Income from salaries

Income from House property

▪
Profits and gains from business or profession 5 Heads of Income
Capital Gains
Income from Other Sources
Gross Total Income Clubbing of Income
Less: Deductions u/s 80C to 80U Set Off and Carry Forward of Losses
Total Income
Tax on Total Income
Add: Surcharge
Tax and surcharge
Add: Education Cess
Add: Secondary and higher education cess
Less: Rebate
Tax Liability
Less: Pre-paid taxes
1. Self assessment tax
2. TDS
3. Advance Tax
Profits
and Gains
from
Business
and
Profession
 • Regularity
Business • Profit
• Number of
Trade
transactions
Commerce
• 2 Parties
Manufacturing
• Inclusive Definition
Activity

Profession

Distinction
Intellectual between
skill/ Business /
Qualification/ Profession
Learning for Income
Tax
 • Profits /Losses
of Business/ Basis of
Profits and Profession Charge
Gains carried out in
a P.Y.

• Arising for
better
Benefit or performance
of business/
Perquisite profession
• Eg: Car rec by
dealer as gift

Compensation
for
termination/ • Company/
Firm/Vested
modification of Interest
terms of
contract
 Interest, • Paid by Basis of
Salary, partnership
Charge
Remuneration, firm to the
partners
Bonus

• Import License
• Duty Drawback
Export • Duty Entitlement
incentives Pass Book
Scheme

Speculative • What is
speculative
Transaction business
 Basis of
Sum received for • Not carrying a particular
business activity or sharing Charge
not carrying out patents, know how,
an activity trademark, copyrights

• Sum received
Keyman Insurance under Keyman
Insurance
Policy Policy

Income of any
trade,
professional
association from
services to
members
What is
not Rent of House
Business Property
Income Dividend
• Dealer of
property Winnings
• Temporary Trader of from Interest on
let out shares lotteries, Compensation
before sale &stocks races, etc.
 May be through
What should agent/
be taken care
of while
Business representative

calculating carried on
Business by Multiple
Income Assessee Business

Business/
Profession Not necessary
of throughout the
Previous year
Year Temporary
suspension/
inactivity-?
 What should
be taken care
of while Real
calculating Profits Illegal
Business
Income only Business

Revenue
Incomes
 Allowable Losses

1. Loss of stock due to

What should natural disaster
be taken care
2. Loss due to exchange
of while
calculating
rate fluctuations
Business
Taxable in Allowance 3. Loss on sale of
Assessment of Business goods/securities
Income
Year Losses 4. Loss of cash/securities
in bank robbery
5. Loss of realisation of
amount advanced in
business
Method of 6. Loss on account of
Accounting embezzlement by
employee
7. Loss of theft
8. Loss on seizure of
illegal goods/not fit for
consumption – seized by
customs
What should
be taken
care of
while
calculating Losses not allowable
Business
Income
1. Loss not incidental to trade
2. Loss on damage of capital asset
3. Loss on sale of shares held as
investment/(if stock in trade-?)
4. Loss of discontinued business
5. Penalties on violation of law
What is
Business
Income

Revenue Expenses Profit

Credited to Debited to
Profit and Loss Profit and Loss
Account Account
 Particulars Rs.
Indirect
Method of Net Profit as per Profit and Loss Account xxxx
Income
Computation Add: All expenses not allowed as per Income Tax Act xxxx

Add: All Unrecorded Business Incomes xxxx

Less: All expenses allowed, but not recorded xxxx

Less: All Incomes which are not Business Incomes xxxx

Taxable Income From Business and Profession

 Profit and Loss Account
Step 1: Pick
Expenses/ Rs. Income Rs. Up Net Profit
NET PROFIT Losses from the P/L
Expense 1 xxxx Revenue yyyy Account
(sales)
Expense 2 xxxx Profit on yyyy
sale
Expense 3 xxxx Recovery yyyy

