1. Profits and Gains of Business and
Profession
Session 5A

2. Charging Section
• As per section 28, income from any Business /
Profession shall be taxable under the head
Business / Profession.

3. Business – Section 2(13)
• “Business” includes any Trade, Commerce or
manufacture or any adventure or concern in
the nature of trade, commerce or
manufacture

4. Profession – Section 2(36)
• “Profession” includes Vocation

5. • Income from speculation business [Section
43(5)] shall be taxable under head Business /
Profession.

6. Meaning of Speculative Business
• A Speculative transaction is defined under
Section 43(5) to mean a transaction in which a
contract for purchase or sale of a commodity
including stocks or shares is periodically or
ultimately settled otherwise than by actual
delivery or transfer of the commodity or scrip.

7. • The Income referred to in Section 28 is
computed in accordance with the provisions
contained in Sections 30 to 43D of the Income
Tax Act.
• For understanding the deductions under this
head, it would be useful to categorize the
sections into seven broad categories:

8. The first category is Deductible Expenses - Sections 30
to 38 [except 37(2)].
• Sections 30 and 31 deal with revenue expenses related to
Buildings, Plant and Machinery.
• Section 32 deals with Depreciation.
• Section 32A is a special case of capital expenditure allowance
for the first year called investment allowance.
• Section 35 relates to expenditure on scientific research and
• section 35ABB relates to expenditure for obtaining license to
operate telecommunication services.

9. The second category is Inadmissible Expenses - Sections
37(2), 40, 40A, 43B & 44-C.
• Not all expenses incurred by the Business are
allowable as deductions for tax purposes.
• The sections in this category spell out
• the kinds of expenditures that are not allowed
as deduction for tax purposes
• and the conditions under which they are not
allowed.

10. • The third category is where certain amounts
have been deposited by specified Businesses
in a specified account like a tea Development
account or Site restoration fund - Sections
33AB, 33ABA.

11. • The fourth category related to expenditure on
certain eligible projects or schemes – 35AC,

12. The fifth category relates to accounting issues – Section
35D, 35DD, 35DDA, 41, 43A.
• Section 35D relates to Amortization of Preliminary expenses,
• 35DD to amortization of expenditure relating to
amalgamation or demerger and
• 35 DDA to amortization of expenditure incurred under
voluntary retirement scheme.
• Section 41 deals with the treatment of expenses or losses
which are subsequently recovered while
• section 43A deals changes in rates of exchange of currency.

13. • The sixth category are Special Provisions
relating to Oil prospecting, extraction or
production and special provision with regard
to Public Financial Institutions and Public
Companies - Sections 42 & 43D

14. The Seventh category consists of special computing provisions for specified
categories - Sections 44, 44A, 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB,
44-D & 44-DA.
• These are special provisions for computing income or allowing deduction
for specific categories.
• Section 44 deals with Insurance Business,
• Section 44A with deduction in case of trade, professional or similar
association,
• section 44AD with Civil construction,
• Section 44AE with the business of leasing and hiring goods carriages,
• section 44AF with retail trade,
• section 44B with shipping Business of non residents,
• section 44BB with exploration of mineral oil,

15. • section 44BBA with operation of aircrafts in case of
non residents,
• section 44BBB with foreign companies engaged in
civil construction, erection , testing or commissioning
of plant and machinery in certain turnkey power
projects,
• section 44D with royalties or fees for technical
services in case of foreign companies,
• section 44DA with royalties or fees for technical
services in case of individuals.

16. DEPRECIATION (SECTION 32)
• Block of Asset
• Depreciation under Income Tax Act is not
allowed on the basis of individual asset.
Depreciation is allowed on the basis of block
of assets which means a group of similar type
of assets having same rate of depreciation.

17. Depreciation on the basis of block of assets shall be
computed in the manner given below:
• Take opening W.D.V. of the block.
• Add purchases during the same year of that particular block.
• Deduct Sale price / Insurance Claim / Scrap Value of all the assets sold during the
year relating to the same block.
• Depreciation shall be charged on the balance at the end of the year.
• If any asset was purchased during the year and was put to use for less than 180
days, in that case depreciation shall be allowed at half the normal rate for that
particular asset.
• If any asset was put to use for less than 180 days & the balance left at the end of
the year is less than the value of such asset, in that case, depreciation shall be
charged at half the normal rate on such balance.
• If all the assets have been sold but still there is some balance it will be called Short
Term Loss under Section 50 and no depreciation is allowed.
• If there is Negative Balance, it will be Short Term Gain under Section 50 and no
depreciation is allowed.

18. Depreciation in case of Power generating or
generating and distributing of units Section 32(1)(i)
• Power generating units shall have the option to claim
depreciation either on the basis of W.D.V. or on the basis of
S.L.M.(Straight Line Method) and the option once exercised
has to be followed consistently
• if the assessee has opted for depreciation on the basis of
W.D.V., depreciation shall be allowed on the basis of block of
assets.
• If the assessee has opted SLM, depreciation shall be allowed
on the basis of individual asset and further at the prescribed
rate.
• However concept of 180 days shall be applicable.

