset can be identified.
A group of contracts, whether with a single customer or with several customers, should be
treated as a single construction contract when:
a. the group of contracts is negotiated as a single package;
b. the contracts are so closely interrelated that they are, in effect, part of a single project with an
overall profit margin; and
c. the contracts are performed concurrently or in a continuous sequence.
D. Contract Revenue:
(i) Contract revenue shall be recognised when there is reasonable certainty of its ultimate
collection.
(ii) Contract revenue shall comprise of:

(a) the initial amount of revenue agreed in the contract, including retentions; and
(b) variations in contract work, claims and incentive payments.

ICDS SATC 28.9
(iii) Where contract revenue already recognised as income is subsequently written off in the books
of accounts as uncollectible, the same shall be recognised as an expense and not as an
adjustment of the amount of contract revenue
E. Contract Costs: Contract costs shall comprise of:

(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be allocated to the contract;
(c) such other costs as are specifically chargeable to the customer under the terms of the contract;
and
(d) allocated borrowing costs in accordance with the ICDS on Borrowing Costs.
(e) These costs shall be reduced by any incidental income, not being in the nature of interest,
dividends or capital gains, that is not included in contract revenue.
(f) Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall
be excluded from the costs of a construction contract.
(g) Contract costs that relate to future activity on the contract are recognised as an asset.
Such costs represent an amount due from the customer and are classified as contract work in
progress.
M. Recognition of Contract Revenue and Expenses

(a) Contract revenue and contract costs associated with the construction contract should be
recognised as revenue and expenses respectively by reference to the stage of completion of
the contract activity at the reporting date.
(b) The standard recognizes percentage completion method, and accordingly, contract revenue is
matched with the contract costs incurred in reaching the stage of completion, resulting in the
reporting of revenue, expenses and profit which can be attributed to the proportion of work
completed.
N. Disclosure: The disclosure requirements under the standard requires a person report:
(a) the amount of contract revenue recognised as revenue in the period; and
(b) the methods used to determine the stage of completion of contracts in progress.
(c) amount of costs incurred and recognised profits (less recognised losses) up to the reporting date;
(d) the amount of advances received; and
(e) the amount of retentions .

ICDS SATC 28.10
Question: What are the main differences between the treatment given in AS 7 and ICDS III relating to
construction contracts?
Answer
Point of AS 7 vis-à-vis ICDS III
difference
Point in time of AS 7 permits recognition of expected loss on construction contract as well as
recognition of contract costs, recovery of which is not probable, as an expense immediately.
expected loss on It also permits recognition of expected loss immediately as an expense, when
construction it is probable that total contract costs will exceed total contract revenue.
contracts
The absence of specific requirement in ICDS III to recognize such expected
losses on construction contracts immediately as expense represents a significant
deviation from AS 7 as well as judicial rulings permitting immediate
recognition of such losses as long as the same are in accordance with the
accounting standard or justified by the principle of prudence or by the nature and
circumstances of the contract.
By implication, such losses are also to be recognized on Percentage of
Completion Method as per ICDS III. Consequently, recognition of losses for
tax purposes is postponed.
Treatment of AS 7 permits decrease in contract revenue as a result of penalties arising
penalties arising from delays caused by the contractor in the completion of the contract.
from delays
caused by the However, ICDS III does not permit such reduction in contract revenue.
contractor in
completion of the Non-recognition of decrease in contract revenue as a result of such penalties
contract would have the effect of inflating the taxable income and consequent tax
liability.
Point in time of ICDS III requires retention money to be treated as part of contract revenue
recognition of and recognized on percentage of completion method. As per ICDS III,
retention money “Contract Revenue” shall comprise of the initial amount of revenue agreed in the
contract, including retentions.
However, as per AS 7, contract revenue should comprise the initial amount of

revenue agreed in the contract.
While there is a specific requirement in ICDS III to include retentions, there

is no such requirement in paragraph 10 of AS 7.
Deviation from judicial precedents:

In CIT v. Associated Cables (P) Ltd. and CIT v. Ignifluid Boilers (I) Ltd., it was held that the payment of
retention money in the case of contract is dependent on satisfactory completion of contract work.
The right to receive the retention money accrues only after the obligations under the contract are
fulfilled and, therefore, it would not amount to income of the assessee in the year in which the
amount is retained. The requirement in ICDS III to recognize retention money on percentage of
completion method marks a significant deviation from the decisions pronounced by the Courts

ICDS SATC 28.11
ICDS IV: Revenue Recognition
This Income Computation and Disclosure Standard deals with the basis for recognition of revenue
arising in the course of the ordinary activities of a person from
(i) the sale of goods;
(ii) the rendering of services; and
(iii) the use by others of the person‘s resources yielding interest, royalties or dividends.
Definition of revenue:
Revenue has been defined as the gross inflow of cash, receivables or other consideration arising in
the course of the ordinary activities of a person from the sale of goods, from the rendering of services,
or from the use by others of the person‘s resources yielding interest, royalties or dividends.
In an agency relationship, the revenue is the amount of commission and not the gross inflow of
cash, receivables or other consideration.
Recognition:
Sale of Goods
In a transaction involving the sale of goods, the revenue shall be recognised when the seller of goods
has transferred to the buyer the property in the goods for a price or all significant risks and
rewards of ownership have been transferred to the buyer and the seller retains no effective control of
the goods transferred to a degree usually associated with ownership.
In a situation, where transfer of property in goods does not coincide with the transfer of significant risks
and rewards of ownership, revenue in such a situation shall be recognised at the time of transfer
of significant risks and rewards of ownership to the buyer.
Revenue shall be recognised when there is reasonable certainty of its ultimate collection.
Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of
raising any claim for escalation of price and export incentives, revenue recognition in respect of such
claim shall be postponed to the extent of uncertainty involved.
Rendering of Services
Revenue from service transactions shall be recognised by the percentage completion method. Under
this method, revenue from service transactions is matched with the service transaction costs incurred in
reaching the stage of completion, resulting in the determination of revenue, expenses and profit
which can be attributed to the proportion of work completed.
Income Computation and Disclosure Standard on construction contract also requires the
recognition of revenue on this basis. The requirements of that Standard shall mutatis mutandis apply
to the recognition of revenue and the associated expenses for a service transaction. However, when
services are provided by an indeterminate number of acts over a specific period of time, revenue
may be recognised on a straight line basis over the specific period.

ICDS SATC 28.12
However, Revenue from service contracts with duration of not more than ninety days may be
recognised when the rendering of services under that contract is completed or substantially
completed.
The Use of Resources by Others Yielding Interest, Royalties or Dividends
Interest on refund of any tax, duty or cess shall be deemed to be the income of the previous year in
which such interest is received.
Other interest shall accrue on the time basis determined by the amount outstanding and the rate
applicable.
Discount or premium on debt securities held is treated as though it were accruing over the period to
maturity.
Royalties shall accrue in accordance with the terms of the relevant agreement and shall be
recognised on that basis unless, having regard to the substance of the transaction, it is more
appropriate to recognise revenue on some other systematic and rational basis.
Dividends are recognised in accordance with the provisions of the Act.
Disclosure:
The following shall be disclosed:
(a) In a transaction involving sale of good, total amount not recognised as revenue during the previous
year due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty.
(b) The amount of revenue from service transactions recognised as revenue during the previous year.
(c) the method used to determine the stage of completion of service transactions in progress.
(d) In the case of service transactions in progress, amount of costs incurred and recognised profits (less
recognised losses) up to end of previous year, amount of advance and retentions shall be disclosed.
AS 9 vis-à-vis ICDS IV:

AS 9 requires recognition of revenue only if no significant uncertainty exists regarding the amount of
consideration that will be derived from sale of goods, rendering of services or use by others of enterprise
resources yielding interest, royalties and dividends.
ICDS IV also requires revenue from sale of goods to be recognized when there is reasonable certainty of
its ultimate collection. However, “reasonable certainty for ultimate collection” is not a criterion for
recognition of revenue from rendering of services or use by others of person‘s resources yielding
interest, royalties or dividends.
By implication, revenue recognition cannot be postponed in case of uncertainty regarding

collectability of consideration to be derived from rendering of services or use by others of person‘s
resources yielding interest, dividend or royalty.

ICDS SATC 28.13
Recognition of revenue from service transactions
AS 9 vis-à-vis ICDS IV:
AS 9 permits revenue from service transactions to be recognised as the service is performed, either by the
proportionate completion method or by the completed service contract method, whichever relates the
revenue to the work accomplished.
ICDS IV requires revenue from service transactions to be recognised only on the basis of percentage
completion method, which may, however, not be appropriate in case of all service transactions.
However, when services are provided by an indeterminate number of acts over a specific period of
time, revenue may be recognised on a straight line basis over the specific period.
Further as per ICDS, Revenue from service contracts with duration of not more than ninety days may be
recognised when the rendering of services under that contract is completed or substantially
completed.
Deviation from judicial precedents:

In this regard, ICDS IV is also in deviation with the Supreme Court ruling in UCO Bank v. CIT, where it was
held that interest on sticky loans would not accrue if the same was not recoverable and the Delhi High Court
ruling in DIT v. Brahmaputra Capital Financial Services Ltd., where it was held that interest on non-
performing assets which is not received with no possibility of recovery may not be recognized.

ICDS SATC 28.14
ICDS V: Tangible Fixed Assets
A. Tangible fixed asset: ‘Tangible fixed asset’ is an asset being land, building, machinery, plant or
furniture held with the intention of being used for the purpose of producing or providing goods or
services and is not held for sale in the normal course of business
B. Cost of assets: The following shall be considered as part of the cost:

(a) The actual cost of an acquired tangible fixed asset shall comprise its purchase price, import duties
and other taxes, excluding those subsequently recoverable, and any directly attributable
expenditure on making the asset ready for its intended use. Any trade discounts and rebates
shall be deducted in arriving at the actual cost.
(b) Administration and other general overhead expenses are to be excluded from the cost of
tangible fixed assets if they do not relate to a specific tangible fixed asset. Expenses which
are specifically attributable to construction of a project or to the acquisition of a tangible fixed asset
or bringing it to its working condition, shall be included as a part of the cost of the project or as a
part of the cost of the tangible fixed asset.
(c) The expenditure incurred on start‐up and commissioning of the project, including the
expenditure incurred on test runs and experimental production, shall be capitalised. The
expenditure incurred after the plant has begun commercial production, that is, production intended
for sale or captive consumption, shall be treated as revenue expenditure.
C. Self‐‐constructed Tangible Fixed Assets:

In arriving at the actual cost of self‐constructed tangible fixed assets, the same principles shall apply.
Cost of construction that relate directly to the specific tangible fixed asset and costs that are attributable
to the construction activity in general and can be allocated to the specific tangible fixed asset shall be
included in actual cost. Any internal profits shall be eliminated in arriving at such costs.
D. Non‐‐ monetary Consideration:

When a tangible fixed asset is acquired in exchange for another asset, the fair value of the tangible
fixed asset so acquired shall be its actual cost. When a tangible fixed asset is acquired in exchange
for shares or other securities, the fair value of the tangible fixed asset so acquired shall be its actual
cost.
E. Improvements and Repairs:

An expenditure that increases the future benefits from the existing asset beyond its previously
assessed standard of performance is added to the actual cost. Similarly, the cost of an addition or
extension to an existing tangible fixed asset which is of a capital nature and which becomes an integral
part of the existing tangible fixed asset is to be added to its actual cost.
F. Depreciation: Depreciation shall be computed in accordance with the provisions of the Income-tax Act.
G. Transfers: Income arising on transfer of a tangible fixed asset shall be computed in accordance with
the provisions of the Act.

ICDS SATC 28.15
H. Disclosures: The following are the requirements of disclosures:
(i) Description of asset or block of assets;
(ii) Rate of depreciation;
(iii) Actual cost or written down value, as the case may be;
(iv) Additions or deductions during the year with dates; in the case of any addition of an asset, date
put to use; including adjustments on account of Central Value Added Tax credit claimed and
allowed under the CENVAT Credit Rules, 2004; change in rate of exchange of currency; and
subsidy or grant or reimbursement, by whatever name called;
(v) Depreciation Allowable; and
(vi) Written down value at the end of year.

ICDS SATC 28.16
ICDS VI: The Effects of changes in foreign exchange rates
A. This Income Computation and Disclosure Standard deals with:
a) treatment of transactions in foreign currencies;
b) translating the financial statements of foreign operations;
c) treatment of foreign currency transactions in the nature of forward exchange contracts.
B. Definitions:
(a) “Foreign operations of a person” is a branch, by whatever name called, of that person, the activities
of which are based or conducted in a country other than India.
(b) “Foreign currency transaction” is a transaction which is denominated in or requires

settlement in a foreign currency, including transactions arising when a person:
(i) buys or sells goods or services whose price is denominated in a foreign currency; or
(ii) borrows or lends funds when the amounts payable or receivable are denominated in a
foreign currency; or
(iii) becomes a party to an unperformed forward exchange contract; or
(iv) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a
foreign currency.
(c) “Forward exchange contract” means an agreement to exchange different currencies at a forward
rate,
(d) ‘Forward rate’ is the specified exchange rate for exchange of two Currencies at a specified future
date;
(e) “Monetary items” are money held and assets to be received or liabilities to be paid in fixed or
determinable amounts of money. Cash, receivables, and payables are examples of monetary
items;
(f) “Non‐monetary items” are assets and liabilities other than monetary items. Fixed assets,
inventories, and investments in equity shares are examples of non‐‐monetary items;
(g) “Reporting currency” means Indian currency except for foreign operations where it shall mean
currency of the country where the operations are carried out.
C. Initial Recognition
A foreign currency transaction shall be recorded, on initial recognition in the reporting currency, by
applying to the foreign currency amount the exchange rate between the reporting currency and the
foreign currency at the date of the transaction.
An average rate for a week or a month that approximates the actual rate at the date of the transaction
may be used for all transaction in each foreign currency occurring during that period. If the exchange
rate fluctuates significantly, the actual rate at the date of the transaction shall be used.

ICDS SATC 28.17
D. Conversion at Last Date of Previous Year: At last day of each previous year:
(a) Foreign Currency Monetary Items shall be converted into reporting currency by applying the
closing rate;
(b) where the closing rate does not reflect with reasonable accuracy, the amount in reporting currency
that is likely to be realised from or required to disburse, a foreign currency monetary item owing to
restriction on remittances or the closing rate being unrealistic and it is not possible to effect an
exchange of currencies at that rate, then the relevant monetary item shall be reported in the
reporting currency at the amount which is likely to be realised from or required to disburse
such item at the last date of the previous year; and
(c) non‐monetary items in a foreign currency shall be converted into reporting currency by using the
exchange rate at the date of the transaction.
(d) non-monetary item being inventory which is carried at net realisable value denominated in a
foreign currency shall be reported using the exchange rate that existed when such value
was determined.
E. Recognition of Exchange Differences:

In respect of monetary items, exchange differences arising on the settlement thereof or on conversion
thereof at last day of the previous year shall be recognised as income or as expense in that
previous year.
In respect of non‐‐monetary items, exchange differences arising on conversion there of at the last
day of the previous year shall not be recognised as income or as expense in that previous year.
Notwithstanding anything contained above; initial recognition, conversion and recognition of

exchange difference shall be subject to provisions of section 43A of the Act or Rule 115 of
Income-tax Rules, 1962, as the case may be
F. Forward Exchange Contracts:

Any premium or discount arising at the inception of a forward exchange contract shall be amortised
as expense or income over the life of the contract. Exchange differences on such a contract shall be
recognised as income or as expense in the previous year in which the exchange rates change.
Any profit or loss arising on cancellation or renewal shall be recognised as income or as expense for
the previous year.

