Profits and Gains from Business and Profession

Section 28 to 44DB of Income Tax Act, 1961

Contents
Charging Section ............................................................................................................................................................. 3
Section 28 ...................................................................................................................................................................... 3
Important Deductions ................................................................................................................................................. 4
Section 30 ...................................................................................................................................................................... 4
Section 31 ...................................................................................................................................................................... 4
Section 32 ...................................................................................................................................................................... 4
Definitions.................................................................................................................................................................. 4
Conditions for claiming Depreciation............................................................................................................. 5
Method of Depreciation........................................................................................................................................ 5
Additional Depreciation ....................................................................................................................................... 5
Capital Gains on sale of Depreciable Assets ................................................................................................. 6
Section 32AD................................................................................................................................................................ 7
Section 35 ...................................................................................................................................................................... 8
Provision..................................................................................................................................................................... 8
Capital Expenditure ............................................................................................................................................... 8
Summary .................................................................................................................................................................... 8
Section 35AD................................................................................................................................................................ 9
Nature of Deduction............................................................................................................................................... 9
Specified Businesses .............................................................................................................................................. 9
Date of Commencement of specified business......................................................................................... 10
Section 35D ................................................................................................................................................................ 10
Situation................................................................................................................................................................... 10
Deduction ................................................................................................................................................................ 11
Preliminary Expenditure .................................................................................................................................. 11
Qualifying limit ..................................................................................................................................................... 11
Section 35DDA ......................................................................................................................................................... 12
Section 36 ................................................................................................................................................................... 12
Bad Debts ................................................................................................................................................................ 13
Expenditure on promoting family planning ............................................................................................. 13
Section 37 ................................................................................................................................................................... 13
Conditions to claim deduction u/s 37 ......................................................................................................... 14
Inadmissible Expenses ............................................................................................................................................ 14

Page 1 of 25
 Section 40A ................................................................................................................................................................ 14
40A(2) Payments to specified persons ....................................................................................................... 14
Cash Expenditures ............................................................................................................................................... 15
40(A)(7) Gratuity ................................................................................................................................................. 16
Mark-to-market losses ....................................................................................................................................... 16
Section 43B ................................................................................................................................................................ 16
Exclusion ................................................................................................................................................................. 17
Interest on loan ..................................................................................................................................................... 17
Section 44AA ............................................................................................................................................................. 18
Specified professions [44AA(1)].................................................................................................................... 18
Others [44AA(2)] ................................................................................................................................................. 18
Books specified ..................................................................................................................................................... 19
Period of custody ................................................................................................................................................. 19
Section 44AB ............................................................................................................................................................. 19
Background ............................................................................................................................................................ 19
Provision.................................................................................................................................................................. 19
Non-applicability.................................................................................................................................................. 20
Section 44AD............................................................................................................................................................. 20
Applicability ........................................................................................................................................................... 20
Deductions .............................................................................................................................................................. 20
Section 44ADA ......................................................................................................................................................... 21
Applicability ........................................................................................................................................................... 21
Presumptive Profits ............................................................................................................................................ 21
Deductions .............................................................................................................................................................. 21
Miscellaneous (Theory) .......................................................................................................................................... 21
Section 33AB ............................................................................................................................................................. 21
Section 35CCA .......................................................................................................................................................... 22
Section 35CCC ........................................................................................................................................................... 23
Section 35CCD .......................................................................................................................................................... 23
Important Case Laws................................................................................................................................................. 23

Page 2 of 25
Charging Section

Section 28
Incomes chargeable under the head of Business and Profession

1. the profits and gains of any business or profession which was carried on by the assessee
at any time during the previous year;

2. income derived by a trade, professional or similar association from specific services

performed for its members;

3. profits on sale of a licence granted under the Imports (Control) Order, 1955;

4. cash assistance (by whatever name called) received or receivable by any person against
exports under any scheme of the Government of India;

5. any profit on the transfer of the Duty Free Replenishment Certificate;

6. any duty of customs or excise re-paid or re-payable as drawback to any person against
exports under the Customs and Central Excise Duties Drawback Rules, 1971;

7. the value of any benefit or perquisite, whether convertible into money or not, arising from
business or the exercise of a profession;

8. any interest, salary, bonus, commission or remuneration, by whatever name called, due
to, or received by, a partner of a firm from such firm;

9. any sum, whether received or receivable, in cash or kind, under an agreement for—
a. not carrying out any activity in relation to any business or profession; or

b. not sharing any know-how, patent, copyright, trade-mark, licence, franchise or

any other business or commercial right of similar nature or information or
technique likely to assist in the manufacture or processing of goods or provision
for services;

10. any sum received under a Keyman insurance policy including the sum allocated by way
of bonus on such policy;

11. the fair market value of inventory as on the date on which it is converted into, or treated
as, a capital asset;

Page 3 of 25
Important Deductions

Section 30
Rent, rates, taxes, repairs and insurance for premises

Conditions:
1. Premise can either be owned by the assessee or taken on lease.
2. However, such premise should be occupied by the assessee and should be used for his
business/profession.
3. If premises are occupied by the assessee:
a. as a tenant, then the rent paid for such premises and further the cost of repairs to the
premises, the amount paid on account of such repairs can be claimed.
b. otherwise than as a tenant, then the amount paid on account of current repairs to the
premises can be claimed.
4. Any sums paid on account of land revenue, local rates or municipal taxes can be claimed as
deduction.
5. The amount of any premium paid in respect of insurance against risk of damage or
destruction of the premises can be claimed as deduction.
6. The expenditure should be of revenue in nature (capital expenditures cannot be claimed).