19. Basic Conditions for claiming Depreciation
• The assessee must be the owner of the asset. The ownership
may be whole or fractional.
• The asset must be used for the purpose of carrying on the
Business / Profession of the assessee.
• In the year of acquisition, if the asset is put to use for less
than 180 days, then it is eligible for only 50% of the normal
depreciation.
• The asset in respect of which depreciation is claimed should
fall within the eligible classification of assets.

20. Is it Mandatory to claim depreciation?
• As per explanation 5 to section 32(1), it is
mandatory for every assessee to claim
depreciation.
• Explanation 5- For the removal of doubts, it is
hereby declared that the provisions of this sub
section apply whether or not the assessee has
claimed the deduction in respect of
depreciation in computing his total income.

21. Depreciation in case of assets not owned by
the assessee.
• If the business of the assessee is carried on in a building not
owned by him
• but in respect of which the assessee holds a lease right of
occupancy
• and any capital expenditure is incurred by the assessee on the
construction, renovation, extension, improvement etc. to the
building,
• the assessee shall be eligible for depreciation in the normal
manner
• and it does not matter that the assessee is not the owner.

22. TEA/COFFEE/RUBBER DEVELOPMENT ACCOUNT
SECTION 33AB
• Deduction is allowed to all the assesses who are engaged in
growing & manufacturing of Tea, Coffee or Rubber and the
Deduction allowed is equal to the amount deposited in an
account opened with NABARD.
• However the maximum deduction allowed shall be 40% of
profits before debiting any amount under Section 33AB.
• Amount has to be deposited within 6 months from the end of
the previous year or before the due date of furnishing of
return of income whichever is earlier.

23. • The deduction is allowed subject to the
condition that the accounts of the assessee
have been audited by a Chartered Accountant.
• The amount so deposited should be utilized
subsequently as per the scheme of Tea
Board/Coffee Board/Rubber Board of India.

24. SITE RESTORATION FUND - SECTION 33ABA
• Deduction is allowed to all the assessees engaged in
prospecting income, extraction or production of mineral oils.
• The deduction is allowed to the extent amount has been
deposited with State Bank.
• However, the maximum deduction allowable shall be 20% of
the profits before debiting any amount under Section 33ABA.
• The amount so deposited should be utilized for restoration of
the site which is being abandoned.

25. EXPENDITURE IN CONNECTION WITH SCIENTIFIC RESEARCH
SECTION 35
• If an assessee has incurred expenditure in
connection with scientific research,
• such expenditure is allowed to be debited to the P&L
A/c
• provided the research is related to the Business /
Profession of the assessee.
• Capital expenditure also can be debited to P&L
Account but expenditure on land is not allowed.

26. • If any assessee has given any donation or
contribution to any approved scientific research,
university, college, Indian Company etc,
• deduction is allowed equal to 1.25 times of the
donation or contribution.
• There is no condition that the research should be
related to the Business / Profession of the assessee.

27. • Capital expenditure in connection with
scientific research is allow to be debited
• only to the extent income is available under
the head Business / Profession and the
unadjusted expenditure
• is eligible for set off and carry forward under
the act, like unabsorbed depreciation.

28. • If any assessee has incurred any expenditure before
commencement of business in connection with
scientific research, but within 3 years before the
commencement,
• such expenditure shall be allowed in the year in
which the business has commenced.
• However, revenue expenditure shall be allowed only
to the extent it has been permitted by the prescribed
authority.

29. • If the company is engaged in Bio Technology,
Manufacturing of drugs, Pharmaceuticals,
Chemicals, Computers, Electronic equipment,
Telecommunication equipment or any other
product notified by the prescribed authority,
• the deduction is admissible up to 1.5 times
the expenditure incurred.

30. • The Scope of provisions relating to weighted
deduction of 150% on expenditure incurred
on in-house R&D to the businesses mentioned
above, is being extended (as per Budget July,
2009) except for a small negative list.
• The proposed amendment will take effect
from 1st April, 2010.

31. Section 41(3)
• Where an assessee has incurred capital expenditure in
connection with scientific research and subsequently the
asset was sold by the assessee,
• the amount recovered shall be considered to be the income
under the head Business / Profession as per Section 41(3)
• but only to the extent the amount has been debited to the
P&L Account.
• Any excess over it shall be taxable under the head Capital
Gains.

32. • Where an assessee has incurred capital expenditure in
connection with scientific research
• & the amount was debited to the P&L Account
• but subsequently the amount was transferred to the normal
business,
• in this case it will be entered in the respective block of assets
• and its WDV shall be taken to be NIL
• and if such asset has been sold subsequently,
• in that case sale price shall be deducted from the WDV of the
block.

33. LICENSE FOR TELECOMMUNICATION
SECTION 35ABB
• If an assessee has incurred expenditure for
the purchase of license for
telecommunication,
• such expenditure shall be allowed in
installments starting with the year in which
the payment has been made,
• and ending with the year in which the license
has expired.

34. • If an assessee has made the payment before
commencement of business, such installments
shall be allowed from the year in which the
business has commenced.
• If the payment has been made in installments
deduction shall be allowed from the year in
which the installment has been paid.

