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P R O F I T S A N D G A I N S O F B U S I N E S S O R P R O F E S S I O N

14

PROFITS AND GAINS OF BUSINESS OR PROFESSION

RELEVENT SECTIONSRELEVENT SECTIONSRELEVENT SECTIONSRELEVENT SECTIONSRELEVENT SECTIONS

Section 28 Income to be chargeable under the head “Profits and gains of business or profes-sion”.

Section 2(13) Business in relation to Income-tax Act.Section 2(36) Profession in relation to Income-tax Act.

Section 145 Provision for method of accounting.Section 145A Method of accounting in certain cases.

RECEIPTS DEEMED TO BE PROFITS AND GAINS OF BUSINESS OR PROFESSION.RECEIPTS DEEMED TO BE PROFITS AND GAINS OF BUSINESS OR PROFESSION.RECEIPTS DEEMED TO BE PROFITS AND GAINS OF BUSINESS OR PROFESSION.RECEIPTS DEEMED TO BE PROFITS AND GAINS OF BUSINESS OR PROFESSION.RECEIPTS DEEMED TO BE PROFITS AND GAINS OF BUSINESS OR PROFESSION.

Section 41(1) Receipt of old loss or expenditure.Section 41(2) Sale of depreciated assets.Section 41(3) Surplus on sale of capital asset for scientific research.Section 41(4) Recovery from bad debts.Section 41(4A) Amount withdrawn from special reserve.Section 176(3A) Income from discontinued business.Section 176(4) Income from discontinued profession.

PROVISIONS OF DEDUCTION ALLOWABLE IN COMPUTING INCOME FROMPROVISIONS OF DEDUCTION ALLOWABLE IN COMPUTING INCOME FROMPROVISIONS OF DEDUCTION ALLOWABLE IN COMPUTING INCOME FROMPROVISIONS OF DEDUCTION ALLOWABLE IN COMPUTING INCOME FROMPROVISIONS OF DEDUCTION ALLOWABLE IN COMPUTING INCOME FROM

BUSINESS OR PROFESSIONBUSINESS OR PROFESSIONBUSINESS OR PROFESSIONBUSINESS OR PROFESSIONBUSINESS OR PROFESSIONSection 30 Rent, rates, taxes, repairs and insurance of buildingsSection 31 Repairs and insurance of building machinery, plant and furniture.Section 32 Depreciation.Section 33AB Tea development account (coffee and rubber development account)Section 33ABA Site Restoration FundSection 33AC Reserves for shipping business. (No deduction available w.e.f. A.Y. 2005-2006)Section 35(1) Revenue expenditure on scienti fic researchSection 35(2) Capita l expenditure on sc ient ific researchSection 35 (2AA) Payment to a national laboratory or a university or an Indian Institute of Technology

or a specified person on scientific researchSection 35(2AB) Expenditure on in-house research and development on scientific researchSection 35A Expenditure on acquisition of patent rights or copyrightsSection 35AB Expenditure on know-howSection 35ABB Expenditure for obtaining license to operate telecommunication servicesSection 35ABB(2) When sale proceeds are less than the amount of deduction remaining unallowed.Section 35ABB(3) When sale proceeds are more than the amount of deduction remaining unallowed.

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Section 35ABB(4) When only a part of the license is transferred and sale proceeds are less than theamount of deduction remaining unallowed.

Section 35ABB(6) When transfer is made in a scheme of amalgamation.

Section 35ABB(7) When transfer is made in a scheme of demerger.Section 35AC Expenditure on eligible projects or scheme.Section 35CCA Expenditure by way of payments to associations and institutions for carrying out rural

development programmesSection 35CCB Expenditure by way of payment to associations and institutions for carrying out

programmes of conservation of natural resourcesSection 35D Amortisation of certain preliminary expensesSection 35DD Amortisation of expenditure in case of amalgamation or demergerSection 35DDA Amortisation of expenditure incurred under Voluntary Retirement SchemeSection 35E Deduction for expenditure on prospecting, etc., of certain mineralsSection 36(1)(i) Insurance against risk of damage or destruction of stocks and stores.Section 36(1)(ia) Insurance premium paid by a federal milk co-operative society

Section 36(1)(ib) Insurance premium paid for the health of employeesSection 36(1)(ii) Bonus or commission paid to employeesSection 36(1)(iii) Interest on borrowed capitalSection 36(1)(iiia) Discount offered on Zero coupon BondSection 36(1)(iv) Contributions towards recognised provident fund or an approved superannuation

fundSection 36(1)(v) Contributions towards an approved gratuity fundSection 36(1)(va) Employees contribution to staff welfare schemesSection 36(1)(vi) Deductions in respect of animals used for business or professionSection 36(1)(vii) Bad debtsSection 36(1)(viia) Provision for bad and doubtful debts made by banks and financial institutionsSection 36(1)(viii) Deduction in respect of any special reserve created and maintained by a Financial

CorporationSection 36(1) (ix) Deduction in respect of expenditure for promoting Family PlanningSection 36(1)(x) Deduction in respect of contribution towards Exchange Risk Administration FundSection 36(1)(xi) Deduction in respect to expenditure incurred for Y2K complianceSection 36(1)(xii) Deduction in respect of expenditure for the objects of incorporationSection 36(1)(xiii) Deduction against payment of banking cash transaction taxSection 37(2B) Expendi ture on adver tisementSection 37 General deductions

OTHER EXPENDITURE NOT DEDUCTIBLE U/S 40OTHER EXPENDITURE NOT DEDUCTIBLE U/S 40OTHER EXPENDITURE NOT DEDUCTIBLE U/S 40OTHER EXPENDITURE NOT DEDUCTIBLE U/S 40OTHER EXPENDITURE NOT DEDUCTIBLE U/S 40Section 40(a) In case of any assesseeSection 40(b) In case of a firm

Section 184(5) Disallowance of interest, salary etc., to partnersSection 40(ba) In case of an association of persons or body of individualsEXPENDITURE NOT DEDUCTIBLE U/S 40AEXPENDITURE NOT DEDUCTIBLE U/S 40AEXPENDITURE NOT DEDUCTIBLE U/S 40AEXPENDITURE NOT DEDUCTIBLE U/S 40AEXPENDITURE NOT DEDUCTIBLE U/S 40A

Section 40A(2) Payment to relativesSection 40A(3) Payments exceeding Rs. 20000 in cashSection 40A(7) Payment of gratuity.



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Section 40A(9) Contributions to non-statutory funds.Section 43B Certa in deductions only on actual payments.Section 43Exp.8 Disallowance of capitalisation of interest.

Section 44AA Maintenance of accounts by certain persons carrying on profession or businessRule 6F(2) The above professionals will keep the following books of accountSection-44AB Audit of accounts of certain persons carrying on business or profession

SPECIAL PROVISION OF COMPUTATION OF INCOME OF CERTAIN TYPE OFSPECIAL PROVISION OF COMPUTATION OF INCOME OF CERTAIN TYPE OFSPECIAL PROVISION OF COMPUTATION OF INCOME OF CERTAIN TYPE OFSPECIAL PROVISION OF COMPUTATION OF INCOME OF CERTAIN TYPE OFSPECIAL PROVISION OF COMPUTATION OF INCOME OF CERTAIN TYPE OFBUSINESSES OR BUSINESS PERSONSBUSINESSES OR BUSINESS PERSONSBUSINESSES OR BUSINESS PERSONSBUSINESSES OR BUSINESS PERSONSBUSINESSES OR BUSINESS PERSONS

Section 43D Income of Public financial institutions, Public Companies etc.Section 44 Insurance businessSection 44A Trade, professional or similar associationSection 44AD Business of civil contractorship etc.Section 44AE Business of goods carriagesSection 44AF Business of retail trade in any goods or merchandiseSections 44B to For non-resident assessee44BBASections 44BBB & Foreign companies44DSection 44DA Income by way of royalties, etc. in case of non-residents.

Note:- For more details kindly refer Income Tax Act or Garg's CD.

Income to be chargeable under the head "Profits and gains of business or profession"Income to be chargeable under the head "Profits and gains of business or profession"Income to be chargeable under the head "Profits and gains of business or profession"Income to be chargeable under the head "Profits and gains of business or profession"Income to be chargeable under the head "Profits and gains of business or profession" [Section 28].—Under section 28 of the Income-tax Act, the following incomes are chargeable under the head “Profits and

gains of business or profession”-i) the profits and gains of any business or profession which was carried on by the assessee at any time

during the previous year;ii) any compensation or other payment due to or received by any person referred to in section 28(ii).iii) income derived by a trade, professional or similar association from specific services performed for its

members;(a) profits on sale of an import licence;(b) cash assistance (by whatever name called) received or receivable by any person against exports

under any scheme of the Government of India;(c) any duty of customs or excise re-paid or re-payable as drawback to any person against exports

under the Customs and Central Excise Duties Drawback Rules, 1971;(d) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being Duty Remission

scheme under the export and import of policy formulated and announced under section 5 of theForeign Trade (development and Regulation) Act, 1992;

(e) any profit on the transfer of the Duty Free replenishment certificate, being the Duty RemissionScheme, under the export and import policy formulated and announced under section 5 of theForeign Trade (Development and Regulation) Act, 1992.

iv) the value of any benefit or perquisite, whether convertible into money or not, arising from businessor the exercise of a profession.

v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or receivedby, a partner of a firm from such firm, provided the same has been disallowed as deduction u/s 40(b)from the income of the firm.

vi) any sum received under a keyman insurance policy including the sum allocated by way of bonus onsuch policy.





vii) any sum received or receivable in cash or kind, under an agreement for–(a) not carrying out any activity in relation to any business [excluding the amount received on transfer

of any rights which otherwise is chargeable under the head ''Capital Gains'' and from the multi-lateral fund.

(b) not sharing any know-how, patent, copyright, trade mark, license, franchise or any other businessor commercial right of similar nature or information or technique likely to assist in the manufactureor processing of goods or provision for services.

A company becomes a legal entity in the eye of law only when it is incorporated. Hence profit earned bythe promoters during the pre-incorporation period cannot be claimed to be that of the company and thuscompany is not liable to pay tax on it --CIT Vs. City Mills Distributors (P) Ltd. (1996) 131 Taxmann 103 (SC).2. Business2. Business2. Business2. Business2. Business [Section 2(13)].—

As defined in section 2(13) of the Income-tax Act, ‘business’ includes any trade, commerce or manufactureor any adventure or concern in the nature of trade, commerce or manufacture.

The word "business" is of large signification, and in its broadest sense includes nearly all the affairs in whicheither an individual or a corporation can be actors. The business of a tea-grower and manufacturer is not merelyto grow tea-plant but to collect tea-leaves and render them fit for sale.

Assessees purchasing a piece of land, carving it into plots and selling the plots for a profit within a shorttime, transaction is adventure in the nature of trade - [Smt. Indramani Bai & Anr. Vs. Addl. CIT (1993) 112 CTR (SC) 241].

In Barendera Prasad Vs. I.T. Officer, AIR 1981 SC 1047, 1953 , it was held that the word "business" isone of wide import and it means an activity carried on continuously and systematically by a person by theapplication of his labour or skill with a view to earning an income.

Business has no definite technical meaning, but is to be read with reference to the object and intent of the Act in which it occur. [Ex parte Breull, (1881) 16 ChD 481].3. Profession3. Profession3. Profession3. Profession3. Profession [Section 2(36)].—

Under section 2(36) of the Income-tax Act, ‘profession’ includes vocation. The word ‘profession’ impliesprofessed attainments in special knowledge as distinguished from mere skill; ‘special knowledge’ which is “to be acquired only after patent study and application”. Many vocations fall within the ordinary and accepteduse of the word “profession” as those of doctors, lawyers, tax experts, chartered accountants, architects,

engineers, journalists, singers, etc. In C.I.T. Vs. Manmohan Das (1966) 59 ITR 699, 710 (SC), it was held that a 'profession' involves the

idea of an occupation requiring either purely intellectual skill or if any manual skill, as in painting and sculptureor surgery, skill controlled by the intellectual skill of the operator, as distinguished from an occupation whichis substantially the production or sale or arrangement for the production or sale of commodities.

Share - broker does not come within the definition of ‘Profession’ under section 2(36) and falls withinthe expression “Business” under section 2(13) being engaged in purchase and sale of shares which aremarketable commodities and therefore, goods. [CIT Vs. Lallubhai Nagardas & Sons (1993) 114 CTR (Bom) 58].

4. Method of accounting4. Method of accounting4. Method of accounting4. Method of accounting4. Method of accounting [Section 145].—The Finance Act, 1995, had clearly specified that w.e.f. A.Y. 1997-98, income under the head "profits and

gains of business or profession" or "income from other sources"shall be computed in accordance with eithercash or mercantile system of accounting. If the Assessing Officer is not satisfied with the method of accounting

employed by the assessee, he can make a best judgement assessment under section 144. In Juggilal Kamlapat Udyog Ltd. Vs. CIT (2005) 278 ITR (Cal), it was held that as long as the income

could be reasonably deduced from the accounting system consistently followed by the assessee, it is boundto be accepted in view of the mandate of section -145 of the Act. Even a hybrid system in such circumstancesis required to be accepted.



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The Central Government has empowered itself to notify relevant accounting standards for the aforesaidpurpose. These standards are to be invariably followed by the assessee while maintaining their accounts. Thefollowing accounting standards have been notified, for all assessees following mercantile system of accounting

– vide Notification No. 9949, dated 25.1.1996, w.e.f. A.Y. 1997-98. In CIT Vs. Chandrika Tower [2005] 275 ITR 175 (MP), it was held that in the case of determination of

income in a developer case, where closing stock have been added it is only proper that the opening stock shouldbe allowed as a deduction.

Method o f accoun t ing i n ce r t a in o the r ca se sMethod o f accoun t ing i n ce r t a in o the r ca se sMethod o f accoun t ing i n ce r t a in o the r ca se sMethod o f accoun t ing i n ce r t a in o the r ca se sMethod of account ing in cer ta in other cases [Sect ion 145A]:-

The valuat ion of purchases , sa les and inventory for the purpose of determining business income

shal l be:-

( i ) i n accordance w i th the me thod o f accoun ting r egu la r ly employed by the a s ses see ; and

( i i ) fu r the r ad jus t ed to i nc lude t he amoun t o f any t ax , duty, c es s o r f ee ac tual ly pa id o r i ncu rr ed

by the assessee to bring the goods to the place of its location and condition as on the date

of valuat ion.

Rece ip t s deemed to be p ro f i t s and ga ins o f bus ines s o r p ro fe s s ion .–Rece ip t s deemed to be p ro f i t s and ga ins o f bus ines s o r p ro fe s s ion .–Rece ip t s deemed to be p ro f i t s and ga ins o f bus ines s o r p ro fe s s ion .–Rece ip t s deemed to be p ro f i t s and ga ins o f bus ines s o r p ro fe s s ion .–Rece ip t s deemed to be p ro f i t s and ga ins o f bus ines s o r p ro fe s s ion .–

The fol lowing receipts are deemed to be the prof i ts chargeable to tax even though the business or profess ion to which they re la te ceased to be in exis tence in the year of their receipts-

11111 . P ro f i t s cha rgeab le t o t ax .P ro f i t s cha rgeab le t o t ax .P ro f i t s cha rgeab le t o t ax .P ro f i t s cha rgeab le t o t ax .Prof i ts chargeable to tax. [Sect ion 41(1)] . -

(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss,expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person)and subsequently during any previous year.–

( a ) some benef i t in respect of such t rading l iabi l ity by way of remiss ion or cessat ion thereof , the amount

obtained by such person or the value of benefit accruing to him shall be deemed to be profits and

gains of business or profess ion and accordingly chargeable to income-tax as the income of that

previous year, whether the business or profess ion in respect of which the a l lowance or deduct ion

has been made is in existence in that year or not; or

( b ) the succes so r i n busines s has obt a ined , whe the r i n cash o r i n any o the r manne r wha tsoeve r, any

amount in respect of which loss or expenditure was incurred by the first-mentioned person in above

clause (a) .

2 . Sa l e o f dep rec i a t ed a s se t s2 . Sa l e o f dep rec i a t ed a s se t s2 . Sa l e o f dep rec i a t ed a s se t s2 . Sa l e o f dep rec i a t ed a s se t s2. Sale of deprecia te d assets [Sect ion 41(2)] . –.–.–.–.–

Where any bui lding, p lant or furni ture owned by the assessee for business purposes and deprecia ted

under sect ion 32(1)( i ) , i s sold , d iscarded or dest royed, the receipt or moneys payable in respect of such

an asset together wi th scrap value, i f any, would be chargeable to income tax. The taxable amount would

be the amount by which the sale value or moneys payable in respect of such assets exceeds their wri t ten

down value. Such an excess as does not exceed the difference between the actual cost and the wri t ten

down value shal l be chargeable to income-tax as business income in the previous year in which the

moneys payable becomes due. Such an amount would be taxable even i f the business of the assessee

is no longer in exis tence.

33333. Su rp lus on s a l e o f cap i t a l a s se t u sed fo r s c i en t i f i c r e sea rchSurplus on sale of capi ta l asset used for sc ient i f ic researchSurp lus on s a l e o f cap i t a l a s se t u sed fo r s c i en t i f i c r e sea rchSurplus on sale of capi ta l asset used for sc ient i f ic researchSurplus on sale of capi ta l asset used for sc ient i f ic research [Sect ion 41(3)] . –––––

Where an asset represent ing expendi ture of a capi ta l nature on scient i f ic research is sold , wi thouthaving been used for any other purposes and the sale proceeds, together with the amount of deduction

al lowed under sect ion 35, exceeds the amount of the capi ta l expendi ture , such surplus or the amount

of deduct ion a l lowed, whichever is less , wi l l be chargeable to income-tax as income of business or

profess ion of the previous year in which the sale took place.





For i n s t anceFor i n s t anceFor i n s t anceFor i n s t anceFor ins tance, an assessee purchases a sc ient i f ic research equipment for Rs. 1 ,75,000 dur ing the

previous year 1994-95 and cla ims Rs. 1 ,75,000 as deduct ion under sect ion 35 for the assessment year

1995-96. I f the assessee sel ls the equipment , wi thout us ing i t for purposes other than for sc ient i f ic

research, in 1999-2000 for Rs. 1,00,000, then Rs. 1,00,000 will be chargeable to tax for the assessment

year 2000-2001 even i f the assessee’s business is not in exis tence dur ing the previous year 1999-2000.