Section 31
Repairs and insurance of machinery, plant and furniture

Conditions:
1. Such machinery, plant or furniture should be used for the purposes of the business or
profession of assessee.
2. The expenditure should be of revenue in nature (capital expenditures cannot be claimed).
3. Premium paid in respect of insurance against risk of damage or destruction of such assets
can also be claimed.

Section 32
Depreciation

Definitions

Block of Assets (Sec 2(11))

"block of assets" means 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, licences, franchises
or any other business or commercial rights of similar nature,
in respect of which the same percentage of depreciation is prescribed.

Page 4 of 25
Conditions for claiming Depreciation
 Asset should be either,
o buildings, machinery, plant or furniture, being tangible assets, or
o know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature, being intangible assets.
 Such asset should be owned, wholly or partly, by the assessee, and
 Such asset should be used for the purposes of the business or profession.

All the above 3 conditions should be satisfied for an assessee to claim depreciation u/s 32 of
Income Tax Act, 1961.

Method of Depreciation
 In the Income Tax Act 1961, the depreciation is on a percentage basis and it is not
dependent on the useful lives of assets.
 Depreciation under Income Tax Act is not provided on a proportionate basis.
 Depreciation is calculated with respect to date of put to use in the assessee’s business or
profession.
 Depreciation Rates are as prescribed under the Income Tax Act, 1961.
 Calculation of Percentage of Depreciation
o In the case of assets of an undertaking engaged in generation or generation and
distribution of power, such percentage on the actual cost,
o In the case of any block of assets, such percentage on the written down value.
 If such 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 in that
previous year, then depreciation shall be restricted to 50% of the amount
calculated at the percentage.

Additional Depreciation
The Additional depreciation can be claimed over and above the normal depreciation.

Who can claim the additional depreciation?

Additional depreciation can be claimed by an assessee engaged in the business of:
a. manufacture or production of any article or thing or
b. generation, transmission or distribution of power.

On what can the additional depreciation be claimed?

Such additional depreciation can be claimed on any new machinery or plant (other than ships
and aircraft), which has been acquired and installed after the 31st day of March, 2005.

What is the rate of such additional depreciation?

 The rate is 20% of the actual cost of such machinery or plant.
 The rate of additional depreciation will be 35% if an assessee sets up an undertaking or
enterprise for manufacture or production of any article or thing, on or after the 1 st April,
2015 in any backward area in the states of Andhra Pradesh, Telangana, Bihar or West
Bengal.

Page 5 of 25
Circumstances in which additional depreciation cannot be claimed
1. If machinery or plant which, before its installation by the assessee, was used either within
or outside India by any other person OR
2. If machinery or plant is installed in any office premises or any residential accommodation,
including accommodation in the nature of a guest-house OR
3. On any office appliances or road transport vehicles OR
4. On 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 ‘Profits and gains of business or profession’ of any one previous year.

Capital Gains on sale of Depreciable Assets

Conditions when capital gains arise

Section 50 of the Income tax Act, 1961 provides conditions for charging capital gains on transfer
of depreciable assets.
1. When full value of the consideration received or accruing as a result of the transfer of the
asset together with the full value of such consideration received or accruing as a result of
the transfer of any other capital asset falling within the block of the assets during the
previous year, exceeds the aggregate of:
a. expenditure incurred wholly and exclusively in connection with such transfer or
transfers,
b. the written down value of the block of assets at the beginning of the previous year,
and
c. the actual cost of any asset falling within the block of assets acquired during the
previous year.
2. Where any block of assets ceases to exist as such for the reason that all the assets in that
block are transferred during the previous year.

On what is the capital gains computed?

Capital Gains is computed on the excess of sale proceeds over the cost of acquisition of such
depreciable assets(block).

Capital Gains = Net Sale Proceeds – Cost of Acquisition

What is the cost of acquisition of such depreciable assets?

As per Section 50A of Income tax Act, 1961, cost of acquisition shall be the written down value
of the block of assets at the beginning of the previous year, as increased by the actual cost of any
asset falling within that block of assets, acquired by the assessee during the previous year.

Cost of Acquisition = Opening WDV + Additions put to us (both >=180 days and < 180 days)

What is the nature of such capital gains?

Such gain on transfer of depreciable asset is considered as short-term capital gain.

Are gains computed for each individual asset?

Capital Gains, similar to depreciation, are calculated block-wise and not on individual assets.

Page 6 of 25
Section 32AD
Investment in new plant or machinery in notified backward areas in certain States

Conditions
Where an assessee,
 sets up an undertaking or enterprise for manufacture or production of any article or thing,
on or after the 1st day of April, 2015 in any backward area notified by the Central
Government in this behalf, in the States of Andhra Pradesh or Bihar or Telangana or West
Bengal, and
 acquires and installs any new asset for the purposes of the said undertaking or enterprise,
 during the period beginning on the 1st day of April, 2015 and ending before the 1st day
of April, 2020

Deduction available
The deduction eligible is of a sum equal to 15% of the actual cost of such new asset for the
assessment year relevant to the previous year in which such new asset is installed.

