business or profession - welcome to master …...no.1 for ca/cwa & mec/cec master minds 5....

CA Inter_39e_Income Tax _PGBP______________________________________5.1

No.1 for CA/CWA & MEC/CEC MASTER MINDS

5. INCOME FROM BUSINESS OR PROFESSIONCONCEPT WISE ANALYSIS OF PAST EXAM PAPERS OF IPCC

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SIGNIFICANCE OF EACH PROBLEM COVERED IN THIS MATERIALProblem No.

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Problem No.in old PM RTP MTP Previous

Exams

CR 1 ILL 6 ILL 3 - - - -CR 2 ILL 5 ILL 2 - - - -CR 3 ILL 2 - PQ 6 - - -CR 4 - - PQ 5 - - -CR 5 ILL 1 ILL 1(100%) - - - M 16 – 8M

CA Inter_39e_Income Tax _PGBP_______________________________________5.2

Ph: 98851 25025/26 www.mastermindsindia.com

CR 6 - ILL 5 - - - -CR 7 - ILL 6 - M 16 - -CR 8 ILL 10 - PQ 13 - - -CR 9 - - PQ 14 - - -

CR 10 ILL 13 ILL 11(100%) - - - -CR 11 ILL 12 - PQ 17 - - -CR 12 ILL 11 ILL 8 - N 15 - -CR 13 - ILL 14 - - - -CR 14 - ILL 13 - - - -CR 15 - - - - - -CR 16 ILL 16 - PQ 29 - - -CR 17 PQ 3 - PQ 21 - - N 15 – 8MCR 18 - - - - - N 12 – 7MCR 19 - - - - - -CR 20 - ILL 16 - - - -CR 21 ILL 19 ILL 17 - - - -CR 22 - - - - - -CR 23 PQ 8 - PQ 34 - - -CR 24 ILL 23 ILL 18 - - - -CR 25 - - - - - -CR 26 - - - - - -CR 27 - - - - - -CR 28 - - PQ 42 - - -CR 29 - - - - - -CR 30 - - - - - -CR 31 PQ 7 - PQ 44 - N 17-1

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AS 10 ILL 12 ILL 9 - - - -AS 11 - - - N 13 - -AS 12 - - - N 13 - -AS 13 - - - M 16 - -AS 14 ILL 15 ILL 14 - - - -AS 15 ILL 22 ILL 17 - - - -AS 16 - ILL 19 - - - -AS 17 - - PQ 36 - - -AS 18 ILL 18 - PQ 28 - - -AS 19 - - PQ 32 - - -AS 20 - - PQ 35 - - -AS 21 - - PQ 45 - - -AS 22 - - PQ 46 - - -AS 23 ILL 21(100%) - PQ 43 N 17 - -AS 24 PQ 9 - PQ 33 - - -



AS 25 - - PQ 48 - - -AS 26 - - PQ 24(100%) - - -AS 27 PQ 4 - PQ 22 - - -AS 28 PQ 5 - PQ 23 - - -AS 29 - - PQ 25 - - -AS 30 PQ 6 - PQ 26 - - -AS 31 ILL 21 - PQ 33 - - -AS 32 - - PQ 30 - - -AS 33 - - - N 16 - -AS 34 PQ 7 - PQ 6 - - -

INTRODUCTIONBusiness: The term “business” has been defined in section 2(13) to “include any trade, commerce ormanufacture or any adventure or concern in the nature of trade, commerce or manufacture”.

Profession: The term ‘profession’ includes vocation [Section 2(36)].

i) Profession – If a person carries on any activity, on the basis of

ability and knowledge acquired out of a professional study, degree / diploma.

ii) Vocation – If a person carries on any activity, on account of

inborn talent, skill and attributes.

Focus points Generally, profession means an occupation requiring some degree of learning. For instance, a

painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect and, even an astrologerare persons who can be said to be carrying on a profession but not business.

SEC.’S TO BE REMEMBERED:

Sec.28Sec.32Sec.35

Sec.35ADSec.36(1)

Sec.37Sec.40(a)Sec.40(b)

Sec.40A(3)Sec.41

Sec.43BSec.44AASec.44ABSec.44AD

Sec.44ADASec.44AE

Charging SectionDepreciationExpenditure on scientific researchspecified businessOther deductionsResiduary sectionDisallowances in case of all assessee’sAllowability of Remuneration & Interest to PartnersCash payments > 10,000Deemed ProfitsDeduction based on actual paymentsMaintenance of booksTax auditPresumptive taxation - construction businessPresumptive taxation - professionPresumptive taxation - goods transportation business

AMENDMENTS IN THE FINANCE ACT, 2017:

ADDITIONS DELETIONS MODIFICATIONSNIL NIL 32(1)(iia), Depreciation rates, 35(1)(ii), 35(1)(iia),

35(1)(iii), 35(2AA), 35(2AB), 35ABA, 35AD, 35CCC,35CCD, 36(1)(viia), 40A(3), 43B, 44AA, 44AB, 44AD,

44ADA, 44AE

ProfessionalIncome



However, it is not material whether a person is carrying on a ‘business’ or ‘profession’ or‘vocation’ since for purposes of assessment, profits from all these sources are treated and taxedalike.

Business necessarily means a continuous exercise of an activity; nevertheless, profit from asingle venture in the nature of trade may also be treated as business

1. CHARGING - Sec.28The following incomes shall be chargeable to income tax under the head PROFITS & GAINS OFBUSINESS OR PROFESSION (PGBP).

SEC.28(i): The profits & gains of any business or profession, which was carried on by the assesseeor on his behalf at any time during the previous year shall be chargeable to tax under the headPGBP.

Focus points: Profits may be realised in money or in money’s worth (i.e., in cash or in kind). If the profit is

realised in any form other than cash, then the equivalent value in cash of such profit/ income shallbe taken.

Capital receipts are not generally to be taken into account while computing profits under thishead.

Any person carrying on business or profession was benefited from some other person who isunder no obligation to pay anything at all. For instance, if an amount paid to a lawyer by a personwho is not his client, then the amount so received shall be assessable as the lawyer’s income.

Gains made even for the benefit of the community by a public body would be liable to tax.

Income from illegal business is also taxable.

The profits of each business of the assessee shall be computed separately but the assessmentshall be made on aggregate basis.

Income earned through an agent is taxable in the hands of principal under the head PGBP.Further, the commission is taxable in the hands of agent under the head PGBP (for LIC agents,taxable under the head other sources.

The charge is on the profits (i.e. on the income net off all admissible deductions) but not on theincome.

Note:1. Income from business is taxable under the head “PGBP”.

Exceptions:a) Rent (IFHP) b) Dividends (IFOS) c) Winnings (IFOS)

2. Business (or) profession must Carried on by the assessee during the previous yearExceptions:a) Sec.41: Discussed in detailed later.

b) Sec.176(3A): Any money collected after the discontinuance of the business will be chargeablein the same manner and to the same extent as if the business was in continuation.

c) Sec.176(4): Any money collected after the discontinuance of the profession will be chargeablein the same manner and to the same extent as if the profession was in continuation.

SEC.28(ii) - COMPENSATION:Compensation means normally a capital receipt but there are certain receipts by way ofcompensation, which are taxable under PGBP. What are they?a) Compensation received by any person, by whatever name called, managing the whole or

substantially the whole of -



i) the affairs of an Indian company orii) the affairs in India of any other company at or in connection with the termination of his

management or office or the modification of any of the terms and conditions relating thereto;b) Any person, by whatever name called, holding an agency in India for any part of the activities

relating to the business of any other person at or in connection with the termination of the agencyor the modification of any of the terms and conditions relating thereto;For e.g. B was the distributor of a company for entire Northern India. Later, the company hasmodified the contract of agency limiting the coverage only for Delhi. For that, companycompensated B with Rs.5,00,000. Such amount shall be taxable as business income

c) Compensation received by any person in connection with the vesting to the Government or anycorporation owned/controlled by Government of the management of business.

By taxing compensation received on termination of agency or on the takeover of management (whichis a capital receipt) as income from business, section 28(ii) provides exception to the general rule thatcapital receipts are not income taxable under the head PGBP.SEC.28(iii): Income of any trade, professional association from specific services rendered to itsmembers. Further, it is not necessary that the income received by the association should be definitely/directly related to such specific services.(Specific services are those services which are available even for members only on payment ofprescribed fee). Eg., Chamber of Commerce, Stock Broker’s Association.SEC.28(iii)(a) to (e): Export incentives in the form of –a) cash compensatory supportb) duty drawbackc) import entitlement licensesd) Profit on transfer of duty entitlement pass book schemee) Profit on transfer of duty free replenishment certificateSEC.28(iv) - Value of any benefit/ perquisite: The value of any benefit or perquisite whetherconvertible into money or not, arising from business/profession.E.g: Mr. X, a lawyer, receives a gift, a wrist watch, worth Rs.5,000 from his client. This is also a perktaxable in the hands of the lawyer as income from profession, as the gift or perk arises to him duringthe course of his profession.SEC.28(v) – Sum due to or received by, a partner of a firm: Any interest, salary, bonus,commission or remuneration, by whatever name called, receivable or received by the partner of a firmfrom such firm to the extent such interest etc., was allowed U/s.40(b) in the assessment of firm (Toavoid double taxation).

Eg., Suppose a firm pays interest to a partner at 20% simple interest p.a. The allowable rate ofinterest is 12% p.a. Hence the excess 8% paid will be disallowed in the hands of the firm. Since theexcess interest has suffered tax in the hands of the firm, the same will not be taxed in the hands ofthe partner.Sec.28(vi) - Any sum received under Keyman Insurance policy:Any sum received (including bonus) under a key man insurance policy by will be taxable as businessincome“Keyman insurance policy” means a life insurance policy taken by a person on the life of anotherperson who is or was the employee of the first mentioned person or is or was connected in anymanner whatsoever with the business of the first mentioned person.Sec.28(vii): Where any capital asset, in respect of which deduction has been allowed u/s 35AD, hasbeen discarded demolished, destroyed or transferred and consequent to that, any sum has beenreceived or is receivable, shall be subject to tax under the head ‘Profit and Gains of Business orProfession’. (Discussed in detailed later)

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Sec.28(viii) – Any sum whether received or receivable, in cash or kind, under an agreement:Any sum whether received or receivable (which are recurring in nature), in cash or kind, under anagreementa) For not carrying out any activity in relation to any business; or profession; orb) For not to share any know-how, patent, copyright, trade mark, license, franchise or any other

business or commercial right of similar nature or information or technique likely to assist in themanufacture or processing of goods or provision for services.

Note for point (a):Howeveri) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to

manufacture, produce or process any article or thing or right to carry on any business orprofession, which is chargeable under the head “Capital gains”;

ii) Any sum received as compensation, from the multilateral fund of the Montreal Protocol onSubstances that Deplete the Ozone layer under the United Nations Environment Programme, inaccordance with the terms of agreement entered into with the Government of India.

Speculation business: (FOR STUDENTS SELF - STUDY)a) According to Explanation 2 to Sec.28, where an assessee carries on speculative transaction

which constitutes a business, such business shall be considered as a separate and distinctbusiness. This is necessary because Sec.73 provides that the losses in speculation businessshall be set off against the profits of a speculation business only.

b) A speculative transaction is defined u/s. 43(5) to mean a ‘’ transaction in which a contract forpurchase or sale of any commodity including stocks and shares is periodically or ultimately settledotherwise then by actual delivery’’.Note: If a part of the business of a company consists in the purchase and sale of shares of othercompanies, then such company shall be deemed to carry on speculative business to such extentof business consisting purchase and sale of shares. However, this deeming provision shall not beapplied to a company - (a) whose gross total income chargeable to tax consists of interest onsecurities, income from house properties, capital gains, income from other sources or (b) whoseprincipal business is trading in shares/ banking/ granting of loans and advances.

c) Where the assessee carries on both speculative and non-speculative transactions on a compositebasis and maintains common accounts, it is necessary to determine the income or loss separatelyand distinctly from speculative business and non-speculative business.

d) For this purpose, the business expenditure incurred should be allocated between speculativebusiness activities and non-speculative business activities on a reasonable basis.

Exceptions: The following shall not be treated as speculative transactions:a) Hedging contract in respect of raw materials/ merchandise: A contract in respect of raw

materials or goods entered in the normal course of business to guard against loss due to pricefluctuations in respect of the contracts for actual delivery.

b) Hedging contract in respect of stocks and shares: A contract in respect of stocks and sharesentered into by a dealer or investor to guard against loss through price fluctuations.

c) Forward contract: A company whose principle business is that of trading in shares has beenexcluded in the speculative transaction. (Finance Act, 2014)

d) Trading in derivatives: An eligible transaction carried out in respect of trading in derivatives in arecognized stock exchange.

e) Trading in commodity derivatives: An eligible transaction in respect of trading in commodityderivatives in a recognized association which is chargeable to commodities transaction tax(CTT)(Finance Act, 2013)





2. METHOD OF ACCOUNTING - Sec.145According to sec.145, any income chargeable under the head “PGBP” shall be computed inaccordance with the method of accounting regularly followed by the assessee (i.e., cash basis ormercantile basis)

However, method of accounting is not relevant for Sec.32, Sec.43B, Sec.35D, DD, DDA etc.

Under section 145(2), Central Government has notified ten new ICDSs to be applicable from A.Y.2017-18. The new ICDSs have to be followed by all assessees (other than an individual or a HUFwho is not required to get his accounts of the previous year audited in accordance with the provisionsof section 44AB) following the mercantile system of accounting, for the purposes of computation ofincome chargeable to income-tax under the head “Profits and gains of business of profession” or“Income from other sources”, from A.Y. 2017-18.

The ten notified ICDSs are:

ICDS No ICDS TitleEquivalentAccounting

standardissued by ICAI

AS title

ICDS I Accounting Policies 1 Disclosure of accounting policiesICDS II Valuation of Inventories 2 Valuation of inventoriesICDS III Construction Contracts 7 Construction contractsICDS IV Revenue Recognition 9 Revenue recognitionICDS V Tangible Fixed Assets 10 Accounting for fixed assetsICDS VI The Effects of Change s in

Foreign Exchange Rates11 The Effects of Changes in Foreign

Exchange RatesICDS VII Government Grants 12 Accounting for Government

GrantsICDS VIII Securities 13 Accounting for investmentsICDS IX Borrowing Costs 16 Borrowing costsICDS X Provisions, Contingent

Liabilities and ContingentAssets

29 Provisions, Contingent Liabilitiesand Contingent Assets

CARDINAL FEATURES OF NOTIFIED ICDSs:i) Applicability: All the notified ICDSs are applicable for computation of income chargeable under

the head Profits and gains of business or profession or Income from other sources and not for thepurpose of maintenance of books of accounts. This is stated in the Preamble at the beginning ofeach ICDS.

ii) Position in case of conflict with the Income-tax Act, 1961: In the case of conflict between theprovisions of the Income Tax Act, 1961 and the notified ICDSs, the provisions of the Act shallprevail to that extent. This is also stated in the Preamble at the beginning of each ICDS.

iii) Scope Paragraph: Each of the ten notified ICDSs has a scope paragraph explaining what exactlythe ICDS deals with. In some standards, the scope paragraph also specifies what the ICDS doesnot deal with.

iv) Transitional Provisions: All ICDSs (except ICDS VIII on Securities) contain transitional provisionsto facilitate first time adoption and prevent any tax leakage or any double taxation.

v) Disclosure Requirements: All ICDSs (except ICDS VI on Effects of changes in foreign exchangerates and ICDS VIII on Securities) contain specific disclosure requirements. The last paragraph(s)of these ICDSs is on disclosure.





3. MODE OF INCOME COMPUTATION - Sec.29Income under this head shall be computed in accordance with Sec.30 to Sec.43D.

PROFORMAComputation of “Profits and gains of business or profession”

Particulars AmountNet profit as per profit and loss account AAdd: Expenses debited to profit and loss account but not

Allowable as deductionB

Depreciation as per books of accountsIncome-tax30% of payment made to residents on which tax is not deducted atsource under section 40(a)(ia)Any payment to partner (in case of firm only) by way of salary, interest,bonus, commission or remuneration in excess of prescribed limits u/s40(b)Disallowance u/s 40A(3) for payment or aggregate paymentsexceeding Rs.10,000 in a single day otherwise than by way of A/cpayee cheque/bank draft or use of ECS through bank account.Personal expensesCapital expenditureAmortization of preliminary expenditure/ expenditure incurred undervoluntary retirement scheme (4/5th of expenditure)Fine or PenaltyAll expenses related to income which is not taxable under this heade.g. Municipal taxes in respect of house property

(A + B) CLess: Expenditure allowable as deduction but not debited to profit and

loss accountD

Depreciation as per Income-tax Act, 1961Investment allowance under section 32ADWeighted deduction under section 35, 35CCC, 35CCD in excess of theamount already debited to profit & loss A/c

(C - D) ELess: Income credited in P& L A/c but not taxable under PGBP/ any

other headF

Dividend income exempt U/S. 10(34) or taxable U/S. 115BBDAAgricultural income exempt U/S. 10(1)Interest on securities taxable under the head “income from othersources”Profit on sale of capital assets taxable under the head “capital gains”Rent from house property taxable under the head “IFHP”Casual incomes (winning from lotteries, horse races, games etc.)taxable under the head “income from other sources”Gifts taxable under the head “income from other sources”Income tax refund not taxableInterest on income tax refund taxable under the head “income fromother sources”

Add: Deemed Income GBad debts recoveredRemission or cessation of a trading liability

Profits and gains of business or profession (E - F + G) H



4. EXPENSES RELATING TO BUILDING - Sec.30In respect of the premises, used for the purposes of the business or profession, the followingexpenses relating to rent, rates, taxes, repairs and insurance, shall be allowed as deductions whichare explained below:

1. Any sum on account of land revenue, local taxes or municipal taxes subject to Sec.43B is allowedas deduction.

2. Where the premises used partly for business and partly for other purposes, only a proportionatepart of the allowable expenses used for business purpose shall be allowed as a deduction.

3. In case of sub-letting of premises, the deduction shall be restricted to the difference between therent paid and rent received.

4. Where the premise is taken on lease, rent of the premises is allowed as deduction.

a. Notional Rent paid by proprietor (i.e. owner) to himself is not allowed as deduction.

b. Rent paid by firm to its partner for using his premises is allowed as deduction.

5. Where the premise is owned by the assessee, it can claim depreciation u/s. 32(1).

6. Insurance charges against the risk of damage or destruction of the building.

7. Repairs of the premises shall be allowed as deduction to the owner/ tenant (if he bears the cost ofrepairs)/ lessee, licensee (only current repairs).

8. Current repairs if the assessee bears the cost of repairs.

9. Capital repairs incurred by the assessee are not allowed as deduction whether premises isoccupied as a tenant or as an owner. However, the assessee can claim depreciation on capitalrepairs.

Meaning of Current Repairs and Capital Repairsa) Expenditure incurred for replacing the part of the asset is current repairs.

b) Expenditure incurred for replacing the whole of the asset is capital repairs.

c) Expenditure incurred for addition of the asset is a capital expenditure.

d) Renovation of assets which effects the sales is current repairs.

5. EXPENSES RELATING TO P & M, FURNITURE - Sec.31The following expenses are spelt out as deductible in respect of machinery, plant and furniture usedfor assessee’s business or profession:a) Current repairs (Not being arrears for earlier years even though they are allowable U/S.37);b) Insurance premium charges against the risk of damage or destruction of the machinery, plant/

furniture.Focus points: The premium should have been actually paid (or payable under the mercantile system of

accounting). Amount paid to the trade association as a contribution to indemnify the loss, will qualify as

insurance premium and allowed as deduction even though the same ensures benefit to someonenot being the owner of the asset.

In order to claim deduction under this section, the asset must be owned and used by theassessee. Further, it is important to note here that even though the assessee may/ may not usethe asset for full year, he can claim the deduction for full amount provided that the asset must notbe a discarded asset.

Repairs include renewal/ renovation of an asset but not its replacement/ reconstruction.

However, any repair expenditure of capital nature shall not be allowed as deduction under thissection. But can be claimed depreciation U/S 32



If machinery, plant and furniture are taken on hire, then such rent payable is not covered by sec.31but shall be allowed as deduction u/s.37(1).

6. DEPRECIATION - Sec.321. Is it compulsory to claim depreciation: The Supreme Court in the case of Mahendra Mills held

that claiming depreciation is optional.To nullify the judgment an Explanation to Sec.32 has been inserted to clarify that depreciationprovisions shall apply.

2. Assets eligible for depreciation:

Tangible assetsPlant, Machinery, Building and Furniture etc.However, Land is not a depreciable asset

Intangibleassets

Know how, Trade mark, Patent, License, Franchise, Copy-right, etc.However, Self / Internally generated goodwill is not a depreciable asset.

3. Definitions:a) Buildings: It includes Roads, Bridges, culverts, wells and Tube wells.

b) Furniture: Nowhere defined in the Act, but any asset used for convenience and decoration istreated as furniture. E.g.: Partition work and false ceiling in the building.

c) Plant & Machinery: It includes vehicles, ships, books, scientific apparatus, surgicalequipment, etc. but it does not include livestock, tea bushes.

4. The term ‘Plant’ is defined as residuary one so as to include any asset not falling under otherclassifications but which is essential to carry on the business or profession.

5. Types: normal depreciation, reduced depreciation & additional depreciation.

6. Conditions for claiming depreciation:

Conditions Explanation1. Assessee must be

the owner of theAsset.

Exceptions:a) Explanation 1 to Sec.32: If the assessee is occupying any

building as a tenant, any capital expenditure incurred towardsrenovation, extension etc. on such building can be treated as thebuilding belonging to him & depreciation can be claimed.

b) Property acquired on hire purchase basis.c) Joint ownership is also recognised for the claim of depreciation.d) Registered ownership is not necessary (Sec.53A of transfer of

property act).2. The assessee must

use the asset forthe purpose ofcarrying on thebusiness orprofession

a) It is clarified that quarters given to the employees is considered tohave been used for the employer’s business. Similarly, fans,refrigerators etc. provided by the employer shall be considered tohave been used for the employer’s business.

b) Whether usage required is active usage or passive usage? Ans.:Passive usage is sufficient, i.e. it is sufficient if the asset is keptready for use.

c) When the asset is neither used at all nor kept ready for use thenno depreciation in respect of that asset is available. This rule isapplicable in the first year in which the asset is acquired as well asin the subsequent years.

d) The owner of the asset can claim the depreciation on the plant,furniture, machinery, building which were hired/ leased to anotherperson. However, in the case of other assets, the owner can claimthe depreciation U/S.57(ii).



Note:For the purpose of business or profession –

i) To claim depreciation, it is not necessary to purchase the asset but a further condition isnecessary that asset should be ‘put to use’ in the relevant previous year (actual use is notnecessary) i.e. depreciation is charged from the day when asset is put to use and not from theday of its acquisition.

ii) Once the asset is ‘put to use’ depreciation is allowed whether the use of the asset is active orpassive. ‘Passive use’ means asset remains idle due to lock-outs or strike. In passive usedepreciation is available.

iii) In the case of buildings, an assessee who has taken the land on hire and build asuperstructure on it (i.e. building) can claim depreciation on such building provided he uses/hires such building for his business purpose.

Tit Bit 1:State whether the following statements are true or false

1. Depreciation is allowed on individual assets. (Ans.: False)

2. Depreciation can be claimed if it is used for personal assets. (Ans.: False)

3. If there are two joint owners of any asset, then each of them shall get deduction ofdepreciation in respect his own share in the property. (Ans.: True)

4. Is it mandatory to claim depreciation? (Ans.: True)

5. Stand by equipment’s and fire extinguishers can be capitalized if they are ready to use.(Ans.: True)

6. Machinery spares which can be used only in connection with a tangible fixed asset and whoseusage is irregular can be capitalized. (Ans.: True)

7. Reduced depreciation: (180 days condition)If

a) An asset is acquired during the year “and”b) Put to use for the purpose of business or profession for less than 180 days.

Then on such asset, depreciation shall be allowed for 50% of normal depreciation.

Note: The restriction of 180 days is applicable only for the year in which such asset is acquiredand not in next year’s. In the subsequent years even if the asset is used for less than 180 daysfull depreciation is allowed for those years. (E.g.: If the new machinery is purchased on 20.3.2017and put to use only on 28.12.2017, depreciation would be allowable at ordinary rates for theprevious year 2017-2018, because the asset has not been acquired during the previous year2017-18 but acquired in previous year 2016-17).

Tit Bit 2:State whether full depreciation or otherwise is allowed on the following:

Asset purchased on Asset put to use on Is Depreciation allowed Fully / Partly?05.08.2016 08.11.201605.08.2016 08.09.201601.01.2016 01.12.201601.12.2016 08.12.2017

QUANTUM/AMOUNT OF DEPRECIATION: Depreciation can be claimed as a % of WDV of theblock of Assets on the basis of WDV method. Therefore, depreciation is allowed on the system ofblock of assets (in case of electricity companies - Asset wise) & allowed on WDV method (in caseof electricity companies - SLM).



However, in the case of companies being a power generating unit can claim the depreciation atthe rates prescribed in Appendix IA read with Rule 5(1A) of Income tax rules, exercised suchoption before the due date of ROI for the AY relevant to the PY in which it starts the powergeneration. Once the option exercised cannot be taken back in any PY.

Block of assets: Each such group of assets falling under same classification and havingsame rate of deprecation will be identified as a block of assets.

8. How to compute WDV of the Block of Assets - Sec.43(6):Opening WDV of the block XXXAdd: Actual cost of additions - Sec.43(1) XXXLess: Money receivable in respect of assets sold, demolished, discarded & destroyed XXXAmount on which dep. can be claimed XXXLess: Current year depreciation XXXClosing WDV XXX

Remember that assets which do not qualify for depreciation such as land, personal assets etc.,will not form part of any block.

Note:1. The WDV shall be the actual cost in case of the assets newly acquired in the PY whereas in

the case other assets WDV shall be the cost as reduced by all the allowable deductions (i.e.depreciation).

2. In case where any block of assets is transferred by a holding company to a subsidiarycompany or vice versa subject to conditions as specified in Sec.47, the actual cost to thetransferee company shall be the WDV of the block in the books of Transferor Company asreduced by the allowable depreciation.

3. In the case of ‘composite income’ (manufacturer of tea etc covered under Rule 8), for thepurpose of computing WDV of assets acquired before the previous year, the total amount ofdepreciation shall be computed as if the entire composite income of the assessee ischargeable under the head “PGBP”. The depreciation so computed shall be deemed to havebeen “actually allowed” to the assessee.

4. The WDV shall be taken as NIL, if –

(a) The moneys receivable (including the value of scrap) by the assessee in regard to theassets sold or otherwise transferred during the PY may exceed the WDV at the beginningof the year plus the actual cost of any new asset acquired if any.

(b) All the assets in the relevant block may be transferred during the year.

9. ACTUAL COST - SEC.43(1): (Applicable for 'individual' assets)

Total cost of the asset XXX

Less: Amount of subsidy or grant received XXXXXX

Add: Interest on capital borrowed for purchase of an asset, paid from the dateon which the capital was borrowed and up to the date such asset was first put touse, shall not be allowed as deduction. (Explanation 8) (FA:2015)

XXX

Expenses incurred for acquiring the asset (E.g. Freight) XXXExpenses incurred in connection with the installation XXXActual cost of the Asset XXX

Note: However, where an assessee incurs any expenditure for acquisition of any asset inrespect of which a payment or aggregate of payments made to a person in a day, otherwise thanby an account payee cheque drawn on a bank or account payee bank draft or use of electronicclearing system through a bank account, exceeds Rs.10,000, such expenditure shall not form partof actual cost of such asset [proviso to section 43(1)]



EXPLANATIONS TO SEC.43(1):

Expl. Mode of acquisition Actual cost

1 Asset acquired for scientific researchsubsequently brought into business use.

Actual cost less deduction availedu/s.35.

2 Acquired by way of gift or inheritance WDV to the previous owner.

3Asset acquired from any other personusing the asset for his business /profession with a view to claim enhanceddepreciation.

Actual cost to be determined by theAssessing Officer with the priorapproval of Deputy Commissioner.

4 Asset transferred by the assessee andreacquired by him.

The WDV at the time of originaltransfer or the price paid for reacquiringthe asset, whichever is less.

4AAsset transferred and depreciation wasalso claimed by the assessee andreacquired by him by way of lease, hire orotherwise.

the WDV of the transferred assets atthe time of transfer thereof by theassessee.

5 Building used for private purposesubsequently brought into business use.

The cost of the building as reduced bythe notional depreciation calculated upto the year of bringing the asset tobusiness at the rate applicable to thatyear.

6

Asset transferred by a holding Co. to itssubsidiary co. or vice versa if the following2 conditions are satisfied:a. 100% subsidiary co.b. Transferee co. is Indian company.

WDV to the transferor company will beadopted as the actual cost to thetransferee company.