However, i f the assessee sel ls the equipment for Rs. 2 ,00,000, then Rs. 1 ,75,000/- wi l l be chargeable

to tax, for the assessment year 2000-2001 as business income and Rs. 25,000 wil l be chargeable to

tax as Capi ta l Gain.

44444 . Recove ry f rom bad deb t sRecove ry f rom bad deb t sRecove ry f rom bad deb t sRecove ry f rom bad deb t sRecovery f rom bad debts [Sect ion 41(4)] .–

Where a deduct ion has been a l lowed in respect of bad debt and subsequent ly any amount is

recovered towards the bad debt a l lowed as deduct ion, the amount so received shal l be deemed to be

the prof i ts of business or profess ion, and charged to income tax as the income of the previous year

in which it is recovered.

Fo r i n s t ance ,Fo r i n s t ance ,Fo r i n s t ance ,Fo r i n s t ance ,For ins tance, i f Rs. 5 ,000/- was a l lowed as deduct ion towards the bad debt out of a debt of

Rs. 10,000/- and subsequent ly Rs. 6 ,000/- was recovered towards such debt , only Rs. 1 ,000/- [6 ,000-

(10,000-5,000)] wi l l be deemed to be the prof i t chargeable to tax.

5 .5 .5 .5 .5 . Amount wi thdrawn from special reserve Amount wi thdrawn from special reserve Amount wi thdrawn from special reserve Amount wi thdrawn from special reserve Amount wi thdrawn from special reserve [Sect ion 41(4A)] .–

When a deduct ion has been a l lowed in respect of any specia l reserve created and maintained by

concerns , engaged in the business of providing long-term f inance for industr ia l , agr icul tural , infras t ructural

or res ident ia l development , as ment ioned under sect ion 36(1) (vi i i ) , any amount subsequent ly withdrawn

from such specia l reserve shal l be chargeable to income-tax as business income of the year of wi thdrawl .

Such an amount is taxable even i f the business of the assessee is no longer in exis tence.

D i scon t inuance o f bus ines s o r d i s so lu t i on .D i scon t inuance o f bus ines s o r d i s so lu t i on .D i scon t inuance o f bus ines s o r d i s so lu t i on .D i scon t inuance o f bus ines s o r d i s so lu t i on .D i scon t inuance o f bus ines s o r d i s so lu t i on .

( i )( i )( i )( i )( i ) Income f rom d i scon t inued bus ines sIncome f rom d i scon t inued bus ines sIncome f rom d i scon t inued bus ines sIncome f rom d i scon t inued bus ines sIncome from discont inue d business [Sect ion 176(3A)] .–

Where any business is d iscont inued in any year, any sum received af ter the discont inuance shal l be

deemed to be the income of the recipient and shall be charged to tax accordingly in the year of receipt,

if such sum would have been included in the total income of the person, who carried on the business,

had such sum been received before such discont inuance.

Amount received under an agreement af ter terminat ion of dis t r ibutorship agreement was assessable

as “business income” and not as “capital gains” - Indian Engg. & Commercial Corpn. (P) Ltd. Vs. CIT (1993) 113 CTR (Bom.) 91.

( i i )( i i )( i i )( i i )( i i ) Income from discont inued profess ionIncome from discont inued profess ionIncome from discont inued profess ionIncome from discont inued profess ionIncome from discont inued profess ion [Sect ion 176(4)] .–

Where any profession is discontinued in any year on account of the cessation of the profession by,

or the re t i rement or death of , the person carrying on the profess ion, any sum received af ter the

discont inuance shal l be deemed to be the income of the recipient and charged to tax accordingly in

the year of receipt, if such sum would have been included in the total income of that person, had it been

received before such discont inuance.

Deduc t ion a l l owab le i n compu t ing income f rom bus ines s o r p ro fe s s ionDeduc t ion a l l owab le i n compu t ing income f rom bus ines s o r p ro fe s s ionDeduc t ion a l l owab le i n compu t ing income f rom bus ines s o r p ro fe s s ionDeduc t ion a l l owab le i n compu t ing income f rom bus ines s o r p ro fe s s ionDeduc t ion a l l owab le i n compu t ing income f rom bus ines s o r p ro fe s s ion .–

For the purpose of computing taxable income from business or profess ion, the fol lowing deduct ions

are a l lowable:-

( i )( i )( i )( i )( i ) Ren t , r a t e s , t axes , r epa i r s and in su rance o f bu i ld ingsRen t , r a t e s , t axes , r epa i r s and in su rance o f bu i ld ingsRen t , r a t e s , t axes , r epa i r s and in su rance o f bu i ld ingsRen t , r a t e s , t axes , r epa i r s and in su rance o f bu i ld ingsRent , ra tes , taxes , repairs and insurance of bui ldings [Sect ion 30] .–

Deduct ion in respect of rent , ra tes , taxes , repairs and insurance for premises , used for the purposesof business or profess ion wil l be a l lowed to the assessee.

However, where the premises are occupied by the assessee as a tenant, the rent paid for such

premises, and if, he has undertaken to bear the cost of repair, taxes etc. of the premises, the actual

amount paid on account of such repairs , taxes e tc . to the premises , wi l l be a l lowed as deduct ion.



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And, where, the premises are owned by the assessee, the amount paid by him on account of current

repairs of the premises , the amount paid on account of land revenue, local ra tes and insurance premium

against the r isk of damage or dest ruct ion of the business premises are a l lowable as deduct ion. No

deduct ion is a l lowed on account of not ional rent .

The Finance Act , 2003, had c lar i f ied that the amount paid on cost of repairs and current repairs which

is in the nature of capi ta l expendi ture shal l not be a l lowed as deduct ion.

( i i )( i i )( i i )( i i )( i i ) Repa i r s and in su rance o f mach ine ry, p l an t & fu rn i tu r eRepa i r s and in su rance o f mach ine ry, p l an t & fu rn i tu r eRepa i r s and in su rance o f mach ine ry, p l an t & fu rn i tu r eRepa i r s and in su rance o f mach ine ry, p l an t & fu rn i tu r eRepairs and insurance of machinery, p lant & furni ture [Sect ion 31] .–

When any machinery, plant or furniture is used for the purpose of the business or profession, the

fol lowing deduct ions shal l be a l lowed-

( a ) t he amoun t pa id on accoun t o f cu r r en t r epa i r s t o such p l an t , mach inery & fu rn i tu r e .

( b ) the amount of any premium paid in respect of insurance against r isk of damage or destruct ion

of such machinery, p lant & furni ture .

The Finance Act , 2003, had c lar i f ied that the amount paid on account of current repairs which is in

the nature of capi ta l expendi ture shal l not be a l lowed as deduct ion.

( i i i )( i i i )( i i i )( i i i )( i i i ) Deprec i a t i on -Deprec i a t i on -Deprec i a t i on -Deprec i a t i on -Deprecia t ion - [Sect ion 32] .–

For deta i led provis ions , p lease refer chapter on “Deprecia t ion” in par t I I .

( i v )( i v )( i v )( i v )( i v ) Tea deve lopmen t accoun t [ co ff ee and rubbe r deve lopmen t accoun tTea deve lopmen t accoun t [ co ff ee and rubbe r deve lopmen t accoun tTea deve lopmen t accoun t [ co ff ee and rubbe r deve lopmen t accoun tTea deve lopmen t accoun t [ co ff ee and rubbe r deve lopmen t accoun tTea development account [coffee and rubber development account [Sect ion 33AB].–

E l ig ib i l i t y fo r deduc t ion :E l ig ib i l i t y fo r deduc t ion :E l ig ib i l i t y fo r deduc t ion :E l ig ib i l i t y fo r deduc t ion :E l ig ib i l i t y fo r deduc t ion :

Where the business of the assessee consis ts exclusively or a lmost exclusively of growing and

manufactur ing tea , coffee or rubber in India and the assessee has , before the expiry of 6 months f rom

the end of the previous year or before the due date of furnishing the re turn of his income, whichever is

ear l ier, deposi ted any amount or amounts in a specia l account wi th the Nat ional Bank for Agricul tural and

Rural Development (NABARD) in accordance with and for the purposes specif ied in , a scheme approved

in this behalf by the Tea, Coffee or Rubber Board or in a Deposi t Account opened by the assessee in

accordance with and for the purposes specif ied in , a “deposi t scheme”framed by the Tea Board, Coffee

Board or Rubber Board as the case may be, wi th the previous approval of Centra l Govt . , the assessee

shal l , subject to the provis ions given below be a l lowed a deduct ion of-

Amount of deduct ion: Amount of deduct ion: Amount of deduct ion: Amount of deduct ion: Amount of deduct ion:

( a ) a sum equa l t o t he amoun t o r amoun ts so depos i ted ; o r

( b ) a sum equa l t o 40% o f i t s p ro f i ts ( compu ted unde r t he head “P ro f i ts and ga ins o f bus iness o r

profess ion” before making any deduct ion under th is sect ion) , whichever is less :

ProvidedProvidedProvidedProvidedProvide d that loss, if any, brought forward from earlier years and set off under section 72 of the Act,

is not to be considered for the purpose of computing the amount of deduct ion under th is sect ion.

Where the assessee is a f i rm or an associat ion of persons or body of individuals , no deduct ion under

th is sect ion shal l be a l lowed to any par tner or member of such f i rm, associa t ion of persons or body of

i n d i v i d u a l s .

Where deduct ion has been a l lowed in respect of deposi t made in such accounts in any previous year,

no deduct ion shal l be a l lowed in respect of such amount in any other previous year.

Audi t of accounts :– Audi t of accounts :– Audi t of accounts :– Audi t of accounts :– Audi t of accounts :–

Assessee is required to get h is accounts audi ted by a Char tered Accountant and to furnish the

report of such audi t in the prescr ibed form 1 duly s igned and ver i f ied by such Chartered Accountant

alongwith the re turn of income.

Withdrawals f rom the Special Account or Deposi t Account are not admissible except for the purpose

specif ied in the scheme or in the fol lowing ci rcumstances :

( i ) C lo su re of b us in es s

( i i ) D ea th of an as se ss ee

1. Form No. 3AC.





( i i i ) P a r ti t i on of H. U .F.

( i v ) D is so l ut io n o f fi r m

( v ) L i qu id a ti on o f th e co mp a ny

No deduct ion under th is sect ion shal l be a l lowed to the assessee carrying on the business of growingand manufactur ing tea in India where amount is u t i l i sed for the purchase of any machinery or plant to

be ins ta l led in any off ice premises or any res ident ia l accommodat ion, including any accommodat ion in

the nature of a guest house or any office appliances not being a computer or any machinery whose actual

cost has been a l lowed as deduct ion in computing income in any previous year or any machinery or

plant to be ins ta l led in any industr ia l under taking for the purposes of business of construct ion, manufac-

ture or product ion of any ar t ic le or th ing specif ied in Eleventh Schedule . [Sect ion 33AB(4)] .

Where any amount s tanding to the credi t of the assessee, in the specia l account or in the Deposi t

Account , i s re leased dur ing any previous year by the Nat ional Bank or wi thdrawn by the assessee f rom

the Deposi t Account , and such amount is u t i l i sed for the purchase of —

( a ) any machinery or plant to be ins ta l led in any off ice premises or resident ia l accommodat ion, including

any accommodat ion in the nature of a guest-house;

( b ) a n y o ff i ce a p p l ia n ce s ( n o t be i n g c om p ut e rs ) ;

( c ) any machinery or plant , the whole of the actual cost of which is a l lowed as a deduct ion (whether

by way of deprecia t ion or otherwise) in computing the income chargeable under the head ‘Prof i ts

and gains of business or profess ion” of any one previous year ;

( d ) any new machinery or plant to be ins ta l led in an Industr ia l under taking for the purposes of business

of construction, manufacture or production of any article or thing specified in the list in the Eleventh

S c h e d u l e ,

the whole of such amount so utilised shall be deemed to be the profits and gains of business of that

previous year and shal l accordingly be chargeable to income-tax as the income of that previous

y e a r . ’ ;

Where any amount is withdrawn from such accounts in the event of closure of business or dissolution

of firm, the firm will be liable to tax in the year of withdrawal on the assumption that there has not been

a c losure of business or a dissolut ion of the f i rm.

Where any amount wi thdrawn from such accounts and ut i l i sed for the purpose of any expendi ture

in accordance with the scheme, such expendi ture shal l not be a l lowed as deduct ion in computing the

income of the assessee under the head “Prof i ts and gains of business or profess ion”.

Where amount so withdrawn is not so ut i l i sed e i ther in whole or in par t , wi thin that previous year,

the unut i l i sed amount shal l be deemed to be the prof i ts and gains of business and accordingly chargeable

to income-tax as the income of that previous year, provided this condi t ion wil l not apply in the event of

death of the assessee, par t i t ion of H.U.F. and l iquidat ion of company.

Where any asset acquired in accordance with the scheme is sold or otherwise t ransferred to any

person at any time before the expiry of 8 years from the end of the previous year in which it was acquired

,such par t of the cost of such asset as is re la table to the deduct ion a l lowed under th is section shal l be

chargeable to tax as the income of the previous year in which the asset i s sold or otherwise t ransferred,

e x c e p t : —

(I) Sale or t ransfer of asset by the assessee to Government , a local author i ty, a corporat ion

establ ished by a Centra l , Sta te or Provincia l Act , or a Government Company as def ined in Sect ion 617

of Companies Act , 1956, or

( I I ) Sale or t ransfer in the event of success ion of f i rm by a company of the business or profess ion

carried on by the firm as a result of which the firm sells or transfers to the company any asset and the

scheme cont inues to apply to the company in the manner appl icable to the f i rm, provided the fol lowing

condi t ions are ful f i l led:



1 8 3



All the proper t ies of the f i rm immediate ly before success ion become the proper t ies of the company.

Al l the l iabi l i t ies of the f i rm immediate ly before success ion become the l iabi l i t ies of the company.

Al l the par tners in the f i rm before the succession become the share-holders of the company.

(v ) S i t e Res to ra t i on Fund(v ) S i t e Res to ra t i on Fund(v ) S i t e Res to ra t i on Fund(v ) S i t e Res to ra t i on Fund(v) Si te Restorat ion Fund [Sect ion 33ABA].–

E l ig ib i l i t y fo r deduc t ion :E l ig ib i l i t y fo r deduc t ion :E l ig ib i l i t y fo r deduc t ion :E l ig ib i l i t y fo r deduc t ion :E l ig ib i l i t y fo r deduc t ion :

Deduct ion under th is new sect ion is avai lable to an assessee carrying on business consis t ing of the

prospect ing for, or extract ion or product ion of , pet roleum or natural gas in India under an agreement wi th

the Centra l Government . The deduct ion shal l be avai lable against the deposi t (s) made by the assessee

as under :–

( i ) depos i t wi th S t a te Bank o f Indi a i n an accoun t (he re ina f t e r r e fe r r ed t o a s spec i a l a ccoun t ) ma in t a ined

by the assessee for the purposes specif ied in an approved scheme of the Government ; or

( i i ) depos i t any amoun t in an accoun t (he re ina ft e r r e f e rr ed t o a s S i t e Res to rat i on Accoun t ) opened by

the assessee in accordance with a scheme framed by the Minis t ry of Petroleum and Natural Gas.

Amount of deduct ion: Amount of deduct ion: Amount of deduct ion: Amount of deduct ion: Amount of deduct ion:

The amount of deduct ion shal l be the amount deposi ted as above, or 20% of the business prof i ts

(before deduct ion under th is sect ion) ,whichever is less . The deduct ion shal l be a l lowed before setoff of brought forward loss , i f any.

Notes

( i ) where assessee i s a f i rm, assoc ia tion of persons o r body of indiv idual s , the deduc t ion sha l l not be a l lowed in

computation of the income of any partner or member of such form, AOPs or BOIs.

( i i ) where any deduc t ion in respec t o f amount depos i ted in the spec ia l account o r S i te Res tora t ion Account (as

referred above), has been allowed in any previous year, no deduction shall be allowed in respect of such amount

in any other previous year.

( i i i ) The amount credited in the special account or si te restoration account by way of interest shall be deemed to

be a deposit .

Audi t of accounts : Audi t of accounts : Audi t of accounts : Audi t of accounts : Audi t of accounts :

No deduct ion under th is sect ion is admissible unless the accounts of the said business have been audi ted

by a char tered accountant and the assessee furnishes the audi t repor t in Form No. 3AD along with the

return. However, if the accounts of the assessee are liable to be audited under any other law, the assesseemay furnish a fur ther audi t repor t in the form prescr ibed under th is sect ion.

Withdrawl of deposi ts :Withdrawl of deposi ts :Withdrawl of deposi ts :Withdrawl of deposi ts :Withdrawl of deposi ts :

No amount s tanding to the credi t in specia l account or Si te Restorat ion Account wi l l be a l lowed to be

withdrawn except for the purposes specif ied in the scheme.

However, no deduct ion under th is sect ion shal l be a l lowed in respect of any amount ut i l i sed for the

purchase of : -

( a ) any mach ine ry, p l ant o r off i ce app l i ances (not be ing compu te r s )

( b ) any machinery or plant , the whole of the actual cost of which is a l lowed as a deduction (whether

by way of deprecia t ion or otherwise) in computing the business income of any previous year.

( c ) any new machinery or plant to be ins tal led in an industr ia l undertaking for the purposes of business

of construct ion, manufacture or product ion of any ar t ic le or th ing specif ied in the l is t in Eleventh

S c h e d u l e .

Where any amount f rom the account is wi thdrawn on closure of the account dur ing any previous year

by the assessee, the amount so withdrawn from the account , as reduced by the amount , i f any, payable

to the Centra l Government by way of prof i t or product ion share as provided in the agreement referred to

in section 42, shall be deemed to be the profits and gains of business or profession of that previous year

and shall accordingly be chargeable to tax even if the business of the assessee is no longer in existence.





Where any amount f rom the accounts so maintained by the assessee is u t i l i sed for any expendi ture

in accordance with the scheme, such expendi ture wi l l not be a l lowed in computing the business income

of the assessee.

Where any amount is re leased by the State Bank of India or is wi thdrawn from the Si te Restorat ion

Account and is not utilised in accordance with the scheme, the whole of such amount shall be deemed to

be the profits and gains of business and would be charged to income-tax as income of the year of withdrawl.

Where any asset acquired in accordance with the scheme is sold or otherwise t ransferred in any

previous year before the expiry of 8 years from the end of the previous year in which such assets were

acquired, such part of the cost of asset as is relatable to the deduction allowed shall be deemed to be the

profits and gains of business or profession of the previous year in which the asset is sold or transferred.