Precautions
 Such new asset acquired and installed by the assessee should not be sold or otherwise
transferred within a period of five years from the date of its installation.
 If such asset is sold or transferred within the above period of 5 years, the amount of
deduction allowed in respect of such new asset shall be deemed to be the income of the
assessee chargeable under the head
o "Profits and gains of business or profession",
o “Capital Gains” for the remaining excess over the cost of such new asset.

New Asset
For the purposes of this section, "new asset" means any new plant or machinery (other than a
ship or aircraft) but does not include—
a. any plant or machinery, which before its installation by the assessee, was used either
within or outside India by any other person
b. any plant or machinery installed in any office premises or any residential accommodation,
including accommodation in the nature of a guest house;
c. any office appliances including computers or computer software;
d. any vehicle; or
e. 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.

Page 7 of 25
Section 35
Expenditure on scientific research

Provision
1. Deduction is available on expenditure incurred and/or contributions made for scientific
research purposes.
2. Such scientific research has to be related to the business of the assessee.

Capital Expenditure

1. Capital Expenditure is allowed as a deduction in the year in which such expenditure is

incurred.
2. Where Capital Expenditure is incurred prior to the commencement of business, any
capital expenditure incurred with 3 years immediately preceding the commencement of
business shall be deemed to have been incurred in the year of commencement of business
and hence is allowable as a deduction.
3. Section 35 specifically prohibits deduction on capital expenditure incurred on acquisition
on land whether the land is acquired as such or as part of any property.
4. No depreciation or additional depreciation u/s 32 shall be eligible to be claimed as
deduction for those capital assets (which are capital expenditure) on which deduction is
claimed u/s 35.
5. Excess of capital expenditure which is unabsorbed by the business profits of the assessee
can be carried forward in the subsequent years without any time limit for set-off.

Summary

Section Particulars Deduction

35(1)(i) Revenue expenditure on scientific research related to assessee’s 100%
business
35(1)(ii) Payment to notified approved research association/ university/ 150%
college/ institutions for scientific purpose
35(1)(iia) Payment to approved Indian company for scientific research 100%
35(1)(iii) Payment to notified approved research association/ university/ 100%
college/ institutions for social science and statistical research
35(1)(v) Capital expenditure on scientific research related to assessee’s 100%
business
35(2AA) Approved National Laboratory/University/IIT/specified person 150%
for scientific research undertaken by an approved programme
35(2AB) Expenditure by a company engaged in the business of bio- 150%
technology or any business of production or manufacture of article
or thing on approved in-house research and development facility

Page 8 of 25
Section 35AD
Deduction in respect of expenditure on specified business

Nature of Deduction
 Assessee can claim the deduction of the whole of any expenditure of capital nature
incurred, wholly and exclusively, for the purposes of any specified business carried on by
him during the previous year in which such expenditure is incurred by him
 Expenditure prior to commencement of operations shall be allowed as deduction during
the previous year in which he commences operations of his specified business, if the
amount is capitalised in the books of account of the assessee on the date of
commencement of its operations.

Specified Businesses
"specified business" means any one or more of the following business, namely:
1. setting up and operating a cold chain facility
2. setting up and operating a warehousing facility for storage of agricultural produce
3. laying and operating a cross-country natural gas or crude or petroleum oil pipeline
network for distribution, including storage facilities being an integral part of such
network
4. building and operating, anywhere in India, a hotel of two-star or above category as
classified by the Central Government
5. building and operating, anywhere in India, a hospital with at least one hundred beds
for patients
6. developing and building a housing project under a scheme for slum redevelopment or
rehabilitation framed by the Central Government or a State Government, as the case may
be, and notified by the Board (CBDT) in this behalf in accordance with the guidelines as
may be prescribed;
7. developing and building a housing project under a scheme for affordable housing framed
by the Central Government or a State Government, as the case may be, and notified by the
Board in this behalf in accordance with the guidelines as may be prescribed
8. production of fertilizer in India
9. setting up and operating an inland container depot or a container freight station
notified or approved under the Customs Act, 1962 (52 of 1962)
10. bee keeping and production of honey and beeswax
11. setting up and operating a warehousing facility for storage of sugar
12. laying and operating a slurry pipeline for the transportation of iron ore
13. setting up and operating a semi-conductor wafer fabrication manufacturing unit
notified by the Board in accordance with such guidelines as may be prescribed
14. developing or maintaining and operating or developing, maintaining and operating a new
infrastructure facility

Page 9 of 25
Date of Commencement of specified business

SL No Nature of Business Date of

commencement
1 laying and operating a cross-country natural gas pipeline on or after the 1st day
network for distribution, including storage facilities being of April, 2007
an integral part of such network.
2 building and operating a new hotel of two-star or above on or after the 1st day
category as classified by the Central Government. of April, 2010
3 building and operating a new hospital with at least one on or after the 1st day
hundred beds for patients of April, 2010
4 developing and building a housing project under a scheme on or after the 1st day
for slum redevelopment or rehabilitation framed by the of April, 2010
Central Government or a State Government, as the case may
be, and which is notified by the Board in this behalf in
accordance with the guidelines as may be prescribed
5 new plant or in a newly installed capacity in an existing plant on or after the 1st day
for production of fertilizer of April, 2011
6 setting up and operating an inland container depot or a on or after the 1st day
container freight station notified or approved under the of April, 2012
Customs Act, 1962
7 Bee keeping and production of honey and beeswax on or after the 1st day
of April, 2012
8 setting up and operating a warehousing facility for storage on or after the 1st day
of sugar of April, 2012
9 laying and operating a slurry pipeline for the transportation on or after the 1st day
of iron ore of April, 2014
10 setting up and operating a semi-conductor wafer fabrication on or after the 1st day
manufacturing unit, and which is notified by the Board in of April, 2014
accordance with such guidelines as may be prescribed
11 developing or operating and maintaining or developing, on or after the 1st day
operating and maintaining, any infrastructure facility of April, 2017
12 all other cases on or after the 1st day
of April, 2009

Section 35D
Amortisation of Preliminary Expenses

Situation
Preliminary expenditure pertaining to business of assessee
 before the commencement of his business or
 after the commencement of his business, in connection with the extension of his
undertaking or in connection with his setting up a new unit
is eligible for deduction under this Section.