7Transfer of capital asset in a scheme ofamalgamation by amalgamating co. toamalgamated Indian co.

WDV to the amalgamating co. will betaken as the actual cost to theamalgamated company.

7A Capital asset transferred by a DemergedCo. to the resulting Indian company

WDV to the Demerged Company willbe taken as the actual cost to ResultingCo.

9 Asset acquired subject to levy of exciseduty or customs duty.

So much of the duty in respect of whichCENVAT credit was allowed, shall notform part of the actual cost.

11Asset is acquired outside India by anassessee, being a non-resident and suchasset is brought by him to India

Cost incurred by the assessee asreduced by the equal amount ofdepreciation calculated at the rate inforce that would have been allowablehad the asset been used in India

12Capital asset is acquired under a schemefor corporatisation of a recognised stockexchange in India approved by the SEBI

Actual cost to the assessee as if nocorporatization takes place

13

Actual cost of any capital asset on whichdeduction has been allowed or allowableu/s 35AD &Asset acquired from Specified businessactivities u/s 35AD by way of:i. Gift or will of Irrevocable trustii. On any distribution on liquidation of the company

Actual cost shall be adopted as Nil.



iii. Any distribution of capital assets on totalor partial partition of a HUF

iv. Transfer through any specified businessreorganization as referred in Sec.47.

ILLUSTRATION: A car purchased by Dr. Soman on 10.08.2014 for Rs. 5,25,000 for personal useis brought into professional use on 01.07.2017 by him, when its market value was Rs. 2,50,000.

Compute the actual cost of the car and the amount of depreciation for the assessment year 2018-19 assuming the rate of depreciation to be 15%.

Answer:As per section 43(1), the expression “actual cost” would mean the actual cost of asset to theassessee. The purchase price of Rs. 5,25,000 is, therefore, the actual cost of the car to Dr.Soman. Market value (i.e. Rs. 2,50,000) on the date when the asset is brought into professionaluse is not relevant. Therefore, amount of depreciation on car as per section 32 for the A.Y.2018-19 would be Rs. 78,750, being Rs. 5,25,000 x 15%.

Note: it is important to note here that the actual cost shall be the cost as reduced by thenotional depreciation calculated up to the year of bringing the asset to business at the rateapplicable to that year for the buildings only (Explanation 5 to Sec.43(1)).

10. GENERAL CONSIDERATIONS ON COST / DEPRECIATION:a) Subsidy/ grant/ reimbursement: Explanation 10 to Sec.43(1) contemplates that the actual

cost shall not include to the extent of an amount of subsidy/ grant/ reimbursement granted/funded by CG/ SG/ any authority/ any other person in relation to a specific asset.

b) Composite Subsidy: When subsidy received cannot be directly related to the Asset acquired,proportionate amount calculated by considering all assets shall be excluded.

c) 'A' Ltd. started an industry in a backward area for which it received a subsidy of 1 crore fromthe CG. Should it be reduced from the cost?Ans.: It need not be reduced because this subsidy so received is directly related to thelocation but not to the asset.

d) Depreciation is allowed to lessor not to lessee (Against to AS-19).e) Consequences if depreciable assets are sold: Sec.50 becomes applicable. (refer capital

gains chapter)f) While claiming dep. for building, the cost of the land should be excluded, since the land is a

non-depreciable asset.g) If any asset is partly used for business and partly for personnel purposes, only

proportionate expenses and depreciation can be claimed - Sec.38.

11. DEPRECIATION IN THE CASE OF AMALGAMATION ETC.

a) The aggregate of depreciation allowable to the predecessor and the successor shall notexceed in any previous year the deduction calculated at the prescribed rates as if thesuccession or the amalgamation or the demerger, had not taken place.Notes: Succession means change of ownership in the business, keeping the business intact -i) to the amalgamating company and the amalgamated company in the case of

amalgamation, orii) to the demerged company and the resulting company in the case of demerger

b) such deduction shall be apportioned between thei) predecessor and the successor, orii) the amalgamating company and the amalgamated company, oriii) the demerged company and the resulting company,

c) In the ratio of number of days for which the assets were used by them.



12. DEPRECIATION RATES (APPENDIX 1 TO INCOME TAX RULES)

TANGIBLE ASSETS

1. BUILDINGS:a) Buildings which are used mainly for residential purposesb) Building which are not used mainly for residential purposes other than (a), (c)

and (d).c) Buildings acquired on/ after 01.09.2002 for installing P&M forming part of

water supply project or water treatment system and put to use for thebusiness of providing infrastructure facilities

d) Purely temporary erections such as wooden structures

5%10%

40%

40%

2. FURNITURE AND FITTINGS:Furniture and fittings including electrical fittings 10%

3. PLANT & MACHINERY:

a) Motor cars, other than those used in a business of running them on hireacquired and put to use on/ after 01.04.1990.

15%

b) Motor buses, Motor Lorries and Motor taxis used in a business of running themon hire.

30%

c) Aeroplane & Aero engines 40%d) Moulds used in rubber and plastic goods factories. 30%e) Lifesaving medical equipments. 40%f) Computers including computer software. 40%g) Air & Water pollution control equipment, solid waste control equipment and

solid waste recycling and resource recovery systems.40%

h) Energy saving devices. 40%i) Gas Cylinders including valve and regulators. 60%j) Books owned by assessee carrying on a profession being annual publications

and books owned by assessee carrying on business in running lendinglibraries

40%

k) Books other than those mentioned above. 40%l) Ships & Vessels 20%m) Other plant and machinery 15%n) Oil wells 15%o) Wind mills and any specifically designed devices which runs on windmills

installed on or after 01.04.2014Note: If the above asset was installed before 01.04.2014, then thedepreciation is 15%

40%

INTANGIBLE ASSETSKnow how, patents, copy rights, trade marks, licenses, franchises etc. 25%

13. Part I - ADDITIONAL DEPRECIATION ON NEW PLANT & MACHINERY: With a view to give aboost to the manufacturing sector this is allowed in addition to the normal depreciation.a) Additional depreciation is available to all assessee engaged in the business of manufacture or

production of any article or thing on or after 01.04.2005. Also extended to the business ofgeneration or transmission or distribution of power (W.E.F. AY 2017 - 18). It alsoapplies to captive power plant

b) Additional depreciation is allowed on New P&M except the following assets



i) Buildings and furnitureii) Road transport vehicles, ships and aircraftsiii) Any office appliancesiv) Any machinery or plant installed in any office premises or any residential accommodation,

or guest housev) Second hand P&M whether used in India or outside Indiavi) Any P&M, where 100% deduction / depreciation is allowed under the act.

c) Rate:ADDITIONAL DEPRECIATION

If eligible manufacturing unit is setup in Rate of AdditionalDepreciation

Notified areas namely West Bengal, Telangana, Andhra Pradesh,Bihar (W-TAB)Condition: The Eligible P&M shall be acquired and installed duringthe period between 1st April, 2015 and 31st March, 2020.

35%

Any other part of India 20%

Note:i) Additional depreciation is over and above the normal depreciation.

ii) Rate of additional depreciation is 20% / 35%. However, if the asset is acquired and put touse in the same previous year for less than 180 days, then the rate of depreciation shallbe 10% / 17.5%. The balance of the depreciation shall be allowed in the immediatelysubsequent FY.

iii) Depreciation shall be computed on individual asset basis and not on block of assets.

iv) Additional depreciation is not available if the new plant is sold in the year of acquisition.

v) However, a power generating unit which claims depreciation on SLM basis can’t claimadditional depreciation.

vi) The business of printing or printing and publishing amounts to manufacture or productionof an article or thing and is, therefore, eligible for additional depreciation under section32(1)(iia).

vii) The additional depreciation is available only in the year in which such asset was acquired(1-year benefit).

Tit bit 3:Nokia Ltd is engaged in the business of manufacture of mobile phone since 2006. Computenormal depreciation and additional depreciation for the AY 2017-18. (Rate of depreciation –15%)

Case 1 Case 2 Case 3WDV of plant on 01.04.2017 6,00,000 3,00,000 6,00,000Purchases 2,00,000 6,00,000 1,50,000Sale 7,00,000 10,00,000 50,000

Answer

(TEACH PROBLEM N0 1, 2, 3, 4, & 5 OF CLASSROOM DISCUSSION)

Part II - TERMINAL DEPRECIATION: In the case of power sector undertakings, if any building/plant/ furniture/ machinery has been sold, discarded, demolished/ otherwise destroyed in the PY,then the amount equivalent to the difference between the WDV of such asset(s) and the moneysreceived including the value of scrap shall be allowed as deduction provided that the deficiencyhas been actually written off in the assessee’s books of accounts.



14. PROVISION FOR UNABSORBED/ UNCLAIMED DEPRECIATION - SEC.32 (2):

Where in any year, depreciation can’t be absorbed in full, because of:

a) There being no profits or gains chargeable for that previous year Or

b) The profits or gains chargeable being less than the depreciation allowance.

TREATMENT:It is deductible from income chargeable under other heads of income (Except Income fromsalaries) for the same assessment year.

Carry forward:a) If depreciation is still unabsorbed, it can be carried forward to the subsequent assessment

year(s) by the same assessee.

b) Such unabsorbed depreciation can be carried forward indefinitely.

c) The business or profession need not be in continuance, during the previous year in which setoff is claimed.

Set off in subsequent years: It can be set off, in the following order of priority:

a) Current year depreciation

b) Brought forward business loss.

c) Unabsorbed depreciation *.

* It shall be treated as current year depreciation. With the result, such unabsorbed depreciationcan be set off from income chargeable under other heads of income (Except Income fromsalaries).

7. INVESTMENT IN NEW PLANT OR MACHINERY (Sec.32AD)Investment in new Plant or Machinery (Sec.32AD):a) Eligible assessee: All assesseesb) Effective date: W.E.F. 01.04.2015c) Period of Acquisition & Installation: Acquisition and Installation during the period from

01.04.2015 to 31.03.2020.d) Conditions:

i) Commencement: assessee should set up an undertaking or enterprise on or after01.04.2015.

ii) Location: In any notified Backward Area in the state of Andhra Pradesh or Bihar orTelangana or West Bengal

e) Deduction for that A.Y: 15% if the Actual Cost of such New Assets.f) Last year of deduction: AY 2020 – 21Notes for Sec.32AD:a) Assessee should be engaged in the business of manufacture or production of any article

thing.b) Sale of new asset: If any new asset acquired and installed by the assesses is sold or otherwise

transferred except in connection with the amalgamation or demerger, within a period of 5years from the date of its installation, the consequence of the same shall be as under:i) The amount of deduction allowed under section 32AD in respect of such new asset shall be

deemed to be income chargeable under the head profit and gains of business and professionof the year in which new asset is sold or otherwise transferred.

ii) In addition to the above, if any capital gain arises under section 50 on account of transfer ofsuch new asset that too shall become taxable in that previous year.



CA Inter_39e_Income Tax _PGBP _____________________________________5.18


c) “New asset” means the same meaning as discussed in the additional depreciation concept.d)

State Notified areas(1) Telengana Adilabad, Nizamabad, Karimnagar, Warangal, Medak, Mahbubnagar,

Rangareddy, Nalgoda, Khammam(2) West

Bengal

South 24 Parganas, Bankura, Birbhum, DakshinDinajpur, Uttar Dinajpur,Jalpaiguri, Malda, East Medinipur, West Medinipur, Murshidabad,Purulia

(3)

Bihar

Patna, Nalanda, Bhojpur, Rohtas, Kaimur, Gaya, Jehanabad,Aurangabad, Nawada, Vaishali,Samastipur, Darbhanga, Madhubani,Purnea, Katihar, Araria, Jamui, Lakhisarai, Supaul, Muzaffarpur,SheoharArwal, Banka, Begusarai, Bhagalpur, Buxar, Gopalganj,Khagaria, Kishanganj, Madhepura, Munger, West Champaran, EastChamparan, Saharsa, Saran, Sheikhpura, Sitamarhi, Siwan.

(4) AndhraPradesh

Anantapur, Chittoor, Cuddapah, Kurnool, Srikakulam, Vishakhapatnam,Vizianagaram

(TEACH PROBLEM No 6, 7 OF CLASSROOM DISCUSSION)

Sec.35 SERIES8. EXPENDITURE ON SCIENTIFIC RESEARCH - Sec.35

Meaning: As per Sec.43 (4), scientific research means any activity for the extension of knowledge inthe fields of natural or applied science including agriculture, animal husbandry of fishers.

A. In - House Research [Sec. 35 (1)(i)]:

Applicable to All assessee(Except specified companies)

Condition It must be related to the business (In House Research)

Beforecommencement ofbusiness (100%)

Specific revenue expenditures (i.e., material or salaryexcluding perquisite) incurred during 3 yearsimmediately preceding the date of commencement ofbusiness, shall be allowed as deduction in the year ofcommencement of business.

Revenueexpenditure

Aftercommencement ofbusiness (100%)

All revenue expenditure incurred during the previousyear shall be fully allowed.

Beforecommencement of

business

Any capital expenditure incurred (excluding land)during 3 years immediately preceding the date ofcommencement of business shall be 100% allowed inthe year of commencement of business.

Capitalexpenditure

Sec.35 (1) (iv)/ Sec.35 (2) After

commencement ofbusiness

Any capital expenditure incurred (excluding land)during the previous year, shall be 100% allowed.

B. In - house scientific research & development expenses for specified companies [Sec.35(2AB)]:

Applicable to Company(Specified companies only)

Conditions1. Company must be engaged in the business of bio-technology or in any

business of manufacture or production of any article or thing, not being anarticle or thing specified in the list of the eleventh schedule



2. The expenditure must be incurred on or before 31-3-20173. Expenditure must be incurred on in-house scientific research (excluding

land or building)4. Such research must be approved by the secretary, department of scientific

and industrial research (DISR).5. Assessee must enter into an agreement with the prescribed authority for

co-operation in such research and development facility and fulfillsprescribed conditions with regard to maintenance and audit of the accountsand also furnishes prescribed reports

6. The prescribed authority shall submit its report in relation to approval ofresearch and development facility to the principal DG or DG, PrincipalChief Commissioner or Chief Commissioner.

Deduction

Any expenditure incurred whether revenue or capital (excluding land andbuilding) shall be eligible for weighted deduction of 150% of the expenditureincurred.Note: No depreciation shall be allowed on such asset

Note:i) If assessee is not eligible for 150% deduction u/s 35 (2AB) he can claim deduction u/s 35.ii) Deduction shall be 100% from the PY 2020-21 onwards. (i.e. From AY 2021-22)

C. Contribution made for scientific research, research in social science or statistical research,etc.:

S.No. Contribution madeto Purpose % of

deductionSection

no

1. Researchassociation Social science or statistical research 100 35(1)(iii)

2. Company registeredin India

Scientific, social science orstatistical research 100 35(1)(iia)

3. Researchassociation

Scientific research 15035(1)(ii)[Refer

Note (ii)]

4.

National laboratory,university or IndianInstitute ofTechnology or aspecified person witha specified direction

Scientific research under aprogramme approved by theprescribed authority.

The prescribed authority shallsubmit its report in the prescribedform to the principal DG or DG,principal chief commissioner or chiefcommissioner.

15035(2AA)[Refer

Note (ii)]

A research Association can be a university, college or other institution or approved researchassociation which has its object as undertaking research in social science or statistical researchor scientific research.Note:i) Contribution for scientific research may be related to business or not and revenue in nature or

not.ii) Deduction shall be restricted to 100% only from the PY 2020-21 onwards. (i.e. From AY

2021 - 22)



Unabsorbed capital expenditure: If full deduction cannot be given in a previous year because of theabsence or insufficiency of profits, then such expenditure, which could not be claimed, shall be knownas unabsorbed capital expenditure on scientific research and its treatment shall be same as ofunabsorbed depreciation.Other points:a) The eligible institutions seeking approval shall make an application to the Central Government.

This is onetime approval and therefore, not required to be renewed periodically.

b) Application seeking approval shall be disposed of within twelve months from the end of the monthin which the application is received by the Central Government.

c) Institution, association, University, or College approved u/s. 35 are required to file their return ofincome - Sec.139(4D).

d) The scientific research association, University, college or other institution shall, furnish astatement to the Commissioner of Income Tax or Director of Income Tax containing the followingdetails on or before the filling the return of income.

i) A detailed note on the research work undertaken by it during the previous year;

ii) A summary of research articles published in National or International journals during the year.

iii) Any patent or other similar rights applied for or registered during the year.

Programme of research projects to be undertaken during the forthcoming year and the financialallocation for such programme.

e) No depreciation/ deduction under any other provisions [in case of Sec.35(2AA) – 150% deduction]shall be allowed in respect of a capital asset represented by the expenditure which has beenallowed as a deduction U/S.35.

f) A company approved under section 35(1)(iia) will not be entitled to claim weighted deduction of150% under section 35(2AB). However, it can continue to claim deduction under section 35(1)(i)in respect of the revenue expenditure incurred on scientific research.

g) Scientific Research Asset ceases to be used or Scientific Research

(TEACH PROBLEM No. 8, 9 OF CLASSROOM DISCUSSION)

9. DEDUCTION OF CAPITAL EXP.OF SPECIFIED BUSINESS – Sec.35ADSec 35AD provides for 100% [W.E.F. 01.4.2017] in respect of any capital expenditure incurred by anassessee for specified business. (Replaces Sec.80IA which is profit based deduction. This isInvestment based Deduction).

Eligible business and date of commencement: The following shall be considered as specifiedbusiness:

Scientific Research Asset ceases to be used or ScientificResearch

Sold without using for the purposeof business

Sold after using for the purpose ofbusiness

a) Sec.41(3) shall apply:Least of (i) sale price, and (ii)deduction allowed U/S. 35(1)(iv)shall be taxable as PGBP income

b) Capital gains shall arise if salesprice exceeds the cost of the asset

a) Explanation 1 to Sec.43(1) shallapply. Actual cost shall be taken asNIL

b) Sec.43(6) and Sec.50 shall apply tothe sale of asset, for the purpose ofcomputation of Capital gains



Eligible businessDate of

commencement(Commenced on

or after)Amount of deduction

1. Setting up and operating a cold chain facility;(Any person)

2. Setting up & operating a warehousing facilityfor storage of agri. produce; (Any person)

3. Laying and operating a cross-country: (a)natural gas; or (b) crude; or (c) petroleum oilpipeline network for distribution, includingstorage facilities being an integral part of suchnetwork. (Only companies or Consortium ofCompanies).

a) 1st April, 2007for natural gas

b) 1-4-2009 (Forothers)

4. Building and operating anywhere in India, anew hotel of two star or above category asclassified by the Central Government;

5. Building & operating anywhere in India, a newhospital with at least 100 beds for patients

6. Developing and building a housing project underthe scheme for slum redevelopment orrehabilitation framed by the Central or StateGovernment and notified by the CBDT inaccordance with the prescribed guidelines.

1st April, 2010

7. Business in the nature of developing andbuilding a housing project under a scheme foraffordable housing framed by the Governmentsand notified by the CBDT.

8. Business of producing fertilizer.

1st April, 2011

9. Setting up and operating an inland containerdepot or a container freight station notified orapproved under the Customs Act, 1962.

10. Bee-keeping and production of honey andbeeswax

11. Setting up and operating a warehousing facilityfor storage of sugar

1st April, 2012

12. The business is in the nature of laying andoperating slurry pipeline for the transportationof iron ore.

1st April, 2014

13. The business is in the nature of setting up andoperating a semi-conductor wafer fabricationmanufacturing unit notified by the board.

1st April, 2014

14. Developing or operating and maintaining ordeveloping, operating and maintaining, anyinfrastructure facility (See Note below) (Onlycompanies or Consortium of Companiesregistered under the Companies Act)

1st April, 2017

a) 100% of theamount of anycapital expenditure[W.E.F. 01.04.2017]

NOTE: Capitalexpenditure shall notinclude acquisition of:Land, Goodwill,Financial instrument.

Note: Further, any expenditure in respect of which payment or aggregate of payment made to aperson of an amount exceeding Rs.10,000 in a day otherwise than by account payee cheque drawnon a bank or an account payee bank draft or use of electronic clearing system through a bankaccount would not be eligible for deduction U/S. 35AD.



Conditions to be complied:

1. It is not setup by splitting up, or the reconstruction, of a business already in existence;

2. It is not setup by the transfer to the specified business of machinery or plant previously used forany purpose. However, up to 20% of total value of plant and machinery can be plant andmachinery earlier used. In the following situations, it shall not be regarded as machinery or plantpreviously used of any purposes, where:

a) such plant or machinery was not used in India at any time prior to the date of its installation by theassessee.

b) Such machinery or plant is imported into India from any country outside India; and

c) No deduction on account of depreciation has been allowed or is allowable in respect of suchmachinery or plant to any person earlier.

3. The deduction shall be allowed only if the accounts are audited by a Chartered Accountant andaudit report thereof is furnished along with the return of income

4. The assessee shall not be allowed any deductions in respect of specified business under the provisionsof chapter VI-A Deductions in respect of heading – C “Deductions based on income”.

5. Once the assessee claims deductions under section 35AD, no other deduction shall be allowedunder any other section in any other previous year.

6. Where the assessee builds a hotel of two-star or above category as classified by the central Govt.and subsequently, while continuing to own the hotel transfers the operation of the said hotel toanother person, the assessee shall be deemed to be carrying on the specified business ofbuilding and operating a hotel. Therefore, he would be eligible to claim deduction U/S 35AD.(FOR STUDENTS SELF - STUDY)

7. Where any goods or services held for the purposes of the specified business are transferred toany other business carried on by the assessee, or vice versa, and if the consideration for suchtransfer less than the market value of the goods or services, then the profits and gains of thespecified business shall be computed as if the transfer was made at market value.

8. For the purpose of point (3) above, the entity should (i) Be Approved by the Petroleum andNatural Gas Regulatory Board and notified by the CG in the OG, (iii) Have made not less than1/3rd (natural gas pipeline) / 1/4th (petroleum pipeline) of its total pipeline capacity available foruse on common carrier basis by any person other than the assessee or an associated person.

9. For the purpose of point (12), (14) above, the entity should be a company formed and registeredin India under the Companies Act, 1956 or by a consortium of such companies or by an authorityor a board or a corporation established or constituted under any Central or State Act.

10. For the purpose of point (14) above, the entity should have entered into an agreement with theCentral Government or a State Government or a local authority or any other statutory body for thepurpose of carrying its business.

Year of deduction:1. The deduction under this section shall be allowed in the previous year in which such capital

expenditure is incurred.

2. In a case where, such capital expenditure was incurred prior to the commencement of theoperations of the specified business, the deduction shall be allowed in the previous year in whichthe operations are commenced, provided the amount is capitalized in the books of account on thedate of commencement its operations.

Holding period of new asset:1. Any asset in respect of which a deduction allowed shall be used only for the specified

business, for a period of 8 years beginning with the previous year in which such asset isacquired or constructed. Sec 35AD(7A)



Exception:The restriction of the holding period of 8 years does not apply:

a) Where the assets are destroyed, discarded or transferred: or

b) The company is declared a sick company.

2. Consequences if asset is not used for 8years: In case the asset is used for a purpose otherthan the specified business within the period of 8 years, the amount of deduction allowed earliershall be deemed as income under the head “profits and gains from business orprofession” of the previous year in which the asset is so used. However, the assessee shall beentitled to reduce the amount of eligible depreciation u/s.32, while computing suchdeemed income (Sec.35AD(7B)).

Set-off or carry forward and set-off of loss from specified business:Any loss from the specified business can be set off against the profit of another specified businesseven though such another specified business was not eligible under Sec.35AD (Sec.73A).

(TEACH PROBLEM No. 10, 11 & 12 OF CLASSROOM DISCUSSION)

10. WEIGHTED DEDUCTION OF 150% FOR EXPENDITURE INCURRED ONAGRICULTUR AL EXTENSION PROJECT – Sec.35CCC

11. WEIGHTED DEDUCTION OF 150% FOR EXPENDITURE INCURREDBY A COMPANY ON SKILL DEVELOPMENT - Sec.35CCD

Sec.35CCC Sec.35CCD1. Applicable to All assessee Company

2. Nature ofexpenditure

Where an assessee incurs anyexpenditure (not being expenditure inthe nature of cost of any land orbuilding), as reduced by the amountreceived (not being a reimbursement)from beneficiary, if any, incurredwholly and exclusively for undertakingon agricultural extension project(notified by the board in this behalf) inaccordance with the guidelines asany be prescribed

Where a company incurs anyexpenditure on any skill developmentproject notified by the board in thisbehalf in accordance with theguidelines as may be prescribed.However, Any expenditure in thenature of cost of any land or buildingshall not be allowed as deduction

3. Deduction

Such expenditure shall be allowed asdeduction to the extent 150% of suchexpenditure.Note: Deduction under this sectionshall be restricted to 100% fromP.Y. 2020-21 onwards (i.e. fromA.Y.2021-22 onwards).

Such expenditure shall be allowed asdeduction to the extent 150% of suchexpenditureNote: Deduction under this sectionshall be restricted to 100% fromP.Y. 2020-21 onwards (i.e. fromA.Y.2021-22 onwards).

4. No doublededuction

Where a deduction under this sectionis claimed and allowed for anyassessment year in respect of anyexpenditure, deduction shall not beallowed in respect of suchexpenditure under any otherprovisions of this act for the same orany other assessment year.

Where a deduction under this sectionis claimed and allowed for anyassessment year in respect of anyexpenditure, deduction shall not beallowed in respect of suchexpenditure under any otherprovisions of this act for the same orany other assessment year.

(TEACH PROBLEM No. 13 OF CLASSROOM DISCUSSION)



12. AMORTIZATION OF PRELIMINARY EXPENSES [Sec.35D)1. Applicable to In case of a company: Only Indian company

In case of other assessee: Resident assesseeBefore the commencement of thebusiness

Must be incurred for setting up a newundertaking or business2. Nature of

expenditure After the commencement of thebusiness

Must be incurred in connection with theextension of any undertaking or settingup a new unit

3. Condition Report of a Chartered Accountant must be submitted along with the return inthe first year i.e., the year in which such expenditure was first claimed

4. Deduction The total eligible preliminary expense shall be allowed in 5 equalinstallments starting from the year in which the business commences orthe undertaking expanded or the new unit commences production oroperation

5. Total preliminaryexpense

Total preliminary expenditure cannot exceeda) In case of Indian company: 5% of the ‘cost of project’ (or) 5% of

‘capital employed’ whichever is higherb) In case of non-corporate resident assessee: 5% of the ‘cost of

project’.6. Amalgamation (or)

demergerSimilar to Sec.35ABB

7. Examples forPreliminaryExpenses

1. Expenditure in connection with –a) the preparation of feasibility reportb) the preparation of project report;c) conducting market survey or any other survey necessary for the

business of the assessee;d) engineering services relating to the assessee’s business;e) legal charges for drafting any agreement between the assessee

and any other person for any purpose relating to the setting up toconduct the business of assessee.

2. Where the assessee is a company, in addition to the above,expenditure incurred –a) by way of legal charges for drafting the Memorandum and Articles

of Association of the company;b) on printing the Memorandum and Articles of Association;c) by way of fees for registering the company under the Companies

Act; 1956,d) in connection with the issue, for public subscription, of the shares

in or debentures of the company, being underwriting commission,brokerage and charges for drafting, printing and advertisement ofthe prospectus.

Note: Capital Employed - means the aggregate of issued capital, debentures & long termborrowings as on the date of 31st March of the relevant previous year.

13. OTHER DEDUCTIONS – Sec .36(1)1. The amount of insurance premium paid in respect of insurance against risk of damage or

destruction of stocks or stores used for the purpose of the business is allowed as deduction.Purchase of stock is allowed as deduction under Sec.37.

2. Insurance premium paid by federal milk co-operative society for insuring on the life of cattle,owned by a member of primary co-operative society.

3. Insurance Premium on Health of Employees:a) The employer takes group health insurance of all its employees.



b) Premium is paid under a scheme framed in this behalf by the General Insurance Corporationof India and approved by the Central Government or any other insurer and approved by IRDA.

c) The premium is paid through Account Payee Cheque / Bearer Cheque / Draft.

Note 1: where premium is paid in cash, deduction is not allowed.

Note 2: Life insurance premium or accident insurance premium paid by employer for employee isallowed as deduction U/S. 37.

4. Any sum paid to an employee as bonus or commission for services rendered, is allowed asdeduction subject to Sec.43B.Note 1: Bonus by whatever name called like Diwali bonus, production bonus shall be coveredunder this section onlyNote 2: where such bonus or commission represents profits or dividend then not allowed asdeduction. In other words, distributing dividend as bonus is not allowed as deduction.Note 3: Salary or allowances or perquisites is allowed as deduction in the hands of employerU/S. 37.