However, the said provis ions shal l not apply in the fol lowing cases : -

( i ) Where the asset i s sold or t ransferred to Government , local authori ty, corporat ion under Centra l , Sta te

or Provincia l Act or a Government Company, or

( i i ) Where the sale or transfer of the asset is made in connection with the succession of a firm by a company

in the same business and as a result of which the firm sells to the company any asset and the scheme

cont inues to apply to the Company in the manner appl icable to the f i rm. For th is purpose, a l l the

proper t ies and l iabi l i t ies of the f i rm should become the proper t ies of the company and al l the

shareholders of the company should have been the par tners of the f i rm immediate ly before thes u c c e s s i o n .

( v i )( v i )( v i )( v i )( v i ) Expend i tu re on s c i en t i f i c r e sea rch .–Expend i tu re on s c i en t i f i c r e sea rch .–Expend i tu re on s c i en t i f i c r e sea rch .–Expend i tu re on s c i en t i f i c r e sea rch .–Expend i tu re on s c i en t i f i c r e sea rch .–

Under section 35, deduction in respect of expenditure on scientific research is to be allowed for the

fol lowing i tems of expendi ture-

22222 ( a ) Revenue expend i tu re( a ) Revenue expend i tu re( a ) Revenue expend i tu re( a ) Revenue expend i tu re(a) Revenue expendi ture [Sect ion 35(1)] :

( i ) Any expend i tu re (no t be ing cap i t a l expend i tu re ) i ncur r ed on sc ien t i f ic r e sea rch r e l a ti ng t o t he bus ines s

of the assessee, i s a l lowable as business expendi ture .

Any revenue expenditure incurred on payment of any salary [as defined in Explanation 2 of Section 40A(5)]

to a person engaged in sc ient i f ic research or on purchase of mater ia ls used in such scient i f ic research,

aggregate of such expenditure paid or incurred after 31-3-1973, but within 3 years immediately preceding the

commencement of the business , i s deemed to have been paid or incurred in the previous year in which the

business is commenced to the extent it is certified by the prescribed authority under Rule 6 i.e. the Director

General ( Income tax Exemptions) in concurrence with the Secretary, Depar tment of Scient i f ic and Industr ia l

Research, Government of India .

(ii) One and one fourth times of the sum paid to a scientific research association, university, college

or other institution to be used for scientific research, provided such association, university, college or institution

is approved by the Centra l Government by not i f icat ion in the Off ic ia l Gazet te .

(iia) an amount equal to one and one-fourth times of any sum paid to a company to be used by it for scientific research:

Provided that such company– (A) is registered in India,(B) has as its main object the scientific research and development,(C) is, for the purposes of this clause, for the time being approved by the prescribed authority in the

prescribed manner, and

(D) fulfils such other conditions as may be prescribed; [Inserted by the Finance Bill, 2008, w.e.f.01.04.2009].

(iii) One and one fourth times of the sum paid to an approved university, college or other institution for

research in social science or statistical research related to the business carried on by the assessee. Provided

that such university, college or institution is for the time being approved by the Central Government by notification

in the Off ic ia l Gazet te 1 .

1 . Vide Notification No. 1/2008 [F.No. 203/83/2004/ITA-II] dated 2-1-2008, Kripa Foundation, Member has been approved by the Central Government.

2. Amended by Finance Bill, 2008



1 8 5



The appl icat ion required to be furnished by a sc ient i f ic or industr ia l research organisat ion or ins t i tu t ion

under clause (ii) or (iii) above, shall be in Form No. 3CF. [Deltron Ltd. Vs. CIT (2008) 166 Taxman-73 (Delhi)]

( b )( b )( b )( b )( b ) Cap i t a l expend i tu reCap i t a l expend i tu reCap i t a l expend i tu reCap i t a l expend i tu reCapi ta l expendi ture [Sect ion 35(2)] :

Where the assessee incurs any expendi ture of a capi ta l nature on scient i f ic research re la ted to hisbusiness , the whole of such expendi ture incurred in any previous year is a l lowable as deduct ion for that

previous year. Where, however, any capi ta l expendi ture has been incurred before the commencement of the

business , the aggregate of such expendi ture so incurred within 3 years immediate ly preceding the commence-

ment of the business is deemed to have been incurred in the previous year in which the business is commenced.

However, no deduction, in respect of land purchased after 29-2-84, will be allowed under section 35(2).

Further if the asset is sold without having been used for other purposes, the sale consideration or deduction

allowed whichever is less, is chargeable to tax under the head ‘Income from Business or Profession’

in the year of sale. However, where the amount of sale exceeds the deduction allowed, the excess is chargeable

to tax under the head “Capital Gains”. [Section 41(3)]

No deprecia t ion is a l lowed on assets used in sc ient i f ic research, for any assessment year.

( c )( c )( c )( c )( c ) Payment to a nat ional laboratory or a univers i ty or an Indian Inst i tu te of TechnologyPayment to a nat ional laboratory or a univers i ty or an Indian Inst i tu te of TechnologyPayment to a nat ional laboratory or a univers i ty or an Indian Inst i tu te of TechnologyPayment to a nat ional laboratory or a univers i ty or an Indian Inst i tu te of TechnologyPayment to a nat ional laboratory or a univers i ty or an Indian Inst i tu te of Technology [Sect ion 35 (2AA)] .–

Where an assessee pays a sum to a National Laboratory or a University or an Indian Institute of Technology

or a specified person, with a specific direction that the said sum shall be used for scientific research undertaken

under a programme approved in th is behalf by the prescr ibed author i ty, then —

( a ) there shal l be a l lowed a deduct ion of a sum equal to one and one-four th t imes the sum so paid; and

( b ) no deduction in respect of such sum shall be allowed under any other provision of the Income Tax Act.

The application for obtaining approval under section 35 (2AA) shall be made by the applicant in Form No.

3 C G .

The requis i te approval to the programme shal l be given by the head of the concerned Nat ional Laboratory

or the University or the I.I.T. In case of a specified person, the approval shall be given by the Principal Scientific

Adviser to the Government of India. However, the approval should be granted in Form No. 3CH after satisfying

the feasibi l i ty of carrying out such scient i f ic research and a repor t to the Director General ( Income-tax

Exemptions) should be submitted in Form No. 3CJ. For detail procedure, refer rule 6 of Income-tax Rules, 1962.

( d )( d )( d )( d )( d ) Expend i tu re on i n -house r e sea rch and deve lopmen tExpend i tu re on i n -house r e sea rch and deve lopmen tExpend i tu re on i n -house r e sea rch and deve lopmen tExpend i tu re on i n -house r e sea rch and deve lopmen tExpendi ture on in-house research and development [Sect ion 35(2AB)] .–

Where a company engaged in the business of manufacture or product ion of any drugs , pharmaceu-

t icals , e lect ronic equipments , computers , te lecommunicat ion equipments , chemicals , b io- technology or

any other ar t ic le or th ing not i f ied by the Board incurs any expendi ture on scient i f ic research (not being

expendi ture in the nature of cost of any land or bui lding) on in-house research and development faci l i ty

as approved by the prescr ibed author i ty (The Secretary, Depar tment of Scient i f ic and Industr ia l Research)

then, there shal l be a l lowed a deduct ion of a sum equal to one and one-half t imes of the expendi ture so

incurred. The Company shal l make the appl icat ion for approval in Form No. 3CK. No company shal l be

ent i t led for deduct ion as ment ioned above unless i t enters in to an agreement wi th the prescr ibed author i ty

for co-operat ion in such research and development faci l i ty and for audi t of the accounts mainta ined for that

faci l i ty. The prescr ibed author i ty shal l submit i t s repor t in re la t ion to the approval of the said faci l i ty to the

Director General in Form No. 3CL within such t ime as may be prescr ibed. No deduct ion shal l be a l lowed

in respect of above ment ioned expendi ture under any other provis ion of Income-tax Act . No deduct ion under

th is c lause shal l be avai lable in respect of expendi ture incurred af ter 31.3 .2007.

As per Finance Act , 2007, th is weighted deduct ion has been extended for a fur ther per iod of f ive years ,

that i s , in respect of the expendi ture incurred upto 31-03-2012.

(v i i ) Expend i tu re on acqu i s i t i on o f pa t en t r i gh t s o r copyr igh t s(v i i ) Expend i tu re on acqu i s i t i on o f pa t en t r i gh t s o r copyr igh t s(v i i ) Expend i tu re on acqu i s i t i on o f pa t en t r i gh t s o r copyr igh t s(v i i ) Expend i tu re on acqu i s i t i on o f pa t en t r i gh t s o r copyr igh t s(vi i ) Expendi tur e on acquis i t io n of patent r ights or copyrights [Sect ion 35A].–

Any expendi ture of capi ta l nature incurred af ter 28.2 .1966 but before 1 .4 .1998, on the acquis i t ion

of patent rights or copyrights used for the purposes of the business shall be allowed in equal instalments

spread over a period of 14 years or over the unexpired life of the patent rights or copy right beginning with

the previous year in which such expendi ture is incurred. Where such expendi ture was incurred before the





commencement of the business , the previous year wi l l be the year in which the business commenced.

If at the time of acquisition of a patent right, the right had already commenced, the period of 14 years will

be reduced by the number of completed years which e lapse between commencement of the r ight and i ts

acquis i t ion by the assessee. Where, however, the ent i re per iod of 14 years had e lapsed af ter the

commencement of a patent right but before its acquisition, the entire cost will be written off in one instalment.

Any prof i t or loss on sale of a copyright or patent r ight is taken into considerat ion whi le computing business

i n c o m e .

As per sub-sect ion (7) of sect ion 35A where in a scheme of demerger, the demerged company sel ls

or otherwise t ransfers the r ights to the resul t ing company (being an Indian company) ,–

( i ) the provis ions of sub-sect ions (3) and (4) shal l not apply in the case of the demerged company; and

( i i ) the provis ions of th is sect ion shal l , as far as may be, apply to the resul t ing company as they would

have appl ied to the demerged company, i f the la t ter has not sold or otherwise t ransferred the r ights .

(v i i i ) Expend i tu re fo r ob t a in ing l i c ense t o ope ra t e t e l ecommunica t ion s e rv i ce s(v i i i ) Expend i tu re fo r ob t a in ing l i c ense t o ope ra t e t e l ecommunica t ion s e rv i ce s(v i i i ) Expend i tu re fo r ob t a in ing l i c ense t o ope ra t e t e l ecommunica t ion s e rv i ce s(v i i i ) Expend i tu re fo r ob t a in ing l i c ense t o ope ra t e t e l ecommunica t ion s e rv i ce s(vi i i ) Expendi ture for obtaining l icense to operate te lecommunicat ion services [Sect ion 35ABB].–

The sect ion seeks to provide that any capi ta l expendi ture actual ly paid by an assessee on the acquis i t ion

of any r ight to operate te lecommunicat ion services e i ther before the commencement of business to operate

te lecommunicat ion services or thereaf ter a t any t ime dur ing the previous year, by obtaining l icence, shal l be

al lowed as a deduct ion for each re levant previous year in equal ins ta lments . Amount of deduction : Amount of deduction : Amount of deduction : Amount of deduction : Amount of deduction :

The deduct ion under th is sect ion shal l be spread over the per iod s tar t ing f rom the year in which such

payment against capi ta l expendi ture has been made and ending in the year in which the l icense comes to an

end. The total expenditure shall be divided by the total number of years of validity of such license and the resulting

amount would be the a l lowable deduct ion in each previous year.

A l lowable deduct ion in each previous year To tal capi ta l expendi ture

(upto t he year i n which th e licen se cease s = ---------------------------------------------------------------------------

to be in force) Number of years for which the license is in force

Deduct ion in case the l icense is t ransferred :Deduct ion in case the l icense is t ransferred :Deduct ion in case the l icense is t ransferred :Deduct ion in case the l icense is t ransferred :Deduct ion in case the l icense is t ransferred :

a ) When sa l e p roceeds a r e l e s s t han the amoun t o f deduc t ion r ema in ing una l lowedWhen sa l e p roceeds a r e l e s s t han the amoun t o f deduc t ion r ema in ing una l lowedWhen sa l e p roceeds a r e l e s s t han the amoun t o f deduc t ion r ema in ing una l lowedWhen sa l e p roceeds a r e l e s s t han the amoun t o f deduc t ion r ema in ing una l lowedWhen sa l e p roceeds a r e l e s s t han the amoun t o f deduc t ion r ema in ing una l lowed [Sec t ion

3 5 A B B ( 2 ) ] . –

Where the l icense is t ransferred and the proceeds of the t ransfer (so far as they consis t of capi ta l

sums) are less than the expendi ture incurred remaining unal lowed, a deduct ion equal to such

unal lowed amount , as reduced by the proceeds of the t ransfer, shal l be a l lowed in respect of the

previous year in which the l icense is t ransferred.

b ) When sa l e p roceeds a r e more t han the amoun t o f deduc t ion r ema in ing una l lowedWhen sa l e p roceeds a r e more t han the amoun t o f deduc t ion r ema in ing una l lowedWhen sa l e p roceeds a r e more t han the amoun t o f deduc t ion r ema in ing una l lowedWhen sa l e p roceeds a r e more t han the amoun t o f deduc t ion r ema in ing una l lowedWhen sa l e p roceeds a r e more t han the amoun t o f deduc t ion r ema in ing una l lowed [Sec t ion

3 5 A B B ( 3 ) ] . –

Where the whole or any par t of the l icense is t ransferred and the proceeds of the t ransfer (so far

as they consis t of capi ta l sums) exceed the amount of the expendi ture incurred remaining

unallowed, the amount of such excess shall be chargeable to tax as profits and gains of the business

in the previous year in which the l icense has been t ransferred. Provided, that such excess shal l not

exceed the amount of deduct ion otherwise a l lowable upto the previous year in which the t ransfer

took place. Fur ther no deduct ion shal l be a l lowed under th is sect ion in succeeding years .

c ) When on ly a pa r t o f t he l i c ense i s t r ans fe r r ed and sa l e p roceeds a r e l e s s t han the amoun t o f When on ly a pa r t o f t he l i c ense i s t r ans fe r r ed and sa l e p roceeds a r e l e s s t han the amoun t o f When on ly a pa r t o f t he l i c ense i s t r ans fe r r ed and sa l e p roceeds a r e l e s s t han the amoun t o f When on ly a pa r t o f t he l i c ense i s t r ans fe r r ed and sa l e p roceeds a r e l e s s t han the amoun t o f When on ly a pa r t o f t he l i c ense i s t r ans fe r r ed and sa l e p roceeds a r e l e s s t han the amoun t o f

deduc t ion r ema in ing una l loweddeduc t ion r ema in ing una l loweddeduc t ion r ema in ing una l loweddeduc t ion r ema in ing una l loweddeduct ion remaining unal lowed [Sect ion 35ABB(4)] .–

Where a par t of the l icense is t ransferred and the proceeds of the t ransfer (so far as they consis t

of capi ta l sums) does not exceed the amount of expendi ture incurred remaining unal lowed, the

deduct ion fur ther a l lowable under th is sect ion shal l be computed as fol lows : -

( i ) t he amoun t o f expend i tu re r emain ing unal lowed le s s t he amoun t o f s a l e p roceeds sha l l be

divided by the remaining number of previous years which have not expired a t the beginning

of the previous year dur ing which the l icense is t ransferred.



1 8 7



This amount of deduct ion shal l be avai lable in each previous year for the unexpired per iod of

l i c e n s e .

d ) When t r ans fe r i s made in a s cheme o f ama lgama t ion .–When t r ans fe r i s made in a s cheme o f ama lgama t ion .–When t r ans fe r i s made in a s cheme o f ama lgama t ion .–When t r ans fe r i s made in a s cheme o f ama lgama t ion .–When t r ans fe r i s made in a s cheme o f ama lgama t ion .–

Where, in a scheme of amalgamation, the amalgamating company sel ls or otherwise t ransfers thel icense to the amalgamated company (being an Indian company) : -

( i ) the provis ions of sub-sections (2) , (3) and (4) of sect ion 35ABB shal l not apply in the case of

the amalgamating company; and

( i i ) t he p rov i s ions o f s ect i on 35ABB sha l l, a s f a r a s may be , app ly t o t he ama lgama ted company

as they would have appl ied to the amalgamating company i f the la t ter had not t ransferred the

l i c e n s e .

e ) When t r ans fe r i s made in a s cheme o f demerge r When t r ans fe r i s made in a s cheme o f demerge r When t r ans fe r i s made in a s cheme o f demerge r When t r ans fe r i s made in a s cheme o f demerge r When t ransfer is made in a scheme of demerger [Sect ion 35ABB(7)] .–

Where, in a scheme of demerger, the demerged company sel ls or otherwise t ransfers the l icence

to the resul t ing company (being an Indian company) , -

( i ) t he p rov i s ions of sub - sec ti ons (2 ) , ( 3 ) and (4 ) sha l l no t app ly i n t he ca se o f t he demerged

company; and

( i i ) t he p rovi s ions of t h i s s ect i on shal l , a s f a r a s may be , app ly to t he r e su lt i ng company a s t hey would have appl ied to the demerged company i f the la t ter had not t ransferred the l icence.

Where a deduct ion for any previous year is c la imed and al lowed in respect of the e l igible

expendi ture under th is sect ion, no deduct ion shal l be a l lowed under sect ion 32(1) for the same

previous year or any subsequent previous year.

( i x )( i x )( i x )( i x )( i x ) Expend i tu re on e l i g ib l e p ro j ec t s o r s chemesExpend i tu re on e l i g ib l e p ro j ec t s o r s chemesExpend i tu re on e l i g ib l e p ro j ec t s o r s chemesExpend i tu re on e l i g ib l e p ro j ec t s o r s chemesExpendi ture on e l igible projects or schemes [Sect ion 35AC].–

An assessee is allowable a deduction for expenditure by way of payment of any sum to a public sector

company or a local authority or to a n a ssociation or institution approved by National Committee for

carrying out project or scheme for promoting the social and economic welfare or the uplift of public,

incurred dur ing the previous year :

ProvidedProvidedProvidedProvidedProvided that a company may incur expenditure either by way of payment of any sum as aforesaid

or di rect ly on the e l igible project or scheme for c la iming the deduct ion. Refer Rule 11K for guidel ines to

be fol lowed by the Nat ional Commit tee to recommend a project or scheme as e l ig ible under th is sect ion.

(Vide Not i f icat ion No. 174/2007 [F.No. NC-274/03/2007] , d t . 24-05-2007) .