Page 10 of 25
Deduction
An amount equal to one-fifth of such preliminary expenditure is eligible as deduction u/s 35D
for each of the five successive previous years.

For example, if ABC Pvt Ltd incurs preliminary expenses of Rs. 1,00,000 in books of accounts for
financial year 2019-20, then an amount of Rs. 20,000 (1/5th) will be allowed as deduction in financial
years 2019-20, 2020-21, 2020-22, 2023-24 and 2024-25.
Preliminary Expenditure
 expenditure in connection with:
o preparation of feasibility report,
o preparation of project report,
o conducting market survey or any other survey necessary for the business of the
assessee,
o engineering services relating to the business of the assessee,
 legal charges for drafting any agreement between the assessee and any other person for
any purpose relating to the setting up or conduct of the business of the assessee,
 where the assessee is a company, also expenditure:
o by way of legal charges for drafting the Memorandum and Articles of Association
of the company,
o on printing of the Memorandum and Articles of Association,
o by way of fees for registering the company under the provisions of the Companies
Act,
o in connection with the issue, for public subscription, of shares in or debentures of
the company, being underwriting commission, brokerage and charges for
drafting, typing, printing and advertisement of the prospectus.

Qualifying limit
Where the aggregate amount of the expenditure referred to in sub-section (2) exceeds an amount
calculated at 5%
 of the cost of the project, or
 where the assessee is an Indian company, at the option of the company, of the capital
employed in the business of the company,
the excess expenditure shall be ignored for claiming deduction.

Cost of Project
Cost of Project means the actual cost of the fixed assets, being land, buildings, leaseholds, plant,
machinery, furniture, fittings and railway sidings (including expenditure on development of land
and buildings) which are shown in the books of the assessee as on the last day of the previous
year in which
 the business of the assessee commences or
 extension of such undertaking is complete/new unit commences production or
operations, as the case may be

Page 11 of 25
Capital Employed
Capital employed means the aggregate of the issued share capital, debentures and long-term
borrowings as on the last day of the previous year in which
 the business of the company commences or
 extension of such undertaking is complete/new unit commences production or
operations, as the case may be

Section 35DDA
Amortisation of expenditure incurred under voluntary retirement scheme

 Where an assessee incurs any expenditure in any previous year by way of payment of any
sum to an employee in connection with his voluntary retirement, in accordance with any
scheme or schemes of voluntary retirement,
o one-fifth of the amount so paid shall be deducted in computing the profits and
gains of the business for that previous year, and
o the balance shall be deducted in equal instalments for each of the four
immediately succeeding previous years
 No deduction shall be allowed in respect of the above expenditure under any other
provision of this Act.

Section 36
Other Deductions

The following deductions are covered u/s 36:

 premium paid in respect of insurance against risk of damage or destruction of stocks or stores
used for the purposes of the business or profession,
 any sum paid to an employee as bonus or commission for services rendered, where such sum
would not have been payable to him as profits or dividend if it had not been paid as bonus or
commission,
 interest paid in respect of capital borrowed for the purposes of the business or profession
 any sum paid by the assessee as an employer by way of contribution towards a recognised
provident fund or an approved superannuation fund, subject to such limits as may be
prescribed for the purpose of recognising the provident fund or approving the
superannuation fund, as the case may be,
 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 ten per cent of the salary of the employee in the previous year
 in respect of animals which have been used for the purposes of the business or profession
otherwise than as stock-in-trade and have died or become permanently useless for such
purposes, the difference between the actual cost to the assessee of the animals and the
amount, if any, realised in respect of the carcasses or animals
 any expenditure bona fide incurred by a company for the purpose of promoting family
planning amongst its employees
 amount of any bad debt or part thereof which is written off as irrecoverable in the accounts
of the assessee for the previous year

Page 12 of 25
 any amount of banking cash transaction tax paid by the assessee during the previous year on
the taxable banking transactions entered into by him
 an amount equal to the securities transaction tax paid by the assessee in respect of the taxable
securities transactions entered into in the course of his business during the previous year, if
the income arising from such taxable securities transactions is included in the income
computed under the head Profits and gains of business or profession
 an amount equal to the commodities transaction tax paid by the assessee in respect of the
taxable commodities transactions entered into in the course of his business during the
previous year, 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

Bad Debts
Following conditions are to be satisfied to claim a deduction for bad debts
 such debt or part thereof should have 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 represents money lent in the ordinary course of the business
of banking or money-lending which is carried on by the assessee
 if the amount ultimately recovered on any such debt or part of debt is less than the difference
between the debt or part and the amount so deducted, the deficiency shall be deductible in
the previous year in which the ultimate recovery is made
 Provision for bad debts are not allowed as a deduction. In other words, only actual bad debts
are eligible for deduction