Expense 4 xxxx Other yyyy

Incomes
Net Profit ZZZZ

Total
 Step 2: Check if there are
Profit and Loss Account any Expenses not related to
EXPENSES
Business and those related
NOT Expenses Rs. Income Rs. to business, but not
ALLOWED incurred as per Act
Expense 1 xxxx Revenue yyyy
(sales)
Expense 2 xxxx Profit on yyyy
sale
Step 3: Add it back to
Expense 3 xxxx Recovery yyyy the Net Profit as per
Step 1 as they are
Expense 4 xxxx Other yyyy disallowed, to calculate
Incomes Profit under Income Tax
Net Profit ZZZZ

Total

Effect: Profit will

increase
 Profit and Loss Account Step 4: Add All
Business related
Expenses Rs. Income Rs. Incomes not
recorded in the
UNRECORDED Profit and Loss
BUSINESS Expense 1 xxxx Revenue yyyy
Account
(sales)
INCOMES
Expense 2 xxxx Profit on yyyy
sale
Expense 3 xxxx Recovery yyyy

Expense 4 xxxx Other yyyy Effect: Profit will

Incomes increase
Net Profit ZZZZ

Total
Unrecorded
Business
Incomes
 Profit and Loss Account Step 5: Deduct
All Business
Expenses Rs. Income Rs. related Expenses
ALLOWABLE not recorded in
EXPENSES the Profit and
Expense 1 xxxx Revenue yyyy
Loss Account
NOT (sales)
RECORDED Expense 2 xxxx Profit on yyyy
sale
Expense 3 xxxx Recovery yyyy

Expense 4 xxxx Other yyyy Effect: Profit will

Incomes Decrease
Net Profit ZZZZ

Total Unrecorded
Business /
Allowable
Expenses
 Step 6: Check
Profit and Loss Account if there are
any Incomes
NON Expenses Rs. Income Rs. not treated as
BUSINESS Business
Income
INCOMES Expense 1 xxxx Revenue yyyy
(sales)
Expense 2 xxxx Profit on yyyy
sale Step 7: Deduct
Expense 3 xxxx Recovery yyyy it from the Net
Profit as per
Step 1,as they
Expense 4 xxxx Other yyyy
are not Business
Incomes
Incomes
Net Profit ZZZZ

Total

Effect: Profit
will decrease
 Particulars Rs.
Indirect
Method of Net Profit as per Profit and Loss Account xxxx
Income
Computation Add: All expenses not allowed as per Income Tax Act xxxx
Increase
Add: All Unrecorded Business Incomes xxxx

Less: All expenses allowed, but not recorded xxxx

Decrease
Less: All Incomes which are not Business Incomes xxxx

Taxable Income From Business and Profession

 Expenses
allowed as
Deductions Sec 30: Rent, Rates, Taxes, Repairs
under Income
Tax Act
, Insurance for Building

Sec 31: Repairs and Insurance of

Plant, Machinery and Furniture

Sec 32: Depreciation of Business

Assets
 Rent – If not owned
ALLOWABLE
Repairs- If agreed to bear
EXPENSES –
as tenant
FOR OFFICE
BUILDING-
Sec -30
Cost of repairs – If building
is owned

Amount paid as Rates and

Municipal Taxes on Owned
Building -43B will apply

Insurance Premium for the

Owned/ Rented Building
What are
current
repairs
 Case Laws on Section 30

ALLOWABLE
1. Rent paid by firm to a partner for the premises?
EXPENSES –
FOR OFFICE
BUILDING 2. Premises taken on lease to carry business and assessee
pays rent of previous tenant – Will the arears of rent
of previous tenant be allowed as deduction ?