5. Interest on borrowed capital:Interest on loan (borrowed capital) for the purpose of business or profession shall be allowed asdeduction under this section.Conditions:a) Assessee must have borrowed money.b) Loan amount must be used for the purpose of business or profession carried on during the

previous year.c) Interest must be incurred on such loan.Focus points:i) Interest on loan raised for payment of income tax is disallowed.ii) Interest on loan used for payment of sales tax is allowed as deduction.iii) Interest paid outside India or to a Non-Resident without deducting tax at source is disallowed.iv) Interest on loan used for payment of dividend is allowed.v) Interest on loan used for granting interest free loan to employees shall be allowed.vi) Interest on borrowings used for acquiring assets shall be treated as under:

Interest for the period -

a) prior to commencement of the business Capitalized to the asset (i.e. add to thecost of the asset)

b) after commencement of the business but beforethe asset is put to use

Capitalized to the asset (i.e. add to thecost of the asset)

c) after the asset is put to use allowed as deduction U/S. 36(1)(iii)

6. Discount on Zero coupon bonds on pro rata basis having regard to the period of life of such bonds(Interest). In the Finance Act 2009, in the list of Eligible Issuers Scheduled banks were added.

7. Employer’s contribution to Recognised PF or to Recognised Super Annuity Fund subject to 43B.8. Employer’s contribution to an approved gratuity fund (Subject to 43B).9. Any sum received from employees towards their contribution to the welfare fund accounts, if

such sum is remitted on or before the relevant due date.For instance, PF contributions in respect of wages of the employees for any particular month shallbe paid within 15 days (plus 5 days grace) of the close of every month (Employees ProvidentFunds Scheme, 1952).



10. Any sum paid by the assessee as an employer by way of contribution towards a pension schemereferred to in Sec. 80CCD on account of an employee shall be allowed as deduction in computingincome from business or profession. The deduction shall be restricted to 10% of salary of theemployee. For this purpose, salary shall include dearness allowance provided in the terms ofemployment and exclude all other allowances and perquisites.

(FOR STUDENTS SELF - STUDY)11. Part A - Bad debts:

This deduction is allowable subject to the following conditions:

a) The debt should be incidental to the business or profession.

b) It should have been taken into account in computing the income of the assessee Or it shouldrepresent money lent in the course of banking or money lending.

c) Mere provision is not sufficient but actual write off of account is required.

However, actual written off in the books of accounts is not necessary, If whole or part of debthas been included in income of the pre- year in which, it becomes irrecoverable or earlierprevious yrs. based on notified ICDS without recording the same in the accounts.

d) The business or profession must be in continuation.

e) The successor of a business or profession is entitled to claim deduction in respect of debtcreated by the predecessor.

Part B - Deduction for Provision for Bad & Doubtful debts (PBD’s):

THIS CONCEPT WAS DELETED IN ICAI NEW STUDY MATERIAL

Nature of the Institution Deduction allowed as PBD’sBanks (scheduled / Non-scheduled / co-operative)other than a primary agricultural co-operative society

or a primary co-operative agricultural and

rural development bank

An amount not exceeding 8.5% of GTI + 10%of the aggregate advances made by the ruralbranches

a) A Public Financial Institution orb) A State Financial Institution, orc) A State Industrial Investment Corporation

An amount not exceeding 5% of GTI

A Foreign Bank An amount not exceeding 5% of GTI (beforeChapter-VIA deductions)

NBFC (Non - Banking Financial Company) An amount not exceeding 5% of GTI (beforeChapter-VIA deductions)

Note: No deduction shall be allowed as bad debt, if the actual bad debt during the current year isequal to or less than the PBD created during the preceding year. However, if the actual bad debtin the relevant previous year is more than the provision for bad and doubtful debt, the balance isallowed as deduction as bad debt.

Clarification for amount to be eligible for deduction as bad debts in case of banks [Section36(1)(vii) & (viia)]: Deduction under section 36(1)(vii) in respect of bad debts written off to be allowedto the extent the same is in excess of the credit balance in the provision for bad and doubtful debtsmade under section 36(1)(viia), irrespective of whether the same relates to rural advances or urbanadvances.

(TEACH PROBLEM No. 14 OF CLASSROOM DISCUSSION)



12. Expenditure incurred on the purchase of animals (other than SIT) which are used for thepurpose of business or profession is a capital expenditure. This will be allowed as deduction inthe year in which such animals die or become permanently useless. Sale proceeds of carcasses/animals will be deducted from the capital exp. However, no deprecation is allowed on such capitalexpenditure.

13. Special reserve A/c.: In the case of: (FOR STUDENTS SELF - STUDY)

a) Deduction: Deduction under this section is allowed to a specified entity up to a maximum of20% of the profits derived from eligible business or profession carried to a special reserve a/c.

b) Twice: Where the aggregate of the amount carried to such reserve a/c exceeds twice theamount of paid up capital and general reserve (excluding bonus share capital), no deductionshall be allowed in respect of such excess.

c) Specified entity and eligible business:

SPECIFIED ENTITY ELIGIBLE BUSINESSA. A Finance Corporation specified in

Sec.4A of the Companies Act. A Finance Corporation which is a

public sector company. A banking company. A co-operative bank other than a

primary agricultural credit society or aco-operative agricultural & ruraldevelopment bank.

The business of providing long termfinance for industrial or agriculturaldevelopment or development ofinfrastructure facility in India orconstruction or purchase of houses inIndia for residential purposes.

B. A housing finance company. The business of providing long-termfinance for the construction or purchaseof houses in India for residential purpose.

C. Any other financial corporationincluding a public company.

The business of providing long-termfinance for development of infrastructurefacility in India.

14. Family planning expenditure:a) Any bonafide revenue expenditure incurred by a company for promoting family planning

among employees shall be allowed as deduction.

b) Any capital expenditure incurred by the company for promoting family planning among theemployees shall be allowed in 5 equal annual installments.

c) Unabsorbed: Where the profits of the business are not sufficient to absorb any expenditure(Whether revenue or capital), the balance shall be treated as unabsorbed expenditure and itstreatment is same as of unabsorbed depreciation.

15. Any amount of STT paid.

16. Any amount of CTT (FA 2013) paid.For this purpose, a ‘taxable commodities transaction’ CTT is to be levied at 0.01% on sale ofcommodity derivative from the date on which means a transaction of sale of commodityderivatives in respect of commodities, other than agricultural commodities, traded in recognizedtrade associations.

14. Sec.37 - RESIDUARY SECTIONGeneral Deduction:a) There should be an expense.

b) The expenditure should not be covered by section 30 to 36.

c) It should not be in the nature of capital expenditure.





d) It should not be personal expenditure of the assessee.e) It should have been incurred in the previous year.f) It should be in respect of the business carried on by the assessee.g) It should have been expended wholly and exclusively for the purpose of such business.h) It should not have been incurred for any purpose that is an offence or is prohibited by any law.Notes:i) Penalty imposed for infraction of law are not allowed as an expenses under the Income tax Act.

ii) Any interest / penalty paid under the Direct tax laws is not allowed as an expenses under the ITAct.

iii) Penalty in the nature of compensation is allowed as an expense under the IT Act.

iv) Interest on loan taken to pay the Income tax is not allowed as an expense under the IT Act.

v) No Deduction is allowed in respect of Expenditure incurred on activities relating to corporatesocial responsibility.

vi) Explanation 2 to Section 37(1): Any expenditure incurred by an assessee on the activitiesrelating to corporate social responsibility (CSR) referred to in section 135 of the Companies Act,2013 shall not be deemed to have been incurred for the purpose of business and hence, shall notbe allowed as deduction under section 37

Advertisement - Sec. 37(2B): No expenditure incurred by an assessee on advertisement in anysouvenir, brochure, pamphlet or the like published by a political party will be allowed as deduction.

SOME ISSUES: (FOR STUDENTS SELF - STUDY)a) Expenses incurred for a bypass surgery by a lawyer. It is not an allowable expenditure since

primary objective - Personal survive i.e. to live.b) Plastic surgery expenses for a TV/News reader allowable as a revenue expenses.c) Subscription to Gym by an actress allowable as revenue expense.d) Deposit made under OYT (Own Your Telephone) scheme allowable as expense.e) Expenditure on advertisements will qualify for deduction.(subject to SEC. 37(2B))f) Expenditure on electricity, telephone and postage will be allowed as expenditure.g) Expenditure incurred by the employer on training of apprentices allowable as expense.h) Profession tax paid by a person carrying on a business allowable as expense.i) Sales tax is a tax on the sale of goods and not on profits, hence deductible expense.j) Audit fees paid is allowed as expenditure.k) Premium paid on loss of profit policies allowable as expense.l) Entertainment expenses incurred allowable as expense.m) Cash shortage found in business at the end of day allowable as expense.n) Share of profit given by debtor to creditor besides interest allowable as expense.o) Annual listing fees paid to stock exchanges allowable as expense.p) Expenditure on temple in factory for recreating of employees allowable as expense.q) Royalty paid by the assessee for use of another’s trade mark allowable as expense.r) Legal expenses to defend or maintain the title to an asset of the assessee’s business are

allowable, but expenses to acquire a title are not allowable.s) Legal and court expenditure spent for income-tax/sales tax appeals are allowable.t) Legal expenses for making agreements, various deeds, etc are allowed.u) Expenses incurred on Diwali, New year etc. are allowed.



v) Compensation paid to an employee for injury during duty is allowed.w) Expenditure incurred on employees welfare is allowed.x) Expenses incurred on issue of shares/debentures are not allowed.

15. DISALLOWANCES IN THE CASE OF ALL THE ASSESSEE’S - Sec.40(a)In the case of any assessee, the following expenses are disallowed under Sec.40(a):1. Income tax, DDT paid is not deductible [Section 40(a)(ii)].2. Disallowance of royalty, license fee, service fee etc. levied exclusively on State

Government Undertakings by the State Government [Section 40(a)(iib)].3. Any contribution to a provident fund or the fund established for the benefit of employees of the

assessee, unless the assessee has made effective arrangements to make TDS from anypayments made from the fund which are chargeable to tax under the head ‘Salaries’[Sec.40(a)(iv)].

4. Tax actually paid by any employer on behalf of the employee in respect of non-monetaryperquisites provided to such employee, which is exempt for the employee U/s 10(10CC) [Section40(a)(v)].

5. Any salary payable outside India or to a non-resident shall be disallowed if tax has not beendeducted or paid [Section 40(a)(iii)].

6. Disallowance under section 40 (a) (i) shall be attracted if:

Condition 1The amount paid or payable is interest, royalty, fees for technical services orany other sum chargeable under I.T act. The aforesaid sums must be taxablein the hands of the recipient under the I.T act.

Condition 2The aforesaid sum is paid / payablei. Outside India to any personii. In India to a non-resident or a foreign company

Condition 3 Tax is deductible at source on the aforesaid payments

Condition 4 And any of the following defaults take place

Default A Tax at source has not been deducted (or)

Default BTax at source has been deducted but has not been paid during theprevious year, or in the subsequent year before the expiry of the timeprescribed under section 139(1)

Amount ofDisallowance

100 % of such Amount.

Note:a) The proviso to Section 40 (a) (i) provides that where

i. Tax has been deducted in the subsequent year orii. Tax has been deducted in the previous year but paid in any subsequent year after the time

prescribed under section 139 (1)Then such sum shall be allowed as deduction in the previous year in which such tax has beenpaid

Tit Bit 4:

Payment of royalty on Deposit of TDS on Deduction allowed in year25.05.2016 08.08.201626.02.2017 01.04.201725.03.2017 29.10.201828.03.2017 14.09.2018



7. Disallowance under section 40 (a) (ia) shall be attracted if:

Condition 1(Amended w.e.f. AY 2015-16) Any amount paid or payable.

Condition 2 The aforesaid sum is paid / payable to resident.Condition 3 Tax is deductible at source on the aforesaid paymentsCondition 4 And any of the following defaults take placeDefault A Tax at source has not been deducted (or)

Default B Having made TDS tax has not been paid within the duedate for filling the return of income U/s 139(1).

Amount of disallowance 30% of such amount shall be disallowed.

Note 1: In case where the tax is deducted in the subsequent year or where the tax deductedduring the previous year is paid after the due date for filing the return of income, 30% of suchamount shall be allowed as a deduction in computing the income of the previous year in whichsuch tax has been paid.

Note 2: Where the resident payee furnishes its return of income before the due date of furnishingof return and includes such amount in its return of income, it shall be deemed that the deductorhas deducted and paid tax on such amount before the due date of furnishing of return of income.

(TEACH PROBLEM NO.15, 16, 17 OF CLASSROOM DISCUSSION)

16. ASSESSMENT OF FIRMSSec. 2(23) which defines the term ‘Firm’ has been amended. Accordingly, a firm shall have themeaning assigned to it in the Indian Partnership Act,1932 and shall include a Limited LiabilityPartnership as defined in the Limited Liability Partnership Act,2008. The taxation of LLP is on par andsimilar to that of taxation of firms.

Tax rate: 30% Flat rate.

Deduction U/S. 40(b):

1. Conditions for claiming deduction:

Deduction U/S. 40(b) shall be subject to following conditions as per Sec.184

a) There must be a partnership deed i.e. there must be a formal legal document indicating theagreement set between the partners.

b) Share of profit must be specifically mention in the partnership deed.

c) Certified copy of such instrument or partnership deed must be submitted to the Income TaxDepartment while filing first return of income.

d) The firm has never been assessed to Best Judgment Assessment U/S.144.

While computing income under head PGBP, firm shall be allowed two special deduction U/S.40(b)(viz, Interest on loan to partner or interest on capital to partner and Remuneration to partner.)

2. Interest on loan to partner or interest on capital to partner:

It shall be allowed as deduction subject to the condition thata) Interest must be authorised by the partnership deed andb) Payment must be related to after the partnership deed.Focus Points:i) If deed is silent then interest to partner shall be disallowed expenditure.ii) If deed authorises then interest shall be allowed to the minimum of the following – Actual interest given to partner



Interest as per Partnership deed. 12% p.a. simple interest.

3. Remuneration to Partner:Remuneration here includes salary, commission, etc. to partner. However, it does not include rentto partner. Such remuneration shall be allowed subject to following conditions:Conditions:i) Such remuneration must be authorised by the partnership deed and

ii) The partner must be a working partner.

4. Book Profits: It should be within the limits prescribed as below:

Book profit Remuneration as a % of Book ProfitOn the first 3 lakhs 1,50,000 or 90% of Book Profit, Whichever is higher.On the balance 60% of book profit exceeding 3 lakhs

5. No deduction shall be allowed in respect of a payment (relates to a period prior to the date ofearlier partnership deed) made to its working partner(s).

6. The following two explanations are also to be considered:Expl.1: If a person is a partner in his representative capacity in the firm and if he received interestin his individual capacity from the firm, such interest should not be disallowed.

E.g.: In the partnership firm ‘X' & Co. the following are the partners A, B, & HUF. Mr. C isrepresenting the HUF i.e., he is acting in a representative capacity. Mr. C out of his own earningsgiven a loan to the firm and he is receiving Interest on such loan i.e., he is receiving the interest inhis individual capacity. Such interest should not be disallowed.

Expl.2.: If a person who is a partner in his individual capacity, receives interest for and on behalfof someone else from the firm in which he is a partner, such interest should not be disallowed.

E.g.: Mr. A is a partner in AB & Co., Mr. A is receiving interest on behalf of his friend C, who hasgiven a loan to the firm. Such interest should not be disallowed.

7. The same explanations (point (6) above) shall also be applicable to an Association of Persons(AOP) or body of individual (BOI) [Sec.40(ba)].

Computation of book profits for remuneration under Sec.40(b)

Particulars Rs.Net profit before income tax as per statement of P&L XXXXAdd: Remuneration to partners as per statement of P&L XXXXAdd: Excessive interest paid to partner on capital XXXXLess: Income under all other heads (other than PGBP head) (XXX)Less: Brought forwarded depreciation (XXX)

Book Profits XXXX

(TEACH PROBLEM NO. 18, 19, 20 OF CLASSROOM DISCUSSION)Issue: Mr.X has given a building to a partnership firm X & Co. in which he is a partner. Is rent paid tosuch partner will be governed by 40 (b)?

Ans.: Sec.40(b) is applicable only for remuneration / interest. Rent paid to a partner is not covered bySec.40 (b) and therefore deductible.

Illustration: Net Profit of a firm- Rs.5,00,000 (Includes a CG of Rs.1,00,000) and no remuneration ispaid to partners. Brought forward business losses from Previous year-Rs.4,00,000. Unabsorbeddepreciation of previous year – Rs.25,000. Compute Book Profit.



17. Sec.40A (2) - EXPENDITURE FOUND TO BE EXCESSIVE1. Payment shall be made to a specified person.

2. Payment is in respect of any expenditure.

3. Payment is considered excessive or unreasonable by the A.O having regards to FMV of thegoods or services.

4. Where the above conditions are exist, the A.O can disallow the expenditure to the extent heconsiders it excessive or unreasonable.

Specified persons for this section:

Payment made by Payment made to / received by

Individual Relative or Person in whose business or profession the individual or his relative

has a substantial interest.

Company

Director, Relative of the director, person in whose business the company, director or any relative of

such director has substantial interest. [Relative of such director/partner/ member, or any other company carrying on business orprofession in which the first mentioned company has substantialinterest]

Firm

Partner, Relative of the partner, Person in whose business the firm, any partner or any relative of such

partner has substantial interest.

Note: ___________________________________________________________________________________________________________________________________________________________Illustration: X Co. Ltd, dealing in furniture, buys 100 tables at the rate of Rs.2,500 per table from R, adirector of the company. The market rate of each table is Rs.2,000. In this case, the payment hasbeen made to a specified person and is excessive. The assessing officer will disallow an amount ofRs.50,000 (Rs.500 X100).

18. CASH PAYMENTS > 10,000 - Sec.40A (3)1. Where an assessee incurs any expenditure in respect of which a payment or aggregate of

payments made to a person in a day exceeds Rs. 10,000. (specified limit for plying, hiring orleasing goods carriages in a day exceeds Rs. 35,000)

2. Otherwise than by an account payee cheque or by an account payee bank draft or use ofelectronic system through bank account.

3. Whole payment made is not allowed as deduction.

4. Deduction is claimed in respect of expenditure on accrual basis in any preceding previous year,but payment is made during the previous year otherwise than account payee cheque or bankdraft, shall be deemed as business income in the year of payment.

5. Sec.40A(3) disallowance does not apply to Payment made by commission agents for goodsreceived by them for sale on commission or consignment basis because such a payment isnot an expenditure deductible in computing the taxable income of the commission agent.

Rule 6DD - In the following cases, no disallowance shall be made u/s.40A (3):1. Where payment is made to RBI, banks, co-operative banks, Primary agricultural credit society or

Primary credit society or Land mortgage bank or LIC or State Bank of India and its subsidiaries.



2. Where the payment is made by Credit Card, Debit Card, Letter of credit, Telegraphic transfer bythrough a bank.

3. Where the payment by way of Gratuity, Compensation etc is paid to an employee or his legalheirs if the income under the head salaries does not exceed Rs.50,000.

4. Where the payment is made to government.

5. Where the payment is made by way of adjustment.

6. Where the payment is made for the purpose of:

a) Agricultural or forest produce or

b) The produce of animal husbandry (including hides and skins) or diary or poultry or

c) Fish or fish products or

d) The products of horticulture or apiculture.

7. Where the payment is made for the purchase of the products manufactured without the aid ofpower in a cottage industry, to the producer of such products.

8. Where the payment is made in a village or town, which, on the date of such payment is not servedby any bank, to person who ordinarily resides, or is carrying on any business or profession in anysuch village or town.

9. Where the payment is made by way of salary to an employee and when such employee:

a) Is temporarily posted for a continuous period of 15 days or more in a place other than hisnormal place of duty or on a ship &

b) Does not maintain any account in any bank at such place or ship.

10. Where the payment was required to be made on a day on which the banks were closed either onaccount of holiday or strike.

11. Where the payment is made by any person to his agent who is required to make payment in cashfor goods or services on behalf of such person.

12. Where the payment is made by an authorised dealer or a money changer against purchase offoreign currency or travelers cheque in the normal course of his business.

Issues on Sec.40A (3):a) This provision shall not apply in respect of expenditure for which no deduction will be allowed

(Like donations given).

b) This is applicable only for revenue exp. since capital exp. is not allowed as deduction.

c) The provisions do not apply to repayment of cash loans (i.e. loan transactions). However thedisallowance attracts in the case of interest on cash loans.

d) If an assessee makes payment of two different bills/expenditures (none of them exceedsRs.10,000) at the same time in cash or by bearer cheque, Sec.40A(3) is not applicable even if theaggregate payment is more than Rs.10,000. This is because for applicability of Sec.40A(3) bothpayment & amount of each bill (or expenditure) should exceed 10,000.

e) Where the assessee made payment over Rs.10,000 at a time, partly by a/c cheque and partly incash to some parties but the payment in cash alone did not exceed Rs.10,000, Sec.40A(3) is notattracted.

f) The provision of Sec.40A(3) are applicable only for the heads ‘Profits and Gains of Business orProfession’ and ‘income from other sources’.

19. PROVISION FOR GRATUITY - SEC.40A(7)a) No deduction shall be allowed in respect of any provision made for the payment of gratuity to his

employees i.e. the amount of provision created shall be disallowed.

Copyrights Reserved

To MASTER MINDS, Guntur



b) However, any provision made for the purpose of payment by way of any contribution towards anapproved gratuity fund Or for the purpose of payment of any gratuity that has become payableduring the previous year shall be allowed as deduction.

20. CONTRIBUTION TO UNRECOGNISED FUNDS - SEC.40A (9)Any contribution made is not allowed as deduction.

21. DEEMED PROFITS - SEC.4121.1 .REFUND OF EXPENDITURE - SEC.41(1)

Where the deduction was allowed in respect of loss, expenditure or trading liability in any precedingyears and subsequently the assessee or successor of the business has received any amount inrespect of such loss or expenditure or obtained some benefit in respect of trading liability by way ofremission or cessation, the amount received or the value of benefit accrued shall be deemed to beincome.

Exp.1 - Recovery or remission can be by the same assessee or by any other assessee also. E.g. XLtd., amalgamated with Y Ltd. After amalgamation Y Ltd., received refund of Rs.1,00,000 relating toan appeal filed by X ltd. It is chargeable in the hand of Y Ltd.

Expl.2 - Sec.41 (1) is applicable even if remission/cessation arises because of a unilateral act.

The ‘Successor of Business’ for this purpose, meAns.:a) Where there has been an amalgamation - the amalgamated Company.

b) Where any person is succeeded by another person - such other person.

c) Where a firm is succeeded by another firm - such other firm.

d) Where there has been a demerger - the resulting company.Examples:a) Where the assessee purchased material for Rs.1,00,000 during the previous year 2010-11 and

charged it to the Profit and Loss A/c of that year. In the previous year 2011-12, the assesseereceived a claim of Rs. 20,000 against this material as it was found to be defective. This 20,000shall be treated as the income of the previous year 2012-13.

b) If advertisement expenditure is incurred and claimed as deduction, but later reimbursed by themanufacturer to the assessee (Distributor), Sec.41 (1) will apply.

c) Under the Own your telephone (OYT) Scheme the assessee has paid a sum of Rs.10,000 asdeposit and it was allowed as expenditure in that year. It is chargeable to tax U/s.41 (1) in theyear in which the deposit was returned by the telephone department.

d) Excise department raised a demand notice on the X Ltd., for a sum of 1 crore rupees. Assessee,after making the payment of 1 Crore has gone for an appeal. As a result of 50 lakhs of paid wasrefunded. Such 50 Lakhs will be chargeable to tax U/s.41 (1).

e) If stock is destroyed by fire and allowed as trading loss but in the next year insurancecompensation is received, the same is taxable u/s 41(1) in the next year.

f) Example for Remission (Bilateral): Commission payable provision is made by X Ltd., at3,00,000 in the P & L a/c. & it was allowed as expenditure. Later on, the other party agreed totake 2,00,000 only. Remaining 1,00,000 is chargeable to tax u/s.41 (1). Another example, if creditpurchase of raw material is made and claimed as deduction but later, a lesser amount is settled tothe supplier creditor, the benefit accruing on remission of the trading liability will be deemed asincome u/s. 41 (1).

g) Example for Cessation (Unilateral): Continuation of E.g. ‘f’ - X Ltd., had not paid anything ascommission to the payee as he absconded. After three years, because of the application oflimitation Act 1927, the Company is no more liable to pay such commission to the payee & as aresult of that, the company has credited 3 lakhs rupees to the P & L a/c. after three years. Such3,00,000 is chargeable to tax.



21.2. CONCEPT OF BALANCING CHARGE- Sec.41(2)Concept of balancing Charge: In the case of Power Generating Units, where the depreciable assetson which depreciation was claimed U/S.32(1)(i), were sold, demolished, destroyed, discarded, theamount by which the moneys payable in respect of such building, machinery, plant or furniture,together with the amount of scrap value, if any, exceeds the written down value. However, theamount of balancing charge should not exceed the difference between the actual cost and the WDV.The tax shall be levied in the year in which the moneys payable become due.

21.3. SALE OF ASSETS USED FOR SCIENTIFIC RESEARCH - Sec.41(3)Where any capital asset used for scientific research is sold without having been used for otherpurposes then, any amount realised on transfer of a capital asset used for scientific research istaxable as business income to the extent of deduction allowed u/s.35 in the year in which the transfertakes place. Further, if the sale proceeds of the capital asset is in excess of the cost of acquisitionthen the excess shall be subject to capital gains.

21.4. BAD DEBTS RECOVERED - Sec.41 (4)Where any bad debt has been allowed as deduction u/s. 36 & and if any amount is subsequentlyrecovered on such bad debt it is chargeable to tax as business income in the year of recoveryirrespective of continuance of business. Since Sec.41(4) does not contain any provision regardingtaxability of bad debts recovered by a successor in business / profession, such amount cannot be taxedin the hands of the successor in business / profession.

21.5. SPECIAL RESERVE - Sec.41(4A)Any amount withdrawn from the reserve, created as per Sec.36 will be charged to tax irrespective ofcontinuance of business.

21.6. Sec.41(5) - SET OFFAny loss incurred in the year in which the business was discontinued by the assessee shall beallowed to set off against the deemed profits & only the balance if any shall be taxed. E.g.: Mr. A is aproprietor of X & Co. The business was closed on 20/09/2008 & the loss incurred in that year is1,00,000. For the same business he has accumulated losses to the extent of Rs.5,00,000. InA/Y.2013-2014, A recovered an expenses of 3,00,000 which was earlier allowed as deduction. Theloss incurred during the year of discontinuance can be set off against 3,00,000 profits.

Note: ___________________________________________________________________________________________________________________________________________________________

22. DEDUCTION BASED ON ACTUAL PAYMENT - Sec.43BThe deduction in respect of the below given expenditures will be allowed as deduction only in theyear of actual payment irrespective of the method of accounting being followed.

a) Taxes: Any sum payable by way of Tax or Duty etc. by whatever name called.

b) Bonus: Bonus or commission payable to employees.

c) Interest: Interest on any loan or borrowings from any public financial institution or state financialcorporation or state industrial investment corporation or any scheduled Bank or co-operative bankother than a primary agricultural credit society or a primary co-operative agricultural and ruraldevelopment bank.

d) Any sum payable by the employer as leave encashment.e) Contribution to welfare funds: Any sum payable by an employer by way of contribution to any

RPF or SPF or any other fund for the welfare of employees.

f) Any sum payable by the assessee to the Indian Railways for use of Railway Assets.



Question: When payment should be made to get the deduction?Year before the expiry of time given u/s 139(1) or the actual date of filling the return of incomewhichever is earlier. If the payment is not made as stipulated above then no deduction shall beallowed in respect of outstanding liability while determining business income for that relevant previousyear. However, the Assessee can claim the deduction in the year of payment. E.g.: X Ltd., has to payan excise duty of 1,00,000 for the previous year 2017-2018. The same has not been paid up to31/03/2018. But the same has been paid on September, 29th, 2018. Since the payment has beenmade on or before the due date of filing the return 30/09/2018, excise duty will be allowed asdeduction for the P/Y. 2017-2018.

Suppose in the above example if the payment is made on 01-12-2018 what is the implication? -Excise duty paid will be allowed as deduction in the P.Y.2018-2019.

Note:

1. Many State Governments have introduced sales tax deferral schemes as a part of the incentives.Under this, eligible units are permitted to collect sales tax and retain it for a prescribed period. Insuch case the taxes so deferred will be deemed as payment of tax.

2. Where the interest on the loan is converted into a loan, interest so converted will not be treated ashaving been actually paid, and accordingly, will not be allowed as a deduction.

3. Allowability of Employer's Contribution to funds for welfare of employees paid after the due dateunder the relevant Act but before the due date of filing of return of income under section139(1).