Expenditure on promoting family planning

 Only the assessee who is a company is eligible to claim this deduction
 Promotion of family planning should be among the employees of the company
 where such expenditure or any part thereof is of a capital nature,
o one-fifth of such expenditure shall be deducted for the previous year in which it was
incurred; and
o the balance thereof shall be deducted in equal instalments for each of the four
immediately succeeding previous years
 Unabsorbed expenditure can be carried forward in the succeeding years for set-off without
any time limit
 Capital expenditure claimed as a deduction in this section should be reduced from the cost of
block of assets for calculation of depreciation

Section 37
General Deductions

Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being
in the nature of capital expenditure or personal expenses of the assessee), laid out or expended
wholly and exclusively for the purposes of the business or profession shall be allowed in
computing the income chargeable under the head Profits and gains of business or profession.

Page 13 of 25
Conditions to claim deduction u/s 37
 Such expenditure should be of revenue in nature
 Such expenditure should be incurred wholly and exclusively for business/profession
 Such expenditure incurred by an assessee should not be for a purpose which is an offence or
which is prohibited by law
 Any expenditure incurred by an assessee on the activities relating to corporate social
responsibility referred to in section 135 of the Companies Act, 2013 is not eligible for a
deduction u/s 37.

Inadmissible Expenses

Section 40A
Expenses or payments not deductible in certain circumstances

40A(2) Payments to specified persons

Where the assessee incurs any expenditure in respect of which payment is made to specified
persons and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable
having regard to the fair market value of the goods, services or facilities for which the payment
is made or the legitimate needs of the business or profession of the assessee or the benefit derived
by or accruing to him therefrom, then expenditure so considered by him to be excessive or
unreasonable shall not be allowed as a deduction.

Assessee’s status Specified person(s)

Individual any relative of the assessee

Company, firm, association of any director of the company, partner of the firm, or
persons or HUF member of the association or family, or any relative of
such director, partner or member

General for all persons

 any individual who has a substantial interest in the business or profession of the assessee,
or any relative of such individual
 a company, firm, association of persons or Hindu undivided family having a substantial
interest in the business or profession of the assessee or
o any director, partner or member of such company, firm, association or family, or
o 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, association of persons or Hindu undivided family of which
o a director,
o partner or
o member, as the case may be,
has a substantial interest in the business or profession of the

Page 14 of 25
 o assessee; or any director, partner or member of such company, firm, association
or family or
o any relative of such director, partner or member

Cash Expenditures

Section 40A(3)- Current Year Expenses

Where the assessee incurs any expenditure in respect of which a payment or aggregate of
payments made to a person in a day, otherwise than by:
o an account payee cheque drawn on a bank or
o account payee bank draft, or
o use of electronic clearing system (ECS)through a bank account or
o through such other electronic mode as may be prescribed (NEFT, RTGS, UPI, IMPS)
exceeds ₹ 10,000 no deduction shall be allowed in respect of such expenditure.

In other words, cash expenses exceeding ₹ 10,000 are not eligible for deduction.

Let us understand this section through an example:

Mr. A obtains goods from Mr. B, for which he has to pay an amount of ₹ 40,000;

Case 1- Mr. A pays the entire amount through NEFT upfront

Allowed as a deduction

Case 2- Mr. A pays entire amount through cash upfront

Not allowed as a deduction

Case 3- Mr. A pays ₹ 10,000, ₹ 10,000, ₹ 10,000 and ₹ 10,000 on the same day
Not allowed as a deduction

Case 4- Mr. A pays ₹ 20,000 in cash on Monday and ₹ 20,000 in cash on Tuesday
Monday- Not allowed as a deduction
Tuesday- Not allowed as a deduction

Case 5- Mr. A pays, in cash, ₹ 20,000 on Monday and ₹ 10,000 on Tuesday and Wednesday
Monday- Not allowed as a deduction
Tuesday- Allowed as a deduction
Wednesday- Allowed as a deduction

Case 6- Mr. A pays the amount in 5 equal installments of ₹ 8,000 on 5 consecutive days
On all 5 days- Allowed as a deduction

Page 15 of 25
Section 40A(3A)- Previous Year provision paid in current year
 Where an allowance has been made in the assessment for any year in respect of any
liability incurred by the assessee for any expenditure and
 subsequently during any previous year, the assessee makes payment in respect thereof,
otherwise than by an
o account payee cheque drawn on a bank or
o account payee bank draft, or
o use of electronic clearing system through a bank account or
o through such other electronic mode as may be prescribed],
 then, the payment so made shall be deemed to be the profits and gains of business or
profession and accordingly chargeable to income-tax as income of the previous year if the
payment or aggregate of payments made to a person in a day, exceeds ₹ 10,000.

40(A)(7) Gratuity
 No deduction is allowable to an assessee carrying on any business or profession in respect
of any provision made by him towards the payment of gratuity towards his employees on
their retirement or termination of their employment for any reason.
 Deduction is allowable to the employer either in the year in which such gratuity is paid or
in which contributions are actually made to an approved gratuity fund (allowed u/s 36).

Mark-to-market losses
No deduction or allowance shall be allowed in respect of any marked to market loss or other
expected loss, except as allowable under section 36(1)(xviii).

Section 43B
Certain deductions to be only on actual payment

The provisions of this section are applicable on certain deductions notwithstanding anything
contained in any other provision of this Act.