3. An assessee was running a hotel in Mussorie and

claimed deduction of the following expenditure :
Repair of furniture, Fixing of tiles in the kitchen,
construction of water tank, replacement of cement roof
with tiled roof

4. Premises used partly for business purposes and partly

for other purposes

5. Premises being sub-let

ALLOWABLE
EXPENSES – Cost of repairs – on Plant,
FOR PLANT, Machinery and Furniture
MACHINERY,
FURNITURE

Insurance Premium on
Plant, Machinery and
Furniture

What about Rent

on P/M and
Furniture
 Case Laws on Section 31
ALLOWABLE
EXPENSES –
FOR OFFICE 1. P/M and Furniture to be used for the business of the
BUILDING assessee. Period of use of the Plant, Machinery and
Furniture during the P.Y.- some part or whole year?
Ans: Allowable Expenditure whether part or whole year

1. First time insurance on car

Ans: Capital in nature, not allowed

1. A factory machine has got 2 to 3 electric motors. If

one of them is worn out and replaced by a new motor
of similar capacity involving heavy cost-would it be
treated as a revenue expenditure on repairs? What if
the P/M itself is replaced?
Ans: Capital Repairs, not allowed
 ALLOWABLE
EXPENSES –
DEPRECIATION
ON BUSINESS
ASSETS
Rates and
Mechanism
Why allowed different from
under Income Accounting
What is Tax Act Depreciation
Depreciation

Is it compulsory to
claim Depreciation
under the Income
Tax Act
 DIFFERENCE
BETWEEN
ACCOUNTING &
ACCOUNTING TAXATION
TAXATION
DEPRECIATION
• Charge Against • Allowance
Profit against profit
• WDV and SLM • WDV
• Individual • Block of Asset
assets • 50% of Normal
• On the basis of Depreciation
no. of days OR Normal Dep
 METHOD OF
CALCULATING
DEPRECIATION
UNDER Depreciation
INCOME TAX
ACT
• Written as per books

Method
may be
Down Value different
Method

• Rates
prescribed
Rates by Income
Tax Act
 Book Profits = 30,000
DIFFERENCE (After Depreciation as
BETWEEN PROFIT AND LOSS ACCOUNT per books)
TAXABLE
PROFITS AND EXPENSES RS. INCOMES RS.
BOOK PROFITS All Expenses 15,000 All Incomes 65,000

Depreciation as 20,000 Book Profit = 30,000

per books/ Add: Depreciation
Companies Act as per Books = 20,000
Less: Depreciation
Net Profit 30,000
as per IT Act = 15,000
Taxable Profit 35,000
Total 65,000 Total 65,000

Depreciation as per Income Tax Act is Rs.15,000

(Difference can be because of Rates or Methods
 CONDITIONS • Assessee must be
FOR CLAIMING owner of the Business
DEPRECIATION Ownership and Asset

• Tangible or
Type of Intangible
Asset • Land?

• Used for
Use of Business
and
Asset During P.Y.
 Period of
CONDITIONS
USE OF ASSET EXPLAINED Usage
FOR CLAIMING
DEPRECIATION

Used For New asset Less than

Business purchased 180 Days –
Half
Purposes during P.Y. Depreciation

More than
During 180 Days –
Previous Full

Active/ Passive Use/ Ready to Use /

Year For full or any
Depreciation

Trial run, Residential quarters for part of the

staff and assets along with it, Previous Year
Partially used for business purpose
DEPRECIATION
UNDER
INCOME TAX
In Income Tax Act Depreciation
ACT
is calculated on Block of Assets
Assets of
Depreciation
similar type
is charged on There can be Whole block
and carrying
the whole multiple gets
the same
block of block of depreciation
rate of
assets and assets for the even if all
depreciation-
not same type of assets are
How many
individual assets – How? not used
blocks are
assets
there?
 All assets were already
existing on 1st April 2021
ILLUSTRATTION
ON BLOCK OF
ASSETS
Name of the Asset Rate of Op. WDV as on
Depreciation 01/04/21
Plant A, B & C 15% 12,25,600
Plant D & E 20% 2,56,300
Plant X & Z 15% 8,94,100
Office Buildings 10% 48,36,400
Residential Building 5% 36,50,700
Furniture & Fixtures 10% 2,41,600
Televisions & Refrigerators 10% 6,98,900
Computer 40% 2,15,200
Trademarks & Patents 25% 6,04,500
 Block of Assets Rate of Op. WDV as
ILLUSTRATTION Depreciation on 01/04/21
ON BLOCK OF
ASSETS Plant- I 15% 21,19,700
(Includes Plant A, B, C, X & Z
Plant – II 20% 2,56,300
(Includes Plant D & E)
Office Buildings 10% 48,36,400
Residential Buildings 05% 36,50,700
Furniture, Fixtures and 10% 9,40,500
Electronics
Computer 40% 2,15,200
Intangible Assets 25% 8,19,700
 Particulars (For Each Block ) Amount
Opening WDV of the block as on the 1st day of the Previous *****
DEPRECIATION
Year (1)
UNDER INCOME
TAX ACT- Add: Actual cost of the assets acquired during the Previous *****
WRITTEN Year (2)
DOWN VALUE Less: Deduct the amount received or receivable in respect *****
of the assets sold or discarded during the Previous Year
(3)
Sub Total : Closing WDV for calculating Depreciation *****
4= (1+2-3)
Less: Amount of depreciation for the year ( On Closing ****
WDV at the rates applicable to the respective block) (5)
Written Down Value at the end of the Previous Year (4-5) *****