(TEACH PROBLEM NO.21 OF CLASSROOM DISCUSSION)

23. DETERMINATION OF CONSIDERATION IN THE CASE OF TRANSFER OF IMMOVABLEPROPERTY (Sec 43CA):

a) Situation: Any consideration received or accruing as a result of the transfer by an assessee of anasset (other than a capital asset), being land or building or both.

b) Value of consideration: Value adopted / assessed / assessable by the stamp valuation authorityof a State Government in respect of such transfer, shall be deemed to be full value of theconsideration received or accruing as a result of such transfer for the purposes of computingprofits and gains from transfer of such asset.

c) Sec.50C: Provisions u/s 50C(2), 50C(3) shall apply in relation to determination of the valueadopted or assessed or assessable u/s 43 CA (1)

d) Relevant date: Where the date of agreement fixing the value of consideration for transfer of theasset and the date of registration of such transfer of asset are not the same, the value u/s 43CA(1) may be the one consideration by the authority on the date of the agreement. This principleshall apply only if the amount of consideration or part thereof has been received by any modeother than cash on or before the date of agreement for transfer of the asset.

Illustration: (New SM)

CaseDate of transfer

of land /building held asstock in- trade

Actualconsideration

Stamp dutyvalue on the date

of agreement

Stamp dutyvalue on the

date ofregistration

Full value ofconsideration Remark

Rs. in Lakhs

1. 1/5/2014

100(Rs.10 lakhs

received by chequeon 31/8/2013)

120 (1/9/2013) 210 (1/5/2014) 120

Stamp duty value on thedate of agreement to beadopted as full value of

consideration.

2. 1/5/2014100 (Rs.10 lakhs

received by cash on31/8/2013)

120(1/9/2013) 210 (1/5/2014) 210

Stamp duty value on thedate of registration to beadopted as full value of

consideration.



3. 31/3/2015100 (Full amount

received on the dateof registration)

120 (1/5/2014) 210 (31/3/2015) 210

Stamp duty value of thedate of registration

would be the full valueof consideration.

24. MAINTENANCE OF BOOKS OF ACCOUNTS - Sec.44AACategory 1(A) Individuals or HUF & Non notified professions: In the case of individual or HUF, carrying on

business or Non notified profession, the books of accounts are required to be maintained in thefollowing cases:

a) Income criteria: If the income from such business or profession has exceededRs.2,50,000 in any of the immediately three preceding previous years or is likely toexceed Rs.2,50,000 during the current previous year in case of newly set up business orprofession, Or

b) Turnover criteria: If the turnover or sales or gross receipts has exceeded Rs. 25,00,000in any of the immediately three preceding years or is likely to exceed Rs. 25,00,000 duringthe current previous year in case of newly set up business or profession, Or

c) Special assessee’s: In the case of assessee’s covered by Sec.44AD, Sec.44AE, Sec.44BB,Sec.44BBB, books of accounts must be compulsorily maintained as required under Sec.44AAif such assessee claims that the income is lower than the prescribed amount under theseprovisions.

(B) Business assesses & Non-notified professions: In the case of any assessee carrying onbusiness or Non notified profession, the books of accounts are required to be maintained in thefollowing cases:a) Income criteria: If the income from such business or profession has exceeded Rs.1,20,000 in

any of the immediately three preceding previous years or is likely to exceed Rs.1,20,000during the current previous year in case of newly set up business or profession, Or

b) Turnover criteria: If the turnover or sales or gross receipts has exceeded Rs. 10,00,000 inany of the immediately three preceding years or is likely to exceed Rs. 10,00,000 during thecurrent previous year in case of newly set up business or profession, Or

c) Special assessee’s: In the case of assessee’s covered by Sec.44AD, Sec.44AE, Sec.44BB,Sec.44BBB books of accounts must be compulsorily maintained as required under Sec.44AA ifsuch assessee claims that the income is lower than the prescribed amount under theseprovisions.

Reasonable books: All the above types of assesses are required to maintain such books ofaccounts as may enable the assessing officer to compute the total income.

Category 2 - Notified professions - Only turnover criteria: In the case of any assessee carryingon the profession of law, medicine, accountancy, architecture, interior decoration, film artist,engineering, technical consultancy or information technology, the following books of accounts arerequired to be maintained if the gross receipts have exceeded 1,50,000 in ALL the immediately 3preceding previous years or is likely to exceed 1,50,000 during the current previous year in case ofnewly set up profession.Books to be maintained (Rule 6F): Cash book, Ledger, Journal, Bills and vouchers in respect ofexpenses incurred & carbon copies of bills > Rs.25, original bills of expenditure > 50.In the case of a medical practitioner, some additional books are to be maintained:a) Daily case registers.b) Inventory as on the first and the last day of the previous year, showing the stock of

medicines (Where medicines are dispensed during the course of practice).Place & Number of years of maintenance (For category I & II):a) The books of accounts are required to be maintained at the place of business andb) If there is more than one place of business at the principal place of business.



c) The books are required to be kept for a period of 6 years from the end of relevant assessmentyear.

Note: The assessee covered u/s.44AD(4), 44ADA can claim that the profits & gains of the Businessor Profession are lower than the income deemed in these provisions, provided whose total incomeexceeds the basic exemption limit has to maintain books of account and other documents undersection 44AA(1) and get them audited and furnish a report of such audit under section 44ABTit Bit 5:Vinod is a person carrying on profession as film artist. His gross receipts from profession are asunder: (New SM)

Financial Year 2014-15 Rs.1,15,000



What is his obligation regarding maintenance of books of accounts for assessment year 2018 -19under section 44AA of income-tax act, 1961? (Ans.: No compulsory requirement for maintaining theBOA)

25. TAX AUDIT - Sec.44ABWho has to get his accounts audited by a C.A. on compulsory basis?a) Business assessee’s: A person carrying on business, if the net sales in the business for the

previous year exceeded 1 Crore OrNote: Section 44AB makes it obligatory for every person carrying on business to get his accountsof any previous year audited if his total sales, turnover or gross receipts exceed Rs.1 crore.However, if an eligible person opts for presumptive taxation scheme as per section 44AD(1), heshall not be required to get his accounts audited if the total turnover or gross receipts of therelevant previous year does not exceed Rs.2 Crores. The CBDT, has vide its Press Releasedated 20th June, 2016, clarified that the higher threshold for non-audit of accounts has beengiven only to assessee opting for presumptive taxation scheme under section 44AD.

b) Professional assessee’s: A person carrying on profession where gross receipts exceeded 50lakhs for the previous year Or

c) Special assessee’s: An assessee covered U/s. 44AE, Sec.44BB, Sec.44BBB, if they claim thatthe profits from such activities are lower than presumptive income.

d) The assessee covered u/s. 44AD(4), 44ADA can claim that the profits & gains of the Business orProfession are lower than the income deemed in these provisions, provided whose totalincome exceeds the basic exemption limit has to maintain books of account and otherdocuments under section 44AA(1) and get them audited and furnish a report of such audit undersection 44AB.

What is the due date for getting books audited?: The persons mentioned above should obtainbefore the specified date an audit report in the prescribed form duly signed and verified by the C.Aand file with the Income tax department.

What are the forms to be submitted in filing the audit report?:Tax payer Audit Report Form No.

a) Person who carries on business or profession and who isrequired by or under any law in force to get his accounts audited 3CA&3CD

b) Person who carries on business or profession but not covered in(a) above

3CB&3CD

What is a specified date?: Due date of filing the return as per Sec.139(1) i.e. 30th of September ofthe relevant assessment year or 30th November of the relevant assessment year in case the



assessee has undertaken any international transaction as per Sec.92B or specified domestictransaction as per Sec. 92BA.

Note:

a) Sec.271B - Penalty: In the case of failure to get accounts audited or furnish such report alongwith the return u/s.139 (1), the Penalty is 0.5% (half a percent) of total sales or turnover or grossreceipts or Rs.1,50,000, whichever is less.

b) Audit under other law: Where any such person is required to get his accounts audited under anyother law, it is sufficient if such person gets his accounts audited under such other law andfurnishes the report in the form prescribed under this section.

Issues:1. Mr. A is an assessee having the following 3 business-

Business – 1, with a turnover of Rs.99,00,000.Business – 2, with a turnover of Rs.99,99,000.Business – 3, with a turnover of Rs.99,99,999.Is Section- 44AB applicable?Solution: Limit is not per business, limit is per assessee. Therefore, Tax Audit is mandatory.Since the turnover is more than Rs. 1,00,00,000 assessee as a whole.

2. Mr. X is a Chartered Accountant. His business turnover is Rs. 98,00,000. His professionalreceipts are Rs. 24,00,000. Is Section- 44AB applicable?Solution: Since, the business turnover is not more than Rs. 1,00,00,000 and professionalturnover is not more than Rs. 25,00,000, the Tax Audit is not mandatory.

3. Mr. X is a Chartered Accountant. His fee collections are Rs.28,00,000. Can Mr. X himself act asan Auditor?Solution: No, Mr. X himself cannot audit his books of accounts. This is because an Auditorshould act independently.

4. Sales for the year Rs.1,02,00,000. Sales returns are Rs. 4,00,000. Is Section- 44AB applicable?Solution: No, Section – 44AB is not applicable as the net sales for the year are Rs. 98,00,000.

5. Sales for the year Rs. 98,00,000. Sales made on sale or return basis Rs. 4,00,000 confirmationnot yet received. Is Section- 44AB applicable?Solution: No, Section-44AB is not applicable as the net sales for the year are Rs. 98,00,000 only.

6. Mr.A is a Commission Agent. Turnover achieved on behalf of his principal is Rs. 1,05,00,000.Commission earned is Rs. 5,00,000. Is Section- 44AB applicable?Solution: The turnover for a Commission Agent is the commission received by him. Since, histurnover is Rs. 5,00,000 only, Section- 44AB is not applicable.

7. Mr. A is a contractor. Value of contract accepted in the year is Rs. 1,50,00,000. Percentage ofwork completed is 50%. Is Section- 44AB applicable?Solution: Turnover of Mr. A depends on the % of work completed. Turnover for the year = 50% X1,50,00,000. = Rs. 75,00,000. So, Section- 44AB is not applicable.

8. Sales achieved during the year are Rs. 98,00,000. Sales tax collected Rs. 4,00,000. Is Section-44AB applicable?Solution: It depends upon the method of accounting followed by the assessee.Method I: Inclusive method:

Debtors a/c Dr. 1,02,00,000To sales a/c 1,02,00,000

Therefore, Section – 44AB is applicable.



Method II: Exclusive method: Debtors a/c Dr. 1,02,00,000

To sales a/c 98,00,000To sales tax payable a/c 4,00,000

Therefore, Section – 44AB is not applicable.

26. PRESUMPTIVE TAX



**Sec44AA(1) covers the profession(s) such as Legal, medical, engineering or architecturalprofession, or profession of accountancy or interior decoration or Authorised representation, filmartists, company secretaries and profession of Information Technology.

Notes:1. Points to be considered for the purpose Sec.44AD:

a) Sec.44AD(4): Where an eligible assessee declares profit for any previous year in accordancewith the provisions of section 44AD and he declares profit for any of the five consecutiveassessment years relevant to the previous year succeeding such previous year not inaccordance with the provisions of sub-section (1)(ACTUAL INCOME), he shall not be eligibleto claim the benefit of the provisions of this section for five assessment years subsequent tothe assessment year relevant to the previous year in which the profit has not been declared inaccordance with the provisions of sub-section (1).

b) Sec.44AD(5): An eligible assessee to whom the provisions of Sec.44AD(4) are applicable andwhose total income exceeds the basic exemption limit has to maintain books of accountunder section 44AA and get them audited and furnish a report of such audit under section44AB.

c) The presumptive rate of 6% of total turnover or gross receipts will be applicable in respect ofamount which is received by an account payee cheque or by an account payee bank draft orby use of electronic clearing system through a bank account during the previous year orbefore the due date of filing of return under section 139(1) in respect of that previous year.

2. Common points to be considered for the purpose Sec.44AD, 44ADA, 44AE:a) The Assessee can declare higher income than the presumptive income at his option.

b) WDV of the Asset used for the purposes mentioned above under relevant sections shall bereduced as if the depreciation has been actually allowed.

c) For sec. 44AD: In the case of an assessee which is a partnership firm to which theseprovisions are applicable the salary & interest paid to partners shall not be deducted fromthe income computed under these provisions subject to the limits specified in Sec.40 (b).

Note: For sec. 44AE salary & interest paid to partners shall be deducted from the incomecomputed under these provisions subject to the limits specified in Sec.40 (b). All deductionsunder Chapter VI A are available to the assessee.

d) Deductions under Chapter VI A (sec.80C to 80U) are available to the assessee

e) The assessee can claim that the profits & gains of the business are lower than the incomedeemed in these provisions, provided –(i) whose total income exceeds the basic exemption limit, and

(ii) Maintains books of account under section 44AA and

(iii)Get them audited and furnish a report of such audit under section 44ABExample for Sec.44AA:Let us consider the following particulars relating to a resident individual, Mr. A, being an eligibleassessee whose gross receipts do not exceed Rs.2 crore in any of the assessment years betweenA.Y.2018-19 to A.Y.2020-21 (New SM)

Particulars A.Y.2018 - 19 A.Y.2019 - 20 A.Y.2020 - 21Gross receipts (Rs.) 1,80,00,000 1,90,00,000 2,00,00,000Income offered for taxation (Rs.) 14,40,000 15,20,000 12,00,000% of gross receipts 8% 8% 6%Offered income as per presumptive taxationscheme u/s 44AD

Yes Yes No



In the above case, Mr. A, an eligible assessee, opts for presumptive taxation under section 44AD forA.Y.2018-19 and A.Y.2019-20 and offers income of Rs. 14.40 lakh and Rs. 15.20 lakh on grossreceipts of Rs. 1.80 crore and Rs. 1.90 crore, respectively.

However, for A.Y.2020-21, he offers income of only Rs. 10 lakh on turnover of Rs. 2 crore, whichamounts to 5% of his gross receipts. He maintains books of account under section 44AA and gets thesame audited under section 44AB. Since he has not offered income in accordance with the provisionsof section 44AD(1) for five consecutive assessment years, after A.Y. 2018-19, he will not be eligibleto claim the benefit of section 44AD for next five assessment years succeeding A.Y.2020-21 i.e., fromA.Y.2021-22 to 2025-26.

(TEACH PROBLEM NO., 22, 23, 24 OF CLASSROOM DISCUSSION)(TEACH PROBLEM NO.25 to 35 OF CLASSROOM DISCUSSION AS COMPREHENSIVE

PROBLEMS)

PROBLEM 1: (PRINTED SOLUTION AVAILABLE) Gamma Ltd. was incorporated on 1-1-2017 formanufacture of tires and tubes for motor vehicles. The manufacturing unit was set up on 1-5-2017. Thecompany commenced its manufacturing operations on 1-6-2017. The total cost of the plant andmachinery installed in the unit is Rs.120 crore. The said plant and machinery included second hand plantand machinery bought for Rs.20 crore and new plant and machinery for scientific research relating to thebusiness of the assessee acquired at a cost of Rs.15 crore.Compute the amount of depreciation allowable under section 32 of the income-tax act, 1961 inrespect of the assessment year 2018-19.

(New SM, Old SM) (Ans.: Depreciation allowable for A.Y.2018-19 – Rs. 32.75 crores)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 2: (PRINTED SOLUTION AVAILABLE) A newly qualified Chartered Accountant Mr.Dhaval, commercial practice and has acquired the following assets in his office during F.Y. 2017-18at the cost shown against each item. Calculate the amount of depreciation that can be claimed fromhis professional income for A.Y.2018-19.

S. No. Description Date ofacquisition

Date when putto use

AmountRs.

1. Computer 27 Sept. 17 1 Oct. 17 35,0002. Computer software 2 Oct. 17 8 Oct. 17 8,5003. Computer printer 1 Oct. 17 1 Oct. 17 12,5004. Books (of which books being annual

publications are of Rs.12,000)1 Apr. 17 1 Apr. 17 13,000

5. Office furniture (Acquired from apracticing C.A)

1 Apr. 17 1 Apr. 17 3,00,000

6. Laptop 26 Sep.16 8 Oct. 17 43,000(New SM, Old SM) (Ans.: Total Depreciation allowable for A.Y.2018-19 – Rs. 64,500)

(Solve Problem No. 5, 7 & 8 of Assignment problems as rework)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 3: (PRINTED SOLUTION AVAILABLE) M/s. QQ & Co., a sole proprietary concern, wasconverted into a company on 1.9.2017. Before the conversion, the sole proprietary concern had aBlock of Plant and Machinery (Rate of depreciation 15%), whose WDV as on 1.4.2017 was Rs.3,00,000. On 1st April itself, a new plant of the same block was purchased for Rs. 1,20,000. After theconversion, the company has purchased the same type of Plant on 1.1.2018 for Rs. 1,60,000.

PROBLEMS FOR CLASSROOM DISCUSSION



Compute the depreciation that would be allocated between the sole proprietary concern and thesuccessor company.

(New SM, Old PM)(Ans.: Ex–sole proprietary concern Rs. 26,408 &Successor Company Rs. 36,592)

(Solve Problem No. 3 & 6 of Assignment problems as rework)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 4: Harish Jayaraj Pvt. Ltd. is converted into Harish Jayaraj LLP on 1.1.2018. Thefollowing particulars are available to you:

S.No. Particulars Rs.i) Cost of land 5,00,000ii) WDV of machinery as on 1.4.2017 3,30,000iii) Patents acquired on 1.6.2017 3,00,000iv) Building acquired on 12.3.2016 for which deduction was allowed under

section 35AD.7,00,000

v) Above building was revalued as on the date of conversion into LLP as 12,00,000vi) Unabsorbed business loss as on 1.4.2017 (Related to A.Y. 2014-15) 9,00,000

Though the conversion into LLP took place on 1.1.2018, there was disruption of business and theassets were put into use by the LLP only from 1st March, 2018 onwards. The company earned profitsof Rs. 8 lacs prior to computation of depreciation. Assuming that the necessary conditions laid downin section 47(xiiib) of the Income-tax Act, 1961 have been complied with, explain the tax treatment ofthe above in the hands of the LLP.

(Old PM) (Ans.: Total depreciation for the year is Rs.1,24,500; Co. – Rs.1,09,995; LLP.- Rs.14,505

Unobserved business loss to be carried forward by LLP is Rs.2,09,995)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 5: (PRINTED SOLUTION AVAILABLE) Mr.X, A sole proprietor engaged inmanufacturing business, furnishes the following particulars

S.No Particulars Rs.1. Opening WDV of plant and machinery as on 1.4.2017 30,00,000

2. New plant and machinery purchased and put to use on 08.06.2017 20,00,000

3. New plant and machinery acquired and put to use on 15.12.2017 8,00,000

4. Computer acquired and installed in the office premises on 2.1.2018 3,00,000

Compute the amount of depreciation and additional depreciation as per the income tax Act, 1961 forthe A.Y. 2018-19. (New SM, Old SM, M16-8M)

(Ans.: P&M: Rs.12,90,000 and computer Rs.60,000)(Solve Problem No. 1, 4 of Assignment problems as rework)

Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 6: B Ltd., a company engaged in the business of manufacture of sports equipments,furnishes the following particulars pertaining to P.Y.2016-17 and P.Y.2017-18. Compute thedepreciation allowable under section 32 for A.Y.2017-18 and A.Y.2018-19, while computing itsincome under the head “Profits and gains of business or profession”. Also, compute the written downvalue of plant and machinery as on 1.4.2017 and 1.4.2018.



Particulars Rs. in croreWritten down value of plant and machinery (15% block) as on 01.04.2016 25.00

Sold plant and machinery on 20.5.2016 (15% block) 4.00

Purchase of second hand machinery (15% block) on 29.5.2016 for businesspurpose (the machinery was put to use immediately)

12.00

Purchased new computers (40% block) on 8.11.2016 for office 0.40

Acquired and installed new plant and machinery (15% block) on31.7.2016 (Rs. 50 crore) and on 31.10.2016 (Rs. 40 crore)

90.00

New air conditioners purchased and installed in office premises on 30.6.2016 0.15

Acquired and installed new plant and machinery (15% block) on 2.4.2017 15.00

(Old SM) (Ans.: WDV as on 1.4.2017 on plant & machinery at 15% & Computer at 40% isRs.93.68 Cr & Rs. 0.32 Cr and WDV as on 1.4.2018 plant & machinery at 15% & Computer at

40% is Rs.89.38 & Rs. 0.168.)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 7: (PRINTED SOLUTION AVAILABLE) Mr.X, set up a manufacturing unit in Warangal inthe state of Telangana on 01.06.2017. It invested Rs.30 crores in new plant and machinery on01.06.2017. Further, it invested Rs.25 crores in the plant and machinery on 01.11.2017, out of whichRs.5 crores was second hand plant and machinery. Compute the depreciation under Sec.32?Is Mr.X entitled for any other benefit in respect of such investment? If so, what is the benefitavailable?

Would your answer change where such manufacturing unit set up by a firm?(Old SM, RTP M-16)(Ans.: i) dep U/s.32AD 7.5 cr, ii) dep U/s.32AD 7.5 cr)

Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 8: (PRINTED SOLUTION AVAILABLE) Mr. Praveen Kumar has furnished the followingparticulars relating to payments made towards scientific research for the year ended 31.3.2018:

S.No. Particulars Rs. (in lacs)1. Payments made to K Research Ltd. 202. Payment made to LMN College 153. Payment made to OPQ College

Note: K Research Ltd. and LMN College are approved researchinstitutions and these payments are to be used for the purposes ofscientific research.

10

4. Payment made to National Laboratory 85. Machinery purchased for in house scientific research 256. Salaries to research staff engaged in in-house scientific research 12

Compute the amount of deduction available under section 35 of the income tax Act, 1961 whilearriving at the business income of the assessee. (New SM, Old PM)

(Ans.: Deduction allowable under section 35 – Rs. 101.5 lakhs, alternative answer – Rs.91.5)(Solve Problem No. 2 of Assignment problems as rework)

Note: ___________________________________________________________________________________________________________________________________________________________



PROBLEM 9: Vivitha Bio-medicals Ltd. is engaged in the business of manufacture of bio-medicalitems. The following expenses were incurred in respect of activities connected with Scientificresearch:

Year ended Item Amount (Rs.)31.03.2015 Land 10,00,000(incurred after 1.9.2014) Building 25,00,00031.03.2016 Plant and Machinery 5,00,00031.03.2017 Raw materials 2,20,00031.03.2018 Raw materials and salaries 1,80,000

The business was commenced on 01-09-2017.In view of availability of better model of plant and machinery, the existing plant and machinery weresold for Rs.8,00,000 on 1.03.2018.Discuss the implications of the above for the assessment year 2018-19 along with brief computationof deduction permissible under section 35 assuming that necessary conditions have been fulfilled.You are informed that the assessee’s line of business is eligible for claiming deduction under section35 at 150% on eligible items. (Old PM) (Ans.: Total deduction under section 35 – Rs.34,90,000)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 10: (PRINTED SOLUTION AVAILABLE) Mr.Arnav is a proprietor having two units – UnitA carries on specified business of setting up and operating a warehousing facility for storage ofsugar; Unit B carries on non-specified business of operating a warehousing facility for storage ofedible oil. Unit A commenced operations on 1.4.2016 and it claimed deduction of Rs.100 lacsincurred on purchase of two buildings for Rs.50 lacs each (for operating a warehousing facility forstorage of sugar) under section 35AD for A.Y.2017-18. However, in February, 2018, Unit Atransferred one of its buildings to Unit B.Examine the tax implications of such transfer in the hands of Mr.Arnav.

(New SM, Old SM) (Ans.: Rs.45,00,000)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 11: (PRINTED SOLUTION AVAILABLE) MNP Ltd. commenced operations of thebusiness of a new four – star hotel in Chennai on 1.4.2017. The company incurred capital expenditureof Rs.40 lakh during the period January, 2017 to March, 2017 exclusively for the above business, andcapitalized the same in its books of account as on 1st April, 2017. Further, during the previous year2017-18, it incurred capital expenditure of Rs.2.5 crores (out of which Rs.1 crore was for acquisition ofland) exclusively for the above business.Compute the income under the head “Profits and gains of business or profession” for the assessmentyear 2018-19, assuming that MNP Ltd. has fulfilled all the conditions specified for claim of deductionunder section 35AD and has not claimed any deduction under Chapter VI – A under the heading “C. –Deductions in respect of certain incomes”.The profits from the business of running this hotel (before claiming deducting under section 35AD) forthe assessment year 2018-19 is Rs.80 lakhs.Assume that the company also has another existing business of running a four - star hotel in Kanpur,which commenced operations 5 years back, the profits from which was Rs.130 lakhs for assessmentyear 2018 -19.

Would MNP Ltd. be entitled to deduction under section 35AD if it transfers the operation of the hotelin Chennai to PQR Ltd. while continuing to own the said hotel? (New SM, Old PM)

(Ans.: Net profit from business after set-off of loss of specified business against profits ofanother specified business under section 73A – Rs. 20L)

(Solve Problem No. 9,10 of Assignment problems as rework)



PROBLEM 12: (PRINTED SOLUTION AVAILABLE) Mr. A commenced operations of the businessesof setting up a warehousing facility for storage of food grains, sugar and edible oil on 1.4.2017. Heincurred capital expenditure of Rs. 80 lakh, Rs. 60 lakh and Rs. 50 lakh, respectively, on purchase ofland and building during the period January, 2017 to March, 2017 exclusively for the abovebusinesses, and capitalized the same in its books of account as on 1st April, 2017.

The cost of land included in the above figures are, Rs. 50 lakh, Rs. 40 lakh and Rs. 30 lakh,respectively. Further, during the P.Y.2017-18, it incurred capital expenditure of Rs. 20 lakh, Rs. 15lakh & Rs. 10 lakh, respectively, for extension/ reconstruction of the building purchased and usedexclusively for the above businesses.

Compute the income under the head “Profits and gains of business or profession” for the A.Y.2018-19 and the loss to be carried forward, assuming that Mr. A has fulfilled all the conditions specified forclaim of deduction under section 35AD and has not claimed any deduction under Chapter VI-A underthe heading “C. – Deductions in respect of certain incomes”. The profits from the business of settingup a warehousing facility for storage of food grains, sugar and edible oil (before claiming deductionunder section 35AD and section 32) for the A.Y. 2018-19 is Rs. 16 lakhs, Rs. 14 lakhs and Rs. 31lakhs, respectively. Also, assume that expenditure incurred during the previous year 2017-18, are byaccount payee cheque or use of ECS through bank account. (New SM, Old SM, RTP N 15)

(Ans.: Income chargeable under “Profits and gains from business or profession” – Rs.28)(Solve Problem No. 10 of Assignment problems as rework)

Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 13: Isac limited is a company engaged in the business of biotechnology. The net profit ofthe company for the financial year ended 31-3-2018 is Rs.15,25,890 after debiting the followingitems:

S. No. Particulars Rs.1. Purchase price of raw material used for the purpose of in-house research

and development1,80,000

2. Purchase price of asset used for in-house research and developmentwrongly debited to profit and loss account:a) Landb) Building

5,00,0003,00,000

3. Expenditure incurred on notified agricultural extension project 1,50,0004. Expenditure on notified skill development project:

a) Purchase of landb) Expenditure on training for skill development

2,00,0002,50,000

5. Expenditure incurred on advertisement in the souvenir published by apolitical party

75,000

Compute the income under the head “Profits and gains of business or profession” for the A.Y.2018-19 of Isac Ltd. (Old SM)(Ans.: Profit and gains from business – Rs.20,10,890)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 14: (PRINTED SOLUTION AVAILABLE) The following are the particulars in respect of ascheduled bank incorporated in India -

Particulars Rs. in Lakhs1. Provision for bad and doubtful debts under section 36(1)(viia) upto

A.Y.2017-18100

2. Gross Total Income of A.Y.2018-19 [before deduction under section36(1)(viia)]

800

3. Aggregate average advances made by rural branches of the bank 300



4. Bad debts written off (for the first time) in the books of account (inrespect of urban advances only) during the previous year 2017-18

210

Compute the deduction allowable under section 36(1)(vii) for the A.Y.2018-19.(Old SM) (Ans.: Rs 12 lakhs)

(Solve Problem No. 11,12 of Assignment problems as rework)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 15: (PRINTED SOLUTION AVAILABLE) M/S. Matrix pvt. Ltd., furnishes the details of thefollowing expenditure incurred during the previous year 2017-18:

Nature of payment Rs. Details of tax deductionsa) Contract payment 2,40,000 Tax not deducted at sourceb) Salary to a resident 5,00,000 Tax not deducted at sourcec) Rent 10,00,000 Tax deducted at source on 31.12.2017. actual remittance

made on 28.09.2018d) Interest 2,00,000 Tax deducted only on 01.04.2018 and remitted on

07.04.2018.e) Professional charges 5,00,000 Liability towards this expense was accounted in the books

on 31.03.2018 and TDS was remitted on 18.11.2018.f) Non-compete fee 10,00,000 Tax not deducted at source

Advise the company on the allowability of the above expenses for the AY 2018-19.