The following are allowed as a deduction in the previous year in which such sum is actually paid
by the assessee;
 any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called,
under any law for the time being in force
 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
 any sum paid to an employee as bonus or commission for services rendered in accordance
with Section 36(1)(ii)
 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, in accordance with the terms and conditions of the agreement governing
such loan or borrowing

Page 16 of 25
  any sum payable by the assessee as interest on any loan or advances from a scheduled
bank or a co-operative bank other than a primary agricultural credit society or a primary
co-operative agricultural and rural development bank in accordance with the terms and
conditions of the agreement governing such loan or advances
 any sum payable by the assessee as an employer in lieu of any leave at the credit of his
employee
 any sum payable by the assessee to the Indian Railways for the use of railway assets

Exclusion
In respect of the previous year in which the liability was incurred by the assessee, any sum which
is actually paid by the assessee on or before the due date applicable in his case for furnishing the
return of income under Section 139(1) shall be allowed as a deduction in the previous year in
which it was incurred, if evidence of such payment is furnished by the assessee.

Interest on loan
Explanation to Sec 43B provides that a deduction of any sum, being interest payable under clause
(d) and (e) of this section, shall be allowed if such interest has been actually paid and any interest
referred to in that clause which has been converted into a loan or borrowing shall not be deemed
to have been actually paid.

Let us understand the relaxation paragraph by way of examples.

Ex. 1- ABC Ltd imported goods from Japan on 28th March 2020 on which an amount of ₹ 2,45,000 of
customs was payable. Customs duty was paid on 8th April 2020.

In this scenario, the financial year in which import took place and customs liability became
payable was FY 2019-20(PY). However, the duty was paid in FY 2020-21(AY). Since the said
amount was paid before the due date of filing the income tax return (30 th Sep 2020), the customs
duty which was actually paid in FY 2020-21 is allowed as a deduction for the FY 2019-20.

Ex. 2- Parvati Pvt Ltd made a provision for bonus to employees in the month of March 2020. The
bonus to employees was paid on 30th June 2020.

In this scenario, though the liability was paid in FY 2020-21(AY), the expenditure was incurred
in FY 2019-20(PY). As the expenditure was paid before the due date of filing income tax return,
the expenditure is allowable as a deduction for the FY 2019-20.

Ex 3- Ajay Ltd has an outstanding borrowing from Bank of ₹ 7,50,000 as on 30 th March 2020, out of
which interest amounted to ₹ 2,50,000. After a loan restructuring programme, the interest portion
was converted into a fresh loan on 31st March 2020. The loan remained unpaid till the due date of
filing income tax returns.

In this scenario, interest has been converted into a fresh loan and has actually not been paid by
the assessee. As a result, deduction for interest payable of ₹ 2,50,000 is not allowed as a deduction.

Page 17 of 25
Section 44AA
Maintenance of accounts by certain persons carrying on profession or business

Specified professions [44AA(1)]

Every person carrying on legal, medical, engineering or architectural profession or the
profession of accountancy or technical consultancy or interior decoration or any other
profession as is notified by the Board in the Official Gazette shall keep and 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 this Act.

Others [44AA(2)]
Every person carrying on business or profession [not being a profession referred to in sub-section
(1)] shall:
a. if his income from business or profession exceeds ₹ 1,20,000 or his total sales, turnover
or gross receipts, as the case may be, in business or profession exceed or exceeds ₹
10,00,000 in any one of the three years immediately preceding the previous year; or

b. 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 business or profession are or is likely to exceed
₹10,00,000, during such previous year; or

c. where the profits and gains from the business are deemed to be the profits and gains of
the assessee under section 44AE or section 44BB or section 44BBB, as the case may be,
and the assessee has claimed his income to be lower than the profits or gains so deemed
to be the profits and gains of his business, as the case may be, during such previous year;
or

keep and 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 this Act.

Provided that in the case of a person being an individual or a HUF, the provisions of clause (i)
and clause (ii) shall have effect, as if for the words "one lakh twenty thousand rupees", the
words "two lakh fifty thousand rupees" had been substituted.

Provided further that in the case of a person being an individual or a HUF, the provisions of
clause (i) and clause (ii) shall have effect, as if for the words "ten lakh rupees", the words
"twenty-five lakh rupees" had been substituted.

Summary of 1st two points

Particulars Individual /HUF Others

If Income from business or profession exceeds 2,50,000 1,20,000
If turnover or sales or gross receipts exceeds 25,00,000 10,00,000

Page 18 of 25
Books specified
a. Cash book
b. Journal Register (if accounts are on mercantile/accrual system)
c. Ledgers
d. Original bills on sales and expenses
e. Carbon copies of bills serially numbered

Period of custody
The books of account and other documents specified shall be kept and maintained for a period of
six years from the end of the relevant assessment year.

For example, the books pertaining to FY 2023-24 (AY 2024-25) has to be kept till 6 years from
the end of AY 2024-25 i.e till 31st March 2031.

Section 44AB
Audit of accounts of certain persons carrying on business or profession

Background
1. This section deals with audit of accounts u/s 44AB of the Income Tax Act, 1961
2. In addition to Income Tax Return, the assessees covered under this section have to file
Tax Audit Report and Form.
3. Tax Audit forms are:
a. Form 3CA-3CD (in a case where the accounts of the business or profession of a
person have been audited under any other law)- Companies and LLPs
b. Form 3CB-3CD (for other cases)
4. For companies covered under this section, this report is to be furnished in addition to the
Independent Auditor’s report required under Companies Act, 2013.

