Contents PAGE
Preface About the Authors
v vi
UNIT 1 : INCOME-TAX
1
Basic concepts that one must know
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
What is an assessment year What is a previous year Who are included in person Who is regarded as assessee How to charge tax on income What is regarded as income under the Income-tax Act What is gross total income What is total income and how is it computed What is agricultural income What is difference between exemption and deduction What are capital and revenue receipts What is capital and revenue expenditure How far method of accounting is relevant in computing income Problems on basic concepts
2
Residential status and its effect on tax incidence
17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29.
What is relevance of residential status What one must know for deciding residential status How to determine residential status of an individual How to find out residential status of a Hindu undivided family How to determine residential status of firm and association of persons How to find out residential status of a company How to determine residential status of every other person What is the relationship between residential status and incidence of tax Connotation of receipt of income - How is it understood What is accrual of income What is income deemed to accrue or arise in India Problems on incidence of tax Other problems
vii
1 1 3 3 4 5 9 10 15 15 15 16 16 16
23 23 24 30 31 31 32 32 35 36 36 38 43
Contents
viii PAGE
3 32. 33. 34. 35. 36. 37.
4 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54.
Income that is exempt from tax
What income is exempted under section 10 What are special provisions in respect of newly-established undertakings in free trade zone, etc. What are special provisions in respect of newly established hundred per cent export-oriented undertakings What are the special provisions in respect of profit from export of artistic hand-made wooden articles How can a political party claim exemption Exemption to electoral trust
45 53 55 55 56 56
Income under the head Salaries and its computation
What do you understand by expression salary What is basis of charge of salary income Different forms of salary - How taxed Different forms of allowances - How taxed Perquisite - When taxable/not taxable Perquisites - How valued for tax purposes What are permissible deductions from salary income What is tax treatment of provident fund What is the tax treatment of approved superannuation fund What is special tax treatment of salary income of non-resident technicians What is the extent of exemption available to other foreign citizens in respect of salary income Deduction under section 80C - How to find out Is salaried employee entitled to relief in respect of salary in arrears, advance, etc. What are important points which one should remember to solve practical problems under the head Salaries Problems on computation of salary income Theoretical problems on computation of salary income
5
Income under the head Income from house property and its computation
66. 67. 68. 69. 70. 71. 72. 73.
What is the basis of charge When property income is not charged to tax What is the basis of computing income from a let out house property How to compute taxable income from self-occupied property What are special provisions when unrealised rent is realised subsequently What is mode of taxation of arrears of rent Problems on computation of property income Theoretical problems on computation of property income
6
Income under the head Profits and gains of business or profession and its computation
77. 78. 79. 80. 81. 82.
What is the basis of charge What are the basic principles for arriving at business income Method of accounting - How far relevant for computing business income What is the scheme of business deductions/allowances What are specific deductions under the Act What are the specific disallowances under the Act
58 59 62 74 81 85 109 110 114 114 114 115 120 120 121 141
151 155 155 162 168 169 169 177
180 181 183 183 185 228
ix
Contents PAGE
83. 84. 85. 86. 87. 88. 89. 90. 91.
What are the deemed profits and how they are charged to tax How and when undisclosed income/investments are taxed When maintenance of books of account becomes compulsory When audit of accounts by certain persons is compulsory What are special provisions for computation of business income What are the special provisions for computing income on estimated basis under sections 44AD, 44ADA and 44AE What are permissible methods of valuation of closing stock Problems on computation of income from business/profession Theoretical problems on business/profession income
7
Income under the head Capital gains and its computation
92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106.
What is the basis of charge What is included in and excluded from capital asset What is transfer of capital asset Capital gains - How computed What is full value of consideration How to find out expenditure on transfer What is cost of acquisition What is cost of improvement How to convert cost of acquisition/improvement into Indexed cost of acquisition/improvement Capital gain in special cases - How to find out Valuation of capital asset - When can be referred to Valuation Officer Capital gains - When and to what extent exempt from tax How to find out tax on short-term/long-term capital gain Problems on computation of capital gains Theoretical problems on capital gains
8
Income under the head Income from other sources and its computation
107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 116A. 116B. 117. 118. 119.