(Ans.: a) 72,000 shall be disallowed. b) 1,50,000 shall be disallowed. c) Rent allowed. d) 60,000disallowed in AY 2018-19 however the same shall be allowed in AY 2019-20 .e) 1,50,000

disallowed in AY 2018-19 however the same shall be allowed in AY 2019-20. f) 3,00,000 shall bedisallowed).

(Solve Problem No. 13 of Assignment problems as rework)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 16: (PRINTED SOLUTION AVAILABLE) During the financial year 2017-18, the followingpayments/expenditure were made / incurred by Mr. Yuvan Raja, a resident individual (whose turnoverduring the year ended 31-3-2017 was Rs.99 lakhs).Interest of Rs.12,000 was paid to Rehman and Co. a resident partnership firm, without deduction oftax at sources

i) Rs.3,00,000 was paid as salary to a resident individual without deduction of tax at source

ii) Commission of Rs.15,000 was paid to Mr. Vidya sagar on 2-7-2017. Without deduction of tax atsource.

Briefly discuss whether any disallowance arises under the provisions of section 40(a)(ia) of theincome-tax act, 1961. (New SM, Old PM)

(Ans.: (i) sec.40(a)(ia) is not attracted (ii) sec.40 (a)(ia) is attracted (iii) sec.40(a)(ia) is notattracted)


PROBLEM 17: (PRINTED SOLUTION AVAILABLE) State with reasons, the allowability of thefollowing expenses incurred by Mr. MN , a wholesale dealer of commodities, under the Income-tax Act,1961 while computing profit and gains from business or profession for the Assessment Year 2018 - 19.

(New SM, Old PM, N 15 - 8M)



i) Construction of school building in compliance with CSR activities amounting to Rs. 5,60,000.

ii) Purchase of building for setting up a warehousing facility for storage of food grains amounting toRs.4,50,000.

iii) Interest on loan paid to Mr. X (a resident) Rs. 50,000 on which tax has not been deducted. Thesales for the previous year 2016-17 were Rs. 202 lakhs.

iv) Commodities transaction tax paid Rs. 20,000 on sale of bullion.(Ans.: i)disallowed u/s 37(1). ii) Allowed u/s 35AD@ 100%. iii) disallowed u/s 40(a)(ia)

@30% iv) CTT allowed u/s 36(1)(xvi))Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 18: (PRINTED SOLUTION AVAILABLE) X & Co. a partnership firm, furnishes thefollowing P&L A/c for the previous year ending 31st March, 2018. (N 12 – 7M)

To Cost of Goods Sold 2,80,000 By Sales 2,92,000To Other Expenses 91,000 By Net Loss 1,72,000To Interest to Partners 25,000To Remuneration to Partners 68,000

4,64,000 4,64,000

The other expenses debited include Rs.13,600 not allowable. Interest to partners is in excess byRs.7,100 (not statutorily allowable). You are required to compute:

a) Book profits of the firm.

b) Permissible remuneration to partners under Sec.40(b).

c) The income of the firm.

(Ans.: Book profit is Rs.(83,300), remuneration to partners is Rs. 68,000 and loss of firm is Rs.(1,51,300)


PROBLEM 19: (PRINTED SOLUTION AVAILABLE) A firm comprising partners A, B, C, D carryingon business, sharing profits or losses equally shows a profit of 1,00,000 in its books after deduction offollowing amounts for the year. Remuneration to A (not a working partner) - 48,000. Remuneration toB & C (working partners) - 60,000 & 72,000. Interest to partner ‘D’ on loan of Rs.1,50,000 -Rs.36,000. The Partnership Deed provides for the payment of above remuneration & interest. Youare required to compute taxable income of firm & partners. Re compute the answer in case thepartnership firm has not complied with the conditions given in Sec.184 or a best judgmentassessment has been made.

(Ans.: Case 1: taxable income of firm – 1,66,000 and taxable income of partners A – Nil , B –60,000, C- 72,000 and D- 18,000, Case 2: taxable income of firm – 3,16,000 and taxable income

of partners is Nil)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 20: (PRINTED SOLUTION AVAILABLE) A firm has paid Rs.7,50,000 as remuneration toits partners for the P.Y.2017-18, in accordance with its partnership deed, and it has a book profit ofRs.10 lakh. What is the remuneration allowable as deduction? (Old SM) (Ans.: Rs.6,90,000)Note: ___________________________________________________________________________________________________________________________________________________________



PROBLEM 21: (PRINTED SOLUTION AVAILABLE) Hari, an individual, carried on the business ofpurchase and sale of agricultural commodities like paddy, wheat, etc. He borrowed loans from AndhraPradesh State Financial Corporation (APSFC) and Indian Bank and has not paid interest as detailedhereunder:

S.No Particulars Amount(Rs.)

1. Andhra Pradesh State Financial Corporation (P.Y.2016-17 & 2017-18) 15,00,0002. Indian Bank (P.Y. 2017-18) 30,00,000

45,00,000

Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during the year 2017-18,converted the above interest payable by Hari to them as a loan repayable in 60 equal installments. Duringthe year ended 31.3.2018, Hari paid 5 installments to APSFC and 3 installments to Indian Bank.

Hari claimed the entire interest of Rs. 45,00,000 as an expenditure while computing the income frombusiness of purchase and sale of agricultural commodities. Discuss whether his claim is valid and ifnot what is the amount of interest, if any, allowable.

(New SM, Old SM) (Ans.: Total amount eligible for deduction Rs.2,75,000)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 22: (PRINTED SOLUTION AVAILABLE) X & Co., a firm, is engaged in the business of civilconstruction (turnover of 2017-2018 being Rs.37,80,000). It wants to claim the following deductions:

Salary and interest to partners 60,000[As permitted by section 40 (b)]Salary to employees 4,90,000Depreciation 2,70,000Cost of material used 25,90,000Other expenses 3,45,000Total 37,55,000

Net profit (Rs.37,80,000 minus Rs. 37,55,000) is Rs.25,000. Determine the net income for the A.Y.2018-19 assuming that (a) Taxable income from other business is Rs.1,90,000, (b) LTCG isRs.40,000 (c) The firm is eligible for a deduction of Rs.5,000 under section 80G.

(Ans.: Net taxable income of the firm for A.Y. is Rs. 2,50,000)(Solve Problem No. 21, 29 of Assignment problems as rework)

Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 23: (PRINTED SOLUTION AVAILABLE) Mr. Sukhvinder is engaged in the business ofplying goods carriages. On 1st April, 2017, he owns 10 trucks (out of which 6 are heavy goodsvehicles). On 2nd May, 2017, he sold one of the heavy goods vehicles and purchased a light goodsvehicle on 6th May, 2017. This new vehicle could however be put to use only on 15th June, 2017.

Compute the total income of Mr. Sukhvinder for the assessment year 2018-19, taking note of thefollowing data: (New SM, Old PM)

Freight collected 12,70,000Less: Operational expenses 6,25,000Depreciation as per section 32 1,85,000Other office expenses 15,000Net Profit 4,45,000Other income 70,000

(Ans.: Net taxable income of the X Ltd. For the A.Y. 2018-19 is Rs. 5,15,000)Note: ___________________________________________________________________________________________________________________________________________________________



PROBLEM 24: (PRINTED SOLUTION AVAILABLE) Mr. X commenced the business of operatinggoods vehicles on 1.4.2017. He purchased the following vehicles during the P.Y.2017-18. Computehis income under section 44AE for A.Y.2018-19.

S.No. Type of Vehicle Number Date of purchase2 10.4.20171. Light Goods Vehicles 1 15.3.20183 16.7.20172. Medium Goods Vehicles 1 2.1.20182 29.8.20173. Heavy Goods Vehicles 1 23.2.2018

Would your answer change if the two light goods vehicles purchased in April, 2017 were put to useonly in July, 2017? (New SM, Old SM)(Ans.: Rs. 5,47,500)

(Solve Problem No. 14, 18 of Assignment problems as rework)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 25: (PRINTED SOLUTION AVAILABLE) Mr. D furnished the following particulars for theassessment year 2018-19.

Profit Loss A/C for the year ending 31 – 3 – 2018To Salary to staff 22,000 By Gross Profit 1,50,000To Entertainment exp. 13,000To General expenses 11,000To Bad debts 4,500To Reserve for bad debts 10,000To Advertisement expenses 7,000To Interest on D’s capital 3,000To Expenditure on acquisition of patent’s 28,000To Telephone expenses 12,000To Depreciation 10,000To Provision for I.T. 4,000To Net Profit 25,500

1,50,000 1,50,000Other information:1. Salary includes salary paid to a relative which is unreasonable to the extent of Rs. 3,100.2. Provision for income-tax is excessive to the extent of Rs.3,0003. Depreciation according to the income-tax provisions comes to Rs.9,500.4. During the previous year 2017 -18 the following payments were made and the same have not

been debited to profit and loss account of 2017 -18:a) Rs. 3000 paid on 10-6-2017 on account of outstanding customs duty of the previous year

2016 -17, andb) Rs. 5,000 paid on 15-12-2017 on account of outstanding sales-tax of the previous year 2016 -

17.5. Patents were acquired on 4-11-2017.

Find out the taxable income of ‘D’ for the assessment year 2018-19. Due date of filing return ofincome is 31st July of the relevant assessment year.

(Ans.: Taxable income of Mr. D for A.Y. is Rs. 65,600)(Solve Problem No. 19, 20 of Assignment problems as rework)

Note: ___________________________________________________________________________________________________________________________________________________________



PROBLEM 26: X Ltd. is a manufacturing company. The profit and loss account of X Ltd. for the yearending March 31, 2018 is given below:

Rs. Rs.50,000

14,15,0005,45,000

20,10,000Sales taxOther expensesNet profit

20,10,000

Sales

20,10,000

Other information:

1. Out of sales tax of Rs. 50,000, only Rs.47,000 is paid. The payment is made as follows:

a) Rs. 40,000 on Sep 2, 2017;

b) Rs. 4,000 on Sep 5, 2018;

c) Rs. 3,000 on Oct 1, 2018.

2. Return of income is submitted on Oct 10, 2018 and evidence of sales tax payment as stated in (b)and (c) above is submitted along with the return of income.

3. During the previous year 2017-18, the following payments are made in respect of expensespertaining to earlier years:

a) Bonus to employees pertaining to the P.Y.2015-16 paid on 30.4.17 - Rs.15,000.

b) Customs duty pertaining to the previous year 2015-16 paid on Dec 1st, 2017: 25,000.

c) Electricity bill pertaining to previous year 2016-17 paid on May 3, 2017; Rs.35,000.

d) Excise duty pertaining to the previous year 2016-17 paid on May 20, 2017: 40,000.e) Leave salary payable to employees pertaining to the previous year 2016-17 paid on

December 2, 2017: Rs. 45,000.

These payments do not pertain to the previous year 2017-18. Consequently, these are not recordedin the profit and loss account given above. Find out the net income of X Ltd.

(Ans.: Net income of X ltd. For A.Y. 2018-19 is Rs. 4,66,000)(Solve Problem No. 18 of Assignment problems as rework)

Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 27: (PRINTED SOLUTION AVAILABLE) Mr. P submits before you the following detailsof his business. Compute his taxable business Income for the A.Y.2018 - 2019.

Profit & Loss Account for the year ended 31st March 2018

Particulars Rs. Particulars Rs.To Office Salaries 1,98,000 By Gross Profit 4,25,000To Proprietors Salary 60,000 By Profit on Sale of residential

house (long-term)90,000

To General Expenses 45,000 By Bad debts recovered(Disallowed in earlier yearsassessment)

24,000

To Bad Debts 11,500 By Interest from Govt. Securities 14,000To Advertisement 8,400 By Dividends received from

agricultural companies6,000

To Fire Insurance Premium 1,500 By Interest from Bank A/c 2,000To Depreciation 11,700 By Income from Horse Racing

(Gross)10,000

To Motor Car Expenses 8,500



To Legal charges for defending suitfor alleged breach of a tradingcontract.

4,000

To Donation to Delhi University forSocial Research

10,000

To Interest on Proprietors Capital 15,000To Reserve for future losses 4,000To Income tax paid on lastAssessment

7,100

To Life Insurance Premium 6,000To Advance Income tax 4,000To Net Profit 1,76,300

a) General expenses include 30,000 paid as compensation to an old employee whose services wereterminated as his continuance in service was considered detrimental to the conduct of thebusiness and Rs.1,000 as help to a poor university student.

b) A sum of 5,000, cost of a small machine has also been included in General Expenses.

c) The advertisement cost includes expenditure of Rs.6,000 on one wooden show case & Rs.1,800on calendars.

d) One-fourth of Motor Car Expenses are for personal use of the car.

e) The depreciation is found to be excess by Rs.2,000 compared to the amount allowable under I.T.Rules.

f) Reserve for future losses represents a demand for Sales-tax under dispute.

(Ans.: Business profits of Mr. P for A.Y. 2017-18 is 1,38,675)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 28: (PRINTED SOLUTION AVAILABLE) Mr. Gupta is having a trading business and hisTrading and Profit & Loss Account for the financial year 2017-18 is as under: (Old PM)

Particulars Amount (Rs.) Particulars Amounts(Rs.)

To Opening Stock 1,00,000 By Sales 2,70,00,000To Purchase 2,49,00,000 By Closing Stock 50,000To Gross Profit 20,50,000Total 2,70,50,000 Total 2,70,50,000Salary to employees (IncludingContribution to PF)

5,00,000 By Gross Profit b/d 20,50,000

Donation to Prime Minister ReliefFund

1,00,000

Provision for bad debts 50,000Bonus to employees 50,000Interest on bank loan 50,000Family planning expenditure incurredon employees

20,000

Depreciation 30,000Income Tax 1,00,000To Net Profit 11,50,000Total 20,50,000 Total 20,50,000



Other Information:a) Depreciation allowable Rs.40,000 as per income – tax Rules, 1962.b) No deduction of tax at source on payment of interest on bank loan has been made.c) Out of salary, Rs.25,000 pertains to his contributions to recognized provident fund which was

deposited after the due date of filing return of income. Further, employees contribution ofRs.25,000 was also deposited after the due date of filing return of income.Calculate gross total income of Mr. Gupta for the Assessment Year 2018-19.

(Ans.: Business income / GTI of Mr. Gupta for A.Y. 2018-19 is Rs. 14,60,000)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 29: Mr. S gives the following manufacturing, P&L a/c for the year 31-3-2018:

Particulars Amount Particulars AmountTo Stock 11,000 By Sales 2,84,500To Purchases 80,000 By Stocks 26,400To Wages 60,000To Factory Rent 30,000To Depreciation 15,000To Gross profit 1,14,900

Profit and Loss AccountTo Office Salaries 27,000 By Gross profit b/d 1,14,900To Establishment Expenses 6,100 By Rent of staff quarters built

in 1990 19,000To Interest on Capital 3,300 By Refund of Income-tax

penalty 2,000To Fire Insurance 200 By Sale of a machinery 25,000To Bad debts 7,000 By Recovery of Bad debts,

not allowed to be bad debtsin earlier years 6,000

To Income tax 6,000 By Sundry receipts 35,000To Expenses on Sales tax proceedings 2,000To Expenses on Income-tax proceedings 13,000To Diwali Expenses 4,000To Legal Expenses 7,000To Medical Expenses of the proprietor 3,000To Staff welfare Expenses 2,000To Repair of Staff quarters 4,000To Security Deposit for telex connection 10,000To Bonus Payable to Employees 20,000To Provision for Sales tax & Excise 25,000To Municipal taxes for staff quarters 4,000To General Reserve 26,000To Entertainment expenses 16,000To Net profit 16,300

You are required to compute the taxable profit considering the following:a) Purchases include a purchase of Rs.21,000. Its payment was made by a bearer cheque.b) Assessee has always valued the stock at cost but since 2017-18 he has valued it at market price

which was in excess of the cost price by 10%.



c) Office salaries paid include Rs. 10,400 to the proprietor of the business.d) Diwali expenses include gifts of Rs. 1,000 made to the relatives.e) The written down value (WDV) of the block consisting of machinery as on 1-4-2017 is Rs.59,000.

Machinery whose WDV as on 1-4-2017, was Rs. 5,000 was sold for Rs. 25,000 during the year.f) The WDV of the block consisting of factory buildings as on 1-4-2017 is Rs. 90,000.g) Sales Tax & Excise Duties amounting to only 20,000 were paid on or before 25-6-2018.

(Ans.: Taxable profit of S Ltd. For A.Y. 2018-19 is Rs. 77,500)(Solve Problem No. 22 of Assignment problems as rework)

Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 30: Mr.S furnishes the following income for the assessment year 2018-19.

Profit and Loss Account for the year ending 31-3-2018

Particulars Amount Particulars AmountTo Office expenses 12,400 By Gross Profit 1,98,000To Audit Fees 12,000 By Sundry Receipts 19,000To Legal Expenses 8,000 By Customs duty recovered back

form Govt. (earlier not allowed asdeduction)

15,300

To Depreciation on Machinery 11,000 By bad debts recovered(earlier allowed as deduction)

3,000

To Staff Salary 21,000 By Gift from son 40,000To Bonus to staff 15,000To Contribution to approvedGratuity Fund

16,000

To O/S liability for Excise Duties 18,000

To General Expenses 21,000To Net Profit 1,40,900

Other relevant particulars:a) Bonus to employee according to the Payment of Bonus Act, comes to Rs.4,200.

b) Depreciation on machinery shown in the profit and loss account is calculated according to theincome-tax provisions.

c) General expenses include payment of Rs. 9,000 to an approved educational institute for thepurpose of carrying on scientific research in natural science. The research is, however, unrelatedto the business of assessee.

d) During the previous year Mr. S also made a capital expenditure of Rs. 5,000 for the purpose ofcarrying on a scientific research related to his business. This expenditure is, however, notrecorded in the profit and loss account.

e) Outstanding liability in respect of excise duty amounting to Rs. 10,500 was paid on 10-4-2018;Rs.1,000 on 10-5-2018, Rs.2,000 on 30-6-2018, Rs.1,000 on 10-7-2018 and Rs. 3,500 is stilloutstanding. The return is furnished on 31-7-2018 (last date).

Determine the taxable income of Mr.S for the assessment year 2018-19.(Ans.: Taxable income of Mr. S for A.Y. 2018-19 is Rs.79,600)

Note: ___________________________________________________________________________________________________________________________________________________________



PROBLEM 31: (PRINTED SOLUTION AVAILABLE) Mr.Sivam, a retail trader gives the following forthe year ended, 31.3.18: (New SM, Old PM, MTP- M17, N 17)

Trading and Profit and Loss Account for the year ended 31st March, 2018Rs. Rs.

To Opening Stock“ Purchases“ Gross profit

90,0001,10,04,000

3,03,600

By Sales“ Closing Stock

1,12,11,5001,86,100

1,13,97,600 1,13,97,600To Salary“ Rent & rates“ Interest on loan“ Depreciation“ Printing & Stationery“ Postage & Telegram

60,00036,00015,000

1,05,00023,200

1,640

By Gross Profit b/dBy Income from UTI

3,03,6002,400

To Loss on sale of shares (Short term)“ Other general expenses“ Net Profit

8,100

7,06050,000

3,06,000 3,06,000

Additional Information:a) It was found, some stocks were omitted to be included in both the Opening and Closing Stock; the

values of which were: Opening stock - Rs.9,000; Closing stock - Rs. 18,000.

b) Salary include Rs. 10,000 paid to his brother, which is unreasonable to the extent of Rs. 2,000.

c) The whole amount of printing and stationery was paid in cash by way of one time payment.

d) The depreciation provided in the profit and loss account Rs. 1,05,000 was based on the followinginformation- The written down value of plant and machinery is Rs.4,20,000 as on 01.04.2017. Anew plant falling under the same block of depreciation of 15% was bought on 01.07.2017 forRs.70,000. Two old plants were sold on 01.10.2017 for Rs.50,000.

e) Rent and rates includes sales tax liability of Rs.3,400 paid on 07.04.2018.

f) Other general expenses include Rs.2,000 paid as donation to a public charitable trust.

You are required to advise Mr. Sivam whether he can opt for presumptive taxation under section44AD and if so, whether it would be beneficial for him to declare income as per section 44AD.Assume that he has not opted for presumptive taxation scheme in any earlier previous year. Also,assume that the whole of the amount of turnover received by account payee cheque or use ofelectronic clearing system through bank account during the previous year.

(Ans.: I advise to Sivam to go for income to normal rate of tax Rs.1,30,900 as the Income islower when compared to u/s44AD Rs. 6,72,690.)

Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 32: X, a leading tax consultant, who maintains books of account on cash basis, furnishesthe following:

Receipts and Payments Account for the year ending March 31, 2018

Balance brought downFees from clients: of 2018-19 of 2017-18 of 2019-20Presents from clients

12,400

1,30,50011,50013,00024,000

Purchase of a typewriterCar expensesOffice expensesSalary to staff: of 2018-19 of 2019-20

6,00018,00040,000

32,00011,000



Interest-free loan from a clientfor purchase of a carWinnings from lottery (Gross)Dividend from UTI (received onSeptember 11, 2017)Rent of let out propertyShare of income from a firm

2,38,000

46,000

12,00060,00015,000

Expenses in respect of let outproperty [municipal tax: Rs.2,000,Repairs -1,000, insurance -3,000]Car purchased on 10.12.2017Repairs of officeInterest on loanIncome-tax paymentLife insurance premiumBalance carried down

6,000

2,40,00012,00010,0002,0008,000

1,77,400

Car is partly for official purposes (40%) and partly for private purposes (60%). Determine the taxableincome and tax liability of X for the assessment year 2018-19.

(Ans.: Taxable income of X for A.Y. is Rs. 1,37,300 and tax liability is Rs.11,330)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 33: (PRINTED SOLUTION AVAILABLE) Mr.B is a practicing Chartered Accountant.Summary of his cash book for the year 2017-2018 is given. You are required to calculate hisprofessional income for the Assessment Year 2018-2019, if accounts are kept on: Cash Basis &Mercantile Basis.

Receipts Rs. Payments Rs.To Balance as on 1.4.17 10,000 By Office rent 8,000To Audit fee 60,000 By Office salary 10,000To Examining fee 10,000 By Personal expenses 30,000To Consultancy fee 5,000 By Income tax 7,000To Rent from property 10,000 By Membership fee 1,000To Dividends received 6,000 By Life insurance premium

By Repair of house4,000

500By Municipal-tax 1,000By Books 1,200By Balance as on 31.3.2018 38,300

Additional Information:a) Rent has been paid up to 31st January, 2018.b) Office salary includes Rs.1,800 paid to personal servant.c) Audit fee for 2017-2018 amounting to Rs.10,000 is outstanding from clients but advance fee for

2018-2019 has been received Rs.15,000.d) Depreciation allowed on professional assets is Rs.2,500.e) The house is used as below: 50% for self-residence, 25% for profession and 25% let out.

(Ans.: Taxable income on cash system of accounting is Rs. 44,205 and mercantile system ofaccounting is Rs. 37,605)

(Solve Problem No. 23,24,25,26,27,28,31 of Assignment problems as rework)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 34: State, with reasons, the allowability of the following expenses under the Income-taxAct, 1961, as deduction, while computing income from business or profession for the AssessmentYear 2017-18:

a) XYZ Credit Corporation, a non-banking finance company, made provision for bad and doubtfuldebts in the books of account for the year ended 31.3.2018.

b) On 14.5.2018, ABC Ltd. paid Rs. 45,000 to the Indian Railways for the use of railway assetspertaining to previous year 2017-18.



c) MNO Ltd. paid Rs. 55,000 as tax on non-monetary perquisite provided to an employee.d) Rs. 32,000 paid by S Ltd. in cash on 28.3.2017 to a transporter (owning 8 goods carriages

throughout the previous year) for carriage of goods, without deduction of tax at source.e) P Ltd. paid Rs. 80,000 in cash for purchase of wheat from a farmer on a banking day.

(RTP M17) (Refer PGBP Provisions)Note: ___________________________________________________________________________________________________________________________________________________________

PROBLEM 35: State with reasons, the deductibility or otherwise of the following expenses/ paymentsunder the Income-tax Act, 1961, while computing income under the head “Profits and gains ofbusiness or profession” for the Assessment Year 2018-19:

a) Rs. 70 crores and Rs. 30 crores invested in new plant & machinery by ABC Ltd., a manufacturingcompany, during P.Y. 2016-17 and 2017-18, respectively.

b) MNO Ltd. paid Rs. 2,50,000 as technical fees to a non-resident on which tax is deducted duringthe previous year 2017-18 but deposited on 31.8.2018.

c) Bus & Train Pvt. Ltd. incurred Rs. 1,80,000 towards CSR Expenditure during the previous year2017-18.

d) XYZ Ltd. has not deducted tax at source on the amount of Rs. 7,50,000 paid as annual salary toMr. Raghav, an employee of the company during the previous year 2017-18. Mr. Raghav has notfurnished any declaration to his employer regarding any investment made by him or any otherincome earned or loss incurred by him for the previous year 2017-18.

e) Rise & Co. has set up a warehousing facility for storage of sugar. It commenced operations on01.04.2016. In July 2017, Rise & Co. incurred capital expenditure of Rs. 72 lakhs on purchase ofbuilding.

Would your answer be different, if the company has set up a warehousing facility of food grain?

(RTP M15) (Refer PGBP Provisions)Note: ___________________________________________________________________________________________________________________________________________________________

1. Mr. Kunal, a proprietor, engaged in the business of generation of power, furnishes the followingparticulars pertaining to P.Y. 2017-18. Compute the depreciation allowable under section 32 forA.Y. 2018-19, while computing his income under the head “Profits and gains of business orprofession”. The proprietor has opted for the depreciation allowance on the basis of written downvalue. (New SM, Old SM)

Particulars Rs.

1. Opening written down value of plant and machinery (15% block) as on 1-4-2017 (purchase value Rs.8,00,000) 5,78,000

2. Purchase of second hand machinery (15% block) on 29-12-2017 for businesspurpose 2,00,000

3. Machinery Y (15% block) purchased and installed on 12-7-2017 for thepurpose of power generation 8,00,000

4. Acquired installed for used a new air pollution control equipment on 31-7-2017 2,50,000

5. New air conditioner purchased and installed in office premises on 8-9-2017 3,00,000

ASSIGNMENT PROBLEMS



6. New machinery Z (15% block) acquired and installed on 23-11-2017 for thepurpose of generation of power 3,25,000

7. Sale value of an old machinery X, sold during the year (purchase valueRs.4,80,000, WDV as on 1-4-2017 Rs.3,46,800) 3,10,000

(Ans.: Total depreciation, P&M @ 15% - Rs.4,37,075, P&M @ 40% - Rs.1,50,000)

2. Mr. A, furnishes the following particulars for the P.Y.2017-18. Compute the deduction allowableunder section 35 for A.Y.2018-19, while computing its income under the head “Profits and gainsof business or profession”. (New SM, Old SM)

Particulars Rs.1. Amount paid to Indian Institute of Science, Bangalore, for scientific research 1,00,0002. Amount paid to IIT, Delhi for an approved scientific research programme 2,50,0003. Amount paid to X Ltd., a company registered in India which has as its main

object scientific research and development, as is approved by theprescribed authority

4,00,000

4. Expenditure incurred on in-house research and development facility asapproved by the prescribed authority

a. Revenue expenditure on scientific research 3,00,000b. Capital expenditure (including cost of acquisition of land Rs.5,00,000) on

scientific research7,50,000

(Ans.: Deduction allowable under section 35 is Rs.14,75,000)

3. Alpha Co-operative Bank amalgamated with Beta Co-operative Bank on 1.12.2017. The depreciationfor the year ended 31.3.2018 calculated as per Income-tax Rules, 1962, allowable to Alpha Co-operative Bank had the amalgamation had not taken place amounts to Rs. 2,40,000. Compute thededuction on account of depreciation allowable in the hands of Alpha Co-operative Bank and BetaCo-operative Bank for A.Y. 2018-19. (Old SM)(Ans.: The deduction allowable to Alpha co-operative bank under section 32 would be Rs.

1,60,438 i.e., Rs.2,40,000 x 244/365. The deduction allowable to Beta co-operative bankwould be Rs. 79,562 i.e., Rs. 2,40,000 x 121/365.)

4. M/s. Dollar Ltd., a manufacturing concern, furnishes the following particulars:

S.No. Particulars Amount(Rs.)

1. Opening writing down value of plant and machinery(01-04-17) (15%block)

5,00,000

2. Purchase of plant and machinery (put to use before 01.10.2017) 2,00,0003. Sale proceeds of plant and machinery which became obsolete- the plant

and machinery was purchased on 01-04-2015 for Rs. 5,00,000.5,000

Further, out of purchase of plant and machinery:

a) Plant and machinery of Rs. 20,000 has been installed in office.

b) Plant and machinery of Rs. 20,000 was used previously for the purpose of business by theseller.