Provided further Provided further Provided further Provided further Provided further where the payment is to a public sector company or a local authority or an association,

( ins t i tu t ion) assessee should get a cer t i f icate in Form No. 58A from such associat ion, company or local

author i ty and in any other case , f rom a Chartered Accountant in the Form No. 58B.

The Nat ional Commit tee may withdraw i ts approval given ear l ier, to associa t ion(s) or project(s) , as the

case may be. However, an opportuni ty of being heard would be given to the concerned associat ion, company

e t c .

Where the payment is received by an approved PSU, local author i ty, associa t ion or ins t i tu t ion and the

approval or not i f icat ion for e l ig ible project or scheme is wi thdrawn, such payment in respect of which the

cer t i f icate ment ioned under sect ion 35AC(2)(a) has been issued, shal l be deemed to be the income of such

PSU, author i ty, associa t ion or ins t i tu t ion, as the case may be, for the previous year in which such approval

or not i f icat ion is wi thdrawn and tax shal l be charged on such income at the maximum marginal ra te in force

for that year.

( x )( x )( x )( x )( x ) Expend i tu re by way o f paymen t s t o a s soc i a t i ons and in s t i t u t i ons fo r ca r ry ing ou t ru r a l deve lop -Expend i tu re by way o f paymen t s t o a s soc i a t i ons and in s t i t u t i ons fo r ca r ry ing ou t ru r a l deve lop -Expend i tu re by way o f paymen t s t o a s soc i a t i ons and in s t i t u t i ons fo r ca r ry ing ou t ru r a l deve lop -Expend i tu re by way o f paymen t s t o a s soc i a t i ons and in s t i t u t i ons fo r ca r ry ing ou t ru r a l deve lop -Expend i tu re by way o f paymen t s t o a s soc i a t i ons and in s t i t u t i ons fo r ca r ry ing ou t ru r a l deve lop -ment programmesment programmesment programmesment programmesment programmes [Sect ion 35CCA].–

An assessee engaged in a business or profess ion is ent i t led to a deduct ion, in the computat ion of the

taxable prof i ts , in respect of expendi ture incurred by him during the previous year by way of payment of

any sum:

( a ) to an a s soc ia t i on o r i n st i t u t ion , t o be u sed fo r ca r ry ing ou t any prog ramme o f ru ra l deve lopmen t

approved by the prescr ibed author i ty [Sect ion 35CCA(1)(a)] :





( b ) to an a s soc i at i on o r i n s t i tu t i on , wh ich has a s i t s ob j ec t t he t r a in ing o f pe r sons fo r imp lemen t ing

programmes of rural development [Sect ion 35CCA(1)(b)] .

( c ) to a rural development fund set up and notified by the Central Government in this behalf, i .e.

Nat ional Fund for Rural Development [Sect ion 35CCA(1)(c)

( d ) to t he Na t iona l Urban Pove r ty E rad ica t i on Fund se t up and no t i fi ed by the Cen tr a l Gove rnmen t i n

this behalf .

The deduct ions under sect ion 35CCA(1)(a) wi l l not be a l lowed unless the assessee furnishes a

cer t i f icate f rom such associat ion or ins t i tu t ion that-

( a ) the p rog ramme o f ru ra l deve lopmen t had been app roved by the p re sc ribed au tho r it y be fo re 1 -

3-1983, and

( b ) where such paymen t i s made a f t e r 28 -2 -1983 , such p rog ramme invo lves work by way o f

construct ion of any bui lding or other s t ructure (whether for use as a dispensary, school , t ra ining

or welfare centre, workshop or for any other purpose) or the laying of any road or the construction

or bor ing of a wel l or tubewel l or the ins ta l la t ion of any plant or machinery, and such work

commenced before 1-3-1983.

The deduct ion u/s 35CCA(1)(b) wi l l not be a l lowed unless the assessee furnishes a cer t i f icate f rom

such associat ion or ins t i tu t ion that-

( a ) the p re scr ibed au thor i t y has app roved the a s soci a t i on o r i n s t it u t i on be fo re 1 -3 -1983 , and

( b ) the tr a in ing o f pe r sons fo r imp lemen t ing any p rog ramme of ru ra l deve lopment had been s t a r ted

by the associat ion or ins t i tu t ion before 1-3-1983.

The deduct ion to which the assessee is ent i t led under th is sect ion shal l not be denied merely on the

grounds that subsequent to the payment of sum by the assessee the approval granted to the programme

of rural development or, as the case may be, to the associat ion or ins t i tu t ion has been withdrawn. [Inser ted

by the Taxat ion Laws (Amendment) Act , 2006, w.e . f . 1-4-2006] .

No certificate of the nature referred above, shall be issued by any association or institution unless

such associat ion or ins t i tu t ion has obtained f rom the prescr ibed author i ty author isat ion in wri t ing to issue

cer t i f icate of such nature .

Where a deduct ion under th is sect ion is a l lowed for any assessment year in respect of any expendi ture ,

no deduct ion shal l be a l lowed in respect of such expendi ture under any other provis ions of th is Act for the

same or any other assessment year.

(x i )(x i )(x i )(x i )(x i ) Amort isa t ion of cer ta in prel iminary expenses Amort isa t ion of cer ta in prel iminary expenses Amort isa t ion of cer ta in prel iminary expenses Amort isa t ion of cer ta in prel iminary expenses Amort isa t ion of cer ta in prel imina ry expenses [Sect ion 35D].–

Sect ion 35D provides that for the amort isa t ion of cer ta in prel iminary expenses incurred af ter

31-3-1998 by an Indian company or a res ident assessee other than a company before the commencement

of his business or af ter the commencement of the business , in connect ion with the extension of his industr ia l

undertaking or the setting up of a new industrial unit, 1/5th (one-fifth) of such expenditure will be allowed

as deduction in each of the 5 successive years beginning from the year of commencement of business

or in the case of an exis t ing industr ia l under taking f rom the year in which extension of such under taking

is completed or the year in which the new industr ia l uni t , se t -up by such under taking, commences

product ion or operat ion [Sect ion 35D(1)] .

The Finance Bi l l , 2008 w.e . f . 2009 subst i tu ted the words ' ' Industr ia l under taking with "under taking" and

"Industr ia l uni t ' wi th uni t ."

Where the aggregate amount of the expendi ture , incurred af ter 31.3 .1998 exceeds 5% of the cost of the project or where the assessee is an Indian company, a t the opt ion of the company, of the capi ta l

employed in the business of the company, the excess will be ignored for the purpose of computing the

deduct ion a l lowable . [Sect ion 35D(3)] .

For expendi ture incurred upto 31.3 .1998, the amort isa t ion shal l be made @10% in each of the ten

successive years . Similar ly the expendi ture in excess of the 2 .5% of the cost of project or the capi ta l

employed as the case may be, shal l be ignored the compution of deduct ion.



1 8 9



Where the assessee is a non-corporate assessee, no deduct ion wil l be admissible u/s 35D(1) , unless

the accounts of the assessee for the re levant year in which the expendi ture is incurred, have been audi ted

by a char tered accountant . The assessee is a lso required to furnish, a longwith the re turn of income for the

f i rs t year, in which the deduct ion is c la imed, the audi t repor t in Form No. 3AE [See rule 6AB).

Where a deduct ion under th is sect ion is a l lowed for any assessment year in respect of any expendi ture ,

no deduct ion shal l be a l lowed in respect of such expendi ture under any other provis ions of th is Act for the

same or any other assessment year. The Finance Act , 1999 had la id down the provis ions for a case of

demerger appl icable w.e . f . A.Y. 2000-2001. Hencefor th , where the under taking of an Indian company which

is ent i t led to the deduct ion under sect ion 35D(1) is t ransferred, before the expiry of the per iod specif ied in

sub-sect ion (1) , to another company in a scheme of demerger, -

( i ) no deduct ion shal l be admissible under sub-sect ion (1) in the case of the demerged company for

the previous year in which the demerger takes place; and

(ii) the provisions of this section shall, as far as may be, apply to the resulting company, as they would

have appl ied to the demerged company, i f the demerger had not taken place.

(x i i ) Amor t i s a t i on o f expend i tu re i n ca se o f ama lgama t ion o r demerge r (x i i ) Amor t i s a t i on o f expend i tu re i n ca se o f ama lgama t ion o r demerge r (x i i ) Amor t i s a t i on o f expend i tu re i n ca se o f ama lgama t ion o r demerge r (x i i ) Amor t i s a t i on o f expend i tu re i n ca se o f ama lgama t ion o r demerge r (xi i ) Amort isa t ion of expendi ture in case of amalgamation or demerger [Sect ion 35DD].–

Where an assessee, being an Indian company, incurs any expendi ture , on or af ter the 1st day of Apri l ,

1999, whol ly and exclusively for the purposes of amalgamation or demerger of an under taking, theassessee shal l be a l lowed a deduct ion of an amount equal to one-f i f th of such expendi ture for each of the

f ive successive previous years beginning with the previous year in which the amalgamation or demerger

takes place.

No deduct ion shal l be a l lowed in respect of sa id expendi ture under any other provis ion of th is Act .

(x i i i ) Amor t i s a t i on o f expend i tu re i ncu r r ed unde r Vo lun ta ry Re t i r emen t Scheme(x i i i ) Amor t i s a t i on o f expend i tu re i ncu r r ed unde r Vo lun ta ry Re t i r emen t Scheme(x i i i ) Amor t i s a t i on o f expend i tu re i ncu r r ed unde r Vo lun ta ry Re t i r emen t Scheme(x i i i ) Amor t i s a t i on o f expend i tu re i ncu r r ed unde r Vo lun ta ry Re t i r emen t Scheme(xi i i ) Amort isa t ion of expendi ture incurred under Voluntary Ret i rement Scheme [Sect ion 35DDA].–

Where an assessee incurs any expendi ture by way of payment made to an employee in connect ion

with his voluntary re t i rement , in accordance with any such re la ted scheme, a deduct ion of 20% of such

amount so paid shal l be made whi le computing the prof i ts and gains of the business for that previous year.

The balance 80% shal l be deducted in 4 equal ins ta lments in four immediate ly succeeding previous years .

Moreover, the deduct ion avai lable under th is sect ion for 5 consecut ive years shal l pass on to the

amalgamated company, in case of an amalgamation, to the resul t ing company, in case of a demerger, to

a company who has succeeded a proprietory concern or a firm, in case of such succession. It is also provided

that no deduct ion shal l be a l lowed to the amalgamating or demerged company, or to the f i rm or propr ie toryconcern, in the year in which the under taking is t ransferred.

(x iv )(x iv )(x iv )(x iv )(x iv ) Deduc t ion fo r expend i tu re on p rospec t ing , e t c . , f o r ce r t a in mine ra l sDeduc t ion fo r expend i tu re on p rospec t ing , e t c . , f o r ce r t a in mine ra l sDeduc t ion fo r expend i tu re on p rospec t ing , e t c . , f o r ce r t a in mine ra l sDeduc t ion fo r expend i tu re on p rospec t ing , e t c . , f o r ce r t a in mine ra l sDeduct ion for expendi tu re on prospect in g, e tc . , for cer ta in minerals [Sect ion 35E].–

Sect ion 35E provides for amort isa t ion of expenses incurred af ter 31-3-1970 by an Indian company

or a res ident assessee other than a company, on any operat ion re la t ing to prospect ing for or extract ion

or product ion of any mineral , 1 /10th (one- tenth) of such expendi ture wi l l be a l lowed as deduct ion for each

one of the re levant previous years i .e . 10 years beginning with the year of commercial product ion. [Sect ion

3 5 E ( 1 ) ]

Where the assessee is a non-corporate assessee, no deduct ion wil l be admissible u/s 35E(1) unless

the accounts of the assessee for the re levant year in which the expendi ture is incurred, have been audi ted

by a char tered accountant .

Where the under taking of an Indian company which is ent i t led to the deduct ion under sub-sect ion (1)

is t ransferred, before the expiry of the per iod of 10 years specif ied in sub-sect ion (1) , to another company

in a scheme of demerger, -

( i ) no deduct ion shal l be admiss ib l e unde r sub -sec t i on (1 ) i n t he ca se o f the demerged company fo r

the previous year in which the demerger takes place; and

( i i ) the provisions of th is sect ion shal l , as far as may be, apply to the resul t ing company, as they would

have appl ied to the demerged company, i f the demerger had not taken place.





( x v )( x v )( x v )( x v )( x v )Insurance against r isk of damage or dest ruct ion of s tocks and s toresInsurance against r isk of damage or dest ruct ion of s tocks and s toresInsurance against r isk of damage or dest ruct ion of s tocks and s toresInsurance against r isk of damage or dest ruct ion of s tocks and s toresInsurance against r isk of damage or dest ruct ion of s tocks and s tores [Sect ion 36(1)( i ) ] .–

The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks

used for the purposes of the business or profess ion, i s a l lowable as deduct ion.

(xvi) Insurance premium paid by a federal milk co-operat ive socie ty(xvi) Insurance premium paid by a federal milk co-operat ive socie ty(xvi) Insurance premium paid by a federal milk co-operat ive socie ty(xvi) Insurance premium paid by a federal milk co-operat ive socie ty(xvi) Insurance premium paid by a federal milk co-operat ive socie ty [Sect ion 36(1)( ia)] .–

The amount of any premium paid by a federal milk co-operative society to effect or to keep in force an

insurance on the life of the cattle owned by a member of a co-operative society, being a primary society

engaged in supplying milk ra ised by i ts members to such federal milk co-operat ive socie ty.

(xv i i ) I n su rance p remium pa id fo r t he hea l th o f employees(xv i i ) I n su rance p remium pa id fo r t he hea l th o f employees(xv i i ) I n su rance p remium pa id fo r t he hea l th o f employees(xv i i ) I n su rance p remium pa id fo r t he hea l th o f employees(xvi i ) Insurance premium paid for the heal th of employees [Sect ion 36(1)( ib)] .–

The amount of any premium paid by any mode of payment other than cash instead of paid by cheque only

by the assessee as an employer to effect or to keep in force an insurance on the health of his employees

under a scheme framed in this behalf by the General Insurance Corporation of India and approved by the Central

Government or any other insurer and approved by Insurance Regulatory and Development Authori ty

establ ished under sect ion 3(1) of Insurance Regulatory and Development Authori ty Act , 1999.

(xv i i i )(xv i i i )(xv i i i )(xv i i i )(xv i i i ) Bonus o r commiss ion pa id t o employeesBonus o r commiss ion pa id t o employeesBonus o r commiss ion pa id t o employeesBonus o r commiss ion pa id t o employeesBonus or commission paid to employees [Sect ion 36(1)( i i ) ] .–

Any sum paid to an employee as bonus or commission for services rendered is a l lowable as deduct ion

provided it is not payable to him as profit or dividend if it had not been paid as bonus or commission.

(x ix )(x ix )(x ix )(x ix )(x ix ) Interes t on borrowed capi ta lInteres t on borrowed capi ta lInteres t on borrowed capi ta lInteres t on borrowed capi ta lInteres t on borrowed capi ta l [Sect ion 36(1)( i i i ) ] .–

Interes t paid on capi ta l borrowed for the purposes of business or profess ion is a l lowable as deduct ion.

The Finance Act, 2003, had clarified that deduction under this clause shall not be available on the amount

of in teres t paid , in respect of capi ta l borrowed for acquis i t ion of new asset for extension of exis t ing business

or profession, for any period from the date of capital borrowed till the date on which asset was first put to use.

The provis ions are appl icable f rom A.Y. 2004-2005.

(xx ) D i scoun t o ff e r ed on Ze ro coupon Bond(xx ) D i scoun t o ff e r ed on Ze ro coupon Bond(xx ) D i scoun t o ff e r ed on Ze ro coupon Bond(xx ) D i scoun t o ff e r ed on Ze ro coupon Bond(xx) Discount offered on Zero coupon Bond [Sect ion 36(1)( i i ia)] .–

The infras t ructure capi ta l company or infras t ructure capi ta l fund or publ ic sector company issuing the bond

may claim a deduction equal to the 'pro rata' amount of discount on a zero coupon bond with regard to the period

of life of such bond. The discount is the amount of difference between the amount received or receivable against

issue of the bond and the amount payable on matur i ty or redemption of such bond.

(xx i ) Con t r ibu t ions t owards r ecogn i sed p rov iden t fund o r an app roved supe rannua t ion fund(xx i ) Con t r ibu t ions t owards r ecogn i sed p rov iden t fund o r an app roved supe rannua t ion fund(xx i ) Con t r ibu t ions t owards r ecogn i sed p rov iden t fund o r an app roved supe rannua t ion fund(xx i ) Con t r ibu t ions t owards r ecogn i sed p rov iden t fund o r an app roved supe rannua t ion fund(xx i ) Con t r ibu t ions t owards r ecogn i sed p rov iden t fund o r an app roved supe rannua t ion fund [Sec t ion

3 6 ( 1 ) ( i v ) ] . –

Any sum paid by an assessee as an employer by way of contributio n towards a recognised provident fund

or an approved superannuat ion fund wil l be a l lowable as deduct ion , subject to the l imits and condi t ions

prescribed in rules - 75, 87 & 88 and in Fourth Schedule.

(xx i i ) Con t r ibu t ions t owards an app roved g ra tu i t y fund(xx i i ) Con t r ibu t ions t owards an app roved g ra tu i t y fund(xx i i ) Con t r ibu t ions t owards an app roved g ra tu i t y fund(xx i i ) Con t r ibu t ions t owards an app roved g ra tu i t y fund(xxi i ) Contr ibut io ns towards an approved gratui ty fund [Sect ion 36(1)(v)] .–

Any sum paid by the assessee as an employer by way of contribution towards an approved gratuity

fund created by him for the exclusive benef i t of his employees under an i r revocable t rus t i s a l lowable as

d e d u c t i o n .

(xx i i i )(xx i i i )(xx i i i )(xx i i i )(xx i i i ) Employees contr ibut ion to s taff welfare schemesEmployees contr ibut ion to s taff welfare schemesEmployees contr ibut ion to s taff welfare schemesEmployees contr ibut ion to s taff welfare schemesEmployees contr ibut io n to s taff welfare schemes [Sect ion 36(1)(va)] .–

Any sum received by the assessee from his employees as contribution towards any provident

fund or superannuation fund or any fund set up under the provisions of the Employees State Insurance

Act, 1948 or any other fund for the welfare of such employees, will be allowed as deduction, if such sum

is credi ted by the assessee to the employee’s account in the re levant fund or funds on or before the duedate , under the re levant Act , rules , orders or not i f icat ions , e tc .