What is basis of charge Relevance of method of accountancy What is regarded as dividend and how is it charged to tax Winnings from lotteries, crossword puzzles, horse races and card games, etc. - How to compute What is regarded as interest on securities How to find out income from machinery, plant or furniture let on hire How to find out income from composite letting of building, machinery, plant or furniture Money/property received without consideration or for inadequate consideration - How to find out income Share premium in excess of fair market value - How to find out income Advance money received in course of negotiations for transfer of a capital asset - When chargeable to tax Sum received by a unitholder from a business trust - When income chargeable to tax Sum received under a life insurance policy - How chargeable to tax What deductions are permissible from income from other sources What are other provisions Problems on computation of income from other sources
243 245 246 246 247 249 252 253 268
271 271 274 276 277 277 277 278 278 278 296 296 310 320 328
335 337 337 339 340 341 341 342 350 350 351 351 354 355 356
Contents
x PAGE
9 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130.
10 132. 133. 134. 135. 136. 137.
11 137A. 138. 139. 140. 141. 142. 142A. 143. 144. 145. 146. 146A. 146B. 146C. 147. 148. 149.
Clubbing of income
Transfer of income without transfer of asset - When income therefrom is regarded as that of transferor Revocable transfer of assets - When income therefrom is regarded as that of transferor When an individual is assessable in respect of remuneration of spouse When an individual is assessable in respect of income from assets transferred to spouse When an individual is assessable in respect of income from assets transferred to son s wife When an individual is assessable in respect of income from assets transferred to a person for the benefit of spouse When an individual is assessable in respect of income from assets transferred to a person for the benefit of son s wife When an individual is assessable in respect of income of his minor child What is tax implication of conversion of self-acquired property into joint family property and subsequent partition Other points Problems on clubbing of income
364 364 365 367 370 371 371 371 373 373 375
Set off and carry forward of losses
What is the mode of set off and carry forward Inter-source adjustment - How made Inter-head adjustment - How made Carry forward of loss - How to set off Carry forward and set-off of business loss and depreciation - When permissible in the hands of amalgamated and demerged company or co-operative bank Problems on set off and carry forward of losses
378 378 379 380 386 387
Permissible deductions from gross total income
What are the basic rules governing deductions under sections 80C to 80U Deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc. Deduction in respect of National Savings Scheme - To what extent available Equity Linked Savings Scheme - When deduction is available Deduction in respect of pension fund - When available Deduction in respect of contribution to a National Pension System (NPS) Deduction in respect of contribution to Agnipath Scheme - When Available Deduction in respect of medical insurance premia - When and to what extent available Deduction in respect of maintenance including medical treatment of a dependent being a person with disability - When and to what extent available Deduction in respect of medical treatment, etc. - To what extent available Deduction in respect of payment of interest on loan taken for higher education - When and to what extent available Deduction in respect of interest on loan taken for residential house property Deduction in respect of interest on loan taken for certain house property - When available Deduction in respect of interest on loan taken for purchase of electric vehicle - When available Deduction in respect of donations to certain funds, charitable institutions, etc. - How arrived at Deduction in respect of rent paid - To whom and to what extent available Deduction in respect of certain donations for scientific research or rural development - When eligible
395 396 399 399 399 399 401 401 403 405 406 407 407 408 408 412 414
xi
Contents PAGE
150. 151. 152. 153. 153A. 154. 154A. 155. 156. 157. 158. 159. 160. 160A. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170.
12 185. 186. 187. 188.
13 192. 193. 194. 195.
14 201. 202. 203. 204. 205.