Compute depreciation and additional depreciation as per Income-tax Act, 1961 for theAssessment Year 2018-19. (Old PM)(Ans.: Depreciation on Plant and Machinery 1,36,250)

5. Mr. Abhimanyu is engaged in the business of generation and distribution of electric power. Healways opts to claim depreciation on written down value for income-tax purposes. From thefollowing details, compute the depreciation allowable as per the provisions of the Income-tax Act,1961 for the assessment year 2018-19:



(Rs. in lacs)a) Opening WDV of block (15% rate) 42b) New machinery purchased on 12-10-2017 10c) Machinery imported from Colombo on 12-4-2017. 9

(This machine had been used only in Colombo earlierand the assessee is the first user in India.)

d) New computer installed in generation wing of the unit on 15-7-2017 2

(New SM, Old PM, RTP - N16)(Ans.: Depreciation on Plant and MachineryRs.10,60,000)

6. M/s Sidhant & Co., a sole proprietary concern is converted into a company, Sidhant Co. Ltd. witheffect from November 29, 2017. The written down value of assets as on April 1, 2017 is as follows:

Items Rate of Depreciation WDV as on 1st April, 2017Building 10% Rs. 3,50,000Furniture 10% Rs. 50,000

Plant and Machinery 15% Rs. 2,00,000

Further, on October 15, 2017, M/s Sidhant & Co. purchased a plant for Rs. 1,00,000 (rate ofdepreciation 15%). After conversion, the company added another plant worth Rs. 50,000 (rate ofdepreciation 15%). Compute the depreciation available to (i) M/s Sidhant & Co. and (ii) SidhantCo. Ltd. for Assessment Year 2018-19.

(Old PM) (Ans.: (i) 48,420 (ii) 32,830)7. Gopi chand Industries furnishes you the following information: (Rs.)

Block I WDV of Plant and machinery (consisting of 10 looms) 5,00,000

Rate of depreciation 15%

Block II WDV of Buildings (consisting of 3 buildings) 12,50,000

Rate of depreciation 10%

Acquired on 5-07-2017 – 5 looms for 4,00,000

Sold on 7-12-2017 – 15 looms for 10,00,000

Acquired on 10-01-2018 – 2 looms for 3,00,000

Compute depreciation claim for the Assessment year 2018-19. (Old PM)(Ans.: 1,40,000)

8. Honest Industry furnishes you the following details pertaining to the financial year 2017-18:

Description Plant &Machinery Building

Intangibleassets

(patents)Rate of depreciation 15% 10% 25%Opening balance as on 01-04-2017 Rs. 14,50,000 Rs. 25,00,000 Rs. 15,00,000Acquired before 30-09-2017 Rs. 12,00,000 Nil Rs. 5,00,000Acquired after 01-12-2017 Rs. 4,00,000 Rs. 18,00,000 NilTransferred in March 2018, one of thepatents held for the past 2 years

- - Rs. 3,00,000

A machinery acquired in July 2017, original cost Rs. 1,50,000 was destroyed by fire and theassessee received compensation of Rs. 50,000 from the insurance company. Newly acquiredbuilding given above includes value of land of Rs. 3,00,000. Calculate the eligible depreciationclaim for the assessment year 2018-19.

Note: Ignore additional/accelerated depreciation. (Old PM) (Ans : 11,70,000)



9. Win Limited commenced the business of operating a three star hotel in Tirupati on 1-4 2017.It furnishes you the following information:a) Cost of land (acquired in June 2015) Rs. 60 lakhsb) Cost of construction of hotel building

Financial year 2015-16 Rs. 30 lakhsFinancial year 2016-17 Rs. 150 lakhs

c) Plant and Machineries (all new) acquired during financial year 2016-17 Rs. 30 lakhs[All the above expenditures were capitalized in the books of the company]Net profit before depreciation for the financial year 2017-18 Rs. 80 lakhsDetermine the amount eligible for deduction under section 35AD of the Income-tax Act, 1961, forthe assessment year 2018-19. (Old PM)(Ans.: 210 lakhs)

10. Mr. Suraj, a proprietor, commenced operations of the business of a new three-star hotel in Madurai,Tamil Nadu on 1.4.2017. He incurred capital expenditure of Rs. 50 lakh during the period January,2017 to March, 2017 exclusively for the above business, and capitalized the same in his books ofaccount as on 1st April, 2017. Further, during the P.Y.2017-18, he incurred capital expenditure ofRs. 2 crores (out of which Rs. 1.50 crores was for acquisition of land) exclusively for the abovebusiness.

Compute the income under the head “Profits and gains of business or profession” for the A.Y.2018-19, assuming that he have fulfilled all the conditions specified for claim of deduction under section35AD and has not claimed any deduction under Chapter VI-A under the heading “C. – Deductionsin respect of certain incomes”.

The profit from the business of running this hotel (before claiming deduction under section 35AD) forthe A.Y.2018-19 is Rs. 25 lakhs. Assume that he also have another existing business of running afour-star hotel in Coimbatore, which commenced operations ten years back, the profits from whichare Rs. 120 lakhs for the A.Y.2018-19. Also, assume that expenditure incurred during the previousyear 2017-18 is by account payee cheque or use of ECS through bank account.

(New SM, Old SM)(Ans.: Net profit from business after set-off of loss of specified business against profits of

another Specified business under section 73A – Rs. 45L)

11. Mr. Anirudh commenced operations of the business of setting up a warehousing facility for storageof pulses and edible oil on 1.4.2017. He incurred capital expenditure of Rs. 50 lacs and 70 lacsrespectively, on purchase of land and building during February 2017 and March, 2016 exclusivelyfor the above businesses, and capitalized the same in the books of accounts as on 1st April, 2017.The cost of land included in the above figures is Rs. 30 lacs and Rs. 20 lacs, respectively. Further,during the P.Y. 2017-18, it incurred capital expenditure of Rs. 20 lacs and Rs. 10 lacs, respectively,for extension of the building purchased and used exclusively for the above businesses. Computethe income under the head “Profits and gains of business or profession” for the A.Y. 2018-19 andthe loss to be carried forward, assuming that Mr. Anirudh has fulfilled all the conditions specified forclaim of deduction under section 35AD and has not claimed any deduction under Chapter VI-A. Theprofits from the business of setting up a warehousing facility for storage of pulses and edible oil(before claiming deduction under section 35AD and section 32) for the A.Y. 2018 -19 is Rs. 14 lacsand Rs. 25 lacs, respectively. (RTP - N 13)

(Ans.: Income chargeable under “Profits and gains from business or profession” Rs.19lacs & Loss from the specified business is Rs. (46) Lacs)

12. State with reasons, whether the following expenses are allowable as deduction while computingincome from business or profession for the Assessment Year 2018-19, and if so, the amountallowable as deduction:a) Expenditure of Rs. 75,000 incurred by A Ltd. on skill development project in the manufacturing

sector.



b) Expenditure of Rs. 50,000 incurred by Mr. X on agricultural extension project.c) Rs. 15 lakh and Rs. 5 lakh, respectively, incurred on purchase of land and building by Z Ltd.,

being expenditure incurred on in-house research and development facility approved by theprescribed authority.

d) Rs. 20 lakh incurred by B Ltd. in March, 2017 for purchase of building for setting up and operatinga warehousing facility for storage of sugar. B Ltd. commenced operations on 1.04.2017.

e) Expenditure of Rs. 20 lakh incurred by Y Ltd. during the previous year 2017-18 on payment toits employees in accordance with a scheme of voluntary retirement.

(RTP N 13) (Ans.: in all cases allowable as a deduction)

13. Discuss, the correctness of the following statements on the basis of the provisions of Income-taxAct, 1961,:i) Where new plant and machinery acquired during the P.Y. 2017-18 is put to use for less than

180 days in that year, additional depreciation allowable under section 32(1)(iia) for A.Y.2018-19 is restricted to 10% (i.e., 50% of 20%). The balance additional depreciation cannot beclaimed in future.

ii) Interest paid in respect of capital borrowed for acquisition of an asset, for the period upto thedate on which the asset is first put to use must not be capitalized, if the acquisition of theasset is not for extension of existing business or profession.

(RTP- M 16) (All the above 2 statements are incorrect)

14. XYZ Ltd. made the following payments in the month of March 2018 to residents without deductionof tax at source. What would be the tax consequence for A.Y.2018-19, assuming that the residentpayees in all the cases mentioned below, have not paid the tax, if any, which was required to bededucted by XYZ Ltd.?

Particulars Amount in Rs.Salary to its employees (credited in March, 2018 and paid in April, 2018) 12,00,000Directors’ remuneration (credited in March, 2018 and paid in April, 2018) 28,000

Would your answer change if XYZ Ltd. has deducted tax on directors’ remuneration in April, 2018at the time of payment and remitted the same in July, 2018? (New SM, Old SM)(Ans.:.3,68,400)

15. An assessee owns a light commercial vehicle for 9 months 15 days, a medium goods vehicle for 9months and a medium goods vehicle for 12 months during the previous year. Compute hisincome applying the provisions of section 44AE. (New SM, Old SM)(Ans.: Rs.2,32,500)

16. Mr. Tiwari, a non-resident, operates an aircraft between Bangkok and Mumbai. He received thefollowing amounts in the course of the business of operation of aircraft during the year ending31.3.2018:

a) Rs.3 crores in India on account of carriage of passengers from Mumbai.

b) Rs.2 crores in India on account of carriage of goods from Mumbai.

c) Rs.1 crore in India on account of carriage of passengers from Bangkok.

d) Rs.2 crores in Bangkok on account of carriage of passengers from Mumbai.

The total expenditure incurred by Mr. Tiwari for the purposes of the business during the yearending 31.3.2018 was Rs. 1.8 crore.

Compute the income of Mr. Tiwari chargeable to tax in India under the head “Profits and gains ofbusiness or profession” for the assessment year 2018-19. (Old SM)

(Ans.: Income from business under section 44BBA at 5% of Rs.8,00,00,000 is Rs.40,00,000,which is the income of Mr. Tiwari chargeable to tax in India under the head “Profits and

gains of business or profession” for the A.Y.2018-19.)



17. Mr. B. A. Patel, a non-resident, operates an Aircraft between London to Ahmedabad. For theFinancial year ended on 31st March, 2018,he received the amounts as under:

a) For carrying passengers from Ahmedabad Rs. 50 lacs.

b) For carrying passengers from London Rs. 75 lacs received in India.

c) For carrying goods from Ahmedabad Rs. 25 lacs.

The total expenditure incurred by Mr. B. A. Patel for the purpose of the business for the financialyear 2017-18 was Rs. 1.40 crores. Compute the income of Mr. B. A. Patel under the head “Profitsand Gains from business or profession” for the Financial year ended on 31st March, 2018 relevantto assessment year 2018-19.

(Old PM, N 07– 8M) (Ans.: Income of Mr.B.A. Patel u/h PGBP for A.Y. is Rs. 7,50,000)

18. Rao & Jain, a partnership firm consisting of two partners, reports a net profit of Rs.7,00,000before deduction of the following items:a) Salary of Rs.20,000 each per month payable to two working partners of the firm (as

authorized by the deed of partnership).b) Depreciation on plant and machinery under section 32 (computed) Rs.1,50,000.c) Interest on capital at 15% per annum (as per the deed of partnership). The amount of capital

eligible for interest Rs.5,00,000.

Compute:i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.

ii) Allowable working partner salary for the assessment year 2018-19 as per section 40(b).

(New SM, Old PM) (Ans.: (i) 4,90,000 (ii)3,84,000)

19. Ramamurthy had 4 heavy goods vehicles as on 1.4.2017. He acquired 7 heavy goods vehicles on27.6.2017. He sold 2 heavy goods vehicles on 31.5.2017. He has brought forward business lossof Rs. 50,000 relating to assessment year 2014-15 of a discontinued business. Assuming that heopts for presumptive taxation of income as per section 44AE, compute his total incomechargeable to tax for the assessment year 2018-19. (Old PM)(Ans.: 6,85,000)

20. X Ltd. follows mercantile system of accounting. After negotiations with the bank, interest of Rs.4lakhs (including interest of Rs.1.2 lakhs pertaining to year ended 31.03.2018) has been convertedinto loan. Can the interest of Rs.1.2 lakhs so capitalized be claimed as business expenditure?

(Old PM)(Ans.: cannot be claimed)

21. Following is the profit and loss account of Mr. Q for the year ended 31-03-2018:

Particulars Rs. Particulars Rs.To Repairs on Building 1,81,000 By Gross Profit 6,01,000To Amount paid to IIT, Mumbai foran approved scientific researchprogramme

1,00,000 By I.T. Refund 8,100

To Interest 1,10,000 By Interest on CompanyDeposits 6,400

To Travelling 1,30,550To Net Profit 93,950

6,15,500 6,15,500

Following additional information is furnished:

a) Repairs on building includes Rs.1,00,000 being cost of building a new toilet.

b) Interest payments include Rs.50,000 on which tax has not been deducted and penalty forcontravention of Central Sales Tax Act of Rs.24,000.



Compute the income chargeable under the head "Profits and gains of Business or Profession" ofMr. Q for the year ended 31-03-2018 ignoring depreciation. (Old PM)(Ans.:Rs.1,68,450)

22. Following is the profit and loss account of Mr. A for the year ended 31.3.2018:

Particulars Rs. Particulars Rs.To Repairs on building 1,30,000 By Gross profit 6,01,000To Advertisement 51,000 By Income Tax Refund 4,500To Amount paid to ScientificResearch Associationapproved u/s 35

1,00,000By Interest fromcompany deposits 6,400

To Interest 1,10,000 By Dividends 3,600To Traveling 1,30,000To Net Profit 94,500

6,15,500 6,15,500

Following additional information is furnished:a) Repairs on building includes Rs.95,000 being cost of raising a compound wall for the own

business premises.b) Interest payments include interest of Rs.12,000 payable outside India to a non-resident Indian

on which tax has not been deducted and penalty of Rs.24,000 for contravention of CentralSales Tax Act.

Compute the income chargeable under the head ‘Profits and gains of business or profession’ ofMr. A for the year ended 31.3.2018 ignoring depreciation. (Old PM) (Ans.: Rs. 1,61,000)

23. Mr. Jagat engaged in retail trade, reports a turnover of Rs.82,46,000 for the financial year 2017-18. His income from the said business as per books of account is computed at Rs.5,85,600.Retail trade is the only source of income for Mr.Jagat.a) Is Mr. Jagat eligible to opt for presumptive taxation of his income chargeable to tax for the

assessment year 2018-19?b) If so, determine his income from retail trade as per the applicable presumptive provision.c) In case Mr. Jagat does not opt for presumptive taxation of income from retail trade, what are

his obligations under the Income-tax Act, 1961?d) What is the due date for filing his return of income under both the options?

(New SM, Old PM, RTP N 17)(Ans.: i) yes, ii) Rs.6,59,680 or Rs.4,94,760 (if he opts for 6% rate satisfying the specified

conditions) iii) he has to maintain books of account as required under section 44AA(2) andalso get them audited and furnish a report of such audit under section 44AB, iv) 31st July,

2018 & 30th September, 2018)

24. Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit &Loss Account for the year ended 31.03.2018:

Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2018

Particulars Rs. Particulars Rs.To Opening Stock 71,000 By Sales 2,32,00,000To Purchase of Raw Materials 2,16,99,000 By Closing stock 2,00,000To Manufacturing Wages &Expenses 5,70,000

To Gross Profit 10,60,0002,34,00,000 2,34,00,000

To Administrative charges 3,26,000 By Gross Profit 10,60,000

To State VAT penalty 5,000 By Dividend from domesticcompanies 15,000



To State VAT paid 1,10,000 By Income from agriculture(net) 1,80,000

To General Expenses 54,000To Interest to Bank(On machinery term loan) 60,000

To Depreciation 2,00,000To Net Profit 5,00,000

12,55,000 12,55,000Following are the further information relating to the financial year 2017-18:i) Administrative charges include Rs.46,000 paid as commission to brother of the assessee. The

commission amount at the market rate is Rs.36,000.

ii) The assessee paid Rs.33,000 in cash to a transport carrier on 29.12.2017. This amount isincluded in manufacturing expenses (Assume that the provisions relating to TDS are notapplicable to this payment.)

iii) A sum of Rs. 4,000 per month was paid as salary to a staff throughout the year and this hasnot been recorded in the books of account.

iv) Bank term loan interest actually paid upto 31.03.2018 was Rs.20,000 and the balance waspaid in October 2018.

v) Housing loan principal repaid during the year was Rs.50,000 and it relates to residentialproperty occupied by him. Interest on housing loan was Rs.23,000. Housing loan was takenfrom Canara Bank. These amounts were not dealt with in the profit and loss account givenabove.

vi) Depreciation allowable under the Act is to be computed on the basis of following information:

Plant & Machinery (Depreciation rate @ 15%) Rs.

Opening WDV (as on 01.04.2016) 12,00,000

Additions during the year (used for more than 180 days) 2,00,000

Total additions during the yearNote: Ignore additional depreciation under section 32(1)(iia)

4,00,000

Compute the total income of Mr. Raju for the assessment year 2018-19.(New SM, Old PM)(Ans.: Rs.3,10,000)

25. Raghav Industries Ltd. furnishes you the following information for the year ended 31-03-2018:

a) Scientific research expenditure related to its business Rs.2,40,000 fully revenue in nature.

b) Building acquired for scientific research (including cost of land Rs.5,00,000) in June 2017 forRs.12,00,000.

c) Amount paid to Indian Institute of Science, Bangalore for scientific research Rs. 50,000.

d) Demerger expenses incurred in financial year 2016-17-Rs.5,00,000.

e) Contribution to the account of employees as per pension scheme referred to in section80CCD amounted to Rs.30,00,000. Amount above 10% of the salary of employees isRs.7,00,000.

f) Amount recovered from employees towards provident fund contribution Rs.12,00,000 of whichamount remitted upto the end of the year was Rs.7,00,000 and the balance was remittedbefore the 'due date' for filing the return prescribed in Section 139(1).

g) Tax on non-monetary perquisites provided to the employees, borne by the employerRs.4,50,000.



h) Gain due to change in the rate of exchange of foreign currency Rs.1,00,000 related to importof machinery. The machinery was acquired two years ago and put to regular use since then.

Explain in brief how the above said items would be dealt with for the A.Y. 2018-19.

(Old PM) (Refer PGBP provisions)

26. Raghu Ltd., engaged in manufacture of medicines (pharmaceuticals), furnishes the followinginformation for the year ended 31.03.2018:

a) Municipal tax relating to office building Rs.45,000 not paid till 30.09.2018.

b) Patent acquired for Rs.25,00,000 on 01.06.2017 and used from the same month.

c) Capital expenditure on in-house scientific research Rs.12,00,000 which includes cost of landRs. 2,00,000.

d) Amount due from customer Raja, outstanding for more than 4 years, written off as bad debt inthe books Rs.4,00,000.

e) Income - tax paid Rs.1,10,000 by the company in respect of non - monetary perquisitesprovided to its employees.

f) Expenditure towards advertisement in souvenir of a political party Rs.2,50,000.

g) Refund of sales tax Rs.85,000 received during the year, which was claimed as expenditure inan earlier year.

State with reasons the taxability or deductibility of the items given above under the Income-taxAct, 1961. (Old PM)(Refer PGBP provisions)

27. State with reasons, for the following sub-divisions, whether the following statements are true orfalse having regard to the provisions of the Income-tax Act, 1961:

a) For a dealer in shares and securities, securities transaction tax paid in a recognized stockexchange is permissible business expenditure.

b) Where a person follows mercantile system of accounting, an expenditure of Rs.15,000 hasbeen allowed on accrual basis and in a later year, in respect of the said expenditure,assessee makes the payment of Rs.15,000 through a cheque crossed as "& Co.”,disallowance of Rs.15,000 under section 40A(3) can be made in the year of payment.

c) It is mandatory to provide for depreciation under section 32 of the Income-tax Act, 1961, whilecomputing income under the head “Profits and Gains from Business and Profession”.

d) The mediclaim premium paid to GIC by Mr. Lomesh for his employees, by a draft, on27.12.2017 is a deductible expenditure under section 36.

e) Under section 35DDA, amortization of expenditure incurred under eligible VoluntaryRetirement Scheme at the time of retirement alone, can be done.

f) An existing assessee engaged in trading activities, can claim additional depreciation underSection 32(1)(iia) in respect of new plant acquired and installed in the trading concern, wherethe increase in value of such plant as compared to the approved base year is more than 10%.

(New SM, Old PM)(Refer PGBP provisions)

28. State, with reasons, the allowability of the following expenses under the Income-tax Act, 1961while computing income from business or profession for the Assessment Year 2017-18:

a) Provision made on the basis of actuarial valuation for payment of gratuity Rs. 5,00,000.However, no payment on account of gratuity was made before due date of filing return.

b) Purchase of oil seeds of Rs. 50,000 in cash from a farmer on a banking day.

c) Tax on non-monetary perquisite provided to an employee Rs. 20,000.



d) Payment of Rs. 50,000 by using credit card for fire insurance.

e) Salary payment of Rs. 2,00,000 outside India by a company without deduction of tax.

f) Sales tax deposited in cash Rs. 50,000 with State Bank of India.

g) Payment made in cash Rs. 30,000 to a transporter in a day for carriage of goods.

(New SM, Old PM)(Refer PGBP provisions)

29. Answer the following with reference to the provisions of the Income-tax Act, 1961:

a) Bad debt claim disallowed in an earlier assessment year, recovered subsequently. Is the sumrecovered chargeable to tax?

b) Tax deducted at source on salary paid to employees not remitted till the ‘due date’ for filing thereturn prescribed in section 139. Is the expenditure to be disallowed under section 40(a)(ia)?

c) X Co. Ltd. paid Rs. 120 lakhs as compensation as per approved Voluntary RetirementScheme (VRS) during the financial year 2017-18. How much is deductible under section35DDA for the assessment year 2018-19?

d) Bad debt of Rs. 50,000 written off and allowed in the financial year 2015-16 recovered in thefinancial year 2017-18. (Old PM) (Refer PGBP provisions)

30. State with reasons, whether the following statements are true or false, with regard to theprovisions of the Income-tax Act, 1961:

a) Payment made in respect of a business expenditure incurred on 16th February, 2017 forRs.15,000 through a cheque duly crossed as "& Co." , is hit by the provisions of section40A(3).

b)i) It is a condition precedent to write off in the books of account, the amount due from debtor

to claim deduction for bad debt.ii) Failure to deduct tax at source in accordance with the provisions of Chapter XVII-B, inter

alia, from the amounts payable to a resident as rent or royalty, will result in disallowancewhile computing the business income where the resident payee has not paid the tax dueon such income.

c) Co-operative banks are not allowed to claim provision for bad and doubtful debts in respect ofadvances made by rural branches of such banks.

(New SM, Old PM) (Refer PGBP provisions)

31. Mr. Praveen engaged in retail trade, reports a turnover of Rs.1,98,50,000 for the financial year2017-18. His income from the said business as per books of account is computed atRs.13,20,000 Retail trade is the only source of income for Mr. Praveen.

i) Is Mr. Praveen eligible to opt for presumptive determination of his income chargeable to taxfor the assessment year 2018-19?

ii) If so, determine his income from retail trade as per the applicable presumptive provision.

iii) In case Mr. Praveen does not opt for presumptive taxation of income from retail trade, whatare his obligations under the Income-tax Act, 1961?

iv) What is the due date for filing his return of income under both the options?(New SM, Old PM)(Ans.: (i) Yes. (ii)15,88,000 or Rs.11,91,000 (in case if he satisfied the

6% rate condition) (iii) Required to maintain books of accounts u/s 44 AA tax audit u/s44 AB (iv) He opted for sec 44 AD then July 31st other wise September 30th)

32. M/s. Arora Ltd., submits the following details of expenditure pertaining to the financial year 2017-18:i) Payment of professional fees to Mr. Mani Rs. 50,000. Tax was not deducted at source.



ii) Interior works done by Mr. Hari for Rs. 2,00,000 on a contract basis. Payment made in themonth of March 2018. Tax deducted in March 2017 was paid on 30.06.2018.

iii) Factory Rent paid to Mr. Rao Rs. 15,00,000. Tax deducted at source and paid on 01.10.2018.

iv) Interest paid on Fixed Deposits Rs. 2,00,000. Tax deducted on 31.12.2017 and paid on28.09.2018.

Examine the above with reference to allowability of the same in the assessment year 2018-19under the Income-tax Act, 1961. You answer must be with reference to section 40(a) read withrelevant tax deduction at source provisions. Assume that the due date of filing the return ofincome is 30.09.2018. (Old PM)Ans.: (i)15,000 Disallowed u/s 40(a)(a) (ii) Allowed as deduction (iii) 4,50,000 is a disallowed

u/s 40 (a)(ia) (iv) allowed as a deduction.

33. Discuss the deductibility or otherwise of the following expenditure incurred by Purnit AgroIndustries, while computing its business income for the year ended 31-03-2018:

i) Revenue expenditure of Rs. 5,65,000 on scientific research related to its business.

ii) Land & Building acquired for scientific research (cost of land is Rs. 9,50,000) in September2017 for Rs. 22,00,000.

iii) Contribution to the account of employees as per pension scheme referred to in section80CCD amounted to Rs. 45,00,000. Amount above 10% of the salary of employees is Rs.6,80,000.

iv) Tax on non-monetary perquisites provided to the employees, borne by the employer Rs.5,50,000. (RTP – N16)

Ans.: (i) Allowed as deduction u/s35(1)(i) (ii) Allowed as deduction u/s 35(1)(iv)Rs.12,50,000 (iii) Allowed as deduction u/s 36(1)(iva)up to Rs.38,20,000 and disallowed u/s

40A(9) Rs.6,80,000 (iv)disallowed u/s 40(a)(v).

34. Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose written down value on01.04.2017 was Rs. 40 lacs. It purchased another asset (second-hand plant and machinery) ofthe same block on 01.11.2017 for Rs. 14.40 lacs and put to use on the same day. Sai Ltd. wasamalgamated with Shirdi Ltd. with effect from 01.01.2018.You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the previousyear ended on 31.03.2018 assuming that the assets were transferred to Shirdi Ltd. at Rs. 60 lacs.

(New SM, Old PM)(Ans.: Total Depreciation – Rs.7,08,000, attributable portion of Depreciation to Sai ltd,

Shirdi ltd are Rs.4,95,684 and Rs.2,12,316 respectively)

LIST OF IMPORTANT CONCEPTS – 6, 6.8,6.11,7,9,12,14,15,21,24,25,25.2LIST OF IMPORTENT CLASSROOM PROBLEMS – 5, 6, 7, 9, 14,16, 18, 26, 29, 30, 32

LIST OF IMPORTENT CLASSROOM PROBLEMS – 1, 6,10,11,15,20,22,23,25,29,31(APPLICABLE FOR WEEKEND EXAMS ONLY BUT NOT FOR ANY OTHER EXAMS)





1. ELIGIBLE PROJECTS FOR PROMOTION OF SOCIAL ANDECONOMIC WELFARE - Sec.35AC

1. Eligible expenditure:

Assessee Deduction for CertificateAll assesses Payment to a public sector company, local authority,

approved association/ institution, for carrying outapproved eligible project by national committee.

Form no.58A fromrecipient entry.

Companies only Direct expenditure incurred on eligible project / scheme Form no.58B fromchartered accountant

2. Amount of deduction: actual payment or actual expenditure incurred for an eligible project orscheme for promoting social and economic welfare or uplift of the public as may be specified bythe central government on the recommendations of the “national committee”.

3. No other deduction: no deduction will be available under any other section, in respect ofexpenditure claimed and allowed u/s 35AC.

2. CONTRIBUTIONS TO RURAL DEVELOPMENT PROGRAMMES - Sec.35CCAContributions made to approved institutions for implementation of rural development programmesand contributions to National Fund for rural development will be allowed as deduction. Contributionsto the National Urban Poverty Eradication Fund also deductible.

3.1. SOME CONDITIONS FOR CLAIMING DEDUCTION U/S.SEC.35CCCThe assessee should -

a) Maintain separate books of accounts and get audited by an accountant.

b) Furnish the following documents to Commissioner / Director of Income tax on/ before the duedate specified U/S.139(1) -

i) A certificate from Ministry of Agriculture, Government of India.

ii) Audited statement of accounts, Audit Report and the amount of deduction claimed.

iii) Agricultural programmes undertaken or to be undertaken and financial allocation of suchprogrammes.

3.2. SOME CONDITIONS FOR CLAIMING DEDUCTION U/S.SEC.35CCDThe assessee should -

a) Maintain separate books of accounts and get audited by an accountant.

b) Furnish the Audited statement of accounts, Audit Report and the amount of deduction claimed.tothe Commissioner / Director of Income tax on/ before the due date specified U/S.139(1).