ICDS SATC 28.18
ICDS VII: Government Grants
A. Grants: This standard deals with government grants (also called subsidies, cash incentives, duty
drawbacks, waiver, concessions, reimbursements, etc.), but it does not deal with Government
assistance other than in the form of Government grants; and Government participation in the
ownership of the enterprise.
B. “Government grants” have been defined as assistance by Government in cash or kind to a person for
past or future compliance with certain conditions. They exclude those forms of Government
assistance which cannot have a value placed upon them and the transactions with Government
which cannot be distinguished from the normal trading transactions of the person.
C. Recognition of Government Grants: Government grants should not be recognised until there is
reasonable assurance that
the person shall comply with the conditions attached to them, and
the grants shall be received.
D. Treatment of Government Grants

(i) Where the Government grant relates to a depreciable fixed asset or assets of a person, the
grant shall be deducted from the actual cost of the asset or assets concerned or from the written
down value of block of assets to which concerned asset or assets belonged to.
(ii) Where the Government grant relates to a non‐‐depreciable asset or assets of a person requiring
fulfilment of certain obligations, the grant shall be recognised as income over the same period
over which the cost of meeting such obligations is charged to income.
(iii) Where the Government grant is of such a nature that it cannot be directly relatable to the
asset acquired, so much of the amount which bears to the total Government grant, the same
proportion as such asset bears to all the assets in respect of or with reference to which the
Government grant is so received, shall be deducted from the actual cost of the asset or shall be
reduced from the written down value of block of assets to which the asset or assets belonged to.
(iv) The Government grant that is receivable as compensation for expenses or losses incurred in a
previous financial year or for the purpose of giving immediate financial support to the person
with no further related costs, shall be recognised as income of the period in which it is receivable.
(v) The Government grants other than covered above shall be recognised as income over the periods
necessary to match them with the related costs which they are intended to compensate.
(vi) The Government grants in the form of non‐monetary assets, given at a concessional rate, shall be
accounted for on the basis of their acquisition cost.

ICDS SATC 28.19
E. Refund of Government Grants
(i) The amount refundable in respect of a Government grant referred to in paragraphs (ii), (iv) and (v)
above shall be applied first against any unamortised deferred credit remaining in respect of the
Government grant. To the extent that the amount refundable exceeds any such deferred credit, or
where no deferred credit exists, the amount shall be charged to profit and loss statement.
(ii) The amount refundable in respect of a Government grant related to a depreciable fixed asset or
assets shall be recorded by increasing the actual cost or written down value of block of
assets by the amount refundable. Where the actual cost of the asset is increased, depreciation
on the revised actual cost or written down value shall be provided prospectively at the prescribed
rate.
F. Disclosures: Following disclosure shall be made in respect of Government grants:

(a) Nature and extent of Government grants recognised during the previous year by way of deduction
from the actual cost of the asset or assets or from the written down value of block of assets during
the previous year;
(b) Nature and extent of Government grants recognised during the previous year as income;
(c) Nature and extent of Government grants not recognised during the previous year by way of
deduction from the actual cost of the asset or assets or from the written down value of block of
assets and reasons thereof; and
(d) Nature and extent of Government grants not recognised during the previous year as income
and reasons thereof.
Q: What are the salient features of Income computation and Disclosure Standards relating
to Government Grants and discuss significant deviations between ICDS VII and AS-12?
A: Income Computation and Disclosure standards VII (Government Grants)

Grants relating to depreciable assets shall be deducted from actual cost of asset or WDV of the
block of assets. Grants relating to non-depreciable assets shall be recognized as income of the period
in which a person is rewired to fulfill the obligations for availing the grants and over that period over
which the cost of meeting such obligations changed to income. All other grants shall be recognized
as income of the period in which it is receivable.
Significant deviations between ICDS VII and AS 12

ICDS VII AS 12 Remarks
Recognition of grants shall not Recognition of grants depend Even when all the conditions
be postponed beyond the upon reasonable assurance of are not fulfilled, recognition
date of actual receipt. complying conditions attached shall not be postponed
to receive such grants beyond date of receipt
There is no specific Grants in the nature of Object for which the grant is
requirement to capitalize promoter’s contribution, given which determines the
grants in the nature of treated as capital reserve nature of grant is not taken
promoter’s contribution. which can neither be into consideration under ICDS
considered as income nor can VII
be distributed as dividend.

ICDS SATC 28.20
Recognition of Government Grants AS 12 vis-à-vis ICDS VII:
AS 12 provides that Government Grants should not be recognized until there is a reasonable assurance
that the enterprise will comply with the conditions attached to them and the grants will be received.
ICDS VII also provides that Government Grants should not be recognized until there is a reasonable
assurance that the enterprise will comply with the conditions attached to them and the grants will be
received. This requirement is in line with AS 12.
However, ICDS VII goes on to provide that recognition of government grant shall not be postponed
beyond the date of actual receipt.
Therefore, as per ICDS VII, initial recognition of government grants cannot be postponed beyond the date of
actual receipt even in a case where all the recognition conditions in accordance with AS 12 are not
met.
Treatment of Government Grants of capital nature and Government Grants in the nature of
promoter’s contribution AS 12 vis-à-vis ICDS VII:
AS 12 permits government grants in the nature of promoters‘ contribution, i.e., grants given with reference to
the total investment in an undertaking or by way of contribution towards its total capital outlay (for example,
central investment subsidy scheme) to be treated as capital reserve which can neither be distributed as
dividend nor considered as deferred income.
ICDS VII, however, does not contain specific requirement to capitalize government grants in the nature of
promoter‘s contribution. Except in case of government grant relating to a depreciable fixed asset, which has
to be reduced from written down value or actual cost, all other grants have to be recognized as upfront
income or as income over the periods necessary to match them with the related costs which they
are intended to compensate.
Deviation from judicial precedent:

The requirement in ICDS VII to recognize such grants as upfront or deferred income is not in line with the
rationale of the Supreme Court that the purpose of the grant would ultimately determine its nature.
The Supreme Court in, CIT v Ponni Sugar Mills, observed that it is the object for which the
subsidy/assistance is given which determines the nature of the incentive subsidy. If the object of the
subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on
revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to
enable the assessee to set up a new unit or to expand the existing unit then the receipt of the
subsidy was on capital account.
In line with the requirement in ICDS VII, new sub-cluase (xviii) has been inserted in the definition of
income under section 2(24) to provide that assistance in the form of a subsidy or grant or cash incentive
or duty drawback or waiver or concession or reimbursement, by whatever name called, by the Central
Government or a State Government or any authority or body or agency in cash or kind to the assessee
would be considered as income. It is only the subsidy or grant or reimbursement which has been
taken into account for determination of the actual cost of the asset in accordance with Explanation
10 to section 43(1) which would not be considered as income.

ICDS SATC 28.21
ICDS VIII: Securities
Part A
A. This Income Computation and Disclosure Standard deals with securities held as stock-in‐‐ trade.
B. The Standard does not deal with:
a. the bases for recognition of interest and dividends on securities which are covered by the ICDS on
revenue recognition;
b. securities held by a person engaged in the business of insurance;
c. securities held by mutual funds, venture capital funds, banks and public financial institutions.
C. Recognition and Initial Measurement of Securities:

(i) A security on acquisition shall be recognised at actual cost. The actual cost of a security shall
comprise of its purchase price and include acquisition charges such as brokerage, fees, tax, duty or
cess.
(ii) Where a security is acquired in exchange for other securities, the fair value of the security so
acquired shall be its actual cost.
(iii) Where a security is acquired in exchange for another asset, the fair value of the security so
acquired shall be its actual cost.
(iv) Where unpaid interest has accrued before the acquisition of an interest‐bearing security and is
included in the price paid for the security, the subsequent receipt of interest is allocated between
pre‐acquisition and post‐acquisition periods; the pre‐‐acquisition portion of the interest is
deducted from the actual cost.
D. Subsequent Measurement of Securities

(i) At the end of any previous year, securities held as stock-in-trade shall be valued at actual cost
initially recognised or net realisable value at the end of that previous year, whichever is lower.
(ii) For above purpose, the comparison of actual cost initially recognised and net realisable value
shall be done categorywise and not for each individual security. For this purpose, securities
shall be classified into the following categories, namely:-
a) shares;
b) debt securities;
c) convertible securities; and
d) any other securities not covered above.
(iii) The value of securities held as stock-in-trade of a business as on the beginning of the
previous year shall be:
a) the cost of securities available, if any, on the day of the commencement of the business
when the business has commenced during the previous year; and
b) the value of the securities of the business as on the close of the immediately preceding
previous year, in any other case.

ICDS SATC 28.22
(iv) In case, at the end of any previous year, securities not listed on a recognised stock exchange;
or listed but not quoted on a recognised stock exchange with regularity from time to time, shall
be valued at actual cost initially recognised.
(v) Where the actual cost initially recognised cannot be ascertained by reference to specific
identification, the cost of such security shall be determined on the basis of first-in-first-out
method or weighted average cost formula.
Part B
Scope
This part of Income Computation and Disclosure Standard deals with securities held by a scheduled
bank or public financial institutions.
Classification, Recognition and Measurement of Securities
Securities shall be classified, recognised and measured in accordance with the extant guidelines
issued by the Reserve Bank of India in this regard and any claim for deduction in excess of the
said guidelines shall not be taken into account.
To this extent, the provisions of Income Computation and Disclosure Standard VI on the effect of
changes in foreign exchange rates relating to forward exchange contracts shall not apply.”
Manner of comparison of cost and NRV for valuation of securities held as stock-in trade
ICDS VIII requires securities held as stock-in-trade to be valued at lower of actual cost initially recognized or
net realizable value at the end of the year, whichever is lower. Further, such comparison has to be
done category-wise and not for each individual security.
Deviation from judicial precedents: This requirement in the ICDS deviates from the judicial position that
anticipated profit should not be taken into consideration for valuation of stock-in-trade. The Supreme Court,
in the case of UCO Bank Ltd. v CIT, observed that it is not proper to take into account anticipated profit in
the shape of appreciated value of closing stock, as no prudent trader would show increased profit before
actual realization. This is the theory underlying the valuation of closing stock at the lower of cost or market
price.
The requirement in ICDS VIII to compare the actual cost and net realizable value category-wise, in effect,
results in recognition of anticipated profits since rise in value of some securities will absorb the
decrease in value of the remaining securities in the same category.
Valuation of unlisted or irregularly traded securities at actual cost initially recognized.

ICDS VIII requires valuation of the following securities at actual cost initially recognized – (i) Securities not
listed on a recognized stock exchange; or (ii) Securities listed but not quoted on a recognized stock
exchange with regularity from time to time.
This requirement in ICDS VIII to value such securities at cost would also impact computation of
taxable income and consequent tax liability.
ICDS SATC 28.23
ICDS IX: Borrowing Costs
A. This Income Computation and Disclosure Standard deals with treatment of borrowing costs. This
Standard does not deal with the actual or imputed cost of owners’ equity and preference share
capital.
B. Definitions:
“Borrowing costs” has been defined as interest and other costs incurred by a person in connection
with the borrowing of funds and include:
(i) commitment charges on borrowings;
(ii) amortised amount of discounts or premiums relating to borrowings;
(iii) amortised amount of ancillary costs incurred in connection with the arrangement of
borrowings;
(iv) finance charges in respect of assets acquired under finance leases or under other similar
arrangements.
“Qualifying asset” has been defined to mean:

(i) land, building, machinery, plant or furniture, being tangible assets;
(ii) know‐how, patents, copyrights, trademarks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets;
(iii) inventories that require a period of twelve months or more to bring them to a saleable
condition.
C. Recognition:
Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset shall be capitalised as part of the cost of that asset. The amount of borrowing costs
eligible for capitalisation shall be determined in accordance with this Income Computation and
Disclosure Standard. Other borrowing costs shall be recognised in accordance with the
provisions of the Act.
D. Borrowing Costs Eligible for Capitalisation:

(a) To the extent the funds are borrowed specifically for the purposes of acquisition, construction or
production of a qualifying asset, the amount of borrowing costs to be capitalised on that asset
shall be the actual borrowing costs incurred during the period on the funds so borrowed.
(b) In respect of borrowing other than above, if any, the amount of borrowing costs to be
capitalised shall be computed in accordance with the following formula namely :—
A x B/C
Where,
A = borrowing costs incurred during the previous year except on borrowings referred to in (a) above;
B = (i) the average of costs of qualifying asset as appearing in the balance sheet of a person on the
first day and the last day of the previous year;
(ii) in case the qualifying asset does not appear in the balance sheet of a person on the first day,
half of the cost of qualifying asset; or

ICDS SATC 28.24
(iii) in case the qualifying asset does not appear in the balance sheet of a person on the last day
of the previous year, the average of the costs of qualifying asset as appearing in the balance
sheet of a person on the first day of the previous year and on the date of put to use or
completion, as the case may be, excluding the extent to which the qualifying assets are
directly funded out of specific borrowings;
C= the average of the amount of total assets as appearing in the balance sheet of a person on the
first day and the last day of the previous year, other than assets to the extent they are directly
funded out of specific borrowings;
Explanation
For the purpose of this paragraph, a qualifying asset shall be such asset that necessarily require
a period of twelve months or more for its acquisition, construction or production.
E. Capitalisation of borrowing costs shall cease:

a) in case of a qualifying asset, when such asset is first put to use;
b) in case of inventory, when substantially all the activities necessary to prepare such inventory for its
intended sale are complete.
F. Disclosure:
The following disclosure shall be made in respect of borrowing costs:
the accounting policy adopted for borrowing costs; and
the amount of borrowing costs capitalised during the previous year.
Treatment of income earned from temporary investment of borrowed funds

AS 16 vis-à-vis ICDS IX:
AS 16 permits income earned on temporary investment of borrowed funds pending their expenditure on the
qualifying asset to be deducted from borrowing costs incurred. ICDS IX however, does not permit such
reduction from borrowing costs. This deviation between AS 16 and ICDS IX would result in increase in
taxable income.
Suspension of capitalization of borrowing costs - AS 16 vis-à-vis ICDS IX:

AS 16 permits suspension of capitalization of borrowing costs during extended periods in which
active development is interrupted. ICDS IX does not permit suspension of capitalization of borrowing
costs in such cases. This deviation between AS 16 and ICDS IX would result in increase in taxable
income.