Deduction in respect of contributions given to political parties or electoral trust - To what extent deductible Deduction in respect of earnings in convertible foreign exchange - How to find out Deduction in respect of profits and gains from industrial undertaking or enterprises engaged in infrastructure development, etc. - How to find out Deduction in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone Deduction in respect of eligible start-up Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings - How to avail Deduction in respect of profits from housing projects Deduction in respect of profits and gains of certain undertakings in certain special category of States - How to find out Deduction in respect of profits and gains from business of hotel/convention centre in NCR How to find out Deduction in respect of certain undertakings in North-Eastern States - How to determine Deduction in respect of business of processing of bio-degradable waste - How to determine Deduction in respect of Employment of new Employees Deduction in respect of certain income of Offshore Banking Units and International Financial Services Centre - To what extent available Deduction in respect of Inter-Corporate Investment - To what extent available Deduction in respect of income of a co-operative society - To what extent available Deduction in respect of certain income of producer companies - To what extent available Deduction in respect of royalty income of authors - To what extent available Deduction in respect of royalty on patents - To what extent available Deduction in respect of interest on deposits in savings accounts - When available Deduction in respect of interest on deposits in case of senior citizens - To what extent available Deduction in the case of a person with disability - To what extent available Deductions from tax liability - How to determine Rebate for resident individuals - How to find out Problems on computation of total income
414 415 415 416 417 417 418 420 420 420 420 420 422 423 423 424 424 426 426 427 427 428 429 431
Meaning of agricultural income and its tax treatment
What is agricultural income What are instances of income held to be agricultural/non-agricultural income What is the tax treatment of income which is partly agricultural and partly from business What is the scheme of partial integration of non-agricultural income with agricultural income
439 441 442 443
Individuals - Computation of taxable income
What is included in income of an individual Taxable income - How computed Tax liability - How calculated Problems on computation of taxable income
448 448 449 459
Hindu undivided families - Computation of taxable income
What is understood by Hindu undivided family What are the basic conditions for assessment of Hindu undivided family What is the basis of computation of taxable income of HUF What is tax implication of partition of a Hindu undivided family Problems on computation of taxable income of HUF
478 478 479 479 480
Contents
xii PAGE
15 212. 213. 214. 215. 216. 217. 218. 219. 220. 221. 222. 223. 224.
16 240. 241. 242. 243. 244. 245. 246. 247. 248. 249. 250. 251. 252. 253. 254. 255. 256. 257. 258. 259. 260. 261.
17 266. 267. 268. 268A.
18 269. 270. 270A. 271.
Firms and associations of persons - Computation of taxable income
What is partnership What is the scheme of taxation of firms When remuneration/interest paid or payable to partners is deductible What are the conditions a firm should fulfil under section 184 What are the conditions for claiming deduction of remuneration of partners under section 40(b) What are the conditions for claiming deduction of interest to partners under section 40(b) Carry forward and set off of loss in the case of change in the constitution of firm How to find out income of a firm How to find out tax liability of firm How to find out taxable income of partners Problems on computation of taxable income of a firm and partners How to find out income and tax of AOP/BOI and members Problems on firms and partners
483 483 483 484 484 487 487 488 488 488 489 491 494
Return of income
Who has to submit his/its return of income on voluntary basis as a statutory obligation When return of loss should be filed Can return be filed beyond time Can revised return be filed What is updated return What is a defective or incomplete return What is modified return What is Permanent Account Number (PAN) When and how Aadhaar Number is to be quoted What is Scheme to facilitate submission of returns through Tax Return Preparers Return by whom to be verified What is self-assessment What is inquiry before assessment under section 142 or 142A What is summary assessment without calling the assessee What is scrutiny assessment under section 143(3) What is best judgment assessment What is income escaping assessment When can mistake be rectified What is time-limit for completion of assessment/reassessment Who is under an obligation to furnish statement of financial transaction What is the requirement of submission of statement by a non-resident having liaison office in India Problem on return of income and assessment
498 501 501 502 502 504 505 505 506 507 507 508 509 509 510 510 511 512 512 513 513 513
Advance payment of tax
When a person becomes liable to pay advance tax When advance tax payment becomes due How advance tax is computed What are the consequences when advance tax is not paid
516 517 517 519
Deduction and collection of tax at source
What is the scheme of Tax Deduction at Source (TDS) When and how tax is to be deducted at source from salary When and how tax is to be deducted at source from withdrawal from employees provident fund scheme When and how tax is to be deducted at source from interest on securities
521 523 525 525
xiii
Contents PAGE
272. 273. 274. 274A. 275. 276. 277. 277A. 278.