Assets already New Assets Sale value of

assets in the 4 * Rate of
existing in the purchased during
block which are 3 cannot Depreciation
block on the year in the
1.4.2021 same block sold during the exceed (1+2)
year
Problem 1- Compute the written down value from the following information for the
assessment year 2022-23

Blocks of asset Rate of depreciation Depreciated value on

(%) 1.4.2021
1. Plant A, B and C 15 10,40,000
2. Plant D and E 40 2,60,000
3. Plant F 30 70,000
4. Building A, B, C and D 10 10,90,600
5. Building E, F and G 5 7,10,200
6. Building H, I, J and K 40 16,90,000
After April 1, 2021 the company purchases the following assets:-
Assets Date of purchase Rate of depreciation (%) Actual cost Rs.
Plant G April 6, 2021 30 6,000
Plant H May 11, 2021 15 18,000
Furniture June 6, 2021 10 56,000
Car July 7, 2021 15 2,56,000
Building L September 26, 2021 5 7,28,700
Computer September 27, 2021 40 90,000
Copyright September 30, 2021 25 17,50,000

The following assets are transferred —

Assets Date of sale Sale consideration Rs
Plant B December 20, 2021 25,10,900
Plant D January 31, 2022 12,000
Building L March 6, 2022 6,00,000
Particulars Block 1 Block 2 Block 3
P/M (15%) P/M (40%) P/M (30%)
Opening WDV 10,40,000 2,60,000 70,000
On 1.4.2021 (A,B,C) (D & E) (F)
Add: New Asset 2,74,000 90,000 6,000
purchased in the block (H & Car) Computer (G)
Less: Any Asset in the 13,14,000 12,000 NIL
block sold (though (D)
(Cannot exceed the cost actual is
of the block) 25,10,900)
Closing WDV on NIL 3,38,000 76,000
31.3.2022
Particulars Block 4 Block 5 Block 6
Buil (10%) Buil (5 %) Buil - 40%
Opening WDV 10,90,600 7,10,200 16,90,000
On 1.4.2021 (A,B,C D) (E,F,G) (H,I,J,K)
Add: New Asset NIL 7,28,700 NIL
purchased in the block (L)
Less: Any Asset in the NIL 6,00,000 NIL
block sold (L)
(Cannot exceed the cost
of the block)
Closing WDV on 10,90,600 8,38,900 16,90,000
31.3.2022
Particulars Block 7 Block 8
Fur (10%) INT A-25%
Opening WDV NIL NIL
On 1.4.2021
Add: New Asset 56,000 17,50,000
purchased in the block
Less: Any Asset in the NIL NIL
block sold
(Cannot exceed the cost
of the block)
Closing WDV on 56,000 17,50,000
31.3.2022
 Particulars (For Each Block ) Amount
Opening WDV of the block as on the 1st day of the Previous *****
DEPRECIATION
Year (1)
UNDER INCOME
TAX ACT- Add: Actual cost of the assets acquired during the Previous *****
WRITTEN Year (2)
DOWN VALUE Less: Deduct the amount received or receivable in respect *****
of the assets sold or discarded during the Previous Year
(3)
Sub Total : Closing WDV for calculating Depreciation *****
4= (1+2-3)
Less: Amount of depreciation for the year ( On Closing ****
WDV at the rates applicable to the respective block) (5)
Written Down Value at the end of the Previous Year (4-5) *****