ICDS SATC 28.25
ICDS X: Provisions, Contingent Liabilities and Contingent Assets
This Income Computation and Disclosure Standard deals with provisions, contingent liabilities and
contingent assets, except those:
(i) resulting from financial instruments;
(ii) resulting from executory contracts;
(iii) arising in insurance business from contracts with policyholders; and
(iv) covered by another Income Computation and Disclosure Standard.
This Income Computation and Disclosure Standard does not deal with the recognition of revenue which is
dealt with by Income Computation and Disclosure Standard ‐ Revenue Recognition.
The term “provision” is also used in the context of items such as depreciation, impairment of assets and
doubtful debts which are adjustments to the carrying amounts of assets and are not addressed in this
Income Computation and Disclosure Standard.
A. Recognition of provisions:
Provisions shall not be recognized unless the following conditions are met:
a person has a present obligation as a result of a past event;
it is reasonably certain that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
a reliable estimate can be made of the amount of the obligation.
B. Recognition of Contingent Liabilities: A person shall not recognise a contingent liability.
C. Recognition of contingent assets: A person shall not recognise a contingent asset. Contingent
assets are assessed continually and when it becomes reasonably certain that inflow of economic
benefit will arise, the asset and related income are recognised in the previous year in which the
change occurs.
D. Measurement: The amount recognised as a provision shall be the best estimate of the expenditure
required to settle the present obligation at the end of the previous year. The amount of a provision
shall not be discounted to its present value.
The amount recognised as asset and related income shall be the best estimate of the value of
economic benefit arising at the end of the previous year. The amount and related income shall not be
discounted to its present value.
E. Reimbursements: Where some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party, the reimbursement shall be recognised when it is reasonably certain
that reimbursement will be received if the person settles the obligation.
The amount recognised for the reimbursement shall not exceed the amount of the provision.
Where a person is not liable for payment of costs in case the third party fails to pay, no provision shall
be made for those costs. An obligation, for which a person is jointly and severally liable, is a
contingent liability to the extent that it is expected that the obligation will be settled by the other
parties.

ICDS SATC 28.26
F. Review: Provisions shall be reviewed at the end of each previous year and adjusted to reflect
the current best estimate. If it is no longer reasonably certain that an outflow of resources embodying
economic benefits will be required to settle the obligation, the provision should be reversed.
An asset and related income recognised as provided above shall be reviewed at the end of each
previous year and adjusted to reflect the current best estimate. If it is no longer reasonably certain
that an inflow of economic benefits will arise, the asset and related income shall be reversed.
G. Disclosures: Following disclosure shall be made in respect of each class of provision:

(a) a brief description of the nature of the obligation;
(b) the carrying amount at the beginning and end of the previous year;
(c) additional provisions made during the previous year, including increases to existing provisions;
(d) amounts used, that is incurred and charged against the provision, during the previous year;
(e) unused amounts reversed during the previous year; and
(f) the amount of any expected reimbursement, stating the amount of any asset that has been
recognised for that expected reimbursement.
(g) Following disclosure shall be made in respect of each class of contingent assets:
a brief description of the nature of the asset and related income;
the carrying amount of asset at the beginning and end of the previous year;
additional amount of asset and related income recognised during the year,
including increases to assets and related income already recognised;
amount of asset and related income reversed during the previous year.
ICDS Vs AS
“The conditions for recognition of provisions and contingent assets are more stringent in ICDS X as
compared to AS 29” - Elucidate.
Answer
Condition for recognition of Provision
AS 29 requires recognition of a provision when it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation. ICDS X requires recognition of a provision only
when it is reasonably certain that an outflow of resources embodying economic benefits will be required to
settle the obligation.
The requirement of “reasonable certainty” in ICDS X to recognize a provision is more stringent as

compared to the requirement of “probability” in AS 29. This may have the effect of postponing the
recognition of provision for tax purposes and consequently, result in earlier payment of taxes.
Condition for recognition of Contingent Asset

Both AS 29 and ICDS X provide that a contingent asset should not be recognized. Further, both AS 29
and ICDS X require contingent assets to be assessed continually. Thereafter, recognition of contingent
assets and related income is required in -
AS 29, if inflow of economic benefits is “virtually certain”;
ICDS X, if inflow of economic benefits is “reasonably certain”.
This deviation between AS 29 and ICDS X may have the effect of advancing recognition of income for tax
purposes and consequently, result in earlier payment of taxes.

ICDS SATC 28.27
Salient Features of ICDSs
ICDS I: Accounting Policies
A. This ICDS deals with significant accounting policies
B. While it recognizes the fundamental accounting assumptions of going concern, consistency and
accrual, it does not recognize the concepts of “materiality” and “prudence” in selection of accounting
policies.
C. Treatment and presentation of transactions have to be governed by their substance and not form.
D. Marked to market loss or an expected loss is not to be recognized unless recognition of such loss is in
accordance with the provisions of any other ICD
ICDS II : Valuation of Inventories
A. “Inventories” has been defined to mean assets held for-

sale in the ordinary course of business;
in the process of production for such sale;
in the form of materials or supplies to be consumed in the production process or in the
rendering of services.
B. This ICDS requires inventory to be valued at cost or net realizable value, whichever is lower.
C. This ICDS requires disclosure of the accounting policies adopted in measuring inventories including
the cost formulae used and the total carrying amount of inventories and its classification
appropriate to a person.
ICDS III: Construction Contracts
A. This ICDS is required to be applied in determination of income for a construction contract of a

contractor.
B. It recognizes percentage of completion method (POCM) for recognizing contract revenue and
contract costs associated with a construction contract.
C. This ICDS also contains certain disclosure requirements, like the amount of contract revenue
recognized as revenue in the period, the methods used to determine the stage of completion of
contracts in progress etc.

ICDS SATC 28.28
ICDS IV: Revenue Recognition
A. This ICDS deals with the bases for recognition of revenue arising in the course of the ordinary
activities of a person from-
the sale of goods;
the rendering of services;
the use by others of the person‘s resources yielding interest, royalties or dividends.
B. It does not, however, deal with the aspects of revenue recognition which are dealt with by other
ICDSs.
C. “Revenue” is the gross inflow of cash, receivables or other consideration arising in the course of the
ordinary activities of a person from the sale of goods, from the rendering of services, or from the use
by others of the person‘s resources yielding interest, royalties or dividends.
In an agency relationship, the revenue is the amount of commission and not the gross inflow of
cash, receivables or other consideration.
D. This ICDS also contains a provision wherein the revenue from sale of goods could be recognized
when there is reasonable certainty of its ultimate collection.
E. However, “reasonable certainty for ultimate collection” is not a criterion for recognition of revenue
from rendering of services or use by others of person‘s resources yielding interest, royalties or
dividends.
F. This ICDS contains certain disclosure requirements, like the amount of revenue from service
transactions recognized as revenue during the previous year, the method used to determine the
stage of completion of service transactions in progress, information relating to service transactions
in progress at the end of the previous year etc.
ICDS V: Tangible Fixed Assets
A. This ICDS deals with the treatment of tangible fixed assets.
B. It contains the definition of tangible fixed assets which also provides the criteria for determining
whether an item is to be classified as a tangible fixed asset.
C. “Tangible fixed asset” is an asset being land, building, machinery, plant or furniture held with the
intention of being used for the purpose of producing or providing goods or services and is not held
for sale in the normal course of business.
D. This ICDS provides the components of actual cost of such assets and valuation of such assets in
special cases.
E. The fair value of a tangible fixed asset acquired in exchange for shares or other securities or
another asset shall be its actual cost.

ICDS SATC 28.29
F. The ICDS also provides that depreciation on such assets and income arising on transfer of such
assets shall be computed in accordance with the provisions of the Income-tax Act, 1961.
G. The ICDS also contains disclosure requirements in respect of such assets, like the description of
asset or block of assets, rate of depreciation, actual cost or written down value, as the case may
be, etc.
ICDS VI: The Effects of changes in foreign exchange rates
A. This ICDS deals with

treatment of transactions in foreign currencies,
translating the financial statements of foreign operations and
treatment of foreign currency transactions in the nature of forward exchange contracts.
B. This ICDS requires exchange differences arising on settlement of monetary items or conversion
thereof at last day of the previous year to be recognized as income or as expense in that previous
year.
C. In respect of non-monetary items, exchange differences arising on conversion thereof as at the last
day of the previous year shall not be recognized as income or as expense in that previous year.
D. The ICDS contains provisions for initial recognition, conversion at the last date of the previous year
and recognition of exchange differences. These provisions shall be subject to the provisions of
section 43A of the Income tax Act, 1961 and Rule 115 of the Income-tax Rules, 1962.

ICDS SATC 28.30
ICDS VII: Government Grants
A. This ICDS deals with the treatment of government grants. It recognizes that government grants are
sometimes called by other names such as subsidies, cash incentives, duty drawbacks etc.
B. This ICDS does not deal with Government assistance other than in the form of Government
grants and Government participation in the ownership of the enterprise.
C. It requires recognition of Government Grants when there is a reasonable assurance that the person
shall comply with the conditions attached to them and the grants shall be received. However, it also
states that recognition of Government grant shall not be postponed beyond the date of actual
receipt.
D. This ICDS requires Government grants relatable to depreciable fixed assets to be reduced from
actual cost/WDV. It further provides that where the Government grant is not directly relatable to
the asset acquired, then a pro-rata reduction of the amount of grant should be made in the same
proportion as such asset bears to all assets with reference to which the Government grant is so
received.
E. The standard requires grants relating to non-depreciable fixed assets to be recognized as income
over the same period over which the cost of meeting such obligations is charged to income.
F. The standard also requires Government grants receivable as compensation for expenses or losses
incurred in a previous financial year or for the purpose of giving immediate financial support to the
person will no further related costs to be recognized as income of the period in which it is
receivable.
G. All other Government Grants have to be recognized as income over the periods necessary to match
them with the related costs which they are intended to compensate.
H. The standard contains certain disclosure requirements, like nature and extent of Government grants
recognized during the previous year as income, nature and extent of Government grants not
recognized during the previous year as income and reasons thereof etc.

ICDS SATC 28.31
ICDS VIII: Securities
A. This ICDS deals with securities held as stock-in-trade.
B. It requires securities to be recognized at actual cost on acquisition, which shall comprise of its
purchase price and include acquisition charges like brokerage, fees, tax, duty or cess.
C. The actual cost of a security acquired in exchange for other securities or another asset shall be the
fair value of the security so acquired.
D. Subsequently, at the end of any previous year, securities held as stock in-trade have to be valued at
actual cost initially recognized or net realizable value at the end of that previous year, whichever is
lower.
E. It goes on to provide that such comparison of actual cost initially recognized and net realizable value
has to be done category-wise and not for each individual security.
ICDS IX: Borrowing Costs
A. This ICDS deals with the treatment of borrowing costs. It does not deal with the actual or
imputed cost of owners’ equity and preference share capital.
B. It requires borrowing costs which are directly attributable to the acquisition, construction or
production of a qualifying asset to be capitalized as part of the cost of that asset. Other borrowing
costs have to be recognized in accordance with the provisions of the Act.
C. Qualifying asset has been defined to mean-

land, building, machinery, plant or furniture, being tangible assets;
know how, patents, copyrights, trade marks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets;
inventories that require a period of twelve months or more to bring them to a saleable
condition.
D. This ICDS requires capitalization of specific borrowing costs and general borrowing costs.
E. This ICDS provides the formula for capitalization of borrowing costs when funds are borrowed
generally and used for the purpose of acquisition, construction or production of a qualifying
asset.
F. It also provides as to when capitalization of borrowing costs would commence and cease.
G. It requires disclosure of the accounting policy adopted for borrowing costs and the amount of
borrowing costs capitalized during the year.

ICDS SATC 28.32
ICDS X: Provisions, Contingent Liabilities and Contingent Assets
A. This ICDS deals with Provisions, Contingent Liabilities and Contingent Assets.
B. However, it does not deal with provisions, contingent liabilities and contingent assets-
resulting from financial instruments,
resulting from executory contracts,
arising in insurance business from contracts with policyholders and
covered by another ICDS.
C. It also does not deal with recognition of revenue dealt with by ICDS on Revenue Recognition.
D. The ICDS specifies the conditions for recognition of a provision, namely, existence of a present
obligation as a result of a past event, reasonable certainty that outflow of resources embodying
economic benefits will be required to settle the obligation and making a reliable estimate of the amount
of the obligation.
E. It provides that a person shall not recognize a contingent liability or a contingent asset.
However, it requires contingent assets to be assessed continually. When it becomes reasonably
certain that inflow of economic benefit will arise, the asset and related income have to be recognized
in the previous year in which the change occurs.
F. It contains provisions for measurement and review of a provision and asset and related income.
G. It also provides that a provision shall be used only for expenditures for which the provision was
originally recognized.
H. The ICDS also contains specific disclosure requirements in respect of each class of provision,
asset and related income recognized

FINAL DT [SATC] 29.1
SHORT NOTES ON SALARIES

Income from Salary XXX
Add: Income by way of Allowances XXX
Add: Taxable Value of Perquisites XXX
Gross Salary XXX
Less: Deduction under section 16
(ia) Statutory Deduction 50,000
(ii) Entertainment Allowances XXX
(iii) Professional Tax XXX XXX
INCOME UNDER THE HEAD “SALARIES” XXX

IMPORTANT FEATURES OF EMPLOYER-EMPLOYEE RELATIONSHIP:
It is a Contract of Services and not Contract for services, Master-Servant Relationship, Direct supervision
and control of the employer.
SECTION 15 - BASIS OF CHARGE
Salary chargeable to tax either on ‘due’ basis or on ‘receipt’ basis whichever is earlier. Accounting method of
the employee is not relevant. However, in case of Advance Salary/Arrear Salary which is taxable on receipt basis,
the assessee is eligible to claim relief under section 89.
SALARY IN THE GRADE SYSTEM: 7,000 - 500 - 10,000 - 800 - 15,600 - 1,000 - 22,600
Salary for every 12 months will remain same and then it will increase by 500 upto 10,000 after that by 800 etc
TAX TREATMENT OF DIFFERENT FORM OF ‘SALARY’

A. Advance Salary:
Salary can’t be taxed twice i.e. where any salary paid in advance is taxed on receipt basis (in the yr. of
receipt) it can’t be taxed again on the due basis (in the yr. in which it becomes due).
B. Arrear of Salary:
Arrear of Salary received by an assessee is charged to tax on receipt basis (if it was not taxed earlier on due
basis).
C. Salary in Lieu of notice period: Salary in lieu of notice period is generally taxable u/s 15 on receipt basis.
D. Salary to Partners:
Any salary, bonus, commission or remuneration received by a partner from his firm is taxed as business
income and not as salary income.
E. Bonus: Bonus is taxed in the year of receipt, it is not taxed on due basis.
F. Salary from UNO {Sec. 2 of UN (Privileges & Immunities Act, 1947)}: Exempt
G. Full-time or part-time employment: Taxable u/h Salary
H. Foregoing of Salary: Taxable
I. Surrender of Salary: Not Taxable
J. TDS on Salary: TDS deducted paid by employer will be added to salary.
K. Salary Paid Tax-Free: Tax paid by employer will be added to salary.
L. Loan or Advance Against Salary - Not taxable
SECTION 17(3) – “PROFITS IN LIEU OF SALARY”
(a) Any Terminal Compensation
(b) Payment from an Unrecognized Provident Fund
(c) Payment under Keyman Insurance Policy
(d) any amount, whether in lumpsum or otherwise, due to the assessee or received by him, from any
person before joining employment with that person, or after cessation of his employment with that person.