35. • If the assessee sells the license
• subsequently, any loss shall be debited to the P&L
Account
• and if there is any income, it will be taxable under
the head Business / Profession
• but only to the extent the amount was debited to
the P&L Account.
• Any excess over it shall be taxable under the head
Capital Gains.

36. DONATION / CONTRIBUTION FOR ELIGIBLE PROJECT
SECTION 35AC
• This Deduction is allowed to all assessee in the case
of donation or contribution to notified institutions
which are carrying on eligible projects.
• “Eligible Project” shall include the projects of social
or economic importance, for example Drinking
Water Project, Contribution of Houses for the Poor
Persons etc.
• A company has the option to incur the expenditure
directly also.

37. NEW SECTION 35AD PROPOSED AS PER FINANCE MINISTER’S
BUDGET SPEECH ON 6TH
JULY, 2009
• By inserting new section 35AD
• businesses are to be given an incentive by providing investment linked tax
exemptions rather than profit linked exemptions.
• Investment linked tax incentives are to be provided to begin with,
• to the businesses of setting up and operating ‘cold chain’, warehousing
facilities for storing agricultural produce and the business of laying and
operating cross country natural gas or crude or petroleum oil pipeline
network for distribution on common carrier principle.
• Under this method, all capital expenditure, other than expenditure on
land, goodwill and financial instruments are to be fully allowable as
deduction.

38. DONATION / CONTRIBUTION FOR RURAL DEVELOPMENT
SECTION 35CCA
• This Deduction is allowable to all categories of assessees, in
cases of donation or contribution to the notified institutions
for the purpose of Rural Development.
• If there is a contribution to a national fund for rural
development, such contribution is also allowed.
• Similarly, contribution to the national urban poverty
eradication fund shall be allowed.

39. AMORTIZATION OF CERTAIN PRELIMINARY EXPENSES
SECTION 35D
• The expenses incurred before the
commencement of business shall be allowed
to be debited
• in five annual equal installments starting with
the year in which the business commenced.
• The expenditure is allowed only to the
resident assessees and to Indian Companies.

40. The expenses which are allowed under Section 35D are as given
below:
• Expenditure in connection with project report, feasibility report,
engineering services, conducting market survey provided the work has
been taken up by the assessee himself or by any organization approved by
the board.
• Expenses incurred in connection with legal agreements relating to the
business or profession.
• Expenses being incorporation fee of the company.
• Expenses on drafting and printing of memorandum and articles of
association.
• Expenses on issue of share capital and debentures including expenses on
drafting and printing of prospectus and also expenses being commission
paid to the underwriters.
• Any other expense prescribed for this purpose.

41. • The expenses incurred before commencement of business is
allowed, to the extent of 5% of the project cost. However, an
Indian Company has the option to take 5% of capital
employed.
• “PROJECT COST” = Total of actual cost of all the fixed assets as
on the last day of the year in which the business was
commenced.
• “CAPITAL EMPLOYED” = Total of issued share capital,
debentures and long term borrowings as on the last day of
the year in which the business was commenced.

42. • If there is expansion or extension of an
existing business, in that case also
expenditure shall be allowed in the similar
manner.
• If there is amalgamation or De merger, the
remaining installments shall be allowed to the
amalgamated company or the resulting
company.

43. EXPENDITURE IN CONNECTION WITH AMALGAMATION / DE
MERGER - SECTION 35DD
• This expenditure is allowed only to an Indian
Company and is allowed for the expenditure
incurred in connection with amalgamation /
de merger.
• The expenditure is allowed in five annual
equal installments.

44. EXPENDITURE IN CONNECTION WITH VOLUNTARY RETIREMENT
SECTION 35DDA
• This Deduction shall be allowed to all
categories of assessees and is with regard to
the expenditure incurred in connection with
Voluntary Retirement.
• The expenditure shall be allowed in five
annual equal installments.

45. PREMIUM FOR INSURANCE OF STOCKS
SECTION 36(1)(i)
• Where an assessee has paid premium for the
insurance of Raw Material, Finished Goods
etc, the premium paid is allowed as a
deduction under this head.

46. PREMIUM FOR INSURANCE OF CATTLE
SECTION 36(1)(ia)
• Where a Cooperative Society has paid
premium for insurance of cattle owned by the
members of society, such premium shall be
allowed to be debited under this head.

47. PREMIUM FOR MEDICLAIM POLICY
SECTION 36(1)(ib)
• Where an assessee has paid premium in
connection with a Mediclaim Policy taken in
the name of employees, the premium shall be
allowed to be debited.

48. PAYMENT OF BONUS / COMMISSION TO EMPLOYEES
SECTION 36(1)(ii)
• Bonus / Commission paid to the employees is
allowed but subject to the provision of Section
43B. Such Bonus / Commission should have
been payable to the employees out of profits.