When and how tax is to be deducted at source from dividends When and how tax is to be deducted at source from interest other than interest on securities When and how tax is to be deducted at source from winnings from lotteries or crossword puzzles When and how tax is to be deducted from winnings from online games When and how tax is to be deducted at source from winnings from horse races When and how tax is to be deducted at source from payments to contractors or sub-contractors When and how tax is to be deducted at source from insurance commission When and how tax to be deducted at source from payment of life insurance policy When and how tax is deductible at source from payment to non-resident sportsmen or sports associations 279. When and how tax is deductible from payments in respect of National Savings Scheme 280. When and how tax is deductible on payments on account of repurchase of units of Mutual Funds or UTI 281. When tax is deductible from commission, etc., on sale of lottery tickets 282. When and how to deduct tax at source from commission or brokerage 283. When and how tax is deductible from rent 283A. When and how tax is deductible from payment on transfer of certain immovable properties under section 194-IA 283B. When and how tax is deductible from rent by certain individuals/HUFs under section 194-IB 283C. When and how tax is deductible from payment under joint development agreement under section 194-IC 284. When tax is deductible at source on fees for professional or technical services 284A. When tax is deductible at source in respect of income from units 284B. When and how to deduct tax at source from payment of compensation on acquisition of certain immovable property 284C. When and how tax is to be deducted at source from interest payable on infrastructure debt fund 284D. When and how tax is to be deducted at source from income from units of business trust 284E. When and how tax is deductible from income in respect of units of investment fund 284F. When and how tax is deductible from income in respect of investment in securitization fund 284G. When and how tax is to be deducted by an Indian company from interest to a non-resident/ Foreign Citizen 284H. When and how tax is to be deducted from interest on bonds/Government securities under section 194LD 284-I. When and how tax is deductible on certain payments by individual/HUF 284J. When and how tax is deductible on payment of certain amounts in cash 284K. When tax is deductible at source in respect of payment by e-commerce operator to e-commerce participants 284L. When and how tax is to be deducted in the case of specified senior citizen 284M. When and how tax is to be deducted on payment for purchase of goods 284N. When and how tax is deductible on benefit/perquisite pertaining to business/profession 284-O. When and how tax is deductible from payment on transfer of virtual digital asset 284-P. When and how tax is deductible by firms from payment of remuneration/interest to partners 285. When and how tax is to be deducted at source from other sums 285A. When tax is deductible at source from any income payable to non-resident unitholders 286. When and how tax is deductible from units or long-term capital gain under section 196B 287. When tax is deductible from income or long-term capital gain from foreign currency bonds/Global Depository Receipts 288. When tax is deductible at source from income of Foreign Institutional Investors from securities 289. What are other points for consideration 290. Tax collection at source
19
Interest payable by assessee/Government
296. 297. 298. 299.
When interest becomes payable by assessee Interest payable to assessee Procedure to be followed in calculation of interest Is it possible to reduce/waive interest
526 526 527 528 528 529 530 531 531 532 532 532 533 533 534 534 534 535 536 537 537 537 538 538 538 539 539 540 540 541 541 542 545 545 546 546 547 547 547 548 553
558 568 568 568
Contents
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300. 301. 302.