4 * Rate of
Depreciation
Exception If written down value of the block of asset is reduced to
one zero, though the block is not empty

Exception If the block of assets is empty or ceases to exist on the

two last day of the Previous Year (though the written down
value is not zero)

Exception If in the first year in which an asset is acquired, it is

three put to use for less than 180days
Time Period
for
Depreciation [Link]. Of the Block is empty
Calculation – block becomes on the last
Exception 1 zero, but day of P.Y. and
and 2 block is not W.D.V. is not
empty zero

Block is empty
on the last
day of P.Y. and
W.D.V. is zero
Depreciation
for the Year
will be zero
 Problem 2: Exception 1
Block 1 – Plant -15% Rs
Opening WDV On 1.4.2021 (A, B) 80,000
Add: New Asset purchased in the block 30,000
(Plant C)
W.D.V. of
Less: Any Asset in the block sold 1,10,000 Block
(Cannot exceed the cost of the block) (A) (Though actual becomes
zero even if
Rs.1,80,000) assets exist
Closing WDV on 31.3.2022 NIL in the block

Depreciation for 2021-22 NIL

Final Closing W.D.V. on 31.3.2022 after depreciation NIL
 Problem 3: Exception 2

Block 1 – Plant -15% Rs

Opening WDV On 1.4.2021 (A, B) 2,37,000
Add: New Asset purchased in the block 20,000 Even though
there is a
(Plant C)
Closing W.D.V.
Less: Any Asset in the block sold 49,000 Block is empty
(Cannot exceed the cost of the block) (A, B and C)
Closing WDV on 31.3.2022 2,08,000

Depreciation for 2021-22 NIL

Final Closing W.D.V. on 31.3.2022 after depreciation NIL

Problem 3 : Exception 2
Block 1 – Plant -15% Rs
Opening WDV On 1.4.2021 (A, B) 2,37,000
Add: New Asset purchased in the block 20,000
(Plant C)
Block is empty
Less: Any Asset in the block sold 2,57,000 and W.D.V. is
(Cannot exceed the cost of the block) (Though actual also zero
(A, B and C) Rs.3,57,000)
Closing WDV on 31.3.2022 NIL

Depreciation for 2021-22 NIL

Final Closing W.D.V. on 31.3.2022 after NIL

depreciation
Time Period Asset acquired
for Asset existing during the
Depreciation
at the year and used
Calculation –
Exception 3
beginning of for less than
P.Y. and used 180 days in
during the P.Y. P.Y

Asset acquired
during the year
and used for
more than 180
days in P.Y. Exception 3:
Full Half
Depreciation Depreciation for
for the Year is the Year is
allowed allowed
Problem 4: Exception 3

Block 1 – Plant -15% Rs Depreciation will

be calculated @
Opening WDV On 1.4.2021 NIL 50% of 15% on the
closing W.D.V. as
Add: New Asset purchased in the block xxxx put to use for less
(Purchased on 10.05.21) (Put to use on 10.01.22) than 180 days
Less: Any Asset in the block sold NIL
(Cannot exceed the cost of the block)
Closing WDV on 31.3.2022 (a) xxxx
Depreciation for 2021-22 (b) xxxx
Final Closing W.D.V. on 31.3.2022 after depreciation xxxx
(a-b)
 Problem 4: Exception 3

Block 1 – Building -10% Rs

Opening WDV On 1.4.2021 14,15,700 On 3,10,000 @ 50%
of 10% = 15,500
Add: New Asset purchased in the block 3,10,000
On 1st December, 2021 (Building C) On (8,55,700 –
3,10,000)
Less: Any Asset in the block sold 8,70,000 =5,45,700@ 10% =
(Cannot exceed the cost of the block) 54,570
(Building A )
Total = 15,500+
Closing WDV on 31.3.2022 8,55,700 54,570 = 70,070