(xxiv) Deduct ions in respect of animals used for business(xxiv) Deduct ions in respect of animals used for business(xxiv) Deduct ions in respect of animals used for business(xxiv) Deduct ions in respect of animals used for business(xxiv) Deduct ions in respect of animals used for business [Sect ion 36(1)(vi) ] .–

In respect of animals used for the purposes of business or profession otherwise than as stock-

in- t rade and have died or become permanent ly useless for such purposes , the difference between

the actual cost to the assessee of the animals and the amount, if any, realised in respect of the carcasses

or animals wi l l be a l lowed as deduct ion.



1 9 1



(xxv) Bad deb t s(xxv ) Bad deb t s(xxv ) Bad deb t s(xxv ) Bad deb t s(xxv) Bad debts [Sect ion 36(1)(vi i ) ] .–

A deduction will be allowed in respect of any bad debt or part thereof which is written off as irrecoverablein the accounts of the assessee for the previous year, subject to the provisions of section 36(2):

P rov idedProv idedProv idedProv idedProvided that the deduct ion shal l be l imited to an amount by which such debt or par t thereof exceedsthe credi t balance in the provis ions for bad an doubtful debts account made under sect ion 36(1)(vi ia) . For the purpose of th is c lause , any bad debt or par t thereof wri t ten off as i r recoverable in the accounts of theassessee shal l not include any provis ion for bad and doubtful debts made in the accounts of the assessee.

Interes t due on ' s t icky ' advances should be t reated as income but in the event of i t s becoming bad

debt, the assessee would be entitled to refund of the tax paid on such interest ----- Kerala Financial Corporat ion Vs. CIT (1994) 119 CTR 164 (SC).

In CIT Vs. Micromax Systems (P) Ltd. [2005] 277 ITR 409 (Mad)- It was held that for a bad debt in

order to be e l igible for deduct ion should be wri t ten off in the book of the assessee. Merely making provis ionfor it is not sufficient.

(xxv i ) P rov i s ion fo r bad and doub t fu l deb t s made by banks and f i nanc i a l i n s t i t u t i ons(xxv i ) P rov i s ion fo r bad and doub t fu l deb t s made by banks and f i nanc i a l i n s t i t u t i ons(xxv i ) P rov i s ion fo r bad and doub t fu l deb t s made by banks and f i nanc i a l i n s t i t u t i ons(xxv i ) P rov i s ion fo r bad and doub t fu l deb t s made by banks and f i nanc i a l i n s t i t u t i ons(xxvi) Provis ion for bad and doubtful debts made by banks and f inancial ins t i tu t ions [Sect ion

3 6 ( 1 ) ( v i i a ) ] . –

A deduct ion shal l be a l lowed in respect of any provis ion for bad and doubtful debts made by a

scheduled bank, not being a bank incorporated by or under the laws of a country outside India, or a non-scheduled bank, an amount not exceeding 7 .5% of the tota l income (computed before making anydeduct ions under th is c lause and Chapter VI-A) and an amount , not exceeding 10% of the aggregateaverage advances made by the rural branches of such banks computed in the prescr ibed manner.

The Finance Act , 1999, had given an opt ion, to the scheduled banks or a non-scheduled bank referredabove, to avai l a deduct ion in respect of any provis ion made by the bank for any assets c lass i f ied by theReserve Bank of India as 'doubtful or loss assets ' as per i t s guidel ines . The amount of deduct ion is l imitedto 10% of the amount of such 'doubtful or loss assets as shown in the books of account of the bank on thelas t day of the previous year. The deduct ion is avai lable for f ive consecut ive assessment years f rom A.Y.2000-2001 to A.Y. 2004-2005.

The Finance Act , 2003, had given the opt ion to scheduled bank or a non scheduled bank for fur ther deduct ion in excess of the l imits specif ied in above provis ions , for an amount not exceeding the incomederived f rom redemption of secur i t ies in accordance with a scheme framed by the Centra l Government . Thebill has also required that to claim deduction it is essential that such income has been disclosed in the return

of income under the head ' 'Prof i ts and gains of business or profess ion. The provis ions are appl icable f rom A.Y. 2004-2005.

In respect of provisions made by a bank, being a bank incorporated by or under the laws of a countryouts ide India , or a Publ ic Financial Ins t i tu t ion or a Sta te Financial Corporat ion or a Sta te Industr ia lInvestment Corporat ion, an amount not exceeding 5% of the tota l income (computed before making anydeduct ion under th is c lause and Chapter VI-A) wil l be a l lowed as deduct ion. The Finance Act , 2002, hadgiven an opt ion to such foreign banks, f inancial ins t i tu t ion e tc to avai l a deduct ion in respect of any provis ionmade on any assets c lass i f ied by the Reserve Bank of India as 'doubtful or loss assets ' . The amount of deduct ion is l imited to 10% of the amount of such assets as shown in the books of account . The deduct ionis a l lowed in any of the two consecut ive years commencing on or af ter 1 .4 .2003 and ending upto 31.3 .2005.

From A.Y. 2008-2009, deduct ion in respect of any provis ion for bad and doubtful debts a lso to be a l lowed to the Co-operat ive Banks. [ Inser ted by the Finance Act , 2007] .

In Mrs. Gita Sanghi Vs. CIT [2005] 277 ITR 388 - It was held that the analogy of the allowance for bad and doubtful debts for banking companies under sect ion 36(1)(vi ia) would not help other c lasses of tax payers . Where the amount is actual ly wri t ten off , because the debtor was declared a s ick company.

(xxv i i ) Deduc t ion i n r e spec t o f any spec i a l r e se rve c r ea t ed and ma in t a ined by a F inanc i a l Corpo ra t i on(xxv i i ) Deduc t ion i n r e spec t o f any spec i a l r e se rve c r ea t ed and ma in t a ined by a F inanc i a l Corpo ra t i on(xxv i i ) Deduc t ion i n r e spec t o f any spec i a l r e se rve c r ea t ed and ma in t a ined by a F inanc i a l Corpo ra t i on(xxv i i ) Deduc t ion i n r e spec t o f any spec i a l r e se rve c r ea t ed and ma in t a ined by a F inanc i a l Corpo ra t i on(xxv i i ) Deduc t ion i n r e spec t o f any spec i a l r e se rve c r ea t ed and ma in t a ined by a F inanc i a l Corpo ra t i on

[Sect ion 36(1)(vi i i ) ] .–

In respect of any special reserve created and maintained by a specified entity, an amount not exceeding40% of the profits derived from eligible business of providing long term Finance computed under the head"profits and gains of business or profession" (before making any deduction under this clause) carried tosuch reserve account:





ProvidedProvidedProvidedProvidedProvided that where the aggregate of the amounts carried to such reserve account from time to timeexceeds twice the amount of the paid up share capital i.e. 200% and of the general reserves of the specifiedentity, no allowance under this clause shall be made in respect of such excess.

From A.Y. 2008-2009, deduction relating the special reserve created by Financial Corporation andpublic companies has been reduced from 40% to 20%. However, the overall limit of 200% remains the same.Further, the provision has also been restructed to provide for different categories of entities (which alsoincludes co-operative banks).(xxv i i i ) Deduc t ion i n r e spect o f expend i tu re fo r p romot ing Fami ly P l ann ing(xxv i i i ) Deduc t ion i n r e spect o f expend i tu re fo r p romot ing Fami ly P l ann ing(xxv i i i ) Deduc t ion i n r e spect o f expend i tu re fo r p romot ing Fami ly P l ann ing(xxv i i i ) Deduc t ion i n r e spect o f expend i tu re fo r p romot ing Fami ly P l ann ing(xxvi i i ) Deduct ion in respect of expendi tur e for promoting Family Planning [Sect ion 36(1) ( ix)] .–

Any bonaf ide expendi ture incurred by a company for the purpose of promoting family planning amongsti ts employees is a l lowable as deduct ion. However, where , such expendi ture is of capi ta l nature , 1 /5th of such expenditure will be allowed as deduction for the previous year in which it was incurred and the balanceis deduct ible in equal ins ta lments in the next four years . However, no deprecia t ion is a l lowed in respectof such capi ta l assets .

(xxix) Deduct ion in respect of contr ibut i on towards Exchange Risk Adminis t ra t i on Fund(xxix) Deduct ion in respect of contr ibut i on towards Exchange Risk Adminis t ra t i on Fund(xxix) Deduct ion in respect of contr ibut i on towards Exchange Risk Adminis t ra t i on Fund(xxix) Deduct ion in respect of contr ibut i on towards Exchange Risk Adminis t ra t i on Fund(xxix) Deduct ion in respect of contr ibut i on towards Exchange Risk Adminis t ra t i on Fund [Sect ion3 6 ( 1 ) ( x ) ] . –

[From A.Y. 2008-2009, sect ion 36(1)(x) Omit ted by the Finance Act , 2007, w.e . f . 1-4-2008] .

(xxx ) Deduc t ion i n r e spec t t o expend i tu re i ncu r r ed fo r Y2K compl i ance(xxx) Deduc t ion i n r e spec t t o expend i tu re i ncu r r ed fo r Y2K compl i ance(xxx) Deduc t ion i n r e spec t t o expend i tu re i ncu r r ed fo r Y2K compl i ance(xxx) Deduc t ion i n r e spec t t o expend i tu re i ncu r r ed fo r Y2K compl i ance(xxx) Deduct ion in respect to expendi ture incurred for Y2K compliance [Sect ion 36(1)(xi) ] .–

Any expendi ture incurred by the assessee, between 1.4 .1999 to 31.3 .2000, whol ly and exclusively for making a computer system as 'Y2K compliant ' computer system, shal l be a l lowed as a deduct ion, subjectto ful f i lment of the fol lowing condi t ions : -

a ) the compu te r sy s t em i s owned by the a sse s see and i s u sed fo r h i s bus iness pu rposes .

b ) the compu te r sy s t em i s a ' non -Y2K compl i an t ' sy s t em be fo re incu r r ing such expend i tu re .

c ) the a s se s see fu rn i shes t he r epo r t o f a cha r t er ed accoun tan t, i n Fo rm No . 3BA, ce r t i fy ing tha t t hededuct ion has been correct ly c la imed as per provis ions of th is c lause . The cer t i f icate should befurnished a longwith the re turn of income of the assessee.

No deducat ion shal l be a l lowed in respect of such expendi ture under any other provis ions of theIncome-tax Act .

D e f i n i t i o n s -D e f i n i t i o n s -D e f i n i t i o n s -D e f i n i t i o n s -D e f i n i t i o n s -

"Y2K compliant computer system" means a computer system capable of correct ly process ing,

providing or receiving data e la t ing to date wi thin and between the twent ie th and twenty-f i rs t century.(xxx i ) Deduc t ion i n r e spec t o f expend i tu re fo r t he ob j ec t s o f i nco rpo ra t i on(xxx i ) Deduc t ion i n r e spec t o f expend i tu re fo r t he ob j ec t s o f i nco rpo ra t i on(xxx i ) Deduc t ion i n r e spec t o f expend i tu re fo r t he ob j ec t s o f i nco rpo ra t i on(xxx i ) Deduc t ion i n r e spec t o f expend i tu re fo r t he ob j ec t s o f i nco rpo ra t i on(xxxi) Deduct ion in respect of expendi ture for the objects of incorporat ion [Sect ion 36(1)(xi i ) ] .–

Any expendi ture (not being in the nature of capi ta l expendi ture) incurred by a corporat ion or a bodycorporate constituted or established by a Central, State or Provincial Act for the objects and purposes authorisedby the Act under which such corporat ion or body corporate was const i tu ted or es tabl ished, shal l be a l lowedas a deduct ion

From A.Y. 2008-09 the deduct ion shal l be a l lowed only i f such corporat ion or body corporate is not i f ied by the Centra l Government in the off ic ia l Gazet te . [ Inser ted by Finance Act , 2007] .

(xxxi i ) Deduct ion against payment of banking cash t ransact ion tax (xxxi i ) Deduct ion against payment of banking cash t ransact ion tax (xxxi i ) Deduct ion against payment of banking cash t ransact ion tax (xxxi i ) Deduct ion against payment of banking cash t ransact ion tax (xxxi i ) Deduct ion against payment of banking cash t ransact ion tax [Sect ion 36(1)(xi i i ) ] .–

Any amount of banking cash transaction tax paid by the assessee during the previous year on the taxablebanking t ransact ions entered into by him, shal l be a l lowed as deduct ion. [For deta i l see chapter Banking cashtransact ion tax] .

(xxxi i i ) Deduct ion against payment to credi t guarantee Fund t rus t for smal l industr ies(xxxi i i ) Deduct ion against payment to credi t guarantee Fund t rus t for smal l industr ies(xxxi i i ) Deduct ion against payment to credi t guarantee Fund t rus t for smal l industr ies(xxxi i i ) Deduct ion against payment to credi t guarantee Fund t rus t for smal l industr ies(xxxi i i ) Deduct ion against payment to credi t guarantee Fund t rus t for smal l industr ies [ Inser ted by Finance

Act , 2007] [Sect ion 36(1)(xiv)] .– Any sum paid by a public financial institution by way of contribution to such credit guarantee fund trust

for small industries as the Central Government may, by notification in the Official Gazette, specify in this behalf.

( xxx i i i a ) Deduc t ion i n r e spec t o f t he i ncome a r i s ing f rom t axab le s ecu r i t i e s t r ansac t ion (xxx i i i a ) Deduc t ion i n r e spec t o f t he i ncome a r i s ing f rom t axab le s ecu r i t i e s t r ansac t ion (xxx i i i a ) Deduc t ion i n r e spec t o f t he i ncome a r i s ing f rom t axab le s ecu r i t i e s t r ansac t ion (xxx i i i a ) Deduc t ion i n r e spec t o f t he i ncome a r i s ing f rom t axab le s ecu r i t i e s t r ansac t ion (xxxi i ia) Deduct ion in respect of the income ar is ing f rom taxable secur i t ies t ransact ion [Sect ion 36(1)(xv) [ Inser ted by the Finance Bi l l , 2008] .–

An amount equal to the securities transaction tax paid by the assessee in respect of the taxable securities transactions entered into in the course of his business during the previous year, if the income arising from such



1 9 3



taxable securities transactions is included in the income computed under the head “Profits and gains of business or profession.”.

Explanation.—For the purposes of this clause, the expressions “securities transaction tax” and “taxable

securities transaction” shall have the meanings respectively assigned to them under Chapter VII of the Finance (No. 2) Act, 2004.(xxxi i ib) Deduct ion in respect of the income ar is ing f rom taxable commodit ies t ransact ion (xxxi i ib) Deduct ion in respect of the income ar is ing f rom taxable commodit ies t ransact ion (xxxi i ib) Deduct ion in respect of the income ar is ing f rom taxable commodit ies t ransact ion (xxxi i ib) Deduct ion in respect of the income ar is ing f rom taxable commodit ies t ransact ion (xxxi i ib) Deduct ion in respect of the income ar is ing f rom taxable commodit ies t ransact ion [Sect ion 36(1)(xvi) [ Inser ted by the Finance Bi l l , 2008] .–

(xvi) an amount equal to the commodities transaction tax paid by the assessee in respect of the taxable commodities transactions entered into in the course of his business during the previous year, if the income arising from such taxable commodities transactions is included in the income computed under the head “Profits and gains of business or profession”.

Explanation.—For the purposes of this clause, the expressions “commodities transaction tax” and “taxable commodities transaction” shall have the meanings respectively assigned to them under Chapter VII of the Finance Act, 2008.

(xxxiv) Expenses deduct ible f rom commission earned by l i fe insurance, post off ice , UTI/Mutual Funds(xxxiv) Expenses deduct ible f rom commission earned by l i fe insurance, post off ice , UTI/Mutual Funds(xxxiv) Expenses deduct ible f rom commission earned by l i fe insurance, post off ice , UTI/Mutual Funds(xxxiv) Expenses deduct ible f rom commission earned by l i fe insurance, post off ice , UTI/Mutual Funds(xxxiv) Expenses deduct ible f rom commission earned by l i fe insurance, post off ice , UTI/Mutual Funds

A g e n t s A g e n t s A g e n t s A g e n t s A g e n t s . –

Vide Circular No. 648 dt . 30.3 .93 w.e . f . 1 .4 .93 , the benef i t of adhoc deduct ion, to Insurance agents of LIC having tota l commission ( including f i rs t year commission, renewal commission and bonus commission)

of less than Rs. 60,000/- for the year, and not mainta ining deta i led accounts for the expenses incurred by

them, may be a l lowed as fol lows:-

( i ) W h er e se p a ra t e f i g ur e s o f fi r s t y e ar a nd r en e wa l co m mi s si o n ar e av a il a b le .

( a ) 5 0% o f fi r st y ea r co mm is si on a nd

( b ) 1 5 % o f th e re ne wa l co mm is si on .

( i i ) W h er e s e pa r a te fi g ur e s a s a b ov e a r e n o t a v ai l a bl e , 3 3 1/3% of the gross commission.

In both the above cases, the adhoc deduction will be subject to a ceiling limit of Rs. 20,000/-.

Notes :-

1 ) The “gros s commiss ion” i n ( i i ) above wi l l inc lude f i r s t yea r commiss ion as we l l a s r enewa l

commission but wi l l exclude bonus commission.

2 ) The comple te amoun t o f bonus commiss ion i s taxab le and wil l be t aken in to accoun t fo r pu rposes

of computing the tota l income, and no adhoc deduct ion wil l be a l lowed from this amount .

3 ) The benef i t of adhoc deduct ion wil l not be avai lable to the agents who have earned tota l

commission of more than Rs. 60,000/- during the year. The admissibility of the expenditure claimed

by such agents will be decided by the Assessing Officers as per the provisions of the Income Tax

Act , 1961.

Agents of UTI, Mutual Funds, etc.: Agents of UTI, Mutual Funds, etc.: Agents of UTI, Mutual Funds, etc.: Agents of UTI, Mutual Funds, etc.: Agents of UTI, Mutual Funds, etc.:

Board vide c i rcular no. 594 dt . 27.2 .1991 and corr igendum dated 15.5 .1991 has granted an adhoc

deduction for expenses @ 50% of the gross receipts of commission to the agents of Unit Trust of India and agents

of the fol lowing secur i t ies : -

( i ) NSC VIII issue, ( i i ) Social Secur i ties Cer t i ficates , ( i i i ) Post - Off ice Time Deposi t Accounts , ( iv) Post-

Off ice Recurr ing Deposi t Accounts , (v) NSS, (vi ) Post-Off ice Monthly Income Account Scheme, (vi i )

Kisan Vikas Patra , (vi i i ) PPF Accounts , and ( ix) Deposi t Scheme for re t i r ing Government Employees ,1 9 8 9 .