49. INTEREST ON LOAN TAKEN FOR BUSINESS / PROFESSION
SECTION 36(1)(iii)
• Where an assessee has taken a loan for the purpose
of Business / Profession, the interest is allowed
without any restriction.
• If the loan has been taken for the purpose of
acquiring a capital asset, the interest up to the date
of putting the asset to use shall be capitalized, and
depreciation shall be allowed on capitalized amount.
The interest for the subsequent period shall be
debited to the P&L Account as per Section 43(1).

50. DISCOUNT ON ZERO COUPON BOND
SECTION 36(1)(iiia)
• The Discount on Zero Coupon Bonds shall be
allowed on pro-rata basis taking into
consideration life of such bond in months.
• “ZERO COUPON BONDS” means such bonds
for which no return is allowed till the maturity
of such bond.
• “DISCOUNT” means difference between the
amount received and the amount paid.

51. EMPLOYER’S CONTRIBUTION TO PF / GRATUITY FUND ETC.
SECTION 36(1)(iv)/(v)
• Employer’s Contribution to Registered PF,
approved Gratuity fund or other similar funds
is allowed but subject to the provision of
Section 43B.

52. EXPENDITURE ON PURCHASE OF ANIMALS
SECTION 36(1)(vi)
• Where an assessee has incurred any
expenditure on purchase of animals for the
purpose of Business / Profession, the
expenditure shall be allowed to be debited at
the time of death of animal or when the
animal has been discarded.
• If the animals are Stock-in-trade, the amount
shall be allowed to be debited.

53. BAD DEBTS / PROVISION FOR BAD DEBTS
SECTION – 36(1)(vii), 36(1)(viia) and 41(4)
• Where an assessee has incurred a bad debt in connection
with Business / Profession, such bad debt shall be allowed to
be debited. If the bad debts debited by an assessee are
recovered subsequently, in any deficiency shall be allowed as
bad debt and any excess shall be considered to be Income
under the head Business / Profession under Section 41(4).
However, if the bad debt were not allowed, in that case
recovery shall not be considered to be income under the head
Business / Profession.

54. EXPENDITURE ON PROMOTION OF FAMILY PLANNING
NORMS (SECTION 36(1)(ix))
• This Expenditure is allowed only to the company assessee
who is promoting family planning among its employees. The
revenue expenditure has to be debited in the same year.
• Capital expenditure is allowed in 5 annual installments. The
Expenditure is allowed to be debited only to the extent
income is available under the Business / Profession. The
unadjusted expenditure shall be allowed to be set-off and
carried forward just like unabsorbed depreciation.

55. BANKING CASH TRANSACTION TAX (BCTT)
(SECTION 36(1)(xiii))
• Where an assessee has paid BCTT, it will be
allowed to be debited to the P&L Account.
BCTT is not payable in case of withdrawal
from savings bank A/c.
• [BCTT HAS BEEN ABOLISHED W.E.F. A.Y.
2010-11]

56. COMMODITIES TRANSACTION TAX AND SECURITIES
TRANSACTION TAX SECTION 36(1)(xv)
• Where an assessee has paid CTT in connection with
Sale/Purchase of various commodities as a part of his
business, it will be allow to be debited to the P&L Account.
• Where an assessee has paid securities transaction tax in
respect of the taxable securities transactions the STT so paid
shall be allowed as a deduction from the P&L Account,
provided the income from such taxable securities is included
in the income computed under the head ‘Profits and Gains of
Business and Profession. This is effective from 1st
April, 2009.

57. GENERAL EXPENDITURE
SECTION 37(1)
• Any other expenditure that wholly and
exclusively incurred in relation to the Business
of the assessee and is revenue in nature, is
covered under Section 37(1).

58. The expenses which may be allowed under Section
37(1) are as given below:-
• Expenditure being payment of salary to employees.
• Expenditure in connection with advertisement (like diaries, calendars etc.) but if
the assessee has incurred capital expenditure, depreciation shall be allowed
• Expenditure incurred in connection with traveling relating to Business / Profession
of the assessee including expenditure incurred on stay in hotels etc.
• Expenditure incurred on the occasion of Diwali provided the expense is not
personal nature or religious nature i.e. it should be in the nature of Business /
Profession.
• Security Deposit under Own Your Telephone Scheme (OYT) or Tatkal Telephone
Scheme or Telex Connection shall be allowed to be debited.
• Expenditure being loss due to embezzlement of funds by the employees.
• Expenditure due to theft.
• Expenditure in connection with legal proceedings.
• Any other expenditure relating to the Business / Profession and is revenue in
nature.

59. • Expenditure incurred for any purpose which is
an offence or which is prohibited by law is not
admissible as a deduction.

60. ASSETS IN MIX USE
SECTION 38
• Where an assessee has any asset in the use of
Business / Profession which is also in personal
use, in such cases, expenses shall be allowed
only to the extent the asset is in the use of the
Business / Profession.

61. PAYMENT OF INCOME TAX OR WEALTH TAX ETC,
SECTION 40(a)
• Direct taxes like Income tax, Wealth Tax, FBT,
Additional Income tax(CDT), are not allowed
to be debited to the P&L Account, but if any
person has paid Sales Tax, Excise Duty,
Custom Duty, Service Tax etc. it will be
allowed to be debited to the P&L Account,
subject to the provisions of Section 43B

62. • Where a person has taken a loan for the payment of
Income Tax etc, interest on that loan is not an
allowable expense but if the loan has been take for
the payment of sales tax etc, interest is allowed.
• Where a person has paid interest for late payment of
Income Tax etc, that interest is not allowed but if the
person has paid interest for late payment of sales tax
etc., the interest is allowed.