Depreciation for 2021-22 70,070

Final Closing W.D.V. on 31.3.2022 after depreciation 7,85,630

Problem 4: Exception 3

Block 1 – Building -10% Rs

Opening WDV On 1.4.2021 14,15,700
As Closing W.D.V. is
Add: New Asset purchased in the block 3,10,000 less than the cost of
On 1st December,2021 (Building C) Building C which is
used for less than 180
Less: Any Asset in the block sold 15,87,000 days depreciation will
(Cannot exceed the cost of the block) be calculated @ 50%
(Building A ) of 10% on 1,38,700 =
6,935
Closing WDV on 31.3.2022 1,38,700

Depreciation for 2021-22 6935

Final Closing W.D.V. on 31.3.2022 after 1,31,765

depreciation
 On 1.4.21 the following details are given :

DEPRECIATION 1.4.21: Opening W.D.V. of Plant A, B, C @ 20% Rs. 5,00,000

UNDER INCOME
TAX ACT- 20.5.2021: Plant D purchased for Rs. 3,00,000
WRITTEN
DOWN VALUE
10.10.2021: Plant A (WDV Rs.1,00,000) lost by theft

Opening W.D.V. Rs.5,00,000

+ New Asset Rs.3,00,000

- Sale / Theft NIL

W.D.V. for Depreciation Rs.8,00,000

Dep on Closing W.D.V. @ 20% Rs.1,60,000

Closing W.D.V. on 31.3.2022 Rs.6,40,000

Practical Exercise on Depreciation
Illustration -1 Block 1 Block 2 Block 3
Particulars Buil (10%) Buil (5%) P/M (15%)
Opening WDV 3,50,000 10,00,000 20,40,000
On 1.4.2021
Add: New Asset 1,00,000 5,00,000 6,50,000
purchased in the block (May 2021) (May 2021) (Nov 2021)
Less: Any Asset in the 60,000 NIL 2,70,000
block sold 24,20,000 - 6,50,000=
17,70,000 * 15%=
(Cannot exceed the cost 2,65,500
of the block) and
6,50,000 * 7.5% =
Closing WDV on 3,90,000 15,00,000 24,20,000 48,750
31.3.2022 (before Depr)
Total = 3,14,250
Depreciation on Closing 39,000 75,000 3,14,250
WDV (10% of (5 % of
3,90,000 15,00,000)
Particulars Block 4 Block 5 Computers
Fur (10%) P/M (40%)
Opening WDV 1,76,000 NIL 1,81,000 - 5,000=
On 1.4.2021 1,76,000 * 10%=
17,600
Add: New Asset 5,000 80,000 and
purchased in the block (Nov 2021) (Oct 2021) 5,000 * 5% = 250

Less: Any Asset in the NIL NIL Total = 17,850

block sold
(Cannot exceed the cost
of the block)
Closing WDV on 1,81,000 80,000 50% of 40%
31.3.2022 (before Depr) of 80,000

Depreciation on Closing 17,850 16,000

WDV (20 % of
80,000)
 Total Depreciation Rs
Block 1 – Building – 10% 39,000
Block 2– Building – 5 % 75,000
Block 3 – Plant & Machinery – 15% 3,14,250
Block 4 – Furniture – 10% 17,850
Block 5 – Plant & Machinery – 40% 16,000
Total 4,62,100
 Illustration -2 Block 1 Block 2 Block 3
Particulars P/M (40%) Furn (10%) Of Bldg (10%)
Opening WDV NIL NIL NIl
On 1.4.2020
Add: New Asset 60,000 + 62,000 12,50,000
(42,000 + 20,000)
purchased in the block 70,000 (July2019)
Less: Any Asset in the NIl NIL NIL
block sold
Closing WDV on 31.3.2021 1,30,000 62,000 12,50,000
Depreciation on Closing 40,000 6,200
WDV (20% of (10 % of 1,25,000
60,000 &
62,000) (10% of
40% of
70,000) 12,500)
Final WDV on 31.3.2021 90,000 55,800 11,25,000
Illustration -3 Block 1 Block 2 Block 3
Particulars P/M (15%) P/M (40%) Buil (10%)
Opening WDV NIL NIL NIl
On 1.4.2020
Add: New Asset 47,00,000 10,00,000 15,00,000
purchased in the block A,B,C, Car, AC D&E (Sept2019)
Less: Any Asset in the NIl NIL NIL
block sold
Closing WDV on 47,00,000 10,00,000 15,00,000
31.3.2021 (before Depr)
Depreciation on Closing 6,22,500 2,00,000 1,50,000
WDV (15% of 36 lac (20% of (10% of
&7.5% of
11 lac)
10,00,000) 15,00,000)
Final WDV on 31.3.2021 40,77,500 8,00,000 13,50,000
 Expenses
allowed as
Deductions
under Income Sec 36: Specific Deductions
Tax Act