Vide Circular No. 677, dt . 28.1 .1994 ,,,,, the Board has included the agents of Mutual Funds, not i f ied u/s

10(23D), as e l ig ible to get adhoc deduct ion as specif ied above.

The above benef i t would only be avai lable i f the fol lowing condi t ions are sa t isf ied : -

( i ) N o d e ta i l ed a c co u n ts a r e m ai n t ai n e d by t h e a ge n ts ; a nd





( i i ) To ta l g ross commiss ion r ece ived ( i nc luding commiss ions a s agen t s o f L IC , UTI , o the r s ecu r it i e s a s

ment ioned above and Mutual Funds) does not exceed Rs. 60,000.

(xxxv) Gene ra l deduc t ions(xxxv) Gene ra l deduc t ions(xxxv) Gene ra l deduc t ions(xxxv) Gene ra l deduc t ions(xxxv) General deduct ions [Sect ion 37] .–

Any other expenditure not specifically covered by sections 30 to 36 and which is not in the nature of capitalexpenditure or personal expenses of the assessee is allowable as a deduction, if it is laid out or expended wholly

and exclusively for the purpose of business or profess ion.

For ins tance the fol lowing expendi ture are deduct ible u/s 37(1) :

( a ) Expend itu re on adve r ti s ement i n souveni r s by t r ade , commerce and indus try, i nc lud ing more t han

one souvenir published by the same organisation or institution [Circular No. 200 dated 28-6-1976

and Circular No. 203 dated 16-7-1976]

( b ) Revenue expenses i ncu r r ed by the i ndus tr i a l unde r t ak ings i n connect ion w i th ma in t enance o f

industr ia l home-guard uni ts [Circular F. No. 10/80/64-IT(A-1) dated 26-2-1965]

( c ) Expend itu re (othe r t han tha t o f endur ing na tu re ) on c iv i l de fence measu re s [Circular No. 316 dated

3 0 - 9 - 1 9 8 1 ]

( d ) Recu r ring expenses i ncu r r ed on impar t i ng o f ba si c t r a in ing to t he app ren t ice s unde r t he Appren t i ce s

Act, 1961 [Circular No. 192 dt . 10-3-1976]

( e ) A n n ua l l i s ti n g f e e p ay a b le t o s t o ck - ex c ha n g es [F.No. 10/67/65-IT(A-1) dated 26-8-1965]

( f ) Commitment charges paid by the borrower on the unused por t ion of loan which has not been drawn

but kept in readiness by lender for disbursement. [Circular No. 2-P(XI-6) F.No. 10/67/65-I T(A-1) dated

2 3 - 8 - 1 9 6 5 ]

( g ) Manage ri a l subs idy pa id i n connec tion w i th s e tt i ng up o f consumer co -ope ra t i ve s tor e s fo r i ndust r i a l

workers. [F.No. 10/16/63-IT(A1) dated 14-5-1963]

( h ) Reba te o r bonus a l l owed by a consumer co-ope ra t i ve s to r e s , on pu rchases made by member [Circular

No. 117 dt . 22-8-73]

( i ) Cus tomary expenses i n re spec t o f D iwa li and Mahura t , exclud ing expenses of a pe r sona l , soc ia l o r

re l ig ious nature [F.No. 13A/20/68-ITA II dated 3-10-1968]

( j ) Reasonab le r emune ra t i on pa id by a company to i t s reg i s t ra r s fo r pe r fo rming the dut i e s i n connec tion

with company’s legal obligations under the Company Law [F.No. 10/25/63-IT(A-1), dated 18-6-1964]

( k ) In t e re s t payab le on unpa id pu rchase p ri ce o f pl an t and machine ry [F.No. 10/92/64-IT(A) dated 13-9-

1 9 6 5 ]

( l ) Member ship f ee fo r t he Ind i an In s ti t u te o f Fo reign Trade [F.No. 9/56/66-IT(A-1) dated 17-1-1967]

( m ) Membersh ip subsc r ip ti on pa id to Ind i an In s t i t ut e o f Packag ing [F.No. 9/23/67-IT(A1) dated 6-7-1967]

( n ) The salar ies and wages paid to the employees for the per iod of t ra ining in the courses organised

by the Central Board of Workers’ Education [F.No. 27(3)-IT/59 dated 6-7-1959]

( o ) Legal expenses incurred in connect ion with the renewal of a lease , provided that the renewal is for

a period of less than 50 years [Circular No. 22 of 1943 dated 23-6-1943]

( p ) Cus tomary Lega l con t r ibu t ions pa id t o t r ade a s soci a t i ons fo r u t i l i s at i on fo r cha r i tab l e pu rposes .

[Circular No. 5-P(XIV-1) dated 28-8-1963]

( q ) D e po s it m a d e u nd e r ‘ o wn y o u r t el e p ho n e s ch e me ’ [F.No. 204/70/75-A-IT(A-II) dated 10-5-1976]

( r ) D e po s it u n d er ‘ Ta tk a l Te l e ph o n e De p o si t S ch e me ’ vide Circular No. 671 dated 27.10.1993.( s ) Expend itu re on r enewal o f r eg i s tr a t i on o f a t r ade mark a s a l so l i t i ga ti on expenses i ncu r r ed i n

connect ion with infr ingement of t rade mark [Circular No.33 of 1943 dated 12-11-1943]

( t ) Paymen t s made to t he employees unde r p ro fi t sha r ing s chemes [Circular No. 64(XI-2) of 1951 dated

2 7 - 1 0 - 1 9 5 1 ]

( u ) P ro fe ss iona l t ax pa id by a pe r son ca rry ing on p ro fe s s ion. [Circular No. 16 dated 18-2-1969]



1 9 5



( v ) Security deposit of Rs. 10,000 required to be made for an existing or new telex connection [Circular

No. 420 dated 4-6-1985]

( w ) Expend itu re i ncu r r ed fo r s e rv i ce s i n connec tion w i th any p roceeding e t c . be fo re t he Income- t ax

A u t h o r i t i e s .

( x ) Con t r ibu t ion t o unrecogn ised Execu t ive S t aff P rov iden t Fund [- CIT Vs. Aspinwal l & Co. Ltd [ (1993)

115 CTR (Ker. )85]

( y ) Payment though referred to as penal ty, but in fact made in exercise of option avai lable under s tatutory

scheme, in course of assessee 's business , i s a l lowable business expendi ture - CIT Vs. Ahmedabad

Cotton Mfg. Co. Ltd. & Ors. (1993) 115 CTR (SC) 401.

( z ) S t a tuto ry impos t pa id a s damages , penal ty o r i n t er e s t , i f compensa to ry i n natu re , i t i s a l lowab le a s

business expenditure, if penal, it is disallowable - - - - - Parkash Cotton Mills (P) Ltd. Vs. CIT (1993) 111 CTR

(SC) 389.

In Addl. CIT Vs. Rajasthan Spinning and Weaving Mill Ltd. [2005] 274 ITR 465 - It was held that,

contr ibut ion to export promotion fund to promote export of text i les could not be disal lowed.

The provis ion made by assessee company for meet ing l iabi l i ty towards leave encashment , proport ionate

to ent i t lement earned by employees of company subject to cei l ing on accumulat ion as appl icable on re levant

date , i s ent i t led for deduct ion out of gross receipts for account ing year dur ing which the provis ion was madefor liability in as much as liability was not a contingent liability – Bharat Earth Movers Vs. CIT [2000] 112 Taxmann

61 (SC). However, section 43B has been amended w.e.f. A.Y. 2002-2003, so as to cover the deduction against

any sum payable in lieu of any leave at the credit of the employee, on actual payment only.

Assessee carried on business of processing cashewnuts in ten units, four of which were situated in Kerala.

Due to some labour problems assessee shut down these four uni ts and cer ta in payments were made to t rade

unions of such units. It was held by the Supreme Court that this expenditure has been incurred in regard to such

business and, thus, allowable under section 37 – K. Ravindranathan Nair Vs. CIT [2000] 114 Taxmann 53 (SC).

Expenditure incurred on foreign tour of director and his wife in connection with the medical treatment

of di rector is a l lowable as business expendi ture on account of commercial expediency. CIT Vs. Steel Ingots

Pvt. Ltd. (1996) 200 ITR 552 (MP).

It was held that reserve to be created for business purposes under the Molasses Control Order would

be an a l lowable business expendi ture even though the amount has been set apar t f rom sales and not out

of profits. Since the assessee has no control over the fund represented by the reserve, the assessee is entitledto deduct ion. CIT Vs. Bhopal Sugar Industr ies Ltd. (1996) 134 CTR 409 (MP).

In TI Diamond Chain Ltd. Vs. CIT [2005] 274 ITR 59 (MAD) – It was held that, compensation paid on

terminat ion of se l l ing agency as par t of an arrangement by which the assessee took over the sale

Organisat ion Market ing network and t ra ined Manpower could be only taken to be on capi ta l account and

cannot be a l lowed as Revenue Expendi ture .

Expenditure incurred for laying a new pipeline, which does belong to the assessee, for supply of water

to the factory premises is held to be a revenue expendi ture . CIT Vs. Chowgule Chemicals (P) Ltd. (1995)

128 Taxat ion 328 (Bom.)

Assessee paid fees to a consul tancy f i rm for preparat ion of project repor t but the project d id not

mater ia l ise . ITO and CIT (A) held the expendi ture as capi ta l in nature . Tr ibunal held that expendi ture did not

br ing into exis tence any asset of enduring nature and therefore , dele ted the disal lowance. I t was held that

Tribunal was correct and mat ter was decided against revenue. CIT Vs. Graphi te India Ltd. (1996) 221 ITR

420 (Cal . )

Embezzlement of amount f rom assessee’s current account by way of secur ing demand draf t on the

basis of a le t ter wi th forged s ignatures of assessee - company’s secretary, i s a l lowable business loss - G.G.

Dandekar Machine Works Ltd. Vs. C.I .T. (1993) 114 CTR (Bom.) 190 . Compensatory penal ty levied under

local sa les tax law is an a l lowable deduct ion. However, no deduct ion is avai lable for the penal ty which is

penal in nature - Standard Bat ter ies Ltd. Vs. CIT (1995) 211 ITR 444 (SC).





The assessee write off the cost of feature film on the basis of a circular permitting it. Later the circular

was modif ied dur ing the pendency of the assessment proceedings . The benef i t cannot be denied. Shakt i

Raj Fi lms Dis t r ibutors Vs. CIT (1995) 213 ITR 20 (Bom).

In Shree Annapurna Financing Co. (P) Ltd. Vs. CIT [2005] 273 ITR 284 (Cal) - It was held that merely

because a payment is made to s is ter concern, i t does not lease to be deduct ible , i f i t i s in the course of

b u s i n e s s .

Amounts not deduct ible f rom business or profess ion u/s 40 income: Amounts not deduct ible f rom business or profess ion u/s 40 income: Amounts not deduct ible f rom business or profess ion u/s 40 income: Amounts not deduct ible f rom business or profess ion u/s 40 income: Amounts not deduct ible f rom business or profess ion u/s 40 income:

The fol lowing amounts are not admissible as deduct ions for the purpose of computing income from

business or profess ion:

( aaaaa ) In case of any assesseeIn case of any assesseeIn case of any assesseeIn case of any assesseeIn case of any assessee [Sect ion 40(a)] .–

( i ) Any in t er e s t , roya l ty, f ee s fo r t e chnica l s e rv i ce s o r o the r sum cha rgeab le under t h i s Act wh ich

is payable outs ide India , or in India to a non res ident not being a company, or to a foreign

company on which tax has not been deducted or af ter deduct ion has not been paid before the

expiry of the t ime prescr ibed under sect ion 200(1) and in accordance with other provis ions of

Chapter XVII-B, shal l not be a l lowed as deduct ion.

In case , such sum has been deducted in any subsequent year or, has been deducted in the

previous year but paid in any subsequent year af ter the expiry of the t ime prescr ibed under sect ion 200(1) , then such sum shal l be a l lowed as a deduct ion in computing the income of the

previous year in which such tax has been paid .

( i a ) any in t e r e st , commission o r b roke rage , ren t , r oya l ty f ee s fo r p ro fe s s iona l / t e chn ica l s e rv i ce s

payable to a res ident , or amounts payable to a contractor or sub-contractor for carrying out any

work, on which tax has not been deducted or paid within the t ime prescr ibed under sect ion

200(1) In case , such sum has been deducted in any subsequent year or, has been deducted

in the previous year but paid in any subsequent year after the expiry of the time prescribed under

sect ion 200(1) , then such sum shal l be a l lowed as a deduct ion in computing the income of the

previous year in which such tax has been paid .

( i b ) any sum pa id on accoun t o f s ecu r i t ie s t r ansact ion t ax on pu rchase o r s a l e o f equ i ty sha re s,

der ivat ives or uni ts of equi ty or iented fund on or af ter 1-10-2004.

The Finance Bi l l , 2008 Omit ted sub-clause ( ib) w.e . f . 01-04-2009.

( i c ) any sum paid on account o f f r i nge bene f i t t ax unde r chap te r XI I-H

(i i) amount paid on account of any rate or tax levied on the profits or gains of any business or

profess ion. Such amount of tax paid shal l be deemed always to have included any sum el igible

for tax relief under section 90 or any deduction from tax payable under section 91. It also includes

any sum el igible for tax re l ief under sect ion 90A.

( i i a ) amoun t pa id on accoun t o f wea lth - t ax cha rgeab le unde r t he Wea l th - tax Ac t, 1957 ;

(i ii ) any payment chargeable under the head ‘Salaries’ if it is payable outside India or to a non-resident

and if the tax has not been paid thereon or deducted at source;

( i v ) any paymen t t o a p rov iden t fund o r o the r fund e s t ab l i shed for t he bene f it o f emp loyees o f t he

assessee, unless the assessee has made effect ive arrangements to secure that tax, wi l l be

deducted a t source f rom any payments made f rom the fund which is chargeable to tax under

‘ S a l a r i e s ;

( v ) any t ax ac tua l ly pa id by an employe r r e fe r r ed to i n s ec ti on 10 (10CCC)( bbbbb ) In case of a firmIn case of a firmIn case of a firmIn case of a firmIn case of a firm [Section 40(b)] :

The fol lowing expenses are not a l lowed for deduct ion i f the same exceed the fol lowing l imits : -

I ) I n te r es t pa i d to p ar t ne r s a t th e ma x im u m r a te o f 1 2 % simple interes t wi l l be a l lowed as a deduct ion.

I I ) Payment o f s al a ry, bonus , commission o r r emune ra ti on by wha teve r name cal l ed t o t he work ing

par tners shal l be a l lowed as a deduct ion as under : -



1 9 7



i ) In case of a firm engaged in profession, on the first Rs. 1,00,000 of the book profit or in case of

a loss, a salary of Rs. 50,000 or @ 90% of the book profit whichever is more shall be allowed. On

the next Rs. 1,00,000 of the book profit @ 60% and on the balance of the book profit @ 40% shall

be a l lowed.

i i ) In the case of any other firm, on the first Rs. 75,000 of the book profit or in case of a loss, a salary

of Rs. 50,000 or @ 90% of the book profit whichever is more shall be allowed. On the next Rs.

75,000 of the book profit @ 60% and on the balance of the book profit @ 40% shall be allowed.

(For fur ther deta i ls p lease refer to our chapter “Income - tax on Par tnership Firms”

It is also provided the payment of salary etc. to working partners or interest to partners will be allowed

as a deduction, which is authorised by and is in accordance with the terms of partnership deed. Terms of

par tnership deed wil l not have re t rospect ive effect in th is respect .

Disal lowance of in teres t , sa lary e tc . , to par tnersDisal lowance of in teres t , sa lary e tc . , to par tnersDisal lowance of in teres t , sa lary e tc . , to par tnersDisal lowance of in teres t , sa lary e tc . , to par tnersDisal lowance of in teres t , sa lary e tc . , to par tners [Sect ion 184(5)] .

The provisions stated that where there is a failure on part of the firm as is mentioned in section 144 or the

firm does not comply with the provisions of section 184, the firm shall be assessed in the capacity of firm but

no deduct ion by way of any payment of in teres t , sa lary, bonus, commission or remunerat ion made to par tners

of such firm shall be allowed in computing the income of the firm.

Circular No. 739, dt . 25.3 .1996 has c lar i f ied that wi th effect f rom A.Y. 1997-98, no deduct ion for remunerat ion to par tners wi l l be admissible unless the par tnership deed e i ther specif ies the amount of

remunerat ion payable to each individual working par tner or lays down the manner of quant i fying such

r e m u n e r a t i o n .

( c )( c )( c )( c )( c ) In case of an associat ion of persons or body of individualsIn case of an associat ion of persons or body of individualsIn case of an associat ion of persons or body of individualsIn case of an associat ion of persons or body of individualsIn case of an associat ion of persons or body of individuals [Sect ion 40(ba)] :

Any payment of in teres t [otherwise than in representat ive capaci ty] sa lary, bonus, commission or

remuneration, by whatever name called, made by such association or body to its member is disallowed under

sect ion 40(ba) .

The amount of interest to be disallowed will be limited to the amount by which the payment of interest

by the association or body to the member exceeds the payment of interest by the member to the association

or body.

( i i i )( i i i )( i i i )( i i i )( i i i ) Expend i tu re no t deduc t ib l e u / s 40A:Expend i tu re no t deduc t ib l e u / s 40A:Expend i tu re no t deduc t ib l e u / s 40A:Expend i tu re no t deduc t ib l e u / s 40A:Expend i tu re no t deduc t ib l e u / s 40A:

( a )( a )( a )( a )( a ) Paymen t t o r e l a t i ve sPaymen t t o r e l a t i ve sPaymen t t o r e l a t i ve sPaymen t t o r e l a t i ve sPayment to re la t ives [Sect ion 40A(2)] :

Where the assessee incurs any expenditure in respect of which payment has been or is to be made

to any of the following persons, so much of the expenditure as is considered by the Assessing Officer to

be excessive or unreasonable will be disallowed.