PLACE OF ACCRUAL OF SALARY
Section 9(1)(ii) provides that salary earned in India is deemed to accrue or arise in India even if it is paid
outside India or it is paid or payable after the contract of employment in India comes to an end.
[Pension paid abroad in respect of services rendered in India & leave salary paid abroad in respect of leave
earned in India is deemed to accrue or arise in India]
Section 9(1)(iii) provides that salaries payable by the Government to a citizen of India for services
outside India shall be deemed to accrue or arise in India.
Foreign Allowances by the Govt. Employer - Section 10(7) –Exempted

Any allowance or perquisite paid or allowed outside India, by the Indian Govt. to a citizen of India, for
rendering service outside India is fully exempt.
ENTERTAINMENT ALLOWANCE [SEC.16 (ii)]

A. First the entire entertainment allowance received by an employee is added to the gross salary.
B. Then deduction u/s 16(ii) [only to Govt employee] shall be allowed as under:
Least of the following is deductible-
a. Amount actual received
b. ` 5,000
c. 20% of salary (Salary=Basic Salary)
Here, Government Employee includes Central/State but excludes employees of local authorities,
statutory corporations, PSU.
PROFESSIONAL TAX
Professional tax or taxes on employment levied by a State is allowed as deduction only when it is actually paid
by the employee during the previous year.
If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount so paid is
first included as salary income and then allowed as a deduction under section 16.
TAXABILITY IN RELATION TO RETIREMENT FUNDS
1. Taxability of Employer’s Contribution:
a. Statutory Provident Fund - Fully Exempt without any limit

b. PPF - Employer does not contribute in PPF
c. Recognised Provident Fund - Exempt to the extent of 12% of Salary [Basic +DA(R) + Com(R)]
d. Approved Superannuation Fund - Exempt upto ` 1,50,000
e. UnRecognised PF - No Tax Treatment at the time of contribution.
2. Taxability of Interest received in above Funds:
a. Statutory Provident Fund - Fully Exempt

b. PPF - Fully Exempt u/s 10(15)
c. Recognised Provident Fund - Exempt to the extent of 9.5%
d. Approved Superannuation Fund - Fully Exempt
e. UnRecognised PF - No Tax Treatment at the time of interest credit.
3. Taxability of amount received from Funds:
a. Statutory Provident Fund - Exempt u/s 10(11)

b. PPF - Exempt u/s 10(11)
c. Recognised Provident Fund - Exempt u/s 10(12) [5 Years works]
d. Approved Superannuation Fund - Exempt u/s 10(13)
e. UnRecognised PF - Employer’s Contribution & Interest – Taxable u/h Salary
- Interest on employee’s contribution – Taxable u/h IOS

GRATUITY [Section 10(10)] Exempt Taxable

(a) Government Employee Fully exempt NIL
(b) Employee covered by Gratuity Act:

Least of:
(i) Actual Gratuity received;
Actual amt.
(ii) 15/26 x Last Drawn Salary x Number of years of Completed
Least is exempt received Less
Service or part thereof in excess of six months;
Amount exempt
(Salary = Basic + D.A.)
(iii) Statutory Limit: ` 20,00,000;
(c) Other employees: Least of the following:

(i) Actual Gratuity received;
(ii) 1/2 x Average salary for 10 months preceding the month of
Actual amt.
retirement x Number of fully completed years of service
Least is exempt received Less
(iii) Statutory Limit: ` 20,00,000;
Amount exempt
Salary = Basic + DA (if forming part of Retirement benefits) +
Commission on Turnover.
PENSION Exempt Taxable

UNCOMMUTED PENSION NIL Fully taxable
COMMUTATION OF PENSION [Section 10(10A)]
a. Government Employee Fully exempt NIL
b. Other Employee
• If in receipt of Gratuity 1/3 x Full Value Actual amt.
of Pension is received Less
Exempt Amount exempt
• If not in receipt of Gratuity 1/2 x Full Value
of Pension is
Exempt
LEAVE ENCASHMENT Exempt Taxable

LEAVE ENCASHMENT DURING SERVICE NIL Fully taxable
LEAVE ENCASHMENT ON RETIREMENT [Sec. 10(10AA)]

(a) Government Employees Fully exempt NIL
(b) Other employees: Least of the following:
i. Amount Actually Received
ii. ` 3,00,000
iii. Average Salary of 10 Months preceding the date of trf x 10
Actual amount
Months
Least is Exempt received Less
iv. Leave credit (Maximum @ 30 days p.a.) for every completed
Amount Exempt
year of service x Average salary on 10 months basis
RETRENCHMENT COMPENSATION [Sec 10(10B)]

Least of the following:
1. Amount actually received
Actual amount
2. ` 5,00,000 Least is exempt
received Less
3. Amount determined u/s 25F(b) of Industrial Disputes Act, 1947
Amount exempt
[15/26 x 3 months average Salary x Number of years of
Completed Service or part thereof in excess of six months;
(Salary = Basic + D.A.)]

VOLUNTARY RETIREMENT COMPENSATION (if relief u/s
89(1) is not claimed) [Section 10(10C)] & Rule 2BA] Exempt Taxable
[Only once in any Assessment Year – Once in a Life]
Least of the following is exempt
(a) Amount actually received Actual amount
(b) ` 5,00,000 received Less
Least is exempt
(c) Last drawn Salary x 3 x No. of fully completed years of service or Amount Exempt
(d) Last drawn Salary x Balance of months of service left C

LEAVE TRAVEL ASSISTANCE [Sec 10(5) - Rule 2B]

Twice in a block of four years: [Current Block is 2018-2021].
(a) By Air - National Airways - Economy Class - Shortest route
(b) By Train -1 Class AC fare - Shortest Route
(c) By Recognized Transport – Deluxe / First Class - Shortest Route
(d) By other means - 1 Class AC fare as per Railways, equivalent for
Amount is exempt Actual amount
distance travelled - Shortest Route
only for the received Less
If LTA is not availed twice in a block of 4 yrs, One LTA can be
st Shortest Route Amount Exempt
availed in the 1 year of next block
This exemption is not available for more than two surviving
children of an individual and born after 1.10.1998. (Multiple Birth
after one child – ok)
Family: Self + Spouse + Child + Dependents (Parents,
brothers, Sisters)
HOUSE RENT ALLOWANCE [Sec 10(13A)]

Least of the following is exempt:
A. Actual HRA Received
B. 50% (metros) / 40% (others) of Salary
C. Rent paid Less 10% of salary
Salary = Basic + DA (Forming Part of Retirement Benefits) + Commission on Turnover
If there is a change in Rent, Salary, Place, HRA etc, than HRA exemption will be on periodic basis.
ALLOWANCES which is Partly Exempted to the extent specified [Section 10(14)]
A. Children Education allowance (for Maximum 2 Children) ` 100 p.m. per child
B. Children Hostel Expenditure allowance (for Max 2 Children) ` 300 p.m. per child
C. Running Allowance/Outstation Allowances for Transport Sector Employees Lower of

70% of amount received
or ` 10,000 p.m.
D. Transport Allowance (for going to office and back)
(i) General NIL
(ii) For handicapped, Blind etc ` 3,200 p.m.
E. Mining / Underground Allowance ` 800 p.m.
F. Tribal Area Allowance ` 200 p.m.
G. Hill compensatory allowance ` 300 p.m.
ALLOWANCES which is Exempted to the extent incurred for official purpose [Section 10(14)]
A. Travelling Allowance B. Conveyance Allowance C. Academic Allowance
D. Daily Allowance E. Helper Allowance F. Uniform Allowance

ALLOWANCES – Fully Taxable
A. City Compensatory Allowances B. Entertainment Allowance C. Dearness Allowance
D. Medical Allowance E. Lunch Allowance F. Overtime Allowance
ALLOWANCES – Fully Exempt
A. Allowances & Perquisites to Indian Citizen working outside India by GOI

B. Allowances & Perquisites to UNO Employee
Allowance/Perquisites u/s 10(45):

Notified allowance or perquisite paid to the Chairman / Retired Chairman / any other Member / Retired Member
of UPSC is exempt.
Exempted Perquisites
Following perquisites are exempted in hands of employee:
1. Tea or snacks: Tea, similar non-alcoholic beverages and snacks provided during working hours.
2. Food: Food provided by employer in working place upto ` 50 per meal. Remote area – full exempt.
3. Recreational facilities: Recreational facilities extended to a group of employees.
4. Goods sold to employee at concessional rate: Goods manufactured by employer and sold by him to his
employees at concessional (not free) rates.
5. Conveyance facility: Conveyance facility provided -
• to employees for journey between office and residence and vice versa.
• to the judges of High Court and Supreme Court
6. Training. Amount spent on training of employees including boarding and lodging expenses of the employees
on such training.
7. Services rendered outside India: Any perquisite/allowances allowed outside India by the Government to a
citizen of India for rendering services outside India.
8. Contribution in some specified schemes
• Employer's contribution to staff group insurance scheme.
• Payment of annual premium by employer on personal accident policy affected by him in respect of his
employee.
9. Loans
• Loan given at nil or at concessional rate of interest by the employer provided the aggregate amount of loan
does not exceed ` 20000.
• Interest free loan for medical treatment of the diseases specified in Rule 3A.
10. Medical facility
• A provision of medical facility at office is exempt.
• In any other case, medical facility up to ` 15000 is exempt.
11. Periodicals and journals: Periodicals and journals required for discharge of work.
12. Telephone, mobile phones: Expenses for telephone, mobile phones actually incurred on behalf of employee
by the employer whether by way of direct payment or reimbursement.
13. Free education facility: Free education facility to the children of employee in an institution owned or
maintained by the employer provided cost of such facility does not exceed ` 1000 per month per child.
14. Computer or Laptop: Computer or Laptop provided whether to use at office or at home (provided ownership
is not transferred to the employee).
15. Movable assets: Sale or gift of any movable asset (covered under SLM method) to employee after being
used by the employer for 10 or more years.
16. Leave Travel Concession: Leave Travel Concession (LTC) to the extent of lowest cost incurred.
17. Rent-free accommodation
• Rent-free official residence provided to a Judge of a High Court or the Supreme Court.
• Rent-free furnished residence (including maintenance thereof) to Official of Parliament, a Union Minister or
a Leader of opposition in Parliament.
18. Accommodation: Accommodation provided -
• on transfer of an employee in a hotel for a period not exceeding 15 days in aggregate.
• in a remote area to an employee working at a mining site or an onshore exploration site or a project
execution site or a dam site or a power generation site or an offshore site.
19. Tax on non-monetary perquisite paid by employer on behalf of employee.
20. Health club. Sports club facility

ACCOMMODATION PROVIDED BY THE EMPLOYER TO THE EMPLOYEE
1. Value of Unfurnished Accommodation
Nature of Perquisite Taxable Value of Perquisite

Provided by Government License fee determined by the Government
Less: Rent recovered from Employee
Provided by Employer other than Central and State Government
(a) Owned by Employer If population > 25 Lakhs: 15% of Salary
If population > 10 Lakhs but does not exceeds 25 Lakhs: 10% of

Salary
If population < 10 Lakhs: 7.5% of Salary
Less Rent actually paid by the employee
(b)Taken on lease by the employer Lower of the Two:

(a) Rent paid by employer or
(b) 15% of Salary
Less Rent recovered from employee
(c) Accommodation in hotel 24% of Salary paid / payable or actual charges paid / payable whichever
is lower Less Amount paid or payable by the employee
Hotel Accommodation: Accommodation provided in a hotel will not be a taxable perquisite if—
• The period of such accommodation does not exceed 15 days;
• Such accommodation has been provided on the transfer of the employee from one place to another.
2. Valuation of Furnished Accommodation:

Particulars `
Value of unfurnished accommodation as above XXX
Add: Value of Furniture
- If owned by employer, then 10% per annum of Original Cost of such Furniture XXX
- If hired from third party, then Actual Hire Charges XXX
Less: Any charges paid or payable by the employee (xxx)
Value of furnished accommodation XXX
Note: Furniture includes Television sets, Radio, Refrigerator, other Household Appliance, Air-Conditioning plant or
Equipment.
VALUATION NOT APPLICABLE

(a) Employees Covered: Employees working at —
• Mining Site; • Offshore Site; • Dam Site;
• Onshore Oil Exploration Site; • Project Execution Site; • Power Generation Site
(b) Conditions:
• The accommodation should be of a temporary nature and
• Accommodation should be located at least 8 kms away from local limits of Municipality / Cantonment or
located in a remote area (i.e. 40 kms away from town with Less than 20,000 population)
VALUATION OF ACCOMMODATION IN CASE OF EMPLOYEES ON TRANSFER

a) For the first 90 days of transfer: Where accommodation is provided both at existing place of work and in
new place, the accommodation, which has lower value, shall be taxable.
b) After 90 days: Both accommodations shall be taxable.
MEANING OF SALARY FOR VALUATION OF ACCOMMODATION FACILITIES
Salary (from one or more employer) includes Salary excludes
• Basic Salary • Employer's contribution to PF
• D.A., if considered for retirement benefits • Exempted Allowances
• All taxable allowances • Value of perquisites (monetary or non-monetary)
• Bonus or Commission • Arrear Salary / Advance Salary
• Any other monetary payment

TAXABLE PERQUISITES PROVIDED BY AN EMPLOYER TO AN EMPLOYEE OR MEMBERS OF HIS
HOUSEHOLD
(A) Taxability of Motor Car Benefits [Rule 3(2)(A)] - Taxable only in the hands of specified employee
[Specified employee means – Director, 20% (beneficial ownership), Cash salary (Excluding non-monetary
perquisites) more than ` 50,000 p.a.]
Owner of Car Expenses Purpose Taxable Value of Perquisite

met by
1(a) Employer Employer Fully Official Not a perquisite provided the documents specified in Rule
3(2)(B) are maintained.
1(b) Employer Employer Fully personal use Aggregate of-
(a) Actual expenditure on car
(b) Remuneration to chauffeur
(c) 10% of the cost of car (normal wear & tear)
Less: Amount charged from employee
1(c)(i) Employer Employer Partly for official Upto 1.6 Litres [Small Car]
and partly for ` 1,800 p.m. + ` 900 p.m. for chauffeur
personal
Above 1.6 Litres
` 2,400 p.m. + ` 900 p.m. for chauffeur
1(c)(ii) Employer Employee Partly for official Upto 1.6 Litres [Small Car]
and partly for ` 600 p.m. + ` 900 p.m. for chauffeur
personal
Above 1.6 Litres
` 900 p.m. + ` 900 p.m. for chauffeur
2(i) Employee Employer Fully official use Not a perquisite provided documents as per Rule 3(2)(B)
are maintained.
2(ii) Employee Employer Partly for official use Subject to Rule 3(2)(B)
and partly for Actual expenditure incurred Less
personal use Small Car - Value as per 1(c)(i)
Big Car - Value as per 1(c)(i)
3(i) Employee Employer Fully official use Not a perquisite provided documents as per Rule 3(2)(B)
owns other auto- are maintained
motive but not car
3(ii) Employee Employer Partly for official Subject to Rule 3(2)(B)

owns other auto- and partly for Actual expenditure incurred by employer
motive but not car personal use Less: 900 p.m.
Notes:
1. Using cars from pool of cars owned or hired by Employer:
The employee is permitted to use any or all cars for both official and personal use:
For one car - Valued as per 1(c)(i)
For more than one car - Valued as per 1(b) as if fully used for personal purpose

Perquisites taxable in case of Specified Employee only (if it is provided by employer):
Rule Nature of perquisite Taxable Value of perquisite (TVP)

3(3) Service of sweeper, gardener or Actual cost to the employer
watchman or personal attendant Less: Amount paid by the employee
3(4) Supply of gas, electricity or water for Procured from outside Agency: Amount paid to outside agency
household consumption
Resources owned by employer himself: Manufacturing cost
per unit Less: Amount paid by the employee
3(5) Education facilities to members of
his household:
(a) Free Education to children
If the cost of education per child does not exceed ` 1,000
in the school maintained by
p.m. - Not taxable [2 Views]
the employer or the school
sponsored by the employer [No
limit]
(b) Other Schools In other case, Cost to such education
Less: Amount recovered from employee
3(6) Transportation of goods or Value at which it is offered to public

passengers at free or concessional Less: Amount recovered from the employee
rate provided by the employer
engaged in that business (other
than railways / airlines)
VALUATION OF OTHER PERQUISITES:

• Interest charged by employer is equal to or higher
than SBI rates: It is not a taxable perquisite
• Interest charged is lower than SBI rates:

Perquisites will be:
Interest at SBI rates on maximum monthly
Interest Free of Concessional Loan: outstanding balance on last day
3(7)(i) Less: Interest paid by the employee on that loan.
SBI Rate = SBI Rate prevailing on
the First Day of the Previous Year Exceptions:
(a) Medical loan for treatment of diseases specified
in Rule 3A except Loan reimbursed by medical
insurance
(b) Loan not exceeding ` 20,000 in aggregate
3(7)(ii) Travelling, touring, accommodation

and other expenses met by the
employer other than official purpose. Amount incurred by employer or Value offered to public
(To be calculated only for the period of Less: Amount recovered from employee
vacation)
3(7)(iii) Free meals during office hours A. Actual cost to the employer above ` 50/- per day per
[Free meal in remote area or offshore meal
installation area is not a taxable Less: Amount recovered from the employee
perquisite]
B. Tea or non-alcoholic beverages / snacks during working
hours is not taxable.
3(7)(iv) Value of any gift or voucher or token

A. Value of gift (in Kind) in excess of ` 5,000. [2 Views]
including cash gift
B. Gift in cash – Fully taxable.
.
3(7)(v) Expenditure incurred on credit card or A. Actual expenditure by employer is taxable
add on card including membership fee Less: Amount recovered from employee.
and annual fee.
B. If it is incurred for official purpose - Not taxable
3(7)(vi) Expenditure on club A. Actual expenditure incurred by the employer Less:
Amount recovered from employee.
B. If it is incurred for official purpose - Not taxable
C. Initial fee of corporate membership of a club is not a
taxable perquisite.
D. Health club or sports club or similar facilities
provided uniformly to all employees – Not a
perquisite.
3(7)(vii) Use of any movable asset other than 10% of Actual cost if owned by the employer; or
computer or laptops or other assets Actual Rental Charge Paid / Payable by employer
Less: Amount recovered from employee
Transfer of movable asset to employees
Computers & Electronic Items Motor Car Other Assets

Actual Cost Actual Cost Actual Cost
Less: Depreciation @ 50% for Less: Depreciation @ 20% Less: Depreciation @
every completed year for every completed 10% for every
under WDV method. year [WDV] completed year
under SLM Method.
Value of the Asset Value of the Asset Value of the
3(7)(viii)
Less: Amount recovered from Less: Amount recovered from Asset
the employee the employee Less: Amount recovered
from the employee
Value of the perquisite Value of the perquisite Value of the
perquisite
• Electronic gadgets include Computer. Digital Diaries and Printers, but exclude washing
machines, Microwave ovens, Mixers, Hot plates, Ovens etc.
• Transfer of other assets (SLM), which are 10 years old, shall not attract taxability.
3(7)(ix) Any other benefit or amenities or Cost to the employer

service or right or privilege provided Less: Amount recovered from employee
by the employer other than telephone
or mobile phone
SECTION 10(10CC) – INCOME IN THE NATURE OF PERQUISITE –Exempted

As per section 10(10CC), tax paid by employer on non-monetary perquisite income of employee shall be exempt
in the hands of employee. Further it will behave like TDS and eligible for deduction from final tax liability.
TAX IMPLICATION IN HANDS OF EMPLOYER: Section 40(a)(v) disallows such expenditure in the hands of the
employer. Therefore, the tax so paid by the employer will not be deductible expenditure in his hands.

Medical Facilities - Exempt
MEDICAL TREATMENT IN INDIA:
I. Expenditure incurred in a HOSPITAL MAINTAINED BY THE EMPLOYER.
II. Sum paid by the employer for any expenditure for medical treatment in any hospital maintained by the
Govt. or local authority or an approved hospital under CGHS or of prescribed diseases/ ailment in a
hospital approved by CCIT. [Certificate is required]
III. Group Medical Insurance, Medical Insurance paid u/s 80D, Premium of Accidental Insurance Policy.
IV. Any other medical expenditure reimbursed to the extent of `15,000
Medical Treatment Abroad:
Medical treatment and Stay expenses (one attendant) abroad – exempt (If permitted by R.B.I.)
Travel expenditure (patient + one attendant) – GTI upto ` 2,00,000 – Fully exempt.
– GTI above ` 2,00,000 (fully taxable)
Family = Spouse + Children + Dependent [Parents + Brothers + Sister]
RELIEF UNDER SECTION 89 VRS vs Relief

COMPUTATION OF RELIEF IF SALARY RECEIVED IN ARREARS OR IN ADVANCE
Steps Procedure
1 Compute the tax payable (after cess) on the total income, including the additional salary, of the
relevant previous year in which the same is received.
2 Compute the tax payable (after cess) on the total income, excluding the additional salary, of the
relevant previous year in which the same is received.
3 Find out the difference between the tax at (1) and (2).
4 Compute the tax (after cess) on the total income after including the additional salary in the
previous year to which such salary relates.
5 Compute the tax (after cess) on the total income after excluding the additional salary in the
previous year to which such salary relates.
6 Find out the difference between tax at (4) and (5).
7 If tax computed in step (3) > tax computed in step (6) then the excess amount is
admissible as relief u/s 89.
If tax computed in step (3) ≤ tax computed in step (6) then NO RELIEF is admissible u/s
89. In such a case, the assessee employee need not apply for relief.
MEANING OF GOVERNMENT EMPLOYEES FOR DIFFERENT PURPOSE

S. No. Purpose Government employees
1. GRATUITY [SECTION 10(10)] CG/SG/LA
PENSION
2. CG/SG/LA/SC
[SECTION 10(10A)]
LEAVE SALARY
3. CG/SG
[SECTION 10(10AA)]
RENT FREE ACCOMODATION
4. CG/SG
[SECTION 17(2)(i) & 17(2)(ii)]
ENTERTAINMENT ALLOWANCE
5. CG/SG
[SECTION 16(ii)]

MEANING OF SALARY FOR COMPUTATION
SECTION Purpose of computation Salary includes
16(ii) Entertainment allowance Basic salary
10(10) Gratuity [if gratuity Act, 1972 is Basic salary + DA
applicable]
10(10) Gratuity [it Act not applicable] Basic salary + DA (R) + % Commission on Sales.
10(10AA) Leave Salary DO
10(10B) Retrenchment Compensation Basic salary + DA
10(13A) HRA Basic salary + DA (R) + % Commission on Sales.
10(10C) VRS DO
10(12) RPF DO
17(2)(i) & RENT FREE ACC [RFA] OR Basic + Allowance +Bonus + Commission + DA(R) + Any
17(2)(ii) ACCOMMODATION AT money payment ( which in chargeable to tax)
CONFESSIONAL RATE But does not include –
1. Employer’s contribution to RPF
2. Value of perquisite specified in Sec 17(2)
[from one or more employer]
17(2)(iii) SPECIFIED EMPLOYEE Basic Salary + D.A. + Commission, whether payable
monthly or turnover based + Bonus + Fees + Advance
Salary + Arrear Salary + Any other taxable payment + Any
taxable allowances + Any other monetary benefits –
Deductions under section 16
[from one or more employer]
DEARNESS ALLOWANCES & DEARNESS PAYS

DEARNESS ALLOWANCE (DA)
If in question DA is given, then it will not be treated as forming part of salary unless question specifically
says that –
• If forming part of retirement benefit
• Under the terms of employment
• Consider for retirement benefit
DEARNESS PAYS (DP)

It means it is forming part of retirement benefit unless question says otherwise.
MEMBERS OF HOUSEHOLD
= Spouse, Children, Spouse of children, Parents, Servants & all other Dependents.
FAMILY = Spouse + Children + Dependent [Parents + Brothers + Sisters]

CLASS NOTES

FINAL DT [SATC] 29A.1
Problems under the head “Salary”

1) Rajesh Kumar, an Indian citizen, is posted in the Indian High Commission at London during the PY
2019-20. His emoluments consist of basic pay of ` 1,00,000 per month and overseas allowance of `
2,000 per month. Besides, he is entitled to airfare for going from and coming to India and also to
free use of Government's car at London. He has no taxable income except salary income stated
above. His employer did not deduct tax at source.
Rajesh Kumar argues that

i) he is not liable to pay tax on salary earned and received outside India since he is a non –
resident during the PY 2019-20 and
ii) even if any tax is due, it is the duty of his employer to deduct tax at source and as such he
has no responsibility to pay the tax.
Discuss whether his contention is correct. Will it make any difference if Rajesh Kumar is
foreign citizen? Give reasons.
2) Calculate taxable pension includible in the salary income in the below cases for AY 2020-21.
a) Mr. Ram Singh retired from the Indian Revenue Service on 16 – 3 – 2018. He gets pension of `
4,000 p.m. upto 31.12.2019. With effect from 01.01.2020 he gets 25% of his pension commuted
for ` 75,000.
b) Mr. Sundar retires from RG Co. on 31-3-2019. He is paid ` 1,800 p.m. as pension. On his
request, RG Co. pays ` 36,000 in lieu of 50% of pension from 01.12.2019.
Assume that (i) gratuity is paid (ii) no gratuity has been paid.
3) Mr. Arif retired from service after serving for 12 years and encashed leave of 15 months to his credit
at ` 60,000. As per the rules of employment he was eligible for 2 months leave per year of
completed service and he was drawing ` 4,000 p.m. as salary throughout the period of 10 months
before retirement. Determine taxable amount of leave salary.
4) X was employed with ABC Ltd. He retired w.e.f. 1.2.2020 after completing a service of 24
years and 4 months. He submits the following information :
Basic Salary ` 5,000 per month (at the time of retirement)
Dearness Allowance 100% of Basic Salary (40% of which forms part of salary for
retirement benefits).
Last increment ` 500 w.e.f. 1.7.2019
His pension – was determined at ` 3,000 per month. He got 50% of the pension commuted w.e.f.
1.3.2020 and received a sum of ` 1,00,000 as commuted pension. In addition to this, he received a
gratuity of ` 1,20,000 and leave encashment amounting to ` 56,000 on account of accumulated
leave of 240 days. He was entitled to 40 days leave for every year of service.
Compute his Gross Salary assuming that he is not covered under Payment of Gratuity Act.

5) Mr. A retires from service on December 31, 2019, after 25 years of service. Following are the
particulars of his income/investments for the previous year 2019-20:
Particulars `
Basic pay @ ` 16,000 per month for 9 months 1,44,000
Dearness pay (50% forms part of the retirement benefits) ` 8,000 per month
for 9 months 72,000
Lumpsum payment received from the Unrecognised Provident Fund 6,00,000
Deposits in the PPF account 40,000
Out of the amount received from the provident fund, the employer’s share was ` 2,20,000 and the
interest thereon ` 50,000. The employee’s share was ` 2,70,000 and the interest thereon ` 60,000.
What is the taxable portion of the amount received from the unrecognized provident and in
the hands of Mr. A? Will your answer be any different if the fund mentioned above was a
recognised provident fund?
6) Mr. B is working in XYZ Ltd. and has given the details of his income for the P.Y. 2019-20. You
are required to compute his gross salary from the details given below:
Basic Salary ` 10,000 p.m.
D.A. (50% is for retirement benefits) ` 8,000 p.m.
Commission as a percentage of turnover 1%
Turnover during the year ` 5,00,000
Bonus ` 40,000
Gratuity ` 25,000
His own contribution in the RPF ` 20,000
Employer’s contribution to RPF 20% of his basic salary
Interest accrued in the RPF @ 13% p.a. ` 13,000
7) X retires on June 30, 2019 He submits the following information —

Basic salary (since January 2018); ` 20,000 per month, dearness allowance : ` 6,000 per month
(1/3 of which is part of salary for retirement benefits), employer's contribution towards provident
fund : ` 3,000 per month (X makes a matching contribution); interest credited at the rate of 15 per
cent on April 30, 2019 : ` 7,500; pension after retirement : ` 10,000 per month; and payment of
provident fund at the time of retirement: ` 7,60,000 (out of which employer's contribution: `
3,30,000, interest thereon ` 44,000, X's contributions : ` 3,40,000, interest thereon : ` 46,000).
Salary and pension become due on the last day of each month. X has deposited the entire
provident fund payment with a company (rate of interest: 9 per cent per annum).
Find out the income of X on the assumption that the provident fund is (a) statutory provident
fund, (b) recognised provident fund, or (c) unrecognised provident fund.
8) Mr. X is employed with AB Ltd. on a monthly salary of ` 25,000 per month and an
entertainment allowance and commission of ` 1,000 p.m. each. The company provides him
with the following benefits:
1. A company owned accommodation is provided to him in Delhi. Furniture costing ` 2,40,000
was provided on 1.8.2019.
2. A personal loan of ` 5,00,000 on 1.7.2019 on which it charges interest @ 6.75% p.a. The
entire loan is still outstanding. (Assume SBI rate of interest to be 12.75% p.a.)
3. His son is allowed to use a motor cycle belonging to the company. The company had
purchased this motor cycle for ` 60,000 on 1.5.2016. The motor cycle was finally sold to him
on 1.8.2019 for ` 30,000.

4. Mr. X is provided with free electricity. Cost to the employer is ` 10,000

5. Professional Tax paid by Mr. X is ` 2,000.
Compute the income from salary of Mr. X.
9) Mr. Raghu Raj is employed with Bhoruka Power Corporation Ltd., as General Manager,
Finance, on a monthly salary of ` 26,000. He has been provided with the following
perquisites:
Rent free accommodation is provided in Bangalore. The company has given him housing loan of ` 4
lakhs repayable in 8 years during the previous year @ 3% per annum [SBI Rate – 10.5%]. The
company had purchased a car on 01.05.2017 for ` 2,50,000/ –. This car is sold to Mr. Raghu Raj on
1 – 7 – 2019 for ` 1,20,000/ –. He made Diwali purchases for office gifts amounting to ` 19,000/ –
on his corporate credit card. This amount along with the annual fee of ` 1,500/ – was paid by the
company. He was allowed to use the video camera and laptop belonging to the company. The
company had purchased these assets for ` 40,000/ – and ` 2 lakhs respectively. Compute taxable
salary of Mr. Raghu Raj.
10) Mr. X is employed in ABC Ltd. getting basic pay of ` 8,000 p.m. Employer has provided him
treatment outside India and has incurred a sum of ` 3,60,000 but Reserve Bank of India has
permitted ` 3,50,000. Employer incurred ` 1,50,000 on stay but Reserve Bank of India has
permitted ` 1,05,000; employer has incurred ` 97,000 on travelling and Reserve Bank of India has
permitted ` 60,000.
Employer has paid medical allowance of ` 10,000 during the year and has incurred ` 7,000 on the
treatment of father in law of Mr. X in India. The treatment was provided in a Government hospital
and father in law of Mr. X is dependent on him.
The employee has been provided with a motor car of 1.8 litre engine capacity for official as well as
personal use and all expenses are met by the employee himself but driver has been provided by
the employer. Compute his total income.
11) Mrs. Z is employed with ABC Ltd. on a monthly salary of ` 15,000. She has been provided
with the following perquisite:
a) Rent free accommodation at Delhi with rent paid by the company ` 60,000.
b) A mobile phone and a fixed line telephone at her residence. The bills reimbursed by the
company during the previous year amounted to ` 12,000.
c) On the eve of Silver Jubilee Celebrations of the company she got a gift worth ` 12,000
from the company.
d) She was allowed to use the Video Camera and Laptop belonging to the company. The
company has purchased these assets for ` 75,000 and ` 2,50,000 respectively on 01.04.2019
and the employee has used it throughout the year.
e) She was given a chauffeur driven car (1.6 litres) for private and official use. All expenses of
running and maintenance including driver's salary were paid by the company.
She also drew the following allowances:
`
(i) Dearness allowance (50% forms the part of basic pay) 5,600 p.m.
(ii) Education allowance for 2 children 300 p.m. per child
(iii) Transport allowance 1,800 p.m.