63. • Income tax refund or wealth tax refund are not
considered as income of the assessee. But sales tax
refund will be considered to be income under head
Business / Profession.
• Interest on refund of income tax will be considered
to be income under the head Income from other
sources, but if the interest is on the refund of sales
tax etc., it is considered income under the head
Business / Profession.

64. • Where an assessee has incurred expenditure
in connection with the filing of the return of
income, the expense is allowed. Similarly, if
salary has been paid to an employee who is
looking after income tax matters, the salary is
allowed. Similarly where there is expenditure
in connection with audit, the expenditure is
allowed.

65. PAYMENTS OUTSIDE INDIA WITHOUT DEDUCTING TAX AT SOURCE
SECTION 40(a)(i)
• Where an assessee has made payment of
interest, technical fees etc. outside India or to
any Non Resident or to any foreign company
in India without deducting tax at source, the
payment is disallowed as expenditure.

66. PAYMENTS IN INDIA TO ANY RESIDENT WITHOUT
DEDUCTING TAX AT SOURCE
SECTION 40(a)(ia)
• Where an assessee has made payment in India
to any resident person and tax is deductible
on such payment at source and such tax has
not been deducted, the payment is not
allowed as expenditure.

67. PAYMENT OF SALARY OUTSIDE INDIA WITHOUT TDS
SECTION 40(a)(iii)
• Where an assessee has paid salary outside
India or salary has been paid in India to any
Non Resident and the assessee has neither
deducted tax at source nor has the tax has
been paid to the government, in such case the
expenditure is disallowed. But if either the
TDS has been deducted or TDS has been paid
to the Government, the salary is allowed to be
debited.

68. PAYMENT OF SALARY AND INTEREST TO THE PARTNER.
SECTION 40(b)
• Interest is allowed but maximum @ 12% p.a. simple interest.
• Salary, Bonus, Commission etc. is allowed, but only to the working partners &
maximum salary allowed shall be as given below:-
– If the partnership firm has specified profession under section 44AA, maximum
salary allowed shall be as given below:-
•
• BOOK PROFITS SALARY ALLOWED AS
PERCENTAGE OF BOOK PROFITS
• Up to 1 Lac 90% or Rs. 50000 whichever is higher
• Next 1 Lac 60%
• Balance amount 40%

69. • “Book Profits” means profit and gains of the
Business / Profession but before debiting any
salary to the partners. If the firm is paying
salary less than from the salary calculated by
above formula, in that case the lesser salary
shall be allowed.

70. – If any partnership firm has business or non-specified profession, in that case
maximum salary allowed shall be as given below:-
•
• BOOK PROFITS SALARY ALLOWED AS
PERCENTAGE OF BOOK PROFITS
•
• Up to 75000 90% or Rs. 50000 whichever is higher
• Next 75000 60%
• Balance amount 40%
• Salary and interest are allowed to be debited to the P&L account, only if it is
permitted as per the partnership deed.

71. PROPOSED CHANGES TO SECTION 40(b) AS PER FINANCE
MINISTER’S BUDGET SPEECH ON 6TH
JULY, 2009
• It is also proposed to prescribe uniform limits for both professional and non
professional firms for simplicity and administrative ease. The revised limits are
proposed to be as under:
• (a) On the first Rs. 3,00,000 of the book-profit or in case of a loss
Rs. 1,50,000 or at the rate of 90 per cent of the book-profit, whichever is more;
• (b) On the balance of the book-profit at the rate of 60 per cent;
The proposed amendment will take effect from 1st April, 2010.

72. PAYMENTS TO RELATIVES / RELATED PARTY
SECTION 40A(2)
• Where a person has made a payment whether
revenue or capital and such payment has been
made to any relative / related person and it is
unreasonable / excessive, in such cases it is
disallowed to the extent the payment is
unreasonable / excessive.

73. PAYMENT IN EXCESS OF RS. 20,000
SECTION 40A (3) RULE 6DD
• Where an assessee
• has incurred Revenue Expenditure
• and the payment with regard to such expenditure
has been made in a sum exceeding Rs. 20,000
• and such payment was made otherwise than through
account payee cheque or account payee bank
overdraft,
• No deduction shall be allowed in respect of such
expenditure.

74. As per Rule 6DD of the Income Tax Rules, a payment in cash or by bearer
cheque or by crossed cheque shall be allowed in following cases:
– If the payment is being made to the Government’s financing
Institutions (like LIC, UTI etc.) or to Government Banks etc.
– If the payment is being made for purchasing
• Agricultural or forest produce.
• Products of dairy farming, poultry farming, fisheries etc. and the
payment is made to the producer or cultivator.
• Products of cottage industries and the goods have been made
without the aid of power.
• Products of Horticulture or Apiculture.