Is it possible for Chief Commissioner/Director General (Investigation) to reduce penal interest in certain cases Can Central Board of Direct Taxes make relaxation Writ petition - Is it maintainable against levy of interest
568 569 569
UNIT 2 : GST
20 401. 402. 403. 404. 405.
21 410. 411. 412. 413. 414. 415. 416. 417. 418. 419.
22 425. 426. 427. 428. 429.
23 435. 436. 437. 438.
24 444. 445. 446. 447. 448. 449. 450.
Basic concepts of GST
What is the difference between direct tax and indirect tax What was pre-GST indirect tax structure in India What are different abbreviations used in the book What one should know before beginning study of law regulating GST What are relevant definitions which a beginner should know
570 570 571 571 577
Concept of Supply
What is taxable event What is supply What is the significance of consideration What are activities or transactions which are treated as supply under Schedule II What are activities which are treated as supply under Schedule I even if consideration is absent What are activities given in negative list (neither supply of goods nor supply of services) What is the significance of expression supply made in the course or furtherance of business What is relevant to attract GST - Supply by a person or supply by a taxable person What are different types of supply Problems on supply
581 582 584 586 592 595 597 597 597 599
Levy of GST
What is the basis of charge of GST How GST is levied in the case of inter-State supply How GST is levied in the case of intra-State supply What are GST rates notified for supply of various goods What are GST rates notified for supply of various services
604 604 605 606 607
Exemptions from GST
Power to grant exemption - How to exercise What are exempted goods under exemption notification What are services given in exemption notification Problems on exemption notifications
620 620 624 641
Place of supply
Why one should find out location of supplier and place of supply Location of supplier of goods - How to find out Location of supplier of services - How to find out Location of recipient of services - How to find out How to find out place of supply of goods How to find out place of supply of services Problems on place of supply
652 652 652 653 653 654 663
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Contents PAGE
25 455. 456. 457. 458.
26 464. 465. 466. 467. 468. 469. 470. 471. 472. 473. 474. 475. 476.
27 481. 482. 483. 484.
28 492. 493. 494. 495. 496. 497. 498. 499. 500. 501.
29 511. 512. 513. 514. 515. 516. 517.
Time of supply
Time of supply - How to determine and its significance What are the rules for determination of time of supply of goods What are the rules for determination of time of supply of services How to find out time of supply in case of change in GST rate
667 668 672 675
Value of taxable supply
What are different methods of calculation of value of taxable supply When value of supply shall be the transaction value How to determine value of supply when valuation under aforesaid provisions is not possible How to determine value of supply where the consideration is not wholly in money How to determine value of supply between distinct persons or related person How to determine value of supply of goods made or received through an agent How to determine value of supply of goods/services based on cost What is mode for determination of value of supply under rule 31 How to determine value of certain supplies given under rule 32 How to determine value of supply of services in the case of pure agent What are other modes of determination of value of taxable supply Rate of exchange of currency - How to determine Value of supply inclusive of GST - How to determine taxable value
679 680 683 683 684 685 686 686 686 689 690 691 691
Reverse charge mechanism
What is reverse charge mechanism When reverse charge mechanism is applicable When reverse charge mechanism is applicable on supply by unregistered person to registered person Problems on reverse charge mechanism
693 693 696 697
Input tax credit
What one should know before beginning study of input tax credit provisions What are conditions for taking input tax credit How input tax credit is allowed for payment of CGST, SGST, UTGST and IGST Apportionment of credit - How to determine What is the mode of computation of input tax credit pertaining to capital goods and reversal thereof What is the mode of distribution of credit by Input Service Distributor (ISD) What is the mode of claiming input tax credit by a banking company What is the mode of availability of credit in special circumstances under section 18 How to take input tax credit in respect of inputs/capital goods sent for job work Problems on input tax credit
702 703 710 713 714 715 716 716 720 721
Composition Scheme and Alternative Composition Scheme
Is there any threshold limit for small taxpayers What is composition levy What are the conditions which one has to satisfy What are specified GST rates under Composition Scheme What are other relevant considerations which one has to keep in mind Problems on Composition Scheme What is Alternative Composition Scheme for small service providers
731 731 731 734 736 737 739
Contents
xvi PAGE
518. 519.