During the year she got reimbursement from the company ` 20,000 spent on the medical treatment
of her husband at a private nursing home.
She made the following payments and contributions:

i. Life insurance premium paid ` 6,000 each against a policy taken on the life of her husband
and her married daughter, (sum assured ` 60,000 each)
ii. Contributed ` 2,500 p.m. to Recognised provident fund, employer contributing an equal
sum.
You are required to compute her Total Income.
12) Mr. Y.R. Meena, an Indian citizen, was working with UNO till 31st July 2019 and was residing
at USA. On 1st August, he joined Indian-Government service and was deputed to Karachi in
Pakistan.
On 1st December he left the Indian Government service and joined a private company and
started working at its Sri Lanka branch. On 1st March, he has been shifted to the head office
in India. He was provided rent-free accommodation during whole of the year.
His salary structure in various assignments is as under: (in `)
Particulars UNO Government Private Ltd.

service Co.
Basic 10000 p.m. 5000 p.m. 4000 p.m.
Dearness Allowance (forms part of salary 3000 p.m. 5000 p.m. 2500 p.m.
for calculation of retirement benefits)
Project Allowance 1500 p.m. 2500 p.m. 1000 p.m.
Entertainment Allowance 1800 p.m. 1000 p.m. 2000 p.m.
Servant and sweeper facility 4000 p.m. 2000 p.m. 1200 p.m.
Education to two children in employer's 2000 p.m. 2500 p.m. 3000 p.m.
school. Cost per child -
Find Gross salary for the previous year 2019-20.

FINAL DT [SATC] 29B.1
SALARY - SOLUTION
Answer 1:
As per section 9 (1) (iii), Income deemed to accrue or arise in India includes, income chargeable under the
head 'Salaries' payable by the Government of India to a citizen of India for services rendered outside India.
As per section 10(7), any allowance or perquisites paid or allowed as such outside India by the Government
to a citizen of India for rendering service outside India shall be exempt.
In view of the above, the computation of taxable income of Mr. Rajesh is as follows.
` `
Basic Pay 100,000 x 12 12,00,000
Overseas allowance 2,000 x 12 24,000
Less: Exempt under section 10(7) 24,000 Nil
12,00,000
Deduction under section 16 50,000
Income under the head Salaries 11,50,000
Contentions of Mr. Rajesh Kumar

(i) The salary shall be deemed to accrue or arise in India and therefore, this contention of Mr. Rajesh Kumar
is not valid.
(ii) As per section 192, the employer is liable to deduct the tax at source from taxable salary. However, if the
employer does not deduct tax, the employee is not granted exemption from tax liability.
If Mr. Rajesh Kumar is a foreign citizen, The above provisions of Sec. 9(1)(iii), shall not apply. Therefore,
there will be no tax liability on Mr. Rajesh Kumar
Answer 2:
a) Computation of taxable pension of Mr. Ram Singh
Particulars ` `
(1) Uncommuted pension before the date of commutation 36,000
(4,000 x 9)
(2) Uncommuted pension after the date of commutation 9,000
(4,000 x 3 x 75%)
(3) Commuted pension 75,000
Less: Exempt U/S 10(10A) 75,000 Nil
Taxable pension includible in salary 45,000
(b) Computation of taxable pension of Mr. Sundar
Case I: Gratuity is paid ` `
(1) Uncommuted pension before the date of commutation (1,800 x 8) 14,400
(2) Uncommuted pension after the date of commutation (1,800 x 4 x 50%) 3,600
(3) Commuted pension - 1/3rd of full value of commuted pension is exempt 36,000
u/s. 10(10A) as he is in receipt of gratuity (36,000 x 100 / 50 x 1/3) 24,000 12,000
Case II: Gratuity has not been paid ` `

(1) Uncommuted pension before the date of commutation (1,800 x 8) 14,400
(2) Uncommuted pension after the date of commutation (1,800 x 4 x 50%) 3,600
(3) Commuted pension Half of the full value of commuted pension is exempt 36,000
U/S 10(10A) as he is not in receipt of gratuity (` 36,000 x 100 ÷ 50 x ½) 36,000 Nil
Answer 3:
Leave enactment is exempt to the extent of least of the following:
Particulars Amount
(`)
(i) Statutory limit 3,00,000
(ii) ` 4000 x 3 12,000
(iii) 10 months average salary (10 x ` 4,000) 40,000
(iv) Actual amount received 60,000
Therefore, ` 12,000 is exempt under section 10(10AA)
Taxable Leave = 60000 - 12000.

Answer 4:
Computation of Gross Salary
` `
Basic Salary (4,500 x 3 + 5,000 x 7) 48,500
Dearness Allowance (100%) 48,500
Uncommuted Pension (3,000 x 1 + 1,500 x 1) 4,500
Commuted Pension 1,00,000
Less : Exempt [(1,00,000/ 50%) × 1/3] 66,667 33,333
Gratuity :
Amount received 1,20,000
Less : Exempt (Note No. 1) 81,480 38,520
Leave Encashment
Amount received 56,000
Less : Exempt (Note No. 2) Nil 56,000
Gross Salary 2,29,353
Solution 5:
Taxable portion of the amount received from the URPF in the hands of Mr. A is computed hereunder:
Amount taxable under the head “Salaries”:
Employer’s share in the payment received from the URPF ` 2,20,000
Interest on the employer’s share ` 50,000
Total ` 2,70,000
Amount taxable under the head “Income from Other Sources” :
Interest on the employee’s share ` 60,000
Total amount taxable from the amount received from the fund ` 3,30,000
Note: Since the employee is not eligible for deduction under section 80C for contribution to URPF at the time
of such contribution, the employee’s share received from the URPF is not taxable at the time of withdrawal as
this amount has already been taxed as his salary income.
In case fund is Recognised PF

Since the fund is a recognized one, and the maturity is taking place after a service of 25 years, the entire
amount received on the maturity of the RPF will be fully exempt from tax.
Solution 6: Computation of Gross Salary of Mr. B

Particulars ` `
Basic Salary [`10,000 × 12] 1,20,000
Dearness Allowance [` 8,000 × 12] 96,000
Commission on turnover [1% × ` 5,00,000] 5,000
Bonus 40,000
Gratuity [Note 1] 25,000
Employee’s contribution to RPF [Note 2] -
Employers contribution to RPF [20% of ` 1,20,000] 24,000
Less : Exempt [Note 3] 20,760 3,240
Interest accrued in the RPF @ 13% p.a. 13,000
Less : Exempt @ 9.5% p.a. 9,500 3,500 .
Note 1 : Gratuity received during service is fully taxable.

Note 2 : Employee’s contribution to RPF is not taxable. It is eligible for deduction under section 80C.
Note 3 : Employers contribution in the RPF is exempt up to 12% of the salary. i.e. 12% of [B.S + D.A. for
retirement benefits + Commission based on turnover]
= 12% of [` 1,20,000 + (50% × Rs. 96,000) + ` 5,000]
= 12% of ` 1,73,000 = ` 20,760

Answer 7: Statutory Recognised Unrecognised

provident provident provident
fund fund fund
` ` `
Basic Salary (20,000 x 3) 60,000 60,000 60,000
Dearness allowance (6,000 x 3) 18,000 18,000 18,000
PF by employer [3,000 x 3 - 12% of
(Rs. 60,000 + 1/3 of 18,000)] — 1,080
Interest credited in PF account in excess of 9.5%
[7,500 x 5.5./15] — 2,750
Pension (10,000 x 9) 90,000 90,000 90,000
Payment for provident fund account
Employer's contribution — — 3,30,000
Interest thereon — — 44,000
Gross Salary 1,68,000 1,71,830 5,42,000
Less : Standard deduction 50,000 50,000 50,000
Income from salary 1,18,000 1,21,830 4,92,000
Income from other sources
- Interest on X's contribution to provident fund — — 46,000
- Interest on company deposits (i.e., 9% per annum
on 7,60,000 from July 1, 2018 to March 31, 2019) 51,300 51,300 51,300
Gross total income 1,69,300 1,73,130 5,89,300
Less : Deduction under section 80C 9,000 9,000 Nil
Net Income 1,60,300 1,64,130 5,89,300
Notes :-
1. X can claim deduction under section 80C in respect of his contribution towards statutory / recognised
provident fund.
2. In the case of recognised provident fund, it is assumed that X has retired after rendering service of 5 years.
Solution 8: Computation of Income from Salary of Mr. X for the A.Y. 2020-21
Particulars ` `
Basic Salary [`25,000 × 12] 3,00,000
Commission [`1,000 × 12] 12,000
Entertainment Allowance [`1,000 × 12] 12,000
Rent free accommodation [Note 1] 48,600
Add : Value of furniture [`2,40,000 × 10% p.a. for 8 months] 16,000 64,600
Interest on Personal loan [Note 2] 22,500
Use of motor cycle [Rs. 60,000 × 10% p.a. for 4 months] 2,000
Transfer of motor cycle [Note 3] 12,000
Free Electricity 10,000
Less : Deduction under section 16
Statutory Deduction u/s 16(ia) 50,000
Professional Tax paid u/s 16(iii) 2,000 52,000
Income from Salary 3,83,100
Note 1: Value of rent free unfurnished accommodation

= 15% of salary for the relevant period
= 15% of (`3,00,000 + `12,000 + `12,000) = ` 48,600
Note 2: SBI rate of Interest on personal loan = 12.75% p.a.
Value of perquisite for interest on personal loan
= [` 5,00,000 × (12.75% - 6.75%) for 9 months] = ` 22,500
Note 3: Depreciated value of the motor cycle
= Original cost – Depreciation @ 10% p.a. for 3 completed years.
= ` 60,000 – (` 60,000 × 10% p.a. × 3 years) = ` 42,000.
Perquisite = ` 42,000 – ` 30,000 = ` 12,000.

Answer 9
Computation of taxable salary of Mr. Raghu Raj
Particulars `
Salary (26,000 x 12) 3,12,000
Perquisite value in respect of accommodation (3,12,000 x 15%) 46,800
Value of housing loan - 4,00,000 x 7.5% (i.e. 10.5% - 3%) 30,000
Perquisite in respect of sale of car (1,60,000 - 1,20,000) 40,000
Credit card expenses reimbursed (Not a perquisite) Nil
Perquisite value of Video camera (40,000 x 10%) 4,000
Perquisite value of laptop Nil
Less: Deduction u/s 16(ia) 50,000
Taxable Salary 3,82,800
Answer 10:
Computation of income under the head Salary `
Basic Pay (8,000 x 12) 96,000.00
Medical Facilities {Proviso to Sec 17(2)}(W Note 1) 62,000.00
Medical Allowance 10,000.00
Motor Car {Sec 17(2) (iii), Rule 3(2)} (W Note 1) 21,600.00
Gross Salary 1,89,600.00
Less: Deduction u/s 16(ia) 50,000.00
Income under the head Salary 1,39,600.00
Total Income 1,39,600.00
Note: Since Gross total income before taking into consideration travelling expenses is not exceeding ` 2
lakhs. Hence travelling is exempt.
Working Note: `
1. Medical Facilities
Expenses on treatment = 3,60,000
Exempt = Permitted by RBI = 3,50,000
(A)Taxable = 10,000
Expenses on Stay = 1,50,000
Exempt = Permitted by RBI = 1,05,000
(B)Taxable = 45,000
Treatment of father in law = 7,000
Total = 10,000 + 45,000 +7,000 = 62,000
2. Motor Car
Since basic pay is ` 96,000 so monetary income is more than ` 50,000 hence, he is a specified employee
(1,800x12)
Answer 11:
Computation of income under the head Salary `
Basic Salary (15,000 x 12) 1,80,000.00
Dearness Allowance (5,600 × 12) 67,200.00
Education Allowance (W Note 1) 4,800.00
Transport Allowance 21,600.00
Rent free Accommodation (W Note 3) 36,000.00
Mobile phone and fixed line telephone Nil
Gift 12,000.00
Use of video Camera 7,500.00
Motor Car (1,800 + 900 x 12) 32,400.00
Reimbursement of medical treatment 20,000.00
Employer's contribution in recognised provident fund in excess of 12% of Salary 4,368.00
(30,000 - 25,632)
Gross Salary 3,85,868.00
Less: Deduction u/s 16(ia) 50,000.00
Income under the head Salary 3,35,868.00
Gross Total Income 3,35,868.00

Less: Deduction u/s 80C

Life insurance premium 12,000
Contribution in recognised provident fund 30,000 42,000.00
Total Income (rounded off u/s 288A} 2,93,870.00
Working Note:
1. Education Allowances `
Received = 300 x 2 x 12 = 7,200
Exempt = 100 x 2 x 12 = 2,400
Taxable 4,800
2. Rent Free Accommodation `

15% of rent free accommodation salary or rent paid whichever is less
Rent free accommodation salary
= Basic Salary + Dearness Allowance (R) + Education Allowance + Transport Allowance
= 1,80,000 + 33,600 + 4,800 + 21,600 = 2,40,000
15% of rent free accommodation Salary 36,000
Rent paid 60,000
Perquisite value of rent free accommodation 36,000
Solution 12: Computation of Gross salary of Mr. Y.R. Meena

UNO April- Govt. Service Pvt. Ltd. Co. (Note 4)
July Aug-Nov Sri lanka India office
branch
(Note 2) (Note 3) Dec-Feb March

Basic Salary — 20000 — 4000
Dearness Allowance — — — 2500
Project Allowance - — — — 1000
Entertainment Allowance — — — 2000
Servant & Sweeper facility (Note 5) — — — —
Education facility (Note 5) — — — —
Rent-free accommodation (Note 6) — — — 1425
Gross Salary NIL 20000 NIL 10925
Notes:
1) Mr. Meena was in India for the month of March i.e. for 31 days only during the previous year. Hence, he is
non-resident in India.
2) Since, Mr. Meena is non-resident in India and services for which salary is received from UNO were not
rendered in India, therefore, the salary from UNO cannot be taxed in India. Further, even if salaries were
income accrued/arisen or received in India, then also it would not be liable to be taxed in India, as it is
exempt from tax.
3) Salary received by a citizen of India from Government of India for services rendered outside India is
deemed to accrue or arise in India under section 9(1)(iii). So, it is taxable in India. However, allowances
and perquisites are exempt under section 10(7).
4) Salaries received from Pvt. Ltd. co. for services rendered outside India is not taxable in India. However,
services rendered in the month of March in India is taxable in India.
5) Servant and sweeper facility and education facility is taxable only in case of specified employees. Since
Mr. Meena is not a specified employee, they will not be taxable in his case.
6) The perquisite in respect of rent-free accommodation has been valued as follows -
15% of Salary = 15% of (4,000 + 2,500 + 1,000 + 2,000) = ` 1,425. (It has been assumed that population
of the place where he was posted in India, exceeds 25 lacs).