Provision
The following persons are required to get their accounts of such previous year audited by an
accountant before the specified date and furnish by that date the report of such audit in the
prescribed form duly signed and verified by such accountant.

Every person:
a. carrying on business shall, if his total sales, turnover or gross receipts, as the case may
be, in business exceed or exceeds one crore rupees in any previous year, OR
b. carrying on profession shall, if his gross receipts in profession exceed fifty lakh rupees
in any previous year, OR
c. carrying on the business shall, if the profits and gains from the business are deemed to be
the profits and gains of such person under section 44AE or section 44BB or section
44BBB, as the case may be, and he has claimed his income to be lower than the profits
or gains so deemed to be the profits and gains of his business, as the case may be, in any
previous year, OR

Page 19 of 25
Non-applicability
This section shall not apply to the person, who declares profits and gains for the previous year
in accordance with the provisions of sub-section (1) of section 44AD and his total sales, turnover
or gross receipts, as the case may be, in business does not exceed two crore rupees in such
previous year,

Section 44AD
Special provision for computing profits and gains of business on presumptive basis

Notwithstanding anything to the contrary contained in Sections 28 to 43C, in the case of an

eligible assessee engaged in an eligible business, a sum equal to 8% of the total turnover or
gross receipts of the assessee in the previous year on account of such business or, as the case
may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee,
shall be deemed to be the profits and gains of such business chargeable to tax under the head
"Profits and gains of business or profession"

In respect of the amount of total turnover or gross receipts which is received by

 an account payee cheque or
 an account payee bank draft or
 use of electronic clearing system through a bank account or
 through such other electronic mode as may be prescribed (NEFT, RTGS, IMPS, UPI, BHIM)
during the previous year or before the due date specified in sub-section (1) of section 139 in
respect of that previous year, then the presumptive profit shall be a minimum of 6% of the such
turnover.

Applicability
Section 44AD is applicable to
1. any business except the business of plying, hiring or leasing goods carriages referred to
in section 44AE; and
2. whose total turnover or gross receipts in the previous year does not exceed an amount of
three crore rupees (earlier two crores).

Deductions
 Any deduction allowable under the provisions of Sections 30 to 38 shall, for the purposes
of sub-section (1), be deemed to have been already given full effect to and no further
deduction under those sections shall be allowed.
 The written down value of any asset of an eligible business shall be deemed to have
been calculated as if the eligible assessee had claimed and had been actually allowed the
deduction in respect of the depreciation for each of the relevant assessment years.

Page 20 of 25
Section 44ADA
Special provision for computing profits and gains of profession on presumptive basis.

Applicability
 The section is applicable to the assessee engaged in any profession referred to in Section
44AA(1) and
 whose total gross receipts do not exceed seventy five lakh rupees (earlier fifty lakhs)
in a previous year.

Presumptive Profits
A sum equal to 50% of the total gross receipts of the assessee in the previous year on account
of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have
been earned by the assessee, shall be deemed to be the profits and gains of such profession
chargeable to tax under the head "Profits and gains of business or profession."

Deductions
 Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes
of sub-section (1), be deemed to have been already given full effect to and no further
deduction under those sections shall be allowed.
 The written down value of any asset used for the purposes of profession shall be deemed
to have been calculated as if the assessee had claimed and had been actually allowed the
deduction in respect of the depreciation for each of the relevant assessment years.

Miscellaneous (Theory)

Section 33AB
Tea development account, coffee development account and rubber development account.

Eligible Assessee
An assessee carrying on business of growing and manufacturing tea or coffee or rubber in India.

Conditions to claim deduction

Where the assessee, before the expiry of six months from the end of the previous year or before
the due date of furnishing the return of his income, whichever is earlier, has:
a. deposited with the National Bank, any amount or amounts in an account (special account)
maintained by the assessee with that Bank in accordance with, and for the purposes
specified in, a scheme approved in this behalf by the Tea Board or the Coffee Board or the
Rubber Board, OR
b. deposited any amount in an account (Deposit Account) opened by the assessee in
accordance with, and for the purposes specified in, a scheme framed by the Tea Board or
the Coffee Board or the Rubber Board, as the case may be (hereafter in this section
referred to as the deposit scheme), with the previous approval of the Central Government.

Page 21 of 25
Quantum of Deduction
The lower of the following amounts will be allowed as a deduction
a. a sum equal to the amount or the aggregate of the amounts so deposited
b. a sum equal to 40% of the profits of such business (computed under the head "Profits
and gains of business or profession" before making any deduction under this section)

The deduction under this section shall not be admissible unless the accounts of such business of
the assessee for the previous year relevant to the assessment year for which the deduction is
claimed have been audited by an accountant.

Illustration
XYZ Tea India Ltd is engaged in the manufacture of Tea. It contributes an amount of ₹ 4,00,000 to
Tea Development Fund in FY 2019-20. Its income from business for that FY stood at ₹ 8,00,000.
Calculate the eligible deduction u/s 33AB.