( i ) any r e l a t i ve o f t he a s se s see whe re as se s see i s an i nd iv idual ;

(i i) any director of the company, partner of the firm or member of the association or family, or any relative

thereof , where the assessee is a company, f i rm or associa t ion or H.U.F. ;

( ii i) any individual who has a substantial interest in the business or profession of the assessee or any

rela t ive of such person;

( iv ) a company, f i rm, associa tion of persons or H.U.F. having a substant ia l in teres t in the business or

profession of the assessee or any director, partner or member of such company, firm or association

or family, or any re la t ive of such director, par tner or member;

( v ) any company, f i rm, a s soc i a t ion o f per sons o r H .U.F. of wh ich a d i r ecto r, pa r tner o r member, has a

substantial interest in the business or profession of the assessee ; or any director, partner or member

of such company, firm, association or family, or any relative of such director, partner or member;

(v i ) any pe r son in whose bus ines s o r p ro fes s ion t he a s se s see has a subs tan t i a l i n t er e s t , d i r ect l y o r

i n d i r e c t l y .





( b )( b )( b )( b )( b ) Paymen t s exceed ing Rs . 20 ,000 in ca shPayments exceeding Rs. 20,000 in cashPaymen t s exceed ing Rs . 20 ,000 in ca shPayments exceeding Rs. 20,000 in cashPayments exceeding Rs. 20,000 in cash [Sect ion 40A(3)] :

Where the assessee incurs any expenditure in respect of which payment is made, of a sum exceeding

Rs. 20,000, otherwise than by a crossed cheque or by a crossed bank draft, such expenditure will not be allowed

as a deduct ion.

The Finance Act , 2007, provides 100% of the amount c la imed as deduct ion shal l be disal lowed i f the

payment is made by a mode other than account payee cheque or account payee draf t .

Where any liability for any expenditure incurred is allowed as a deduction on accrual basis in the relevant

assessment year and subsequently during any previous year, the assessee makes any payment in respect

of such liability in a sum exceeding Rs. 20,000 otherwise than by an account payee cheque drawn on a bank

or account payee bank draf t, the deduct ion or iginal ly a l lowed wil l be deemed to have been wrongly a l lowed

and will be withdrawn by rectifying that assessment u/s 154(7) within 4 years reckoned from the end of the

assessment year next following the previous year in which the payment is so made. Rule 6DD prescribes the

cases and c i rcumstances under which no disal lowance wil l be made even i f , payment of a sum in excess of

Rs. 20,000 is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft.

Note : It is further clarified that the above circumstances are not exhaustive but illustrative. There could be

cases other than those fa l l ing within the above categories which would a lso meet the requirements of Rule

6 D D ( j ) .

(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payeee cheque drawn on a bank or account payeee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.

(3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds twenty thousand rupees:

Provided Provided Provided Provided Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payeee bank draft, exceeds twenty thousand rupees, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. [The Finance Bill, 2008 w.e.f. 01.04.2009 substituted the section 40A(3)] ( c )( c )( c )( c )( c ) Provis ions for payment of gratui tyProvis ions for payment of gratui tyProvis ions for payment of gratui tyProvis ions for payment of gratui tyProvis ions for payment of gratui ty [Sect ion 40A(7)] ::::: No deduct ion wil l be a l lowed in respect of any

provision made by the assessee in his books of account for the payment of gratuity to his employees on their

re t i rement or on terminat ion of their employment for any reason. This res t r ic t ion wil l however not apply in

rela t ion to any provis ion made for the purpose of payment of a sum by way of contr ibut ions towards an

approved gratui ty fund that has become payable dur ing the previous year, or for the purpose of meet ing

actual l iabi l i ty in respect of payment of gratui ty to the employees , ar isen dur ing the previous year.

( d )( d )( d )( d )( d ) Contr ibut ions to non-s ta tutory fundsContr ibut ions to non-s ta tutory fundsContr ibut ions to non-s ta tutory fundsContr ibut ions to non-s ta tutory fundsContr ibut ions to non-s ta tutory funds [Sect ion 40A(9)] ::::: No deduct ion wil l be a l lowed in respect of any

sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any

fund, trust, company, association of persons, body of individuals, society registered under the Societies

Regis t ra t ion Act , 1860, or other ins t i tu t ion, for any purpose, except where the sum so paid is required to be

paid by or under any other law for the time being in force.

Ce r t a in deduc t ions on ly on ac tua l paymen t sCer t a in deduc t ions on ly on ac tua l paymen t sCer t a in deduc t ions on ly on ac tua l paymen t sCer t a in deduc t ions on ly on ac tua l paymen t sCerta in deduct ions only on actual payments [Sect ion 43B]:

Deduction in respect of the following sums will be allowed only when such sum is actually paid by the

assessee. In other words deduct ion is made a l lowable only on payment basis :

( a ) any sum payable by the assessee by way of tax, duty, cess or fees, by whatever name called, under

any law for the time being in force, or

( b ) any sum payable by the assessee as an employer by way of contribution to any provident fund

or superannuat ion fund or gratui ty fund or any other fund for the welfare of employees , or



1 9 9



( c ) any sum payab le a s bonus o r commiss ion fo r s e rv i ce s r ende red ; o r

( d ) any sum payab le by the a s se ssee a s i n te r e s t on any loan o r bo r rowing f rom any pub l ic f i nanci a l

ins t i tu t ion or a Sta te Financial Corporat ion or a Sta te Industr ia l Investment Corporat ion; or

(e) any sum payable by an assessee as interest on any type of loan or advances from a scheduled bank,in accordance with the terms and condi t ions of the agreement governing such loan or advances; or.

(f) any sum payable by the assessee as an empoyer in lieu of any leave at the credit of his employee.

The Finance Act , 2003, had c lar i f ied that deduct ion under sect ion 43B shal l be avai lable where the

payment of the sum referred to in clauses (a) to (f) is made before the due date of filing of return of income

under sect ion 139(1) . Thus the different ia l t reatment given to a l lowance of payment made against

contr ibut ion to provident fund or super annuat ion fund is removed. The provis ions are appl icable f rom A.Y.

2 0 0 4 - 2 0 0 5 .

Where a deduct ion in respect of the aforesaid sums is a l lowed in any ear l ier year on accrual basis , the

same wil l not again be a l lowed as deduct ion on payment basis .

As per provisions of the section, the assessee is required to furnish the evidence of payment of tax,

duty, bonus, etc., alongwith the return to get deduction under this section. However in cases (a), (c) & (d)

above, i f the evidence of payment had been omit ted to be furnished a longwith the re turn, the Assess ing

Off icer can enter ta in appl icat ions u/s 154 -vide Circular No. 669 dt . 25.10.93.

Di sa l l owance o f cap i t a l i s a t i on o f i n t e r e s tD i sa l l owance o f cap i t a l i s a t i on o f i n t e r e s tD i sa l l owance o f cap i t a l i s a t i on o f i n t e r e s tD i sa l l owance o f cap i t a l i s a t i on o f i n t e r e s tDisal lowance of capi ta l isa t ion of in teres t [Sect ion 43 expl . 8] :

Where any amount is paid or is payable as in teres t in connect ion with the acquis i t ion of an asset , that

amount which is related to any period after such asset is first put to use will not be included in the actual

cost of such asset. In other words, such interest will not form part of the actual cost of asset to claim the

deprecia t ion and investment a l lowance but wi l l be t reated as a business expendi ture .

Ma in t enance o f accoun t s by ce r t a in pe r sons ca r ry ing on p ro fe s s ion o r bus ines sMaintenance of accounts by cer ta in persons carrying on profess ion or businessMain t enance o f accoun t s by ce r t a in pe r sons ca r ry ing on p ro fe s s ion o r bus ines sMaintenance of accounts by cer ta in persons carrying on profess ion or businessMaintenance of accounts by cer ta in persons carrying on profess ion or business [Sect ion 44AA]:

1 .1 .1 .1 .1 . Eve ry pe r son ca r ry ing on l ega l , med ical , eng inee ring o r a r ch i tec tu ra l p ro fe ss ion o r t he p ro fe s sion

of accountancy or technical consultancy or interior decoration or any other profession as notified by the

Board in the Off ic ia l Gazet te , wi l l keep and maintain such books of account and other documents as wi l l

enable the Assess ing Off icer to compute his to ta l income [Sect ion 44AA (1)]

The Central Board of Direct Taxes has notified the following professions in exercise of powers vested

in i t u /s 44AA(1) of the Income-tax Act , vide not i f icat ion No. S.O. 17(E) , dated, 12-1-1977.

( a ) t h e p r of e ss i on o f a u t h or i se d r e p re s en t at i ve :

( b ) t h e p r o fe s si o n o f f i l m a r t is t :

It has been provided in the proviso to sub-rule (1) of rule 6F that the aforesaid professional persons

are not required to keep and maintain books of account and other documents as prescr ibed under rule 6F,

if their gross receipts in the profession do not exceed Rs. 1,50,000 in any one of the three years

immediate ly preceding the previous year, or, where the profess ion has been newly set up in the previous

year, h is to ta l gross receipts in the profess ion for that year are not l ikely to exceed the said amount .

RULE 6F(2) :RULE 6F(2) :RULE 6F(2) :RULE 6F(2) :RULE 6F(2) : The above profess ionals wi l l keep the fol lowing books of account-

( i ) a cash book;

It means a record of all cash receipts and payments, kept and maintained from day-to-day and giving

the cash balance in hand at the end of each day or at the end of a specified period not exceeding

a month;

( i i ) a j ourna l , i f the accoun t s a r e ma in t a ined acco rd ing to t he mercan ti l e sys t em o f accoun ting ;

( i i i ) a le dg er ;

( iv) carbon copies of bi l ls , whether machine numbered or otherwise ser ia l ly numbered, wherever

such bi l ls are issued by the person and carbon copies or counterfoi ls of machine numbered or

otherwise serially numbered receipts issued by him. However, nothing in this clause shall apply in

rela t ion to sums not exceeding Rs. 25/- (Rupees Twenty Five only) .





(v) original bills wherever issued to the person and receipts in respect of expenditure incurred by the

person or, where such bi l ls and receipts are not issued and the expendi ture incurred does not

exceed Rs. 50, payment vouchers prepared and s igned by the persons. However, the requirements

as to the preparation and s igning of payment vouchers shal l not apply in a case where the cash book

maintained by the person contains adequate par t iculars in respect of the expendi ture incurred by him.

A person carrying on medical profess ion in addi t ion to the books of account and other documents

ment ioned above, keep and maintain the fol lowing, namely:

(i) a daily cash register in Form No. 3C

(ii) an inventory (under the broad heads) as on the first and the last day of the previous year, of the

stocks of drugs , medicines and other consumable accessor ies used for the purpose of his profess ion.

2 .2 .2 .2 .2 . Every person carrying on business or profess ion (not being a profess ion ment ioned in sec . 44AA(1)

wil l keep and maintain such books of account and other documents as wi l l enable the Assess ing Off icer to

compute his total income, if his business income exceeds Rs. 1,20,000/- or his total sales, turnover or gross

receipts, as the case may be, in business or profession exceed or exceeds Rs. 10,00,000 in any one of the

three immediate ly preceding previous years or where the business is newly set -up in any previous year, i f

h is business or profess ion income is l ikely to exceed Rs. 1 ,20,000 or his to ta l sa les , turnover or gross

receipts, as the case may be, in business or profession are or is likely to exceed Rs. 10,00,000 during such

previous year. [Sect ion 44AA(2)]

The Finance Act , 1997, had made i t essent ia l to mainta in books of account for assessees carrying on

the business referred under sect ions 44AD, 44AE or 44AF or sect ion 44BB or sect ion 44BBB, provided the

assessee has c la imed his income to be lower than the prof i ts or gains so deemed to be the prof i ts & gains

of his business under the above ment ioned sect ions . These businesses are : -

( i ) B u si n e ss o f c i v il c o n st r u ct i o n, e t c . [ Se c ti o n 4 4A D ]

( i i ) Bus iness o f p ly ing , h i r i ng o r l e a sing goods ca r r i ages [Sec t ion 44AE]

( i i i ) Bus iness o f r e t a i l t r ade i n any goods o r merchand i se [Sect ion 44AF ]

( i v ) Non r e siden t p rov id ing se rv i ce s o r supply ing p l an t and mach ine ry on h i r e used in exp lo ra ti on e t c

of mineral o i ls . [Sect ion 44BB].

( v ) Bus iness o f Fo re ign company engaged in c iv i l cons t ruct ion , e r ec t i on o f p lan t o r mach ine ry t es t i ng

or commissioning [Sect ion 44BBB].

Note :

1. The above books of account are required to be kept and maintained for a period of 6 years from the end of

the relevant assessment year including cash book and ledger. However, where the assessment in relation to anyassessment year has been reopened u/s 147 of the Act within the period specified in section 149, al l the books of

account and other documents which were kept and maintained at the t ime of re-opening of the assessment will

continue to be so kept and maintained t i l l the assessment so reopened has been completed.

2. The books of account and other documents specified above other than those relating to a previous year which

has come to an end will be kept and maintained by the person at the place where he is carrying on the profession

or, where the profession is carried on in more places than one, at the principal place of profession. And where theperson keeps and maintains separate books of account in respect of each place where the profession is carried on,

such books of account and other documents may be kept and maintained at the respective places at which the

profession is carried on.

Audi t of accounts of cer ta in persons carrying on business or profess ion Audi t of accounts of cer ta in persons carrying on business or profess ion Audi t of accounts of cer ta in persons carrying on business or profess ion Audi t of accounts of cer ta in persons carrying on business or profess ion Audi t of accounts of cer ta in persons carrying on business or profess ion [Sect ion-44AB]:

Sect ion 44AB in the Income-tax Act re la t ing to audi t of accounts of cer ta in persons carrying on

business or profess ion, provides:

( A ) Where t he accoun ts a r e no t requ i r ed t o be aud i t ed unde r any o the r l aw, t hi s s ec t i on makes i t

obligatory that-

( i ) every person carrying on business wi l l , i f h is to ta l sa les in the business exceed Rs. 40 lakhs

in any previous year, or



2 0 1



(i i ) every person carrying on profession wil l , i f h is gross receipts in profession exceed Rs. 10

lakhs in any previous year, or(iii) carrying on the business shall, if the profits and gains from the business are deemed to be the

profits and gains of such person under section 44AD or section 44AE or section 44AF orsection 44BB or section 44BBB, as the case may be, and he has claimed his income to belower than the profits or gains so deemed to be the profits and gains of his business, as thecase may be, in any previous year.

get his accounts of such previous year audi ted by a Char tered Accountant before the specif ied date and

furnish by that date the report of such audi t in the prescr ibed form duly s igned and ver i f ied by such

Chartered Accountant and set t ing for th such par t iculars as may be prescr ibed.

The ' spec i f i ed da t e ' ,The ' spec i f i ed da t e ' ,The ' spec i f i ed da t e ' ,The ' spec i f i ed da t e ' ,The ' specif ied date ' , in re la t ion to the accounts of the previous year re levant to an assessment year,

means the 31st day of October of the assessment year.

Due date for submission of audi t repor t - October 31st of assessment year.

Due date for get t ing book audi ted - 31st October of the assessment year.

The Finance Act , 1997, had extended the provis ions for audi t of accounts of the fol lowing businesses ,

subject to cer ta in condi t ions : -

( i ) Bus iness o f c iv i l cons truc t ion, e t c. a s r e f e r r ed i n s ec t i on 44AD

( i i ) Bus iness o f p lying , h i ri ng o r l e a sing goods ca r r i ages a s r ef e r r ed in s ec t ion 44AE

( i i i ) Bus iness o f r e ta i l t r ade i n any goods o r merchandi se a s r ef e r r ed in s ec t i on 44AF.

( i v ) Non r e siden t as se s see p rovid ing serv i ce s o r supply ing p lan t and mach ine ry on hi r e u sed in

explorat ion e tc of mineral o i ls . [Sect ion 44BB]

( v ) Fore ign company engaged in busines s o f civ i l const ruc tion , e r ec ti on o f p l an t or mach inery, t e st i ng

or commissioning [Sect ion 44BBB]

Condi t ion of audi t :Condi t ion of audi t :Condi t ion of audi t :Condi t ion of audi t :Condi t ion of audi t :

The audi t of accounts is obl igatory i f the assessee carrying on the above ment ioned business

cla ims his income to be lower than the prof i ts or gains presumed under the above ment ioned sect ions .

(B) Where the accounts are required to be audi ted under any other law, i t shal l be suff ic ient compliance

with the provis ions of th is sect ion i f such person gets the accounts of such business or profess ion audi ted

under such law before the specified date and furnish by that date report of the audit as required under

such other law and a further report in the form prescribed under this section. The said further report shall be

furnished by a char tered accountant .

On fa i lure to furnish such audi t repor t penal ty is chargeable under sect ion 271B. With effect f rom

1.7.1995, i t i s compulsory to furnish the audi t repor t required u/s 44AB within the specif ied date so as to

avoid penal ty u/s 271B:

ProvidedProvidedProvidedProvidedProvide d that this section shall not apply to the person, who derives income of the nature referred to

in sections 44AC or section 44BB or section 44BBA or section 44BBB, on and from 1-4-1985, or, as the

case may be, the date on which the re levant sect ion came into force , whichever is la ter.

SPECIAL PROVISION OF COMPUTATION OF INCOME OF CERTAIN TYPE OF BUSINESSES ORSPECIAL PROVISION OF COMPUTATION OF INCOME OF CERTAIN TYPE OF BUSINESSES ORSPECIAL PROVISION OF COMPUTATION OF INCOME OF CERTAIN TYPE OF BUSINESSES ORSPECIAL PROVISION OF COMPUTATION OF INCOME OF CERTAIN TYPE OF BUSINESSES ORSPECIAL PROVISION OF COMPUTATION OF INCOME OF CERTAIN TYPE OF BUSINESSES OR

BUSINESS PERSONSBUSINESS PERSONSBUSINESS PERSONSBUSINESS PERSONSBUSINESS PERSONS

Income of Publ ic f inancial ins t i tu t ions , e tcIncome of Publ ic f inancial ins t i tu t ions , e tcIncome of Publ ic f inancial ins t i tu t ions , e tcIncome of Publ ic f inancial ins t i tu t ions , e tcIncome of Publ ic f inancial ins t i tu t ions , e tc [Sect ion 43D]:

The income by way of in teres t in re la t ion to such categories of bad and doubtful debts as may beprescr ibed by the guidel ines issued by Reserve Bank of India , shal l be chargeable to tax in the previous

year in which it is credited by the following assessees to their profit and loss account, or as the case may be,

in the previous year in which i t i s actual ly received, whichever is ear l ier : -

( i ) p ub l ic f in an ci a l in st it ut io n,

( i i ) s ch ed ul ed b an k,





( i i i ) S t at e f i n an c ia l c o r po r a ti o n o r

( i v ) S t a t e i ndus tr i a l i nves tmen t co rpo rat i on .