CLASS NOTES

FINAL DT SATC 30.1
INCOME FROM HOUSE PROPERTY

HOW TO COMPUTE INCOME FROM HOUSE PROPERTY:
Gross Annual Value [GAV] XXX
Less: Municipal Taxes PAID by owner during the P.Y. XXX
Net Annual Value (Sec 23) [NAV] XXX
Less: Deductions u/s 24
(a) Statutory deduction @ 30% of NAV XXX
(b) Interest on Loan [Accrual Basis] XXX .
Income from House Property XXX
Add: (a) Recovery of Unrealised Rent (Less 30%) [Section 25A] XXX
(b) Arrear Rent Received (Less 30%) [Section 25A] . XXX .
Income Under the head House Property XXX
Important Facts:
1. The annual value of property shall be taxable under the head “Income from House Property”
subject to fulfillment of the following conditions:
a. Property should consist of any building or land appurtenant thereto.
b. Assessee must be the owner [Including Deemed owner] of the property
c. Property must not be used by the assessee for his own business/profession.22 in certain
typical cases
2. House property situated in a foreign country - As per Residential Status
• ROR- Taxable as per H.P. Head
• RNOR / NR - Taxable as per H.P. Head but rent must be received in India.
3. Disputed ownership: - The income shall be taxable in the hand of recipient.
4. Property held as a stock in trade: Taxable in H.P. Head.

[Letting out incidental to Business is taxable under the head PGBP]
5. Annual value of the following properties are chargeable under the head “Profits and gains
of business or profession” –
a) Portions of property occupied by the assessee for the purpose of any business or
profession carried on by him
b) Properties of an assessee engaged in the business of letting out of properties.
6. Annual value of house property will be charged under the head “Income from house property”,
where it is held by the assessee as stock-in-trade of a business also.
However, the annual value of property being held as stock in trade would be treated as NIL for a
period of two year (amended by Finance Act 2019 w.e.f. AY 2020-21) one year from the end
of the financial year in which certificate of completion of construction of the property is obtained
from the competent authority, if such property is not let-out during such period. [Section 23(5)]

FINAL DT SATC 30.2
7. Where the property is let out with the object of carrying on the business of the assessee in
an efficient manner, then the rental income is taxable as business income. Related
expenses are also deductible in computing such business Income.
8. Composite Rent
If it is separable:
Rent against Property will be taxable in HP Head and Rent towards other Facilities
(services/Assets) will be taxable in Other Sources Head.
If it is not separable:
All the receipt will be taxable either in PGBP or in IOS as the case may be.
Synopsis of Sections
Section Description Important Provisions
Chargeability of Income from

Property
22 Annual value chargeable to tax
(Ownership, Property, Not be
Business Use)
FR
23(1) Annual Value – Manner of MV ALV or Expected Rent
(a)/(b)/(c) Determination SR
AR less UR
Deduction for Municipal tax

including water/sewerage tax Paid by Owner during current previous year
23(1) Proviso
[Land revenue, Ground Rent - allowed as deduction
Not covered ]
23(1) Expln, Treatment of unrealised rent Reduced from actual rent [in case Rule 4 is satisfied]
Self occupied property or

Annual Value - NIL
23(2) Unoccupied property (Max. 2
(Not let out for part of the year & no benefit derived)
house)
More than TWO house TWO house treated self occupied all other house
23(4)
property self occupied deemed let out at the option of the assessee
Deductions from income from (a) 30% of NAV and

24
house property (b) Interest on borrowed capital
Treatment of Pre-construction Allowed in 5 equal instalments from the PY in which

24 Exptn.
period interest acquisition was made or construction completed.
25 Interest paid outside India Disallowed if paid without deduction of TDS and no
person treated as agent u/s 163

FINAL DT SATC 30.3
Treated as the income of the previous year in

25A Recovery of Unrealized Rent
which it is realized and allow deduction 30%
Treated as the income of the previous year in

Treatment of receipt of arrears of
25A which it is received and allow deduction 30% of
rent
arrears.
Property owned by co-owners If their shares are defined, it is assessable in their

26
hands independently to the extent of their share
Person treated as owner even though no

document of title is registered in his name and
includes:
1. Transfer to spouse (except agreement to
live apart) and Transfer to a minor child
(except minor married daughter) without
adequate consideration.
2. Holder of Impartible estate
Deemed ownership 3. Member of Co-operative Society, Company
27 which has allotted house property
4. Part-performance of a contract u/s 53A of
the Transfer of Property Act (Holder of a
Power of Attorney)
5. Ownership of property is under dispute
6. Lessee of a property taken on a lease for a
period of not Less than 12 years [Other than
month to month or renewal of not more than
12 month]
7. Property constructed on a Leasehold Land.
(a) One Palace of Ex-ruler,

(b) Farm House,
(c) TWO self occupied property,
(d) Property used for business or profession,
Property Exempt from Tax
Section 10
(e) Property used for Charitable Purposes,
(f) House Property of a Local Authority or
approved scientific research association or
universities/educational institutions or any
registered trade union or any political party.

FINAL DT SATC 30.4
COMPUTATION OF INCOME UNDER THE HEAD HOUSE PROPERTY
Let-out for
Let-out Let-out Self- Property More than Portion of
full year
property property Occupied self- TWO Property let
kept vacant kept or Kept occupied Property Out and
for whole vacant Vacant for part of Self- Portion self
Particulars year for part u/s 23(2) the year Occupied Occupied
of arid let out (Area-wise)
the year for part of
the year
(Time-wise)
(1) (2) (2A) (3) (4) (5) (6)
Gross Annual ALV for
Value whole year
Higher of will be
Check u/s 23(1)(a)(b)
ALV compared
conditions (in proportion
[FR,MV,SR] NIL NIL with AR of
of Section TWO to the portion
or let-out
23(1)(c) Property like occupied)
AR less UR period u/s
Column 3 (at
23(1)(a)/(b)
the option of
the
Less: Paid basis Paid basis
Assessee)
Municipal Tax Paid basis Paid basis Paid basis NIL for whole but
Paid year (Proportionate)
Net Annual NAV (NAV) NAV NIL NAV NAV

Value
Less: Dedn. u/s
24
U/s 24(a):
30% x NAV NIL 30%xNAV NIL 30% x NAV 30%xNAV
Deduction@ 30%
Other
Properties
U/s 24(b): 30,000/- Interest for like Column 1
th
Interest + 1/5 [2,00,000 whole
PCPI No Limit No Limit No Limit in year (No No Limit
specific Ceiling
condition Limit)
s]

FINAL DT SATC 30.5
DETERMINATION OF ANNUAL VALUE IN DIFFIRENT SITUATION
(1) Where the property is let out throughout the previous year
GAV would be the higher of:
(a) Annual Letting Value (ALV) OR EXPECTED RENT OR
(b) Actual rent received or receivable [Less Unrealised Rent] during the year
ALV (or Expected Rent) means Municipal Valuation or Fair Rent (Market Rent), whichever
is more, subject to maximum of Standard Rent.
(i) Municipal Valuation
Higher
(ii) Fair Rent
Lower (ALV)
(iii) Std. Rent
Higher will be GAV.
(iv) Actual Rent [Less Unrealised Rent]
[Unrealised Rent – Conditions of Rule 4: (i) Tenancy Bonafide (ii) Tenant has vacant or Steps
have been taken (iii) Tenant is not in occupation of any other property (iv) Assessee has taken all
reasonable steps for the recovery of unpaid rent.]
(2) Where Let Out Property is vacant for part of the year [Section 23(1)(c)]
Where let out property is vacant for part of the year and owing to vacancy, the actual rent is lower
than the ALV, then the actual rent received or receivable will be the GAV of the property.
Step 1: Find ALV/Expected Rent (Reasonable Expected Rent) – 12 months
Step 2: Find out AR received or Receivable for 12 months after excluding UR only (not vacancy
loss) – assuming there is no vacancy
Step 3: Find out AR received or Receivable after excluding UR & loss due to Vacancy (Actual Rent
received)
Situation A: If ALV is higher than Rent amount computed as per STEP 2, then ALV is GAV
Situation B: If Rent computed as per STEP 2 is higher than ALV but Rent computed as per STEP 3 is
lower than ALV, then GAV is rent as computed in STEP 2
Situation C: If Rent computed in STEP 3 is higher than ALV, then rent so computed will be GAV.
(3) In case of TWO Self-Occupied Property or Unoccupied Property

GAV – NIL, M. Tax Deduction – NIL, Net Annual Value – NIL
Deduction u/s 24 (b): Interest on capital borrowed – ` 30,000 (Maximum limit) [Aggregate for 2
House]
Maximum Limit will be ` 2,00,000 [Aggregate for 2 House] – if –

a) Loan on or after 1.4.99
b) for Acquisition/Construction
c) Construction Completed within 5 years from the end of the financial year in which the
loan is taken,
d) Certificate

FINAL DT SATC 30.6
Note: 1. There is no upper limit on Interest u/s 24(b) if the property is Let out or DLO
2. Limit will be applicable after adding Current Year Interest with 1/5th of the Pre-construction
interest.
(4) In case of Deemed to be Let Out Property [Section 23(4)]
Where the assessee owns more than TWO property for self-occupation, then the income from
any TWO such property, at the option of the assessee, shall be computed under the self
occupied property category and its annual value will be NIL. The other self occupied/
unoccupied properties shall be treated as “deemed let out properties”.
(5) Where a house property is Let-out for Part of the year and Self-occupied for part of the year
[Time Wise Division]
(a) If a single unit of a property is self-occupied for part of the year and let-out for the remaining
part of the year, then the ALV for the whole year shall be taken into account for determining
the GAV.
(b) The ALV for the whole year shall be compared with the actual rent for the let out period
and whichever is higher shall be adopted as the GAV.
(6) Where a portion let out and a portion self-occupied [AREA WISE DIVISION]
(a) Income from any portion or part of a property which is let out shall be computed separately
under the “let out property” category AND the other portion or part which is self occupied shall
be computed under the “self-occupied property” category.
(b) There is no need to treat the whole property as a single unit for computation of income
from house property.
Deduction u/s 24(b) – Interest on borrowed capital – ACCRUAL BASIS
(a) loans borrowed for the acquisition, construction, repairs, renewal or reconstruction
(b) Interest relating to the year of completion of construction can be fully claimed in that year
irrespective of the date of completion.
(c) Interest on unpaid interest is not deductible.
(d) Pre Construction Period Interest: Interest payable on borrowed capital for the period
prior to the previous year in which the property has been acquired or constructed, can be
claimed as deduction.
Pre-acquisition/pre-construction period = Period Starting from the date of borrowing
and ending on the,
(i) 31st March immediately prior to the date of completion of construction or acquisition of
property, or,
(ii) Date of repayment of whole loan, whichever is earlier.
Period of Deduction: 1/5th of the interest of pre-acquisition or pre-construction period, for 5

consecutive years starting from the previous year in which the property is acquired or
constructed.
Deduction of 5 installment will be available even if the loan outstanding is repaid

before 5 year period

FINAL DT SATC 30.7
TREATMENT OF INCOME FROM CO-OWNED PROPERTY [SECTION 26]
1. Where property is owned by two or more persons, whose shares are definite and ascertainable,
then the income from such property cannot be taxed as income of an AOP.
2. Where the house property owned by co-owners is self occupied by each of the co-owners, the
annual value of the property of each co-owner will be NIL and each co-owner shall be entitled to a
deduction of ` 30,000 or ` 2,00,000, as the case may be.
3. Where the house property owned by co-owners is let out, the income from such property shall
be computed as if the property is owned by one owner and thereafter the income so computed
shall be apportioned amongst each co-owner as per their specific share.
House Property - CASE STUDY

No Notional Income for House Property Held as Stock in Trade
Following sub-section (5) shall be inserted in Section 23 by the Finance Act, 2017 w.e.f AY 18-19:
Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and
the property or any part of the property is not let during the whole or any part of the previous year, the
annual value of such property or part of the property, for the period up to TWO one year from the end
of the financial year in which the certificate of completion of construction of the property is obtained from
the competent authority, shall be taken to be NIL
[The Delhi High Court in case of CIT v. Ansal Housing & Construction Ltd. held that the assessee
engaged in business of construction and sale of flats is liable to pay tax on notional rent in respect of
unsold flats, owned by the assessee at the end of the relevant financial year if these flats are not let for
the whole of the previous year. Above amendment is introduced to provide relief to builders]
Assessee engaged in the Business of Letting out House Properties

“The income earned by an assessee engaged in the business of letting out of properties on rent
would be taxable as business income”
Recently, the Supreme Court in case of “Rayala Corporation Pvt. Ltd. v. ACIT” held that Income
from Letting out of Property on rent by an assessee engaged in the business of letting is assessable
as “Business Profits” u/s 28 and not as “Income from House Property” u/s 22 and there is no concept of
notional rent under the head “Profits and Gains of Business of profession”
Also, the Supreme Court in case of “Chennai Properties & Investment Ltd. v. CIT” held that where
the assessee company is incorporated with main objective, as stated in the MOA to acquire the
properties in the city & let out those properties and the assessee had rented out such properties, rental
income from such properties is a business income & cannot be taxed as Income from House Property
u/s 22.
(Earlier, we used to treat above income as Income from House Property)
CBDT Circular: Lease Rent from letting out buildings/developed space along with other amenties
in Industrial Park/SEZ
In case of an undertaking which develops, develops and operates or maintains and operates a notified
Industrial Park/SEZ, the income from letting out of premises/developed space along with other
amentities/facilities in such park/SEZ is to be charged to tax under the head ‘PGBP’.

FINAL DT SATC 30.8
CLASS NOTES

FINAL DT SATC 30A.1
Question – Set A
1. Mr. L is the owner of a commercial property let out at ` 40,000 p.m. The Municipal tax on the property is `
25,000 annually, 60% of which is payable by the tenant. This tax was actually paid on 15.4.2020. He had
borrowed a sum of ` 30 Lakhs from his cousin, resident in USA (in dollars) for the construction of the
property on which interest at 8% is payable. He has also received arrears of rent of ` 60,000 during the
year, which was not charged to tax in the earlier years. What is the Property Income of Mr. L for A.Y. 2020-
21?
Solution:
Assessee : Mr. L Previous Year : 2019-20 Assessment Year : 2020-21
Computation of Income from House Property
Particulars ` `
Let Out : So, Annual Value u/s 23(1)(a)/(b) = Actual Rent = ` 40,000×12 4,80,000
Less : Municipal Taxes Paid during the F.Y. 2019-20 NIL
Net Annual Value 4,80,000
Less : Deduction u/s 24
- 30% of NAV - ` 4,80,000 × 30% 1,44,000
- Interest on Housing Loan (Note) ` 30,00,000 × 8% 2,40,000 (3,84,000)
Income from House Property before considering Arrears of Rent 96,000
Arrears of Rent Received 60,000
Less : Deduction u/s 25A - 30% of Arrears received - ` 60,000 × 30% (18,000) 42,000
Net Income from House Property 1,38,000
Note: It is presumed that the tax has been deducted at source on the amount of interest payable outside
India.
2. Discuss the admissibility of deduction of Interest Paid on More Than One Loan Borrowed for Purchase or
Construction of same House.
Solution: There is no bar in Section 24 of the Income Tax Act regarding the number of loans on which interest is
allowable simultaneously. In fact ,the simple rule of the deduction of interest u/s 24 of the Income Tax Act is that
whatever be the interest paid or due on loan borrowed for purchase or construction of house is allowable as
deduction. So, whether you take loan from one bank or five banks , all loan should be utilised for buying or
constructing the house for allowance of interest paid to all the banks.
However, as far as self occupied house is concerned, the allowance of interest is limited to ` 2,00,000 per owner.
3. Can, the benefit of self-occupation of house property under section 23(2) of the Income-tax Act, 1961 be
denied to HUF on the ground that it cannot occupy a house property, being a fictional entity?
(Past CMA Question)
Solution:
Provision of Law: As per Section 23 (2) of the Income Tax Act, if the house consists of one or two house in the
occupation of owner for his own residence, the annual value of such house shall be taken to be nil.
Fact of the Case: The issue similar to present case decided in case of CIT vs. Hariprasad Bhojnagarwala (2012)
342 ITR 69 (Guj.) (Full Bench). The assessee, being a Hindu Undivided Family (HUF), claimed the benefit of self
occupation of a house property under section 23(2). However, the Assessing Officer did not accept the said claim
and denied the benefit of self occupation of house property by the HUF arguing that such benefit is available only
to the owner who can reside in his own residence i.e., only an individual assessee, who is a natural person, and
not to a imaginary assessable entity being HUF or a firm, etc.
Decision: On the above mentioned issue, the Gujarat High Court observed as follows:
That a firm, which is a fictional entity, cannot physically reside in a house property and therefore a firm
cannot claim the benefit of this provision, which is available to an assessable entity who can actually occupy
the house.
The HUF is a group of individuals related to each other i.e., a family comprising of a group of natural
persons. The said family can reside in the house, which belongs to the HUF. Since a HUF cannot consist
of artificial persons, it cannot be said to be a fictional entity.
Since singular includes plural, the word "owner" would include "owners" and the words "his own" used in
section 23(2) would include "their own".
Therefore, the Court held that the HUF is entitled to claim benefit of self-occupation of house property
under section 23(2) of income tax act.