75. – If the payment is being made in a village / town and there is no bank
in that village or town on the date of making the payment and the
payment is made to a person who has Business / Profession at that
place, or the person ordinarily resides at that place.
– If the payment is being made on a day when the banks are closed due
to a strike or otherwise.
– If the payment is being made to the Central / State Government in
legal tender.
– Payments of terminal benefits like gratuity, retrenchment
compensation etc. to low paid employees (Drawing less than Rs.
7,500 annually) or to their families.

76. – Where the payment is made by any person to his agent who is
required to make payment in cash for goods and services on behalf
of such person.
– Where the payment is made by an assessee by way of salary to his
employee after deducting the Income-Tax from salary in accordance
with the provisions of Section 192 of the Act, 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
• Does not maintain any account in any bank at such place or ship.

77. SPECIAL PROVISION FOR TRANSPORT
OPERATORS ON LONG HAUL JOURNEYS
• As per Finance Minister’s Budget speech on 6th
July,
2009, given the special circumstances of transport
operators for incurring expenditure on long haul
journeys, it is proposed to raise the limit of payment
to such transport operators otherwise than by an
account payee cheque or account payee bank draft
to Rs 35,000/- from the existing limit of Rs 20,000/-.
The proposed amendment will apply to transactions
effected on or after the 1st October, 2009.

78. PROVISION FOR GRATUITY
SECTION 40A(7)
• In general a provision or a reserve is not an
allowable deduction. However, provision for
Gratuity is an allowable deduction provided
the amount has become due for payment.

79. CONTRIBUTION TO VARIOUS FUNDS
SECTION 40A(9)
• Employer’s Contribution to RPF, SPF, and Approved
Superannuation Fund, Approved Gratuity fund or any
other fund required under any other Act shall be
allowed.
• Employer’s Contribution to URPF, Unapproved
Superannuation Fund, Unapproved Gratuity fund etc.
shall not be allowed.
• For Example: Employer’s Contribution to Staff
welfare Fund or other similar fund is not allowed.

80. DEEMED INCOME - SECTION 41(1)
• Where an assessee has debited expenditure
and subsequently such expenditure is
recovered by him, the amount so recovered
shall be considered to be his income under
the head Business / Profession under Section
41(1)

81. SALE OF CAPITAL ASSET – SCIENTIFIC RESEARCH
SECTION 41(3)
• Where an assessee has incurred capital expenditure in
connection with scientific research
• and subsequently the asset is sold by the assessee,
• the amount recovered shall be considered to be the income
under the head Business / Profession as per Section 41(3)
• but only to the extent the amount has been debited to the
P&L Account.
• Any excess over it shall be taxable under the head Capital
Gains.

82. RECOVERY OF BAD DEBTS
SECTION 41(4)
• Where an amount was allowed as bad debt
• and subsequently it was recovered,
• the amount so recovered shall be considered
to be income under the head Business /
Profession
• in the year in which the amount has been
recovered.

83. LOSSES OF DISCONTINUED BUSINESS / PROFESSION
SECTION 41(5)
• Where an assessee has closed down his Business /
Profession
• and there are losses relating to such Business /
Profession,
• the losses shall be allowed to be carried forward
even after expiry of the period of 8 years.
• However such losses can be set off only from income
under Section 41(1), 41(3) and 41(4).
• (The above provisions shall not be applicable in case
of Speculation Business)

84. • Section 41(1) relates to some trading benefit in respect of a previously
incurred expenditure.
• Section 41(3) relates to
• where an asset representing expenditure of a capital nature on scientific
research is sold,
• and the proceeds of the sale together with the total amount of the
deductions exceed the amount of the capital expenditure,
• the excess or the amount of the deductions so made, whichever is the
less, shall be chargeable to income-tax as income of the business or
profession of the previous year in which the sale took place.

85. Section 41(4)
• Where a deduction has been allowed in respect of a bad debt
or part of debt under the provisions of clause (vii) of sub-
section (1) of section 36, then, if the amount subsequently
recovered on any such debt or part is greater than the
difference between the debt or part of debt and the amount
so allowed, the excess shall be deemed to be profits and gains
of business or profession, and accordingly chargeable to
income-tax as the income of the previous year in which it is
recovered, whether the business or profession in respect of
which the deduction has been allowed is in existence in that
year or not.

86. Special provisions consequential to changes in rate of exchange
of currency – 43A - Expenditure of a capital nature
• Notwithstanding anything contained in any other provision of this Act,
where an assessee has acquired any asset in any previous year from a
country outside India for the purposes of his business or profession and,
in consequence of a change in the rate of exchange during any previous
year after the acquisition of such asset, there is an increase or reduction
in the liability of the assessee as expressed in Indian currency (as
compared to the liability existing at the time of acquisition of the asset) at
the time of making payment—
• (a) towards the whole or a part of the cost of the asset; or
• (b) towards repayment of the whole or a part of the moneys borrowed by
him from any person, directly or indirectly, in any foreign currency
specifically for the purpose of acquiring the asset along with interest, if
any,