4. EXPENDITURE IN CASE OF AMALGAMATION OR DEMERGER - Sec.35DDTHIS CONCEPT WAS DELETED IN ICAI NEW STUDY MATERIAL

Applicable to Indian CompanyNature ofexpenditure

Company had incurred expenditure wholly & exclusively for the purpose ofamalgamation or demerger

Deduction Such expenditure shall be allowed as deduction in 5 equal installmentscommencing from the year in which amalgamation or demerger takes place

ADVANCED CONCEPTS FOR STUDENTS SELF STUDY



5. VRS COMPENSATION - Sec.35DDAApplicable to All assesseeCondition Assessee has paid voluntary retirement compensationDeduction Deduction shall be allowed in 5 equal installment on cash basis.

Note:1. No deduction shall be allowed in respect of the above expenditure under any other provision of

the Act.

2. Deduction in the case of Amalgamation, Reorganisation etc.:a) Where the undertaking of an Indian Co. which is entitled to the deduction is transferred within

the specified period in a scheme of de-merger/Amalgamation, deduction will be allowed to theresulting co./Amalgamated company in the same manner as allowable to the de-mergedco./Amalgamating company.

b) Similarly, in case of re-organisation of a firm or a proprietary concern into company, thededuction shall continue to be available to the successor company.

c) On Conversion of a private limited or unlisted public company to LLP as provided u/s.47 (xiiib)deduction for the remaining period is allowed to be claimed by successor (LLP).

6.TEA DEVELOPMENT ACCOUNT/COFFEE DEVELOPMENT ACCOUNT/RUBBER DEVELOPMENTACCOUNT SEC- 33AB:

Deduction u/s 33AB is available to an assessee who satisfies the following conditions.Conditions:1. Where an assessee carrying on the business of growing and manufacturing tea or coffee or

rubber in India

2. The assessee has, before the expiry of six months from the end of the previous year or before thedue date of furnishing the return of income, whichever is earlier,a) Deposited with a National Bank any amount in a special account maintained by the assessee

with that Bank in accordance with a scheme approved by Tea Board or Coffee Board orRubber Board, or

b) Deposited any amount to be known as Deposit Account opened by the assessee inaccordance with the scheme framed by the Tea Board or Coffee Board or Rubber Board, asthe case may be, with the previous approval of the Central Government.

3. Quantum of deduction: Lower of -a) A sum equal to the aggregate of the deposits made orb) 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.

4. Restriction on utilization of amount deposited:Where the sum standing to the credit of the assessee in the Special account or in the Depositaccount is released by the National Bank or is withdrawn by the assessee from the Depositaccount and is utilised for the purchase of:a) Any machinery or plant installed in any office premises or residential accommodation including

a guest house.b) Any office appliances (other than computers)c) Any machinery or plant the whole of whose actual cost is allowed as deduction by way of

depreciation or otherwise in computing the business income.d) Any new machinery or plant installed for production of any XI Schedule item, the whole of

such amount so utilised will be treated as taxable profits of that year and taxed accordingly.



5. Withdrawal of deposit: Any amount standing to the credit of the assessee in the special accountcannot be withdrawn except for the purposes specified in the scheme, or, as the case may be, inthe deposit scheme.

The above amount can also be withdrawn in the following circumstances:

a) Closure of business

b) Death of an assessee

c) Partition of HUF

d) Dissolution of a firm

e) Liquidation of a company.

6. Withdrawal of deduction:a) Where any amount is withdrawn by the assessee from the special account during any

previous year on the closure of his business or dissolution of a firm, the whole of suchwithdrawal shall be deemed to be the profits and gains of business of that previous year andshall be chargeable to tax as the income of that previous year, as if the business had notclosed or the firm had not been dissolved.

b) Where an asset acquired in accordance with the scheme is sold or otherwise transferred inany previous year by the assessee to any person at any time before the expiry of 8 years fromthe end of the previous year in which it was acquired, such portion of the cost equal to thededuction allowed under this section shall be deemed to be profits of the previous year inwhich the asset is sold or transferred and shall be chargeable to income-tax as the income ofthat previous year.

However, the above restriction will not apply in the following cases :i) Where the asset is sold or otherwise transferred to Government, local authority, statutory

corporation or a Government company.ii) Where the sale or transfer is made in connection with the succession of a firm by a

company in the business or profession carried on by the firm as result of which the firmsells or otherwise transfers any asset to the company and the scheme continues to applyto the company in the same manner as applicable to the firm. Further, all the properties ofthe firm relating to the business or profession immediately before the succession shouldbecome the liabilities of the company and all the shareholders of the company shouldhave been partners of the firm immediately before the succession.

7. SITE RESTORATION FUND ACCOUNT (PETROL OR NATURAL GAS) - Sec.33ABATHIS CONCEPT WAS DELETED IN ICAI NEW STUDY MATERIAL

1. Applicability: Assessee carrying on business of prospecting for, or extraction or production, ofpetroleum or natural gas or both in India and in relation to which the Central Government hasentered into an agreement with such assesse for such business.

2. Deposit: deposit shall be made before the end of previous year witha) SBI in a scheme approved by ministry of petroleum and natural gas. Orb) Site restoration fund account.

3. Amount of deduction:a) a sum equal to the sum deposited; orb) a sum equal to 20% of its profits (as computed under the head “Profits and gains of business

or profession” before making any deduction under the new section), Whichever is less.

4. Use of deposit: it should be utilized fora) Purpose of business other than declaration of dividend.b) Purchase of eligible asset.

Copyrights Reserved

To MASTER MINDS, Guntur



5. In eligible assets: No deduction shall be allowed in respect of any amount utilised for thepurchase of the following items:

a) Any machinery or plant to be installed in any office premises or residential accommodation,including any accommodation in the nature of a guest house;

b) Any office appliances (not being computers);

c) 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 thehead ‘Profits and gains of business or profession’ of any one previous year;

d) Any new machinery or plant to be installed in an industrial undertaking for the purpose of thebusiness of construction, manufacture or production of any article or thing specified in the listin the Eleventh Schedule.

8. LICENSE FOR TELECOMMUNICATION SERVICES - Sec.35ABBTHIS CONCEPT WAS DELETED IN ICAI NEW STUDY MATERIAL

1. Applicable to All assessee2. Conditions to be satisfied i) Assessee has acquired any right to operate

telecommunication servicesii) Payment has been actually made

3. Deduction Actual expenditure paid shall be allowed as deduction during thelife of license remain in force in equal installments

4. Deduction shall be allowedfrom the year

Where the license-fee is paid before the commencement ofbusiness: Previous year in which such business commences.In any other case: Previous year in which fee is actually paid.

5. Depreciation on telecomlicense

No depreciation is allowed on such capital expenditure

6. Treatment in case thelicense is transferred in ascheme of amalgamation ordemerger

Can claim deduction u/s 35 ABB for the residual period,beginning form the year of amalgamation or demerger as thecase may be.

Sale of Tele communication license

Sale considerationmore than WDV

(Part or the entirelicense is transferred)

Saleconsideration

less than WDV

Surplus to theextent of deductionalready claimed is

taxable asbusiness income.

The remainingsurplus, if any is

taxed ascapital gain

Part of theLicense sold

Entire licenceis sold

Balance shall beallowed as

deduction duringthe remaining

number of yearsin equal

installments

Balance shall beallowed as

deduction in theyear of transfer.



Illustration: Swadeshi Ltd., which follows mercantile system of accounting, obtained license on1.4.2016 from the Department of telecommunication for a period of 10 years. The total license feepayable is Rs.18,00,000. The relevant details are: (Old PM)

Payments madeYear ended 31st

MarchLicense fee payable for

the year (Rs.) Date Amount (Rs.)2017 10,00,000 30.03.2017

15.05.20173,70,0006,30,000

2018 8,00,000 28.02.2018 5,40,000Balance of Rs.2,60,000 is pending as on 31.3.2018.Compute the amount of deduction available to the assessee under section 35ABB for theassessment years 2017 - 18 and 2018 - 19. Can any deduction be claimed under section 32 also?

Answer: As per section 35ABB, any amount actually paid for obtaining licence to operatetelecommunication services, shall be allowed as deduction in equal installments during the number ofyears for which the license is in force. Therefore, the year of actual payment is relevant and not theprevious year in which the liability for the expenditure was incurred according to the method ofaccounting regularly employed by the assessee.

1. Rs.3,70,000 paid on 30.03.2017 [P.Y.2016-17]Unexpired period of license 10 years

Hence Rs.37,000 [i.e. Rs.3,70,000/10] can be claimed under section 35ABB for period of 10years commencing from A.Y.2017-18.

2. Rs.11,70,000 paid during year ended 31.03.2018 [P.Y.2017-18]Unexpired period of license 9 years

Hence, Rs.1,30,000 [i.e. Rs.11,70,000/9] can be claimed under section 35ABB for a period of 9years commencing from A.Y.2018-19.

3. Amount of deduction u/s 35ABB

Assessment year Amount (Rs.)2017-182018-19

37,00037,000 + 1,30,000 = 1,67,000

4. Where deduction under section 35ABB is claimed and allowed, deduction under section 32(1)cannot be allowed for the same previous year or any subsequent previous year.

9. SPECTRUM FEE FOR TELECOMMUNICATION SERVICES - Sec.35ABATHIS CONCEPT WAS DELETED IN ICAI NEW STUDY MATERIALW.e.f. 01.04.2016 – Capital Expenditure for obtaining right to use Spectrum forTelecommunication Services –Conditions for Allowability: Same as License for Telecommunication Services [ (8) ABOVE]Note:*Meaning of Relevant previous years:

Case MeaningWhere the spectrum fee is actually paidbefore the commencement of business tooperate telecommunication services

The previous years beginning with the P.Y. in whichsuch business commenced and the subsequent P.Y.or P.Y.s during which the spectrum, for which the feeis paid, shall be in force.

In any other case The previous years beginning with the P.Y. in whichthe spectrum fee is actually paid and the subsequentP.Y. or years during which the spectrum, for which thefee is paid, shall be in force.



10. SECTION 44B TO 44BBB

10.1. Section 44B to 44BBA - BUSINESS OF NON-RESIDENTSIn the case of a non-resident, special provisions have been enacted determine income in the case ofcertain business activities as indicated hereunder:

Section Nature of Business Profit - % OnTurnover

44B Shipping business 7-1/2%

44BBBusiness of providing services of facilities in connection with orsupplying plant and machinery on hire used in the prospecting foror extraction or production of mineral oils.

10%

44BBA Business of operation of aircraft 5%

The amount on which the percentage shall be applied is:

a) The amount paid or payable to the assessee or to any person on his behalf on account of theabove mentioned business activity carried on in India; and

b) The amount received or deemed to be received in India by or on behalf of the assessee onaccount of the above mentioned business activity carried on outside India.

For the purpose of Sec.44B, such amount shall also include demurrage charges of handling chargesor any other amount of similar nature.

10.2. FOREIGN CO. DOING CIVIL CONSTRUCTION BUSINESS - Sec.44BBBIn the case of a foreign company engaged in the business of civil construction or the business of erectionof plant or machinery or testing or commissioning thereof in connection with power project approved bycentral government, profit is taken at 10% of the gross amount.Note: Assesses who covered under 44 BB & BBB are entitled to declare profits lesser than thedeemed income/profits. In such case they are subject to the provisions of maintenance of books ofaccounts U/s 44AA and get their books audited U/s 44AB.

11.BUSINESS REORGANIZATION OF CO-OPERATIVE BANKS [SEC.44DB]Where business re-organisation (amalgamation/demerger) of a co-operative bank has taken placeduring the financial year, the predecessor and the successor co-operative bank

a) Shall be allowed proportionate deduction (based on no. of days) in respect Depreciation u/s 32.

b) Amortisation of expenses u/s 35D, u/s 35DD, u/s 35DDA.Deduction under above sections for the unexpired period available to the successor bank.

12. COMPUTATION OF INCOME IN THE CASE OF BUSINESS OF PROSPECTING FOR EXTRACTIONOR PRODUCTION OF MINERAL OIL SEC 42:

1) In the case of any person carrying on the business of prospecting for extraction or production ofmineral oil with whom the central Government has entered into an agreement for association orparticipation duly approved by the parliament, certain provisions of the ACT Will stand modified tothe extent provided for in such agreement.

2) The deduction or allowances stipulated in such agreements will be permissible even if they arenot provided for under the Act. The allowances are as followsa) expenditure by way of in fructuous or abortive exploration expenses in respect of any area

surrendered prior to the beginning of commercial production by the assessee:



b) Expenditure incurred by the assesses whether before or after such commercial production, inrespect of drilling or exploration activities or services of in respect of physical assets used inthat connection. This implies that such expenditure incurred prior to beginning of commercialproduction also can be claimed once the commercial production has commenced:

c) For the depletion of mineral oil in the mining area in the previous year in which commercialproduction has begun and for succeeding years as may be specified in the agreement.

13.HEAD OFFICE EXPENDITURE – SEC.44CIn the case of a non-resident deduction for the head office expenditure incurred outside India andattributable to the business or profession carried on in India cannot exceed the following Limits:a) an amount equal to 5% of adjusted total income: or

b) actual head office expenditure attributable to the business or profession of the assessee in Indiawhichever is less.

“Adjusted total income” means the total income computed in accordance with the provision of this Actbefore allowing deduction under this section or unabsorbed depreciation or brought forward losses ordeductions under chapter VI-A or deduction u/s.36(1)(ix).“Average Adjusted Total Income” means-

a) in a case where the total income of the assesses is assessable for each of the three assessmentyears immediately preceding the relevant assessment year,1/3rd of the aggregate amount of theadjusted total income in respect of the previous years relevant to the aforesaid three assessmentyears

b) in a case where the total income of the assesses is assessable only for two of the aforesaid threeassessment years, one half of the aggregate amount of the adjusted total income in respect of theprevious years relevant to the aforesaid two assessment years:

c) in a case where the total income of the assesses is assessable only for one of the aforesaid threeassessment years, the amount of the adjusted total income in respect of the previous yearrelevant to that assessment year.

“Head office expenditure” means the executive and general administration expenditure incurred bythe assessee outside India.

14.SUBSTANTIAL INTERESTAs per Explanation to section 40A(2), a person shall be deemed to have a substantial interest in abusiness or profession, if, -

1. in case where the business or profession is carried on by a company, such person who, at anytime during the previous year, is the beneficial owner of shares (not being shares entitled to afixed rate of dividend, whether with or without a right to participate in profits), carrying not lessthan 20% of the voting power.

2. In any other case, such person who, at any time during the previous year, is beneficially entitledto not less than 20% of the profits of such business or profession

Following are the situations under which the substantial interest assumes importance -

i) Taxability of deemed dividend under section 2(22)(e);

ii) Disallowance of excessive or unreasonable expenditure under section 40A(2) to an individualwho has a substantial interest in the business or profession of the assessee, and

iii) Clubbing of salary income of spouse, under section 64(1)(ii) in respect of remunerationreceived by the spouse from a concern in which the individual has a substantial interest.





Q.No.1. “Certain deductions are allowed only on actual payment”. Discuss.

Q.No.2. What are the exceptions to the rule that income from business can be assessed only if thebusiness is carried on during the P.Y.?

Q.No.3. What are the receipts to be excluded for computing ‘actual cost’ under the Income-tax Act,1961?

Q.No.4. What are the consequences of failure to deduct tax at source or pay the tax deducted sourceto the credit of Central Government.

Q.No.5. Failure to deduct tax at source in accordance with the provisions of Chapter XVII-B, inter alia,from the amounts payable to a resident as rent or royalty, will result in disallowance while computingthe business income

Q.No.6. Z uses his property for his own business, can he claim depreciation?

Q.No.7. What are the incomes that are chargeable to tax under the head ‘profits and gains ofbusiness or profession”?

Q.No.8. State the conditions to be satisfied for claimed deduction u/s.37(1) of the Act?

Q.No.9. Income from business or profession is chargeable to tax only if it carried on during theprevious year by an assessee. Given five examples of cases where the income is taxable, even if thebusiness or profession is not in existence during any previous year?

Q.No.10. Anand, is a person carrying on profession as film artist. His gross receipts from professionare as under:?Financial year 2010-2011 1,25,000Financial year 2011-2012 1,60,000Financial year 2012-2013 1,80,000Is he required to maintain any books of accounts u/s 44AA of the income-tax Act? If so, what arethese books?

Q.No.11. Discuss the tax implication research transaction in the case of a doctor running a nursinghome:

a. Amount paid to a scientific research association approved by the central government and run by aDrug manufacturing company Rs.20,000

b. Amount received from the employees of the nursing home as contributions towards providentfunds for the month of March, 2014, paid to the P.F. commissioner on 25th April, 2014 Rs. 25,000

c. Payment made in cash towards purchases of medicines Rs.50,000

Q.No.12. An existing assessee engaged in trading activities, can claim additional depreciation undersection 32(1)(iia) in respect of new plant acquired and installed in the trading concern? Comment.

INTERESTING PAST EXAM QUESTIONS



Q.No.13. Is it mandatory for an assessee to claim depreciation u/s 32?

Q.No.14. A car purchased by S on 10.08.2014 for Rs.3,25,000 for personal use is brought into thebusiness of the assessee on 01.07.2017, when its market value is Rs.1,50,000. Compute the actualcost of the car and the amount of depreciation for the assessment year 2018-19 assuming the rate ofdepreciation to be 15%?

Q.No.15. M/s. Q & Co., a sole proprietary concern, was converted into a company on 31.08.2013.Before the conversion, the sole proprietary concern had a block of plant & machinery (Rate ofDepreciation 15%), whose WDV as on 01.4. 2013 was Rs.3,00,000/-. On 1st April, itself a new plantof the same block was purchased for Rs.1,20,000. After the conversion, the company has purchasedthe same type of plant on 01.01.2014 for Rs.1,60,000. Compute the depreciation that would beallocated between the sole proprietary concern and the successor company?

Q.No.16. List six items of expenses which otherwise are deductible shall be disallowed, unlesspayments are actually made with in the due date for furnishing the return of income u/s 139(1). Whencan the deduction be claimed, if paid after the said date?

Q.No.17. It is a condition precedent to write off in the books of account, the amount due from debtorto claim deduction for bad debt?

Q.No.18. Payment made in respect of a business expenditure incurred on 16th February 2014 forRs.25,000/- through a cheque duly crossed as “ & Co.” is hit by the provisions of Sec.40A(3)?

Q.No.19. Where an assessee engaged in business is obligated to deduct tax at source pertaining tointerest payment in India during the earlier year, has failed to do so, but deducts and pays the samebelatedly, during the current year, he can claim, the said interest as deductible business expenditurein the current year?

Q.No.20. U/s 35DDA, amortization of expenditure incurred under eligible voluntary retirement schemeat the time of retirement alone can be done. State whether the statement is true of false withreasons?

Q.No.21. In the case of a dealer in shares, income by way of dividend is taxable under the head“profits and gains of business or profession”. True or False with reasons?

Q.No.22. What is meant by speculation business? What are the transactions not deemed to bespeculative transactions?

Q.No.23. The director of a company was accompanied by his wife on a foreign tour undertaken byhim for business purposes. It was claimed that her presence fulfilled a social purpose and facilitatedtransaction of business. What tested would you apply to decide whether the expenditure incurred onthe wife in foreign travel is admissible as a deduction?

Q.No.24. Briefly describe the provisions of the income-tax Act that deal with the computation ofbusiness income on a presumptive basis in certain cases, in the cases of resident assessee?





Q.No.25. A manufacturer of goods who is liable to excise duty maintains a separate account forexcise duty collected and paid by him. The balance remaining in this account is carried to the balancesheet. The levy of central excise was disputed by the assessee and being successful, he received arefund of excise duty to the turn of Rs.10 lakhs which was credited to the central excise collectionaccount. The assessing officer, taking the view that the provisions of Sec.41(1) are attracted, broughtthe sum of Rs.10 lakhs to tax. The assessee disputes its levy on the ground that he had not claimedthe payment of central excise as a deduction in arriving at his income and therefore the provisions ofSec.41(1) are not attracted. Discuss the comparative merits of two view points?

Q.No.26. Mr. Achal, an hoterlier, claimed expenditure on replacement of lien and carpets in his hotelas revenue expenditure?

Q.No.27. In the case of a company engaged in the execution of building contracts, it is found that the totalvalue of the contract is Rs.190 Lakhs. The work commenced in June 2013 and as on 31.3.2014, therunning bills submitted amounted to Rs.95 Lakhs. The value of the work executed is estimated at 75%.The whole building was completed in the previous year ending 31.3.2015. Will the company be liable toTax Audit, if so, in which year? Give your reasons in brief.

Q.No.28. A company paid the full consideration for building acquired for its administrative office andoccupied the same as the possession was taken. The registration could not take place before the end of theprevious year for some reason or other can the depreciation claim be made?

Q.No.29. Discuss the expenses to which the Accrual Rule does not apply under the Income Tax Act.

Q.No.30. What is “principle of Mutuality”? or Discuss the taxability of a Club or a Mutual Association.

Q.No.31. Briefly explain the term "substantial interest". State three situations in which the sameassumes importance.

Q.NO.32. Comment on the allowability of the following claim made by the assessee: Mr. Achal, ahotelier, claimed expenditure on replacement of Linen and carpets in his hotel as revenueexpenditure?

PROBLEM NUMBERS TO WHICH SOLUTIONS ARE PROVIDED: 1, 2, 3, 5, 7, 8, 10, 11, 12, 13, 15, 16, 17,18, 19, 20, 21, 22, 23, 24, 25, 26, 28, 29, 32, 34.

PROBLEM NO. 1Computation of depreciation allowable in the hands of Mr. Gamma for the A.Y. 2018 - 19.

Particulars Rs. in croreTotal cost of plant and machineryLess: Used for Scientific Research (Note 1)

Normal Depreciation at 15% on Rs.105 crore

Additional Depreciation:Cost of plant and machineryLess: Second hand plant and machinery (Note 2)Plant and machinery used for scientific research,the whole of the actual cost of which is allowableas deduction under section 35(2)(ia)

20.00

15.00

120.00 15.00

105.00

120.00

(35.00)

85.00

15.75

PRINTED SOLUTIONS FOR SOME SELECTIVE PROBLEMS



Additional Depreciation at 20% on Rs.85 CroresDepreciation allowable for A.Y.2018-19

17.00 32.75

Note:1. As per section 35(2)(iv) no depreciation shall be allowed in respect of plant and machinery purchased for

scientific research relating to assessee’s business, since deduction is allowable under section 35 inrespect of such capital expenditure.

2. As per section 32(1)(iia) additional depreciation is allowable in the case of any new machinery or plantacquired and installed after 31.3.2005 by an assessee engaged in the business of manufacture orproduction of any article or thing, at the rate of 20% of the actual cost of such machinery or plant.

PROBLEM NO. 2Computation of depreciation allowable for A.Y.2018-19

Asset Rate DepreciationBlock 1 Furniture 10% 30,000Block 2 Plant (Computer, computer software, laptop, printer & books) 40% 34,500

Total depreciation allowable 64,500

Notes:

1. Computation of depreciation

Block of Assets Rs.

Block 1: Furniture – rate 10%Put to use for more than 180 days [Rs.3,00,000@10%]Block 2: Plant – rate 40%a) Computer (put to use for more than 180 days) [Rs.35,000 @ 40%]b) Computer printer (put to use for more than 180 days)(12,500 @ 40%)c) Laptop (put to use for less than 180 days) [Rs. 43,000 @ 20%]d) Computer Software (put to use for less than 180 days) [Rs.8,500@ 20%]e) Books (other than annual publications) (Put to use for more than 180 days) [Rs.1,000 @

40%]f) Books (being annual publications) put to use for more than 180 days [12,000 @ 40%]

30,000

14,0005,0008,6001,700

400

4,80034,500

2. Where an asset is acquired by the assessee during the previous year and is put to use for the purposesof business or profession for a period of less than 180 days, the deduction on account of depreciationwould be restricted to 50% of the prescribed rate. In this case, since Mr. Dhaval commenced hispractice in the P.Y. 2017-18 and acquired the assets during the same year, the restriction ofdepreciation to 50% of the prescribed rate would apply to those assets which have been put to use forless than 180 days in that year, namely, laptop and computer software.

PROBLEM NO. 3Computation of depreciation in the case of transfer of business:

Depreciation is to be calculated as if there is no succession Rs.WDV as on 1st AprilAdd : Additions made before succession

Less : Sale consideration of the asset sold

Depreciation @ 15%

3,00,000 1,20,000

4,20,000 Nil 4,20,000

63,000

Allocation of depreciation between sole proprietary concern and the successor company:

The depreciation of Rs. 63,000 is to be allocated in the ratio of number of days the assets were used by thesole proprietary concern and the company.


No.1 for CA/CWA & MEC/CEC MASTER MINDSEx–sole proprietary concern:

1st April to 31st August = 153 days Rs. 63,000 x 153 / 365 = Rs. 26,408

Successor company:

Rs. 63,000 - Rs. 26,408 = Rs. 36,592 (i.e. Rs. 63,000 x 212 /365)

The depreciation of Rs. 12,000 [50% of 15% on Rs. 1,60,000] in respect of asset purchased by the successorcompany on 1st January is fully allowable in the hands of the successor company.

Note: Since it has not been specified that the company is a manufacturing company or a company engaged inthe generation or generation and distribution of power, additional depreciation has not been provided for.

PROBLEM NO. 5Computation of depreciation and additional depreciation for A.Y. 2018-19

Particulars Plant & Machinery(15%)

Computer(40%)

Normal depreciation: @ 15% on Rs. 50,00,000 [See Working Notes 1 & 2] @ 7.5% (50% of 15%, since put to use for less than 180 days) on

Rs. 8,00,000 @ 20% (50% of 40%, since put to use for less than 180 days) on

Rs. 3,00,000Additional Depreciation: @ 20% on Rs. 20,00,000 (new plant and machinery put to use for

more than 180 days) @10% (50% of 20%, since put to use for less than 180 days) on

Rs. 8,00,000Total depreciation*

7,50,00060,000

-

4,00,000

80,00012,90,000

--

60,000

-

-60,000

Working Notes:(1) Computation of written down value of Plant & Machinery as on 31.03.2018

Particulars Plant & Machinery ComputerWritten down value as on 1.4.2017Add: Plant & Machinery purchased on 08.6.2017Add: Plant & Machinery acquired on 15.12.2017Computer acquired and installed in the office premisesWritten down value as on 31.03.2018

30,00,00020,00,000

8,00,000-

58,00,000

---

3,00,0003,00,000

(2) Composition of plant and machinery included in the WDV as on 31.3.2018Particulars Plant & Machinery Computer

Plant and machinery put to use for 180 days or more[Rs. 30,00,000 (Opening WDV) + Rs. 20,00,000(purchased on 8.6.2017)]Plant and machinery put to use for less than 180 days

Computers put to use for less than 180 days

50,00,000

8,00,000

_____-___58,00,000

-

-

3,00,0003,00,000

Notes:1. As per the second proviso to section 32(1)(ii), where an asset acquired during the previous year is put to

use for less than 180 days in that previous year, the amount of deduction allowable as normal depreciationand additional depreciation would be restricted to 50% of amount computed in accordance with theprescribed percentage.Therefore, normal depreciation on plant and machinery acquired and put to use on 15.12.2017 andcomputer acquired and installed on 02.01.2018, is restricted to 50% of 15% and 40%, respectively. Theadditional depreciation on the said plant and machinery is restricted to Rs.80,000, being 10% (i.e., 50% of20%) of Rs.8 lakh



2. As per third proviso to section 32(1)(ii), the balance additional depreciation of Rs.80,000 being 50% ofRs.1,60,000 (20% of Rs.8,00,000) would allowed as deduction in the A.Y.2019-20.

3. As per section 32(1)(iia), additional depreciation is allowable in the case of any new machinery or plant acquiredand installed after 31.3.2005 by an assessee engaged, inter alia, in the business of manufacture or production ofany article or thing, @ 20% of the actual cost of such machinery or plant.However, additional depreciation shall not be allowed in respect of, inter alia, any machinery or plantinstalled in office premises, residential accommodation or in any guest house.Accordingly, additional depreciation is not allowable on computer installed in the office premises.

PROBLEM NO. 7Computation of depreciation under section 32 for Mr.X for A.Y. 2018-19

Particulars Rs. in croresPlant and machinery acquired on 01.06.2017Plant and machinery acquired on 01.11.2017WDV as on 31.03.2018Less: Depreciation @ 15% on Rs. 30 croreDepreciation @ 7.5% (50% of 15%) on Rs. 25 croreAdditional Depreciation@35% on Rs. 30 croreAdditional [email protected]% (50% of 35%) on Rs. 20 croreWDV as on 01.04.2018

4.5001.875

10.500 3.500

30.000 25.000

55.000

20.37534.625

Computation of deduction under section 32AD for Mr.X for A.Y. 2018-19

Particulars Rs. in croresDeduction under section 32AD @ 15% on Rs. 50 croreTotal benefit

7.507.50

No, the answer would be same, where the manufacturing unit is set up by a firm. The deduction under section32AD is available to any manufacturing units and therefore, the deduction of Rs. 7.50 crore under section 32ADwould be available even if the manufacturing unit is set up by X & Co., a firm.