Sec 37: General

Deductions

Sec 40 to 43B :
Disallowances under the Act
 Expenses
allowed as
Deductions Sec 36: Specific
under Income
Tax Act Deductions

Sec 37: General

Deductions

Sec 40 to 43B :
Disallowances under the Act
 Specific
Deductions Insurance Premium on Goods,
under Section
36
Stocks

Insurance Premium on Business

assets
Insurance premium on the life
of cattle

Insurance premium on health of

employees (No monetary
ceiling) (Payment not in cash)
 Specific Bonus , Commission paid to
Deductions
under Section
employees
36
(Legal or contractual)

Condition :1: Not allowed as

deduction if bonus given in
lieu of profits/dividend

Condition: 2: Payment of
Bonus made during P.Y. or
before filing return for
relevant P.Y.- 43 B
 Specific
Interest on loan borrowed for business- whether
Deductions for long term assets or Working Capital
under Section Section 43B applicable
36

Loan should be taken from a third person-

1. proprietor charging interest on capital- is it
allowed?
2. Interest paid by firm to partner?
3. A person engaged in business of paper can claim
deduction of interest for capital borrowed on setting
a garment business (even if the new business is
unremunerative)

Can it be taken from a relative or family member?

Loan borrowed for personal use?- not allowed
Interest on late payment of any taxes?-not allowed
The department needs no proof whether there was a
need to borrow loan or not
 Specific
Employers contribution
Deductions towards employees
under Section
36
retirement benefits- P.F.,
Gratuity, Pension, etc.

Condition:1: P.F., Gratuity

and Pension fund should be
approved by the authority

Condition:2: Deduction is
available only if
contribution (payment) is
made on or before due date
 Bad Debts – allowed as business deduction
Specific provided it was treated as income in that
Deductions or earlier P.Y.
under Section
36
Represents money lent in normal course of
business

There must be a debt, incidental to

business, and considered while
computing assessable business income
Allowed only if it is written off as
irrecoverable from the books of accounts

Recovery of bad debt is treated as

income- business may or may not
continue

Provision for bad and doubtful debts is

not allowed as deduction
 Specific
Deductions X sells goods on credit – Out of credit
under Section
36
sales Rs.50,000 written off as bad debt

Z, a money lender gives loan to A. A

becomes insolvent. If interest income is
included on accrual basis , can be written
off as bad debt and claim deduction. Also
non recovery of loan can be deductible if
written off in books

Money given in advance for purchase of

material and forfeited by creditor- not
treated as bad debt- as it is not income
 Expenses
allowed as
Deductions
under Income Sec 36: Specific Deductions
Tax Act

Sec 37: General

Deductions

Sec 40 to 43B :
Disallowances under the Act
 Specific Expenditure not claimed under other sections -30to 36
Deductions
under Section
37
Expenditure should not be capital in nature

Expenditure should not be personal

Expenditure should be incurred in the previous

year

Expenditure must be related to business /profession

carried on by the assessee in the P.Y.