87. • the amount by which the liability as aforesaid is so increased or reduced during
such previous year and which is taken into account at the time of making the
payment, irrespective of the method of accounting adopted by the assessee, shall
be added to, or, as the case may be, deducted from—
• (i) the actual cost of the asset as defined in clause (1) of section 43; or
• (ii) the amount of expenditure of a capital nature referred to in clause (iv) of sub-
section (1) of section 35; or
• (iii) the amount of expenditure of a capital nature referred to in section 35A; or
• (iv) the amount of expenditure of a capital nature referred to in clause (ix) of sub-
section (1) of section 36; or
• (v) the cost of acquisition of a capital asset (not being a capital asset referred to in
section 50) for the purposes of section 48,
• and the amount arrived at after such addition or deduction shall be taken to be
the actual cost of the asset or the amount of expenditure of a capital nature or, as
the case may be, the cost of acquisition of the capital asset as aforesaid:

88. CERTAIN EXPENDITURE ALLOWED ONLY ON ACTUAL PAYMENT
BASIS - SECTION 43B
• Where an assessee maintains books of accounts on the basis of mercantile system
of accounting, all expenditures are allowed on due basis.
• However the expenses listed below shall be allowed only on actual payment basis:
-
• Sales tax, Custom Duty, Excise Duty, Service Tax, Municipal tax or License Fee Etc.
• Employer’s Contribution to RPF, approved superannuation fund, statutory
provident fund, approved gratuity fund or any other approved fund for
employee’s welfare.
• Bonus or Commission to the employees.
• Leave salary to the employees.
• Interest on loan taken from Public Financial Institutions, State Financial
Corporations, State Industrial Investment Corporation.
• Interest on loan or advance from Banks.

89. • Expenditure listed under Section 43B is
allowed only if the assessee has made the
actual payment. The proof of having made the
payment should be enclosed.
• The payment can be made till the last date of
filing of return of income. Otherwise the
expenditure shall be allowed in the year in
which the payment is made.

90. ACTUAL COST
SECTION 43(1)
• In case of depreciable assets, the depreciation is allowed on the actual
cost (which means total of expenditure incurred up to the date of putting
the asset to use).
• Where the assessee has incurred expenditure in connection with
transportation of the capital asset, the expenditure on loading and
unloading, transit insurance, payments given top the experts for
installation of such asset, interest on loan taken for purchase of such asset
(but only for the period between purchase of asset and put to use of such
asset) etc., such expenditure shall be capitalized.
• Where the assessee has received subsidy from the Government or similar
agency, the amount of subsidy will be deducted from the cost while
computing actual cost.

91. BOOKS OF ACCOUNTS
SECTION 44AA RULE 6F
• In case of Specified Profession
• A person having specified profession has to maintain
any books of accounts which may help the assessing
officer in computing his income. However, where the
gross receipt from the profession, has exceeded Rs.
1,50,000 during all the three years immediately
preceding the relevant Previous year, in such cases
assessee should maintain prescribed books of
accounts.

92. • “Prescribed Books of Accounts” shall include
Cash Book, Journal, Ledger, Bills Received,
Copies of Bills issued etc.
• Where a person is required to maintain the
prescribed books of accounts, such person
must retain these books of accounts for a
period of at least 6 years from the end of the
relevant Assessment Year.

93. “Specified profession” shall include:
• Medical Profession
• Architectural Profession
• Legal Profession
• Profession of Accountancy
• Interior Decoration
• Technical Consultancy
• Authorized representative
• Film artist.

94. • Where a person has started a specified
profession during the year, he must maintain
prescribed books of accounts if the gross
receipts are likely to exceed Rs. 1,50,000

95. In case of Business or Non-Specified Profession
• Where an assessee has Business or Non-Specified Profession,
in such cases no books of accounts are required.
• However, if the gross receipt exceeds Rs. 10 Lac or the
income is exceeds Rs. 1,20,000 in any of the three years
immediately preceding the relevant P.Y.,
• in such cases the assessee should maintain any books of
accounts which may help the assessing officer in computing
his income.
• (Prescribed Books are required only if the Books are required
to be Audited)

96. • Where the Business or the Non-Specified Profession has been
setup during the year,
• in that case assessee should maintain any books of accounts if
the Gross Receipt is likely to exceed Rs. 10 Lac or the income
is likely to exceed Rs. 1,20,000.
• Where the income of a person is to be computed on
presumptive basis under Section 44AD, 44AE and 44AF
• and such person has rejected presumptive income,
• in such case, the person should maintain any books of
accounts which may help the assessing officer in computing
his income.

97. COMPULSORY AUDIT OR TAX AUDIT
SECTION 44AB
• Where a person is engaged in a business and his turnover during the year
has exceeded Rs. 40 Lac, in such cases the person must get his accounts
audited in that particular year.
• Where a person is engaged in a specified or a non-specified profession
and his gross receipt during the year has exceeded Rs. 10 Lac, in such
cases, such person must get his accounts audited in that particular year.
• Where the income of a person is to be computed on presumptive basis
under Section 44AD, 44AE and 44AF and such person has rejected the
presumptive income, in such cases such person shall be required to get his
accounts audited.