Notes:

1. As per the second proviso to section 32(1)(ii), where an asset acquired during the previous year is put touse for less than 180 days in that previous year, the amount deduction allowable as normal depreciationand additional depreciation would be restricted to 50% of amount computed in accordance with theprescribed percentage. Therefore, normal depreciation on plant and machinery acquired and put to use on1.11.2017 is restricted to 7.5% (being 50% of 15%) and additional depreciation is restricted to 17.5% (being50% of 35%).

2. The balance additional depreciation of Rs. 3.5 crores, being 50% of Rs. 7 crores (35% of Rs. 20 crores)would be allowed as deduction in the A.Y.2019-20.

3. As per section 32(1)(iia), additional depreciation is allowable in the case of any new machinery or plantacquired and installed after 31.3.2005 by an assessee engaged, inter alia, in the business of manufactureor production of any article or thing. In this case, since new plant and machinery acquired was installed by amanufacturing unit set up in a notified backward area in the State of Telengana, the rate of additionaldepreciation is 35% of actual cost of new plant and machinery. Since plant and machinery of Rs. 20 croreswas put to use for less than 180 days, additional [email protected]% (50% of 35%) is allowable asdeduction. However, additional depreciation shall not be allowed in respect of second hand plant andmachinery of Rs. 5 crores. Likewise, the benefit available under sections 32AD would not be allowed inrespect of second hand plant and machinery.

Accordingly, additional depreciation and investment allowance under sections 32AD have not beenprovided on Rs. 5 crores, being the actual cost of second hand plant and machinery acquired and installedin the previous year.

PROBLEM NO. 8Computation of deduction allowable under section 35

Particulars Amount(Rs. in lakhs)

% of weighteddeduction

Amount ofdeduction

(Rs. in lakhs)Payment for scientific research



K Research Ltd.[see Note 3]LMN CollegeOPQ College.[see Note 1] National Laboratory.[see Note 4]In-house researchCapital expenditure.[see Note 2]Revenue expenditureDeduction allowable under section 35

2015108

2512

150%150%

Nil150%

100%100%

30.0022.50

Nil12.00

25.0012.00

101.50

Notes:-

1. Payment to OPQ College: Since the note in the question below item (vi) clearly mentions that only KResearch Ltd. and LMN College (mentioned in item (i) and (ii), respectively) are approved researchinstitutions, it is a logical conclusion that OPQ College mentioned in item (iii) is not an approved researchinstitution. Therefore, payment to OPQ College would not qualify for deduction under section 35.

2. Deduction for in-house research and development: Only company assessees are entitled to weighteddeduction @150% under section 35(2AB) in respect of inhouse-research and development expenditureincurred. However, in this case, the assessee is an individual. Therefore, he would be entitled todeduction@100% of the revenue expenditure incurred under section 35(1)(i) and 100% of the capitalexpenditure incurred under section 35(1)(iv) read with section 35(2), assuming that such expenditure is laidout or expended on scientific research related to his business.

3. Payment to K Research Ltd. (Alternative Answer): Any sum paid to a company registered in India whichhas as its main object scientific research, as is approved by the prescribed authority, qualifies for aweighted deduction of 100% under section 35(1)(iia). Therefore, it is also possible to take a view thatpayment of Rs. 20 lakhs to K Research Ltd. qualifies for a weighted deduction of 100% under section35(1)(iia) since K Research Ltd. is a company. The weighted deduction under section 35(1)(iia) would beRs. 20 lacs (i.e., 100% of Rs. 20 lacs), in which case, the total deduction under section 35 would be Rs.91.50 lacs.

4. Payment to National Laboratory: The percentage of weighted deduction under section 35(2AA) in respectof amount paid to National Laboratory is 150%.

PROBLEM NO. 10Since the capital asset, in respect of which deduction of Rs. 50 lacs was claimed under section 35AD, has beentransferred by Unit A carrying on specified business to Unit B carrying on non-specified business in theP.Y.2017-18, the deeming provision under section 35AD(7B) is attracted during the A.Y.2018-19.

Particulars Amount(Rs.)Deduction allowed under section 35AD for A.Y.2017-18 50,00,000Less: Depreciation allowable u/s 32 for A.Y.2017-18 [10% of Rs. 50 lacs] 5,00,000Deemed income under section 35AD(7B) 45,00,000

Mr. Arnav, however, by virtue of proviso to Explanation 13 to section 43(1), can claim depreciation undersection 32 on the building in Unit B. For the purpose of claiming depreciation on building in Unit B, the actualcost of the building would be :

Particulars Amount(Rs.)Actual cost to the assessee 50,00,000Less: Depreciation allowable u/s 32 for A.Y.2017-18 [10% of Rs. 50 lacs] 5,00,000Actual cost in the hands of Mr. Arnav in respect of building in its Unit B 45,00,000

PROBLEM NO. 11Computation of income under the head “Profit and gains of business or profession” of MNP Ltd. for

A.Y.2018 – 19.

Particulars Rs. Rs.Profits from the specified business of new four-star hotel in Chennai (beforeproviding deduction under section 35AD)Less: Deduction under section 35ADCapital expenditure incurred during the P.Y. 2017-18 (excluding the expenditureincurred on acquisition of land) = Rs.250 lakh - Rs.100 lakh 150

80



(See Notes 1 & 2 below)Capital expenditure incurred during January 2017 to March 2017(i.e., prior to commencement of business) and capitalized in the books of accountas on 1.4.2017 (See Note 3 below)Total deduction under section 35AD for A.Y.2018-19Income from the specified business of new hotel in ChennaiProfit from the existing business of running a four-star hotel in Kanpur(See Note 4 below)Net profit from business after set-off of loss of specified business against profits ofanother specified business under section 73A

40

190(110) 130

20LNotes:1. According to the provisions of section 35AD, an assessee shall be allowed a deduction in respect of 100%

of the capital expenditure incurred wholly and exclusively for the purpose of the specified business

2. The expenditure on acquisition of land, however, does not qualify for deduction under section 35AD.

3. The capital expenditure incurred prior to commencement of specified business shall be allowed asdeduction under section 35AD(1) in the year of commencement of specified business, if the same iscapitalized in the books of accounts of the assessee on the date of commencement of its operations.

4. As per section 73A, the loss computed under section 35AD in respect of a specified business can be set offagainst the profit of another specified business. Building and operating a hotel of two-star and abovecategory, anywhere in India, is a specified business, therefore, the loss from the business of new four-starhotel in Chennai can be set-off against the income of the existing four-star hotel in Kanpur.

5. Section 35AD(6A) provides that where the assessee, MNP Ltd., builds a hotel of two-star or above categoryas classified by the Central Government and subsequently, while continuing to own the hotel, transfers theoperation of the said hotel to another person, the assessee shall be deemed to be carrying on the specifiedbusiness of building and operating a hotel. Therefore, in this case, MNP Ltd. would be eligible to claiminvestment linked deduction under section 35AD even if it transfers the operation of the Chennai hotel toPQR Ltd.

PROBLEM NO. 12Computation of profits and gains of business or profession for A.Y.2018-19

Particulars Rs.Profit from business of setting up of warehouse for storage of edible oil (before providing fordepreciation under section 32)Less: Depreciation under section 3210% of Rs.30 lakh, being (Rs.50 lakh - Rs.30 lakh + Rs.10 lakh)Income chargeable under “Profits and gains from business or profession”

31

3 28

Computation of income/loss from specified business under section 35AD

Particulars FoodGrains Sugar Total

A.

B.

C.D.E.

Profits from the specified business of setting up a warehousing facility(before providing deduction under section 35AD)Less: Deduction under section 35ADCapital expenditure incurred prior to 1.4.2017 (i.e., prior tocommencement of business) and capitalized in the books of account ason 1.4.2017 (excluding the expenditure incurred on acquisition of land) =Rs.30 lakh (Rs.80 lakh - Rs.50 lakh) and Rs.20 lakh (Rs.60 lakh - Rs.40lakh)Capital expenditure incurred during the P.Y.2017-18Total capital expenditure (B + C)Deduction under section 35AD100% of capital expenditure (food grains, sugar)Total deduction u/s 35AD for A.Y.2018-19

16

30

20 50

5050

14

20

15 35

3535

30

50

35 85

85

F. Loss from the specified business of setting up and operating awarehousing facility (after providing for deduction under section35AD) to be carried forward as per section 73A (A-E)

(34) (21) (55)



PROBLEM NO. 14Sec.36(1)(viia) was deleted in the New SM

Particulars Rs. in LakhsBad debts written off (for the first time) in the books of account 210Less: Credit balance in the “Provision for bad and doubtful debts” under section36(1)(viia) as on 31.3.2018a) Provision for bad and doubtful debts under section 36(1)(viia) upto A.Y.2017-18b) Current year provision for bad and doubtful debts under section 36(1)(viia) [7.5% of Rs.

800 lakhs + 10% of Rs. 300 lakhs]

100

98 198Deduction under section 36(1)(vii) in respect of bad debts written off for A.Y.2018-19 12

PROBLEM NO. 15According to sec.40(a)(ia), where tax has not been deducted or the amount of tax deducted has not beenremitted to the credit of central government as per the provisions of tax deduction at source, then,30% of suchexpenditure shall be disallowed while computing income under the head “profits and gains from business orprofession”. Accordingly, in respect of various situations given in question, the following shall be theconsequences u/s.40(a)(ia):

S.No. Nature ofpayment

Compliance /violation Tax consequence

a) Contractpayment

Tax not deducted atsource

Rs.72,000 shall be disallowed (Rs.2,40,000*30%)

b) Salary to aresident


Rs.1,50,000 shall be disallowed (Rs.5,00,000*30%)

c) Rent TDS remitted withinstipulated time limit.

The assesse has remitted the amount of TDS on28.09.2018 which is within the time limit for filing return ofincome. i.e. 30.09.2018. accordingly, no disallowance ofexpenditure u/s.40(a)(ia) is warranted.

d) InterestTax not deducted at

source during thefinancial year.

Rs.60,000 shall be disallowed in A.Y 2018-19. However,the same shall be allowed as a deduction in AY 2019-20.(Rs.2,00,000*30%)

e) Professionalcharges

Delay in remittanceof TDS.

Rs.1,50,000 shall be disallowed in A.Y 2018-19 since thesame is not remitted within time limit stipulated u/s 139 (1).However the same shall be allowed as a deduction inAY2019-20 (Rs.5,00,000*30%)

f) Non-competefee


Rs.3,00,000 shall be disallowed (Rs.10,00,000*30%)

PROBLEM NO. 16Disallowance under section 40(a)(i)/40(a)(ia) of the Income-tax Act, 1961 is attracted where the assessee failsto deduct tax at source as is required under the Act, or having deducted tax at source, fails to remit the same tothe credit of the Central Government within the stipulated time limit.i) The obligation to deduct tax at source from interest paid to a resident arises under section 194A in the case

of an individual, whose total turnover in the immediately preceding previous year, i.e., P.Y. 2016-17exceeds Rs. 100 lakhs. Thus, in present case, since the turnover of the assessee is less than Rs. 100lakhs, he is not liable to deduct tax at source. Hence, disallowance under section 40(a)(ia) is not attracted inthis case.

ii) The disallowance of 30% of the sums payable under section 40(a)(ia) would be attracted in respect of allsums on which tax is deductible under Chapter XVII-B. Section 192, which requires deduction of tax atsource from salary paid, is covered under Chapter XVII-B. The obligation to deduct tax at source undersection 192 arises, in the hands all assessee-employer even if the turnover amount does not exceed Rs.100 lakhs in the immediately preceding previous year.

Therefore, in the present case, the disallowance under section 40(a)(ia) is attracted for failure to deduct taxat source under section 192 from salary payment. However, only 30% of the amount of salary paid withoutdeduction of tax at source would be disallowed.



iii) The obligation to deduct tax at source under section 194-H from commission paid in excess of Rs. 15,000to a resident arises in the case of an individual, whose total turnover in the immediately preceding previousyear, i.e., P.Y.2016-17 exceeds Rs. 100 lakhs. Thus, in present case, since the turnover of the assessee isless than Rs. 100 lakhs, he is not liable to deduct tax at source. Therefore, disallowance under section40(a)(ia) is not attracted in this case.

PROBLEM NO. 17Allowability of the expenses incurred by Mr. MN, a wholesale dealer in commodities, while computingprofits and gains from business or professioni) Construction of school building in compliance with CSR activities: Under section 37(1), only

expenditure not being in the nature of capital expenditure or personal expense and not covered undersections 30 to 36, and incurred wholly and exclusively for the purposes of the business is allowed as adeduction while computing business income.However, any expenditure incurred by an assessee on the activities relating to corporate socialresponsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have beenincurred for the purpose of business and hence, shall not be allowed as deduction under section 37.Accordingly, the amount of Rs. 5,60,000 incurred by Mr. MN, towards construction of school building incompliance with CSR activities shall not be allowed as deduction under section 37.

ii) Purchase of building for setting up a warehousing facility for storage of food grains: Mr. MN, wouldbe eligible for investment-linked tax deduction under section 35AD @100% in respect of amount of Rs.4,50,000 invested in purchase of building for setting up a warehousing facility for storage of food grainswhich commences operation on or after 1st April, 2012 (P.Y.2017-18, in this case).Therefore, the deduction under section 35AD while computing business income would be Rs. 6,75,000.

iii) Interest on loan paid to Mr. X (a resident) Rs. 50,000 on which tax has not been deducted: As persection 194A, Mr. MN, being an individual is required to deduct tax at source on the amount of interest onloan paid to Mr. X, since his turnover during the previous year 2016-17 exceeds the monetary limit of Rs.100 lacs. Therefore, Rs. 15,000, being 30% of Rs. 50,000, would be disallowed under section 40(a)(ia)while computing the business income of Mr. MN for non-deduction of tax at source under section 194A oninterest of Rs. 50,000 paid by it to Mr. X. The balance Rs. 35,000 would be allowed as deduction undersection 36(1)(iii),assuming that the amount was borrowed for the purposes of business.

iv) Commodities transaction tax of Rs. 20,000 paid on sale of bullion: Commodities transaction tax paid inrespect of taxable commodities transactions entered into in the course of business during the previous yearis allowable as deduction, provided the income arising from such taxable commodities transactions isincluded in the income computed under the head “Profits and gains of business or profession”.Taking that income from this commodities transaction is included while computing the business income ofMr. MN, the commodity transaction tax of Rs. 20,000 paid is allowable as deduction under section36(1)(xvi).

PROBLEM NO. 18a) Calculation of Book Profits:

Particulars AmountNet Loss as per P&L A/cAdd: Interest to partners Other expenses to be disallowed

(1,72,000)7,100

13,600Profit as per P.G.B.PAdd: Remuneration to partners

(1,51,300)68,000

Book profit (83,300)

b) Permissible Remuneration in case of losses = 1,50,000 (or) 68,000 which ever is lower = 68,000c) Income of Partnership Firm:

Particulars AmountNet loss as per P/L A/cAdd: Other expenses

(1,72,000)13,600

(1,58,400)Add: Interest Disallowed [Sec.40(b)] Excess remuneration (68,000 – 68,000)

7,100

Loss (1,51,300)



PROBLEM NO. 19Case -1:

Taxable Income of the Partnership FirmParticulars Amount

1,00,00018,000

Net Profit as per P&L A/cAdd: Interest Paid in excess [Sec.40 (b)] [1.5L×12%-36K) 1,18,000Add: Excess Remuneration paid [1.8L-allowable remuneration (W.N.1)

48,000

Taxable Income 1,66,000

W.N.1:Calculation of Book profits

Net Profit as per P & L A/cAdd: Excess interest paid U/s 40(b)Add: RemunerationBook Profit

1,00,00018,000

1,80,0002,98,000

Remuneration as per Slab system

On Rs.2,98,000 – Rs.1,50,000 (or) 90% of Book Profit which ever is higher.

Remuneration = Rs.2,68,200

Remuneration as per Partnership Deed (60,000 + 72,000) or as per Sec.40 (b) (2,68,200) which ever is lower

Allowable Remuneration = 1,32,000Taxable Income of Partners

Particulars A B C DShare of profits (Exempted U/s.10 (2A)Interest (To the extent it is allowed as deduction)RemunerationTaxable Income

--------

----

60,00060,000

----

72,00072,000

--18,000

--18,000

Case - 2:a)

Taxable Income of the Partnership Firm

Particulars Amount1,00,000

36,000Net Profit as per P&L A/cAdd: Interest Paid in excess – U/s 40 (b)

1,36,000Add: Remuneration 1,80,000Taxable Income 3,16,000

b) Nothing is allowed as expenditure in the hands of partnership firm, no income is taxable in the hand ofpartners.

PROBLEM NO. 20The allowable remuneration calculated as per the limits specified in section 40(b)(v) would be

Particulars Rs.

On first Rs. 3 lakh of book profit [Rs. 3,00,000 × 90%] 2,70,000

On balance Rs. 7 lakh of book profit [Rs. 7,00,000 × 60%] 4,20,000

6,90,000

The excess amount of Rs. 60,000 (i.e., Rs. 7,50,000 – Rs. 6,90,000) would be disallowed as per section40(b)(v).



PROBLEM NO. 21According to section 43B, any interest payable on the term loans to specified financial institutions and anyinterest payable on any loans and advances to scheduled banks shall be allowed only in the year of payment ofsuch interest irrespective of the method of accounting followed by the assessee. Where there is default in thepayment of interest by the assessee, such unpaid interest may be converted into loan. Such conversion ofunpaid interest into loan shall not be construed as payment of interest for the purpose of section 43B. Theamount of unpaid interest so converted as loan shall be allowed as deduction only in the year in which theconverted loan is actually paid.

In the given case of Hari, the unpaid interest of Rs. 15,00,000 due to Andhra Pradesh State FinancialCorporation (APSFC) and of Rs. 30,00,000 due to Indian Bank was converted into loan. Such conversion wouldnot amount to payment of interest and would not, therefore, be eligible for deduction in the year of suchconversion. Hence, claim of Hari that the entire interest of Rs. 45,00,000 is to be allowed as deduction in theyear of conversion is not tenable. The deduction shall be allowed only to the extent of repayment made duringthe financial year.Accordingly, the amount of interest eligible for deduction for the A.Y.2018-19 shall be calculated as follows:

InterestOutstanding

Number ofInstallments

Amount perinstallment

InstallmentsPaid

InterestAllowable (Rs.)

APSFC 15 lakh 60 25,000 5 1,25,000Indian Bank 30 lakh 60 50,000 3 1,50,000Total amount eligible for deduction 2,75,000

PROBLEM NO. 22Computation of Taxable Income of X & Co. for the A.Y.2018-19

Particulars Amount

PGBPConstruction business (Note-1) – 25,000Other business – 1,90,000 2,15,000

Capital GainsLong term Capital Gains 40,000

Gross total incomeLess: Chapter VI – A Deductions (Sec.80G)

2,55,0005,000

Net taxable income 2,50,000

Calculation of Presumptive income

Gross Presumptive income (37,80,000×6%)Less: Interest & salary to partners

2,26,80060,000

Taxable presumptive Income 1,66,800

Note - 1: Since the actual income of the Assessee is less than the presumptive income. Assessee can declarethe actual income as taxable income by satisfying following two conditions:i) Maintaining books of accounts U/s.44AAii) By getting them audited U/s.44AB

PROBLEM NO. 23Computation of Taxable Income of Mr.Sukhvindar for the A.Y.2018-19

Particulars Amount

Business Income (W.N.1)Other Income

4,45,00070,000

Gross Total IncomeLess: Chapter VI A Deductions

5,15,000-

Net taxable income 5,15,000


No.1 for CA/CWA & MEC/CEC MASTER MINDSW.N.1:

Calculation of Presumptive Income as per Sec.44 AE

Type of Vehicle Duration No. of Months Income9 – Heavy good vehicles1 – Heavy good vehicle1 – Light good vehicle

1-4-17 to 31-3-181-4-17 to 2-5-17

6-5-17 to 31-3-17

122

11

(9x12x7500) 8,10,000(1x2x7500) 15,000

(1x11x7500) 82,5009,07,500

Actual Income = Rs.4,45,000

Conclusion: Since the actual income is less than the presumptive income, assessee can declare actualincome as taxable income subject to the satisfaction of the following two conditions:a) Maintaining Books of accounts U/s.44 AAb) By getting them audited U/s 44 AB

PROBLEM NO. 24Since Mr. X does not own more than 10 vehicles at any time during the previous year 2017-18, he is eligible toopt for presumptive taxation scheme under section 44AE. Rs. 7,500 per month or part of month for which eachgoods carriage is owned by him would be deemed as his profits and gains from such goods carriage.

(1) (2) (3) (4)Number ofVehicles Date of purchase No. of months for which

vehicle is ownedNo. of months × No. of vehicles

[(1) × (3)]2 10.04.2017 12 241 15.03.2018 1 13 16.07.2017 9 271 2.01.2018 3 32 29.08.2017 8 161 23.02.2018 2 2

10 TOTAL 73

Therefore, presumptive income of Mr. X under section 44AE for A.Y.2018-19 is Rs. 5,47,500, being 73 × Rs.7,500.

The answer would remain the same even if the two vehicles purchased in April, 2017 were put to use only inJuly, 2017, since the presumptive income of Rs. 7,500 per month has to be calculated per month or part of themonth for which the vehicle is owned by Mr. X.

PROBLEM NO. 25Computation of Taxable Income of Mr.D for the A.Y.2018-19

Net profit as per P & L A/c 25,500(+) Expenses to be disallowed Excess salary paid Reserve for bad debts

Interest on D’s capital Expenditure on acquisition of patents Depreciation in excess (10,000-9,500) Provision for income tax (Sec.40(a))(-) Allowable expenses Depreciation on patents (28K×25%×1/2) Outstanding sales tax liability (Note-1)

3,10010,000

3,00028,000

5004,000

3,5005,000

Taxable Income 65,600

Assumption: Assumed that assessee as satisfied the conditions as given in Sec.36(1) for the allowability ofdeduction towards bad debts

Note-1: As per Sec. 43B to get deduction towards the taxes for the P.Y 2016-17 will be allowed only if thepayment was made before 31-07-17. Since the payment was not made with in the due date the same will beallowed as deduction in the year of actual payment 2017-18.



Note – 2: The cut off date for payment of customs duty is 31st July, 2017. Since the amount was made withinthe cut off date it should have been allowed as deduction for the previous year 2016-17. So, it will not beallowed as deduction again in 2017-18 (i.e., year of payment)

PROBLEM NO. 27Computation of Taxable Income of P for the A.Y.2018-19

Particulars AmountNet profit as per the P & L A/c(+) Expenses to be disallowed:

Prop. SalaryDonationSmall machine – capital exp.Adv. Income taxWooden show case – capital exp.DepreciationMotor car Exp. @ 1/4th

Int. on prop. CapitalReserve for future lossesIncome tax paidLife insurance premium

(-) Allowable Exp.Depreciation on small mach. @ 15%Depreciation on show case @ 10%Donation to Delhi university.(10K x125%-10K)

(-) Income taxable under other headsL.T.C.GBad debts recovered (Note:2)Int. on govt. SecuritiesDividendsInterest from bank account

Income from Horse racing

1,76,300

60,0001,0005,0004,0006,0002,0002,125

15,0004,0007,1006,000

750600

2,500

90,00024,00014,000

6,0002,000

10,000Business profits 1,38,675

Note 1: Assumed that the conditions as given in Sec. 36 (1) were satisfied (Bad debts)Note 2: Bad debts recovered are not taxable as business income

PROBLEM NO. 28Computation of Gross Total Income of Mr. Gupta for the A.Y. 2018-19

Particulars Rs. Rs.Income from Business or professionNet profit as per Profit and Loss AccountAdd : Expenses not deductibleDonation to Prime Minister Relief Fund (Refer Note - 1)Provision for bad debts (Refer Note - 2)Family planning expenditure incurred on employees (Refer Note - 3)Depreciation as per Profit and Loss AccountIncome-tax (Refer Note - 4)Employer’s contribution to recognized provident fund (Note-5)

Less : Expense allowedDepreciation as per Income- tax Rules, 1962

Add : Employee’s contribution included in income as perSection 2(24)(x) (Refer Note-6)Business Income / Gross Total Income

1,00,00050,00020,00030,000

1,00,00025,000

11,50,000

3,25,00014,75,000

40,00014,35,000

25,000

14,60,000


No.1 for CA/CWA & MEC/CEC MASTER MINDSNotes:

1. Donation to Prime Minister Relief Fund is not allowed as deduction from the business income. It is allowedas deduction under section 80G from the gross total income.

2. Provisions for bad debts is allowable as deduction under section 36(1)(viia) (subject to the limits specifiedtherein) only in case of banks, public financial institutions, State Financial Corporation and State IndustrialInvestment Corporation. Therefore, it is not allowable as deduction in the case of Mr. Gupta.

3. Expenditure on family planning is allowed as deduction under section 36(1)(ix) only to a companyassessee. Therefore, such expenditure is not allowable as deduction in the hands of Mr. Gupta.

4. Income-tax paid is not allowed as deduction as per the provisions of section 40(a)(ii).

5. Since, Mr. Gupta’s contribution to recognized provident fund is deposited after the due date of filing returnof income, the same is disallowed as per provisions of section 43B.

6. Employee’s contribution is includible in the income of the employer by virtue of Section 2(24)(x). Thededuction for the same is not provided for as it was deposited after the due date. It has been assumed thatit has not been already debited in the given profit and loss account.

7. TDS provisions under section 194A are not attracted in respect of payment of interest on bank loan.Therefore, disallowance under section 40(a)(ia) is not attracted in this case.

PROBLEM NO. 31Computation of business income of Mr. Sivam for the A.Y. 2018-19

Particulars Amount AmountNet Profit as per profit and loss accountAdd: Inadmissible expenses / lossesUnder valuation of closing stockSalary paid to brother – unreasonable [Section 40A(2)]Printing and stationery paid in cash [Section 40A(3)]Depreciation (considered separately)Short term capital loss on sharesDonation to public charitable trustLess: Deductions items:Under valuation of opening stockIncome from UTI [Exempt under section 10(35)]Business income before depreciationLess: Depreciation (See Note 1)

18,0002,000

23,2001,05,000

8,100 2,000

9,0002,400

50,000

1,58,300 2,08,300

11,4001,96,900

66,0001,30,900

Computation of business income as per section 44AD:

As per section 44AD, where the amount of turnover is received inter alia by way of account payee cheque oruse of electronic clearing system through bank, the presumptive business income would be 6% of turnover, i.e.,Rs. 1,12,11,500 x 6 /100 = Rs. 6,72,690

The business income under section 44AD is Rs. 6,72,690.

In this case, Mr. Sivam is eligible to opt for presumptive taxation under section 44AD, since his turnover doesnot exceed Rs. 2 crores in the P.Y.2017-18. However, in his case, business income as per the normalprovisions of the Act is lower than the presumptive income of Rs. 6,72,690 computed under section 44AD.Therefore, it is beneficial for him to compute business income as per the normal provisions of the Act. However,since his turnover exceeds Rs. 1 crore, he has to get his books of account audited under section 44AB, if hedoes not opt to declare his income as per the presumptive tax provisions of section 44AD.

Further, if he declares income as per presumptive tax provisions of section 44AD this year i.e., P.Y.2017-18,and he does not opt for presumptive taxation in any of the five succeeding previous years (i.e., from P.Y.2018-19 to P.Y.2022-23), say, for instance, in P.Y.2018-19, then he will not be eligible to opt for presumptive taxationfor five assessment years succeeding the A.Y. 2019-20 relevant to the P.Y. 2018-19.



Notes:

1. Calculation of depreciation

Particulars AmountWDV of the block of plant & machinery as on 1.4.2017Add : Cost of new plant & machinery

Less : Sale proceeds of assets soldWDV of the block of plant & machinery as on 31.3.2018

Depreciation @ 15%

No additional depreciation is allowable as the assessee is not engaged in manufacture orproduction of any article.

4,20,00070,000

4,90,00050,000

4,40,000

66,000

2. Since sales-tax liability has been paid before the due date of filing return of income under section 139(1),the same is deductible.

PROBLEM NO. 33Cash system of Accounting

Taxable receipts Amount Audit Fees Consultancy Fees(-) Allowable Expenses Rent Salary (10K-1800) Membership Fee

Repairs Municipal Taxes Dep. on books (1,200×60%) Dep. on professional Assets

60,0005,000

8,0008,2001,000

125250720

2,500Taxable Income 44,205

Mercantile system of accountingTaxable Income Amount

Audit Fees (WN- 1)Consultancy

(-) Allowable Exp.

Rent

12M108K

Salary [10K – 1800]Member ship feeRepairsMunicipal TaxesDep. on books

Dep. On Professional assets

55,0005,000

9,600

8,2001,000

125250720

2,500Taxable Income 37,605

W.N.1:Audit Fees(-) Advance(+) O/s

60,00015,00010,00055,000

THE END



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