Expenditure is not incurred for any purpose which is an

offence
 Expenses
allowed as
Deductions
under Income Sec 36: Specific Deductions
Tax Act

Sec 37: General Deductions

Sec 40 to 43B :
Disallowances under the Act
 Salary, Rent, Deduction will not
Disallowances – Royalty, be allowed if TDS is
Section 40(a) Payments Commission, deducted but not
eligible for tax Interest deposited with
Central
deduction at Government before
source filing return

Payments will not

be allowed as
deduction if TDS is Deduction will
not deducted as be allowed in a
per due date subsequent year
when deposited
Disallowances –
Payment to Non
Section 40(a) resident/
Payment
outside India

Interest,
Royalty, Fees,
Salary
Rent,
Commission

Default to Default to
deduct TDS- deduct TDS-
100% amount 100% amount
disallowed disallowed
Disallowances –
Section 40(a) Payment to
Resident

Salary, Interest,
Royalty, Fees,
Rent,
Commission

Default to Default to
deduct TDS- 30% deposit TDS-
amount 30% amount
disallowed disallowed
 Expenditure in Full amount
cash or bearer Will be
Disallowances –
Section 40A(3) cheque disallowed
exceeding
Rs.10,000-may Some
be an allowed exceptions
expense apply

• Payment made to Bank,

Government,
Limit of • Through Banking system,
Rs.10,000 is Payment to be made on a
per person, public holiday when banks
per day basis are closed,
• Payment made by a money
changer against purchase
of foreign currency in his
normal course of business
Disallowances –
Section 40A(2)
Unreasonable
Payment made to with regard to the
relatives, sister FMV of the
concerns transaction

Will be disallowed
if payment is
unreasonable or
excessive- only to
the extent of
excessive
payment
List of payments:
1. Individual to relative
2. Company to director or relative of director
3. Firm to partner or relative of partner
4. Payment to a person having a substantial interest in the business of the payer

Examples:
1. X is a trader. He purchases goods from his brother at Rs.1,40,000 though the
market value is Rs.1,30,000.
2. X has a substantial interest in Y Ltd. Y Ltd. takes on hire trucks owned by X
and pays rent.
3. X is a trader. He sells goods to his brother at Rs.1,00,000 whose market value
is Rs.1,40,000. X has not incurred any expenditure.
4. X carries a business. He employs his son as Manger and pays him salary
@Rs.10,000 p.m. Can be disallowed by the AO if not appropriate to his
qualification ?
Disallowances – Assessee maintains books as per mercantile
Section 43B
system- Following payments are allowed as
deduction on actual payment during the P.Y.
3. Sum paid as
1. Tax, Duty,
bonus or 5. Sum paid by
Cess, Fee
commission to employer as
2. Employers employees leave salary to
contribution to employee
4. Interest on
employees
loan taken
welfare funds
from Banks, PFI
Sum No. 4 Computation of Business Income of ABC (A.Y . 2022-2023 P. Y. 2021-22)
Particulars Amount Rs.
Net Profit as per Profit and Loss Account 30,500 30,500
Add: Expenses disallowed
Penalty of FEMA 1,200
Expenses on Criminal Cases 3,000
Donation to PM National Relief Fund 2,000
Wealth Tax 3,000
Bad Debts (No Dr and Cr Relationship) 500
Provision for Tax 22,000
Depreciation as per books 40,000 +71,700
Add: Unrecorded Income
Less: Allowed Expenses
Depreciation allowed as per IT 36,000 -36,000
Less: Incomes Considered Separately
Income Tax Refund (IFOS) 5,000 -5,000
Gross Income as per PGBP 61,200
 Sum No. 6
Computation of Business Income of Mr. Sharma
(A. Y. 2022-2023
P. Y. 2021-2022)
Particular Amount
Net profit 20,000
Add: -
Payment made by cheque 30,000
Depreciation 10,000
Freight (penalty and demurrage) 7,000
Diff in stock valuation 1,000
Donation 10,000
Income tax 10,000
Reserve for bad debts 10,000
Patents (cap exp.) 90,000
Interest on Capital 10,000
Less: -

Depreciation as per I.T. 8,000

Entertainment expense not recorded 8,000

Life policy amount 5,000
Sale of machine (Capital Gain) 2,000

Interest and Dividend (IFOS) 4,000

Income from Business and Profession 171000