98. • Where a person is required to get his accounts
audited, such person must submit the audit
report on or before the last date of filing of his
return of income.
• Where an assessee violates the provision of
Section 44AB, penalties shall be imposed
equal to 0.5% of the turnover but subject to a
maximum of Rs. 1 Lac.

99. PRESUMPTIVE INCOME IN CASE OF PERSONS ENGAGED IN
CIVIL CONSTRUCTION
SECTION 44AD
• Where a person is engaged in the business of civil
construction or in the business of supply of labor for
civil construction and his turnover during the year
does not exceed Rs. 40 Lac,
• in that case his income under the head Business /
Profession shall be 8% of the Gross Receipt
• and no other expenditure shall be allowed under
Section 28-44D
• and such person shall be exempt from maintaining
the books of account.

100. • “Civil Construction” means construction of
roads. Dams, bridges, sea port, airport etc.

101. • While computing Income under the head
Business / Profession, no further expenditure
shall be allowed under Section 28-44D
• Where the assessee is a partnership firm, in
such case salary and interest to the partners is
allowed as per Section 40(b).

102. • The assessee has the option to reject the
presumptive income but in that case the
assessee has to maintain books of accounts
and also he should get the books of accounts
audited.

103. PRESUMPTIVE INCOME IN CASE OF PERSONS ENGAGED IN
RETAIL TRADE
SECTION 44AF
• Where an assessee is in the business of retail trade and the
turnover does not exceed Rs. 40 Lac, in such cases income
shall be presumed to be 5% of the Gross Receipt.
• While computing Income under the head Business /
Profession, no further expenditure shall be allowed under
Section 28-44D
• If the assessee is a partnership firm, in that case salary and
interest to the partners is allowed as per Section 40(b).
• The assessee has the option to reject the presumptive income
but in that case the assessee has to maintain books of
accounts and also he should get the books of accounts
audited.

104. PRESUMPTIVE INCOME IN CASE OF NON-RESIDENTS
ENGAGED IN SHIPPING BUSINESS SECTION 44B
• Where a Non Resident is engaged in shipping
business, the income from shipping business
shall be presumed to be 7.5% of the following
amounts:-
– Amount received in India in connection with
loading of goods etc. outside India.
– Income received / receivable in connection with
loading of goods etc. in India.

105. PRESUMPTIVE INCOME IN CASE OF NON-RESIDENTS ENGAGED IN AIRCRAFT
BUSINESS SECTION 44BBA
• Where a Non Resident is engaged in Aircraft
business, the income from such Business shall
be presumed to be 5% of the following
amounts:-
• Amount received in India in connection with loading of
goods etc. outside India.
• Income received / receivable in connection with
loading of goods etc. in India.

106. PRESUMPTIVE TAX FROM THE 1ST
APRIL 2010, AS
PROPOSED IN THE JULY 2009 BUDGET
• The scope of presumptive taxation is proposed to be extended to all small
businesses with a turnover up to Rs. 40 lakh as per Budget - July, 2009.
• All such taxpayers are to have the option to declare their income from
business at the rate of 8 percent of their turnover and simultaneously
enjoy exemption from the compliance burden of maintaining books of
accounts.
• As a procedural simplification, they are also to be exempted from advance
tax and to be allowed to pay their entire tax liability from business at the
time of filing their return.
• This new scheme is to come into effect from the financial year 2010-11.

107. MINIMUM ALTERNATE TAX
• As per the Finance Minister’s Budget speech
on 6th
July, 2009, (Section 115 JB)
• Minimum Alternate Tax (MAT) is to be
increased to 15 per cent of book profits from
10 per cent.
• These amendments will take effect from 1st
April, 2010.

108. COMMODITIES TRANSACTION TAX
• As per the Finance Minister’s Budget speech
on 6th
July, 2009, Commodity Transaction Tax
(CTT) is to be abolished.
• These amendments will take effect from 1st
April, 2009.

109. Questions for Revision
• What is meant by the term ‘ Block of Assets’ .
How is depreciation calculated under the
Income Tax Act ?
• What are the basic conditions to claim
Depreciation ? Is it mandatory to claim
depreciation ?

110. Questions for Revision
• What are Preliminary expenses ? Discuss the
deductibility of Preliminary expenses. Give
some examples of such expenses allowable ?
• Are payments in excess of Rs 20,000 in cash
deductible under the head ‘ Income from
Business and Profession’. What are the
exceptions ?

111. • There are certain expenditures under the head ‘
Income from Business and Profession’ that are
deductible only on actual payment basis. Give some
examples of such expenditures ?
• What is meant by the term ‘specified profession’.
What is meant by ‘ prescribed books of accounts’.
Under what conditions does a person engaged in a
specified profession have to maintain prescribed
books of accounts.

112. • When is compulsory audit of books of
accounts for Income under the head ‘ Income
from Business and Profession’ necessary ?
When does such report need to be
submitted? What are the penalties for non
compliance ?

113. • What is the concept of presumptive income ?
Explain the provisions of the Income Tax Act in
relation to any one case where presumptive
income is permitted?

114. The End