FINAL DT SATC 30A.2
4. Jupiter Pharma Ltd., a pharmaceutical company, plans to collect "service charges" from the tenants of the
buildings owned by it. The service agreement is dependent upon the rental agreement, which is executed
by the company with the tenants. Services provided under the service agreement are in respect of
staircase of the building, lift, common entrance, main road leading to the building through the compound,
drainage facilities, open space in/around the building, air condition facility, etc. The company wishes to
know whether the service charges collected will be taxed under the head 'Income from house property' or
as income from other sources. Advise them suitably. [PAST CMA Questions]
Answer:
Taxability of service charges collected from tenants
The Bombay High Court had to consider a similar situation in the case of CIT vs. J.K. Investors (Bom) Ltd.
(2012) 211 Taxman 383 (Bom). The Bombay High Court observed and held thus:
i) It is an undisputed fact that no services are being provided by the assessee to the occupants of its property
and that the service charges have to be included as a part of its rental income.
ii) The test to determine whether the service agreement is different from the rent agreement would be whether
the service agreement could stand independently of the rent agreement. In the instant case, the service
agreement is dependent upon the rent agreement, as in the absence of the rent agreement there could be no
service agreement.
iii) It may also be pointed out that according to the assessee, the services being provided under the service
agreement are in respect of staircase of the building, lift, common entrance, main road leading to the building
through the compound, drainage facilities, open space in/around the building, air condition facility, etc. These
are services which are not separately provided, but go along with the occupation of the property.
iv) Therefore, the amounts received as service charges are to be considered as a part of the rent received
and subjected to tax under the head 'Income from house property'.
Applying the ratio of the above judgment, the advice will be that the service charges collected will be taxed
as income from house property and not as income from other sources.

FINAL DT SATC 30B.1
PRACTICAL QUESTION – SET B

1) Anirudh has a property whose municipal valuation is ` 1,30,000 p.a. The fair rent is ` 1,10,000 p.a. and
the standard rent fixed by the Rent Control Act is ` 1,20,000 p.a. The property was let out for a rent of `
11,000 p.m. throughout the previous year. Unrealised rent was ` 11,000 and all conditions prescribed by
Rule 4 are satisfied. He paid municipal taxes @10% of municipal valuation. Interest on borrowed capital
was ` 40,000 for the year. Compute the income from house property of Anirudh.
2) Compute Income from house property of Mr. X, having house property in Delhi, for PY 2019-20:
Municipal Valuation : ` 1,75,000 PA
Fair Rent : ` 2,50,000 PA
Std. Rent : ` 2,10,000 PA
Actual Rent : ` 22,500 Per Month
Municipal taxes are ` 40,000 PA and Repairs towards the house are ` 23,000. Also X has taken a loan of
` 8,00,000 @ 10% on 1.7.2016 for construction of house which is completed on 20.2.2019. The loan is
still not paid.
3) Compute Income from house property of Mr Yatin, having house property in Delhi, for P.Y. 2019-20
(Let out for 10 Months and Self occupied for 2 month):
Municipal Valuation : ` 3,15,000 P.A.
Fair Rent : ` 3,50,000 P.A.
Std. Rent : ` 3,20,000 P.A.
Actual Rent (Let out for 10 Month) : ` 25,000 P.M.
Municipal taxes are 20% of MV and half of the amount is paid. Yatin also has taken a loan of ` 10,00,000
@ 10% on 1.7.2014 which is fully repaid on 31.12.2017 and construction of house is completed on
20.4.2018.
4) Smt. Rajni owns a house property at Adyar in Kolkata. The municipal value of the property is `
5,00,000, fair rent is ` 4,20,000 and standard rent is ` 4,80,000. The property was let-out for ` 50,000
p.m. up to December 2019. Thereafter, the tenant vacated the property and Smt. Rajni used the house for
self-occupation. Rent for the months of November and December 2019 could not be realised in spite of
the owner’s efforts. All the conditions prescribed under Rule 4 are satisfied. She paid municipal taxes
@12% during the year. She had paid interest of ` 25,000 during the year for amount borrowed for repairs
for the house property. Compute her income from house property for the AY 2020-21.
5) X owns a residential house property. It has two equal residential units- Unit 1 and Unit 2. While
Unit 1 is self – occupied by X for his residential purpose, Unit 2 is let out on rent being ` 6,000 per month,
rent of 2 months could not be recovered). Municipal value of the property is ` 1,30,000, standard rent is `
1,25,000 and fair rent is ` 1,40,000. Municipal tax is imposed @ 12% which is paid by X. Other expenses
for the previous year 2019-20 being repairs: ` 250, insurance: ` 600, interest on capital (borrowed during
1998) for constructing the property: ` 63,000. Find the income of X for the assessment year 2020-21
on the assumption that income of X from other sources is ` 1,80,000.
6) Mr. X owns one residential house in Mumbai. The house is having two units. First unit of the house is self
occupied by Mr. X and another unit is rented for ` 8,000 p.m. the rented unit was vacant for 2 months
during the year. The particulars of house for the previous year 2019-20 are as under:
Standard rent ` 1,62,000 p.a.

Municipal valuation ` 1,90,000 p.a.
Fair rent ` 1,85,000 p.a.
Municipal tax 15% of municipal valuation
Light and water charges ` 500 p.m
Interest on borrowed capital ` 1,500 p.m.
Lease money ` 1,200 p.a.
Insurance charges ` 3,000 p.a.
Repairs ` 12,000 p.a.
Compute income from house property of Mr. X for the AY 2020-21.

FINAL DT SATC 30B.2
Class Notes

FINAL DT SATC 30C.1
HOUSE PROPERTY – PRACTICAL SOLUTION

1. Computation of Income from house property of Mr. Anirudh for A.Y. 2020-21
Computation of GAV
Step 1 Compute ALV
ALV = Higher of MV of ` 1,30,000 p.a. and FR of ` 1,10,000 p.a.,
but restricted to SR of ` 1,20,000 p.a. 1,20,000
Step 2 Compute actual rent received/receivable
Actual rent received/receivable less unrealized rent as per
Rule 4 = 1,32,000 - 11,000 1,21,000
Step 3 Compare ALV of ` 1,20,000 and Actual rent
received/receivable of ` 1,21,000.
Step 4 GAV is the higher of ALV and Actual rent
received/receivable 1,21,000
Gross Annual Value (GAV) 1,21,000

Less: Municipal taxes (paid by the owner during the previous
year) = 10% of ` 1,30,000 13,000
Net Annual Value (NAV) = 1,21,000 - 13,000 1,08,000

(a) 30% of NAV 32,400
(b) Interest on borrowed capital
(actual without any ceiling limit) 40,000 72,400
Income from house property (1,08,000 - 32,400 - 40,000) 35,600
2. GAV – 270,000; NAV – 230,000; Deduction u/s 24(a) - 69,000 + u/s 24(b) Interest – 28,000 (1/5 of 140,000) +
80,000 Income from House property – 53,000
3. GAV – 3,20,000. Mun tax – 31,500 (Half Paid), Pre Construction Interest – 3,50,000 [42 month]
Income from House Property – 131950.
4. Computation of income from house property of Smt. Rajni for the A.Y. 2020-21
Particulars Amount in rupees
Computation of GAV
Step 1. Compute ALV for the whole year
ALV = Higher of MV of ` 5,00,000 and FR of
` 4,20,000, but restricted to SR of ` 4,80,000 4,80,000
Step 2. Compute Actual rent received/receivable
Actual rent received/receivable for the period let out less
unrealized rent as per Rule 4 = (50000x9)-
(50000x2)=4,50,000-1,00,000= 3,50,000
Step 3. Compare ALV for the whole year with the actual rent
received/receivable for the let out period i.e. 4,80,000
and 3,50,000
Step 4. GAV is the higher of ALV computed for the whole year
and Actual rent received/receivable computed for the letout
period. 4,80,000
Gross Annual Value (GAV) 4,80,000

Less: Municipal taxes (paid by the owner during the previous
year) = 12% of ` 5,00,000 60,000
Net Annual Value (NAV) = 4,80,000-60,000 4,20,000
(a) 30% of NAV = 30% of ` 4,20,000 1,26,000
(b) Interest on borrowed capital 25,000 1,51,000
Income from house property 2,69,000

FINAL DT SATC 30C.2
5. Unit 1 - Self-occupied `
Gross annual value Nil
Less: Municipal tax Nil
Net annual value Nil
Less: Interest on borrowed capital [1 /2 of ` 63,000 or ` 30,000 whichever is lower] 30,000
Income of Unit 1 (-) 30,000
Unit 2- Let out

Municipal value (50% of ` 1,30,000) (MV) 65,000
Fair rent (50% of ` 1,40,000) (FR) 70,000
Standard rent (50% of ` 1,25,000) (SR) 62,500
Annual rent (` 6,000 X 12) 72,000
Unrealised rent 12,000
Gross Annual Value

Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject
to maximum of SR] 62,500
Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss
due to vacancy 60,000
Step III - Amount computed in Step I or Step II, whichever is higher 62,500
Step IV - Loss due to vacancy NIL
Step V - Gross annual value is Step III minus Step IV 62,500
Less: Municipal tax (50% of 12% of ` 1,30,000) (7,800)
Net annual value 54,700
Less: Deduction under section 24
Standard deduction (30% of ` 54,700) (16,410)
Interest on borrowed capital (50% of ` 63,000) (31,500)
Income of Unit 2 6,790
Computation of income of X `
Unit 1: ` (-) 30,000
Unit 2: ` 6,790 (-) 23,210
Other income 1,80,000
Net income 1,56,790
6. Computation of Income chargeable under the head 'Income from House Property" of Mr. X for the
Particulars 50 % self occupied 50% let out
Gross Annual Value [Section 23(1)(c) - Vacancy] Nil 80,000
Less: Municipal taxes Nil 14,250
Net Annual Value Nil 65,750
Less: Deductions under section 24 19,725
(a) Statutory deduction @ 30% of NAV Nil
(b) Interest on borrowed capital for purpose of house 9,000 9,000 9,000 28,725
(9,000) 37,025
Income from house property 28,025
Note: It has been assumed that both the units are of equal area. Thus, both the units occupy half area of the
total residential house in Mumbai.

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THIS BOOK HAS BEEN A REALITY

ONLY BECAUSE OF MY FAMILY &

Contact: 85272 30445 (Call or Whatsapp); 01147542530

I dedicate this book to my beloved late grandparents & Papa.

Updated as on 21.02.2020 (10th Edition – 1st Print)

“One more step towards success”

S. No. Particulars Page No.

21 Depreciation 21.1 – 21.12

22 PGBP 22.1 – 22.48

25 Mutual Association 25.1 – 25.04

26 Cooperative Society 26.1 – 26.04

27 HUF 27.1 – 27.06

28 ICDS 28.1 – 28.32

29 Salary 29.1 – 29.12

30 House Property 30.1 – 30.08

Depreciation [Section 32]

Some Important Points:

8) Sec. 53A of Transfer Of Property Act: 9) Deduction on account of depreciation shall

SIGNIFICANCE OF DATE OF PURCHASE (EFFECT OF TIME ON DEPRECIATION)

[There is no significance of date of sale for computation of depreciation]

SURAJ AGRAWAL TAX CLASS, LAXMINAGAR I 01147542530 I 85272 30445 I

Block of Assets [Section 2(11)]:

WRITTEN DOWN VALUE [Section 43(6)]

WRITTEN DOWN VALUE OF BLOCK OF ASSETS

WDV for the purpose of depreciation xxx

SURAJ AGRAWAL TAX CLASS, LAXMINAGAR I 01147542530 I 85272 30445 I

II Furniture and Fittings

Block 1. (a) Plant & machinery (General rate) 15%

Block 2. Motors buses, motor lorries, motor taxis used in a business

Block 3. Energy Saving Devices (as specified)

Air, Water Pollution control equipments, Solid waste

Block 4. Ships or Vessels 20%

PART B INTANGIBLE ASSETS

Now, there is no block with depreciation rate higher than 40%.

DIFFERENT SITUATION FOR DEPRECIATION CALCULATION:

Section 43(1) - IMP

SURAJ AGRAWAL TAX CLASS, LAXMINAGAR I 01147542530 I 85272 30445 I

SECTION 50: SHORT-TERM CAPITAL GAINS SHALL BE COMPUTED AS UNDER:

Full value of consideration received /receivable xxx

Less: Aggregate of following amounts:

Compensation is determined on 28.02.2020 and received on 31.12.2020.

Assessment Year 2021-22

SURAJ AGRAWAL TAX CLASS, LAXMINAGAR I 01147542530 I 85272 30445 I

Case A Building X sold for ` 20,000 on 1/5/19

Assume in all cases new building is charged to depreciation @ 10%.

Computation of depreciation for the AY 2020-21

SURAJ AGRAWAL TAX CLASS, LAXMINAGAR I 01147542530 I 85272 30445 I

Depreciation under Straight Line Method (SLM) [Section 32(1)(i)]

Terminal Depreciation [Section 32(1)(iii)]

In the case of any building, machinery, plant or furniture or intangible assets

Balancing Charge [Section 41(2)]

In the case of any building, machinery, plant or furniture or intangible assets

SURAJ AGRAWAL TAX CLASS, LAXMINAGAR I 01147542530 I 85272 30445 I

Such additional depreciation will not be available in respect of:

SURAJ AGRAWAL TAX CLASS, LAXMINAGAR I 01147542530 I 85272 30445 I

However, additional depreciation shall not be allowed in respect of:

Additional depreciation @35% to be allowed to assessees setting up manufacturing

SURAJ AGRAWAL TAX CLASS, LAXMINAGAR I 01147542530 I 85272 30445 I

SURAJ AGRAWAL TAX CLASS, LAXMINAGAR I 01147542530 I 85272 30445 I