The lower of the following shall be eligible as a deduction u/s 33AB of IT Act, 1961
An amount of 40% of income = ₹ 3,20,000 (40% of 8,00,000)
Amounts contributed = ₹ 4,00,000
Eligible deduction u/s 33AB = ₹ 3,20,000

Section 35CCA
Expenditure by way of payment to associations and institutions for carrying out rural
development programmes

Applicability
Where an assessee incurs any expenditure by way of payment of any sum:
a. to an association or institution, which has as its object the undertaking of any programme
of rural development, to be used for carrying out any programme of rural development
b. to an association or institution, which has as its object the training of persons for
implementing programmes of rural development
c. to a rural development fund set up and notified by the Central Government
d. to the National Urban Poverty Eradication Fund set up and notified by the Central
Government

Deduction
The assessee shall be allowed a deduction of the amount of such expenditure incurred during the
previous year.

Page 22 of 25
Section 35CCC
Expenditure on agricultural extension project

Applicability
Where an assessee incurs any expenditure on agricultural extension project notified by the Board.

Deduction
The assessee shall be allowed a deduction of a sum equal to one and one-half times (150%) of
such expenditure.

Section 35CCD
Expenditure on skill development project

Applicability
Where a company incurs any expenditure (not being expenditure in the nature of cost of any land
or building) on skill development project notified by the Board.

Deduction
The assessee shall be allowed a deduction of a sum equal to one and one-half times (150%) of
such expenditure.

Important Case Laws

1. I.C.D.S. Ltd. v. CIT (2013) 350 ITR 527 (SC

Issue Can depreciation on leased vehicles be denied to the lessor on the ground
that the vehicles are registered in the name of the lessee and that the
lessor is not the actual user of the vehicles?

Judgement  Section 32 imposes a twin requirement of ―ownership and usage for

business as conditions for claim of depreciation thereunder
 As far as usage of the asset is concerned, the section requires that the
asset must be used in the course of business. It does not mandate
actual usage by the assessee itself.
 In this case, the assessee did use the vehicles in the course of its
leasing business. Hence, this requirement of section 32 has been
fulfilled, notwithstanding the fact that the assessee was not the actual
user of the vehicles.
 The proof of ownership lies in the lease agreement itself, which
clearly points in favour of the assessee. The assessee-lessor was,
therefore, entitled to claim depreciation in respect of vehicles leased
out

Page 23 of 25
2. CIT v. Orient Ceramics and Industries Ltd. (2013) 358 ITR 49 (Delhi)

Issue What is the nature of expenditure incurred on glow-sign boards displayed

at dealer outlets- capital or revenue?
Judgement The expenditure on glow sign boards displayed at dealer outlets is
revenue in nature due to the following reasons-
(i) The expenditure incurred by the assessee on glow sign boards
does not bring into existence an asset or advantage for the
enduring benefit of the business, which is attributable to the
capital.

(ii) The glow sign board is not an asset of permanent nature. It has a
short life.

(iii) The materials used in the glow sign boards decay with the effect
of weather. Therefore, it requires frequent replacement.
Consequently, the assessee has to incur expenditure on glow sign
boards regularly in almost each year.

(iv) The assessee incurred expenditure on the glow sign boards with
the object of facilitating the business operation and not with the
object of acquiring asset of enduring nature

3. CIT v. ITC Hotels Ltd. (2011) 334 ITR 109 (Kar)

Issue Would the expenditure incurred on issue and collection of convertible

debentures be treated as revenue expenditure or capital expenditure?
Judgement The expenditure incurred on the issue and collection of debentures would
be treated as revenue expenditure even in case of convertible debentures,
i.e., the debentures which had to be converted into shares at a later date.

4. CIT v. Neelavathi & Others (2010) 322 ITR 643 (Kar)

Issue Can payment to police personnel and gundas to keep away from the
cinema theatres run by the assessee be allowed as deduction?
Judgement  Any payment made to the police illegally amounts to bribe and such
illegal gratification cannot be considered as an allowable deduction.

 Similarly, any payment to a gunda as a precautionary measure so that

he shall not cause any disturbance in the theatre run by the assessee
is an illegal payment for which no deduction is allowable under the
Act.

Page 24 of 25
5. CIT vs Gujarat State Road Transport Corporation (Guj)
Employees’ contributions recovered from employer shall be treated as employer’s income.
Section 43B applies to only Employer’s contribution and that section cannot be applied to
employees’ contribution. If employees’ contribution is not paid before the due date under the
respective fund, it shall not be allowed as a deduction even if the same was paid before the
due date of filing Income Tax Returns.

6. Dr. T A Qureshi vs CIT (SC)

Loss of illegal business shall be allowed to be set off against profits from legal business.
Section 37 disallows an expenditure incurred on business for illegal purpose but does not
apply to loss of illegal business.

7. Shanti Bhushan v. CIT (2011) 336 ITR 26 (Delhi)

Issue Can the expenditure incurred on heart surgery of an assessee, being a

lawyer by profession, be allowed as business expenditure u/s 31, by
treating it as current repairs considering heart as plant and machinery, or
u/s 37, by treating it as expenditure incurred wholly and exclusively for the
purpose of business or profession?
Judgement  Though the definition of plant as per the provisions of section 43(3)
is inclusive in nature, such plant must have been used as a business
tool which is not true in case of heart.

 Therefore, the heart cannot be said to be plant for the business or

profession of the assessee. Therefore, the expenditure on heart
surgery is not allowable as repairs to plant u/s 31.

 Also, there is no direct nexus between the expenses incurred by the

assessee on the heart surgery and his efficiency in the professional
field.

 Therefore, the claim for allowing the said expenditure u/s 37 is also
not tenable.

Page 25 of 25