The Finance Act , 1999 had extended the provis ions to the income by way of in teres t on bad and

doubtful debts of a publ ic company having i ts main object of providing long-term f inance for construct ion or purchase of houses in India for res ident ia l purposes and is regis tered under Nat ional Housing Bank Act ,

1987. The income by way of in teres t on such bad and doubtful debts shal l be governed by the guidel ines

issued by the Nat ional Housing Bank. [For more deta i ls , p lease refer rule 6EB].

Insurance businessInsu rance bus ines sInsurance businessInsu rance bus ines sInsurance business [Sect ion 44] :

Notwithstanding anything to the contrary contained in the Act , the prof i t and gains of any business of

insurance, including any such business carr ied on by a mutual insurance company or by a co-operat ive

society, shal l be computed in accordance with the rules contained in the Firs t Schedule to Income Tax Act .

Also refer rule 6E of the Income-tax Rules , 1962.

Trade , p ro fe s s iona l o r s imi l a r a s soc i a t i onTrade , p ro fe s s iona l o r s imi l a r a s soc i a t i onTrade , p ro fe s s iona l o r s imi l a r a s soc i a t i onTrade , p ro fe s s iona l o r s imi l a r a s soc i a t i onTrade, profess ional or s imilar associa t ion [Sect ion 44A]:

Where the amount received dur ing a previous year by any t rade,profess ional or s imilar associa t ion f rom

its members , fa l ls shor t of the expendi ture incurred by such associat ion sole ly for the purpose of protect ion

or advancement of common interes ts of i t s members , the amount of shor t fa l l shal l be a l lowed as deduct ion

in computing the income under the head "Profits and gains of business or profession” and if the income under th is head is n i l or less than the deduct ion a l lowable , the whole or balance of the shor t fa l l shal l be a l lowed

as deduct ion under any other head. However, the a l lowable deduct ion shal l be res t r icted to 50% of the tota l

prof i ts of the associat ion before making such deduct ion.

Business of c ivi l construct ionBusiness of c ivi l construct ionBusiness of c ivi l construct ionBusiness of c ivi l construct ionBusiness of c ivi l construct ion [Sect ion 44 AD] :

Notwithstanding anything to the contrary contained in sections 28 to 43C, i f an assessee is engaged

in the business of civil construction or supply of labour for civil construction ,a sum equal to 8% of the gross

receipts paid or payable to the assessee in the previous year on account of such business or a sum higher

than the aforesaid sum as declared by the assessee in his return of income shall be deemed to be the “Profits

& gains of business or profess ion" and no deduct ion under sect ions 30 to 38 shal l be a l lowed assuming that

i t had a l ready been given ful l effect . However, these provis ions wil l not apply i f the gross receipts paid or

payable to the assessee exceed Rs. 40,00,000/- .

In case the assessee opts for the appl icabi l i ty of the provis ions ment ioned above, he shal l be deemed

to have avai led the deprecia t ion on the wri t ten down value of the assets used in his business . In case of af i rm, the income est imat ion should be made af ter g iving deduct ion(s) on account of sa lary/ interes t to the

par tners subject to the condi t ions and l imits specif ied in sect ion 40(b) .

The provis ions of sect ion 44AA regarding maintenance of accounts and of sect ion 44AB regarding audi t

of accounts , shal l not apply in re la t ion to business to which the sect ion appl ies and monetary l imits under

those sect ions shal l be computed af ter excluding therefrom the gross receipts or as the case may be, income

of such business .

The Finance Act , 1999, had provided that an assessee, covered under th is sect ion may cla im his income

to be lower than the prof i ts and gains presumed under the provis ions of th is sect ion. However, he shal l have

to maintain books of account as ment ioned under sect ion 44AA and shal l a lso be l iable to get the accounts

audi ted and furnish the audi t repor t as required under sect ion 44AB. The amended provis ions are appl icable

wi th re t rospect ive effect f rom A.Y. 1998-99.

Business of goods carr iagesBusiness of goods carr iagesBusiness of goods carr iagesBusiness of goods carr iagesBusiness of goods carr iages [Sect ion 44 AE] :

Notwithstanding anything contained in sect ions 28 to 43C, in case of an assessee who owns not morethan 10 goods carriages at any time during the year and who is engaged in the business of plying, hiring or

leas ing such goods carr iages , the income of such business chargeable to tax under the head “Prof i ts and

gains of business or profess ional shal l be deemed to be the aggregate of the fol lowing :

(a) In case of a heavy goods vehicle income shall be Rs. 3,500 per month for every month or part of a

month dur ing which the vehicle is owned by the assessee.



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(b) In case of a vehicle other than a heavy goods vehicle, income shall be Rs. 3,150 per month for every

month or part of a month during which the vehicle is owned by the assessee and no deduction under sections

30 to 38 shal l be a l lowed assuming i t had a l ready been given ful l effect . However, the assessee may show

an income higher than the aforesaid amount in his re turn of income.

In case the assessee opts for the appl icabi l i ty of the provis ions ment ioned above, he shal l be deemed

to have avai led the deprecia t ion on the wri t ten down value of the assets used in his business . In case of a

f i rm, the income est imat ion should be made af ter g iving deduct ion(s) on account of sa lary/ interes t to the



of accounts , shal l not apply in re la t ion to business to which the sect ion appl ies and monetary l imits under

those sect ions shal l be computed af ter excluding therefrom the gross receipts or as the case may be, income

of such business .




audi ted and furnish the audi t repor t as required under sect ion 44AB.

Bus ines s o f r e t a i l t r ade i n any goods o r merchand i seBus ines s o f r e t a i l t r ade i n any goods o r merchand i seBus ines s o f r e t a i l t r ade i n any goods o r merchand i seBus ines s o f r e t a i l t r ade i n any goods o r merchand i seBusiness of re ta i l t rade in any goods or merchandise [Sect ion 44AF]:

Notwithstanding anything to the contrary contained in sect ions 28 to 43C, in the case of an assessee

engaged in retail trade in any goods or merchandise, a sum equal to 5% of the total turnover in the previous

year, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits

and gains of business or profess ion”. The assessee may declare a higher ra te of prof i t on the tota l turnover.

However, the provis ions of th is sect ion shal l not apply where the tota l turnover exceeds Rs. 40 lakh.

No deduct ion under the provis ions of sect ions 30 to 38 shal l be a l lowable to the assessee. Such

deduct ions shal l be deemed to have been a l ready given ful l effect ( including deprecia t ion on assets) . In case

of a f i rm, the income est imat ion should be made af ter g iving deduct ion(s) on account of sa lary/ interes t to the



of accounts, shall not apply in so far as they relate to the business referred above. In computing the monetary

limits referred in section 44AA & 44AB, the total turnover or income referred in this section shall be excluded.




audi ted and furnish the audi t repor t as required under sect ion 44AB. The amendment is appl icable wi th

ret rospect ive effect f rom A.Y. 1998-99.

Fo r Fo r Fo r Fo r Fo r non - r e s iden t a s se s seenon- re s iden t a s se s seenon- re s iden t a s se s seenon- re s iden t a s se s seenon-res ident assessee [Sect ions 44B to 44BBA]:

i ) In t he ca se of an a sse s see, be ing a non - re s iden t, engaged in t he bus ines s o f ope ra ti on o f sh ip s ,

a sum equal to 7½% of the aggregate of the amounts received or receivable shal l be deemed to be

the prof i ts and gains of such business chargeable to tax under “Prof i ts & gains of business or

profess ion”. [Sect ion 44B].

i i ) In t he ca se o f an as se s see , be ing a non - r e siden t , engaged in the bus ines s o f prov id ing se rv i ce s

or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the

prospect ing for, or extract ion or product ion of , mineral o i ls , a sum equal to 10% of the aggregate

of the amounts received or receivable shal l be deemed to be the prof i ts and gains of such business

chargeable to tax under “Prof i ts and gains of business or profess ion”. [Sect ion 44BB]

An assessee may claim lower profits and gains if it keeps and maintains such books of account and other

documents as required under section 44AA and gets his accounts audited and furnishes a report of such audit

as required under sect ion 44AB. The Assess ing Off icer shal l proceed to make an assessment of the tota l

income or loss of the assessee and determine the sum payable by, or refundable to , the assessee w.e . f . A.Y.

2 0 0 4 - 2 0 0 5 .





i i i ) In t he ca se o f an a s se s see , be ing a non -r e s ident , engaged in t he bus ines s o f ope ra ti on o f a i r c ra f t ,

a sum equal to 5% of the aggregate of the amounts received or receivable shal l be deemed to be

the prof i ts and gains of such business [Sect ion 44BBA]

The meaning of amounts referred to in ( i ) , ( i i ) & ( i i i ) above shal l be the fol lowing, namely : -

( a ) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf,

on account of the carriage of passengers, live stock, mail or goods, from any place in India by aircraft,

or shipped, a t any por t in India , as the case may be, or on account of provis ion of services and

faci l i t ies in connect ion with , or supply of plant and machinery on hire , used or to be used, in the

prospect ing for or extract ion or product ion of mineral o i l in India; and

( b ) the amount received or deemed to be received in India by or on behalf of the assessee, on account

of the carr iage of passengers , l ivestock, mai l or goods, f rom any place outs ide India by a i rcraf t , or

shipped, a t any por t outs ide India , as the case may be, or on account of the provis ions of services

and facilities in connection with or supply of plant and machinery on hire used, or to be used, in the

prospect ing for, or extract ion or product ion of mineral o i ls outs ide India .

Note :- For the purpose of clause (i) above, the amount chargeable to tax shall include an amount accrued

or received by way of demurrage charges or handling charges or any other amount of similar nature.

Foreign companiesForeign companiesForeign companiesForeign companiesForeign companies [Sect ions 44BBB & 44D] :In the case of an assessee, being a foreign company, engaged in the business of c ivi l construct ion or

the business of erect ion of plant or machinery or tes t ing or commissioning thereof , in connect ion with a

turnkey power project approved by the Centra l Government in th is behalf and f inanced under any

international aid programme, a sum equal to 10% of the amount paid or payable (whether in or out of India)

to the said assessee or to any person on his behalf on account of such civil construction, erection, testing

or commissioning shall be deemed to be the profits and gains of such business chargeable to tax under

“Prof i ts & gains of business or profess ion”. [Section 44BBB]

The Finance Act , 2003 had withdrawn the condi t ion of the project to be f inanced under any internat ional

aid programme, for the purpose of appl icabi l i ty of provis ions of th is sect ion.

It is also provided that an assessee may claim lower profits and gains if it keeps and maintains such books

of account and other documents as required under sect ion 44AA and gets his accounts audi ted and furnishes

a report of such audi t as required under sect ion 44AB. The Assess ing Off icer shal l proceed to make an

assessment of the tota l income or loss of the assessee under sect ion 143 and determine the sum payable

by or refundable to the assessee. The provis ions are appl icable f rom A.Y. 2004-2005.

In case of income of a foreign company from royal ty or fees for technical services received f rom

Government or an Indian concern under an agreement before 1 .4 .1976, deduct ions under sect ions 28 to

44C shal l not exceed 20% of the specif ic amount of royal ty or fees received. However, in cases where

agreement is made af ter 31.3 .1976 [but before 1 .4 .2003] , no deduct ion under the said sect ions is a l lowable .

[Sect ion 44D]

Income by way of royal t ies , e tc .Income by way of royal t ies , e tc .Income by way of royal t ies , e tc .Income by way of royal t ies , e tc .Income by way of royal t ies , e tc . [Sect ion 44DA].

In case of income of a non res ident assessee f rom royal ty or fees for technical services received f rom

Government or an Indian concern under an agreement af ter 31st day of March, 2003, where such non

resident (not being a company) or foreign company carr ies on business in India through a permanent

es tabl ishment s i tuated therein , or performs profess ional services f rom a f ixed place of profess ion s i tuated

therein , and the r ight , proper ty or contract in respect of which the royal t ies or fees for technical services are

paid is effect ively connected with such permanent es tabl ishment or f ixed place of profess ion as the case

may be, shal l be computed under the head ' 'Prof i ts and gains of business or profess ion ' ' in accordance with

the provisions of this Act :

Provided that no deduct ion shal l be a l lowed,–

( i ) i n r e spec t of any expendi tu re o r a l l owance wh ich i s no t who l ly and exc lusive ly i ncur r ed fo r t he

business of such permanent es tabl ishment or f ixed place of profess ion in India; or

( i i ) i n r e spec t o f amoun t s , i f any, pa id (o the rwi se t han towards r e imbur semen t o f ac tua l expenses ) by

the permanent es tabl ishment to i t s head off ice or to any of i t s o ther off ices .



2 0 5



Every non res ident (not being a company) or foreign company shal l keep and maintain books of account

and other documents in accordance with the provis ions contained in sect ion 44AA and get h is accounts

audi ted by an accountant and furnish a long with the re turn of income, the report of such audi t in Form No.

3CE duly s igned and ver i f ied by such accountant .

Special provision for computing deductions in the case of business reorganization of co-operative banks.Special provision for computing deductions in the case of business reorganization of co-operative banks.Special provision for computing deductions in the case of business reorganization of co-operative banks.Special provision for computing deductions in the case of business reorganization of co-operative banks.Special provision for computing deductions in the case of business reorganization of co-operative banks.[Section 44DB](Inserted by Finance Act, 2007)

(1) The deduction under section 32, section 35D, section 35DD or section 35DDA shall, in a case wherebusiness reorganization of a co-operative bank has taken place during the financial year, be allowed inaccordance with the provisions of this section.

(2) The amount of deduction allowable to the predecessor co-operative bank under section 32, section35D, section 35DD or section 35DDA shall be determined in accordance with the formula

BA x —–

Cwhere A = the amount of deduction allowable to the predecessor co-operative bank if the business

reorganisation had not taken place;B = the number of days comprised in the period beginning with the 1st day of the financial year and

ending on the day immediately preceding the date of business reorganisation; andC = the total number of days in the financial year in which the business reorganisation has taken place.(3) The amount of deduction allowable to the successor co-operative bank under section 32, section 35D,

section 35DD or section 35DDA shall be determined in accordance with the formulaB

A x —–C

whe re A = the amount of deduction allowable to the predecessor co-operative bank if the businessreorganisation had not taken place;

B = the number of days comprised in the period beginning with the date of business reorganisation

and ending on the last day of the financial year; andC = the total number of days in the financial year in which the business reorganisation has taken place.(4) The provisions of section 35D, section 35DD or section 35DDA shall, in a case where an undertaking

of the predecessor co-operative bank entitled to the deduction under the said section is transferred before theexpiry of the period specified therein to a successor co-operative bank on account of business reorganisation,apply to the successor co-operative bank in the financial years subsequent to the year of business reorganisationas they would have applied to the predecessor co-operative bank, as if the business reorganisation had nottaken place.

Ta x a t i o n o f f o r e i g n t e l e c a s t i n g c o m p a n i e sTa x a t i o n o f f o r e i g n t e l e c a s t i n g c o m p a n i e sTa x a t i o n o f f o r e i g n t e l e c a s t i n g c o m p a n i e sTa x a t i o n o f f o r e i g n t e l e c a s t i n g c o m p a n i e sTa x a t i o n o f f o r e i g n t e l e c a s t i n g c o m p a n i e s [ C i r c u l a r N o . 7 6 5 , d a t e d 1 5 . 4 . 1 9 9 8 ] :

The Assess ing Off icer shal l compute the income in the case of foreign te lecast ing companies , which are

not having any branch off ice or permanent es tabl ishment in India or are not mainta ining countrywise accounts ,

by adopting a presumptive rate of profit. The presumptive rate of profit shall be 10% of the gross receipts meant

for remit tances abroad or the income as per the re turn f i led by such companies , whichever is h igher.

Consequent ly the exis t ing income-tax ra te shal l be appl ied on such prof i t to arr ive a t the tax l iabi l i ty of thecompany. The gross receipts shal l not include the amount re ta ined, by the adver t is ing agent and the Indian

agent of the non-res ident foreign te lecast ing company, as their commission/charges .

I t i s a lso c lar i f ied that the above guidel ines would be appl icable to a l l pending cases , i r respect ive of the

assessment year involved. Also refer Circuler No. 742, dated 2 .5 .1996 .




Il lustration 1:

V & S is a partnership firm in the business of trading the goods and also doing some construction work on

contract basis. During the financial year 2007-2008 the receipts from the contracts were Rs. 16,27,680 andthe sales were Rs. 1,87,114. As per partnership deed the partners V and S shall be allowed salary of Rs. 45000/

- p.a. each and interest on their capital @18%. The interest on capital for V and S is Rs. 16,373.00 and 15,960.00

respectively. Calculate the taxable income as per section 44AD and 44AF for the A.Y. 2008-2009.

Solution:

(a) Receipt s f rom contrac t s 1 6 , 2 7 , 6 8 0

Deemed income @8% u/s 44AD 1 , 3 0 , 2 1 4 . 4 0

(b) Sale Receipt s f rom Trading 1 , 8 7 , 1 1 4

Profi t @5% u/s 44AF 9 , 3 5 5 . 7 0

(i) . 1,39,570.10

Less : Salary to partners

S 45,000

V 45,000 90,000

: Interest on capital

S 15,960

Less : Disallowed 5,320 10,640

(See Note 2)

V 16,373

Less : Disallowed 5,458 10,915 2 1 , 5 5 5 (ii) .1 , 1 1 , 5 5 5 . 0 0

(i-ii)=(iii) . 2 8 , 0 1 5 . 1 0

Add : Inadmissible Salary u/s 40(b) (see Note 1) (iv) . 3 , 1 5 8 . 0 0

Taxable Income (ii i+iv)=(v) . 3 1 , 1 7 3 . 1 0

Rounded off to nearest Rupee 3 1 , 1 7 0 . 0 03 1 , 1 7 0 . 0 03 1 , 1 7 0 . 0 03 1 , 1 7 0 . 0 03 1 , 1 7 0 . 0 0

Note 1. : Allowable salary on

f irs t Rs. 75 ,000 @90% 6 7 , 5 0 0

Balance Rs . 32,237 @60% 1 9 , 3 4 2

Al lowable salary 86 ,8 4 2

salary paid 90,000

Excess salary paid 3 1 5 8

Note 2 : The maximum allowable interest on capital has been reduced from 18% to 12% w.e.f . A.Y. 2003-2004.

profit&gains b p

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