30
What are salient features of Alternative Composition Scheme What are special features for GST payments under Alternative Composition Scheme Registration
521. 522. 523.
What is the significance of registration Who is liable for registration under GST What is the procedure for registration
31
Tax invoice, credit and debit notes
531. 532. 533. 534. 535. 536. 537. 538. 539. 540. 541. 542. 543. 544.
32 551. 552. 553. 554. 555. 556. 557. 558. 559. 560. 561. 562. 563. 564.
33 570. 571. 572. 573.
740 741
What is invoice under GST What is importance of tax invoice under GST When tax invoice/bill of supply be issued by a registered person What are the contents of tax invoice What are the contents of bill of supply What are the contents of receipt voucher What are the contents of refund voucher What are the contents of payment voucher What are the contents of revised tax invoice What are the provisions regarding tax invoice in special cases given under rule 54 What are provisions of transportation of goods without issue of invoice What are provisions pertaining to collection of tax and its indication in invoice What are credit and debit notes Problems on tax invoice, credit and debit notes
744 744 750
760 760 760 762 765 766 766 766 767 768 769 770 770 771
Returns, tax payment and interest
What are the basic features of GST returns mechanism What are different GST returns What is matching, reversal and reclaim of input tax credit What is electronic liability ledger What is electronic credit ledger What is electronic cash ledger What are different assessments under GST When interest and late fee are applicable under GST When a person is liable for penalty under GST What is the significance of national anti-profiteering authority in GST What are the provisions regulating e-way bill in GST What are the provisions regulating e-commerce What is the mechanism of Tax Deduction at Source (TDS) under GST What are provisions regulating audit in GST
774 777 781 781 782 783 784 786 788 789 791 796 799 801
Provisions governing Real Estate Services
What one should know before beginning study of GST law pertaining to real estate services What are important definitions What are GST provisions regulating real estate projects with effect from April 1, 2019 What is GST on Transfer of Development Rights (TDR), FSI, upfront amount in real estate transactions
803 804 805 812
xvii
Contents PAGE
34
Problems on GST
581.
Problems on GST
1
APPENDIX
Tax rates
2
827
APPENDIX
Questions set for CA (Intermediate) Examinations and Answers
3
815
838
APPENDIX
Depreciation rates for power generating units
944
CHAPTER 6
Income under the head Profits and gains of business or profession and its computation
W
hile section 28 defines the scope of income, which can be taxed under this head, sections 29 to 44D specify the method of computation of income. Expenses/ allowances expressly allowed by the Act are listed under sections 29 to 37, whereas sections 40, 40A and 43B enumerate those expenses which are expressly disallowed while computing taxable income. This Chapter deals with all the provisions which have a bearing on the computation of taxable income of a business or profession
nn WHAT IS THE BASIS OF CHARGE [SEC. 28] 77. Under section 28, the following income is chargeable to tax under the head Profits and gains of business or profession : a. profits and gains of any business or profession ; b. any compensation or other payments due to or received by any person specified in section 28(ii) ; c. income derived by a trade, professional or similar association from specific services performed for its members ; d. the value of any benefit or perquisite1, whether convertible into money or not, arising from business or the exercise of a profession ; e. any profit on transfer of the Duty Entitlement Pass Book Scheme; f. any profit on the transfer of the duty free replenishment certificate; g. export incentive available to exporters; h. any interest, salary, bonus, commission or remuneration received by a partner from firm [see para 221, for detailed discussion] ; i. any sum received for not carrying out any activity in relation to any business or profession or not to share any know-how, patent, copyright, trademark, etc.; j. fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner; k. any sum received under a Keyman insurance policy including bonus ; l. any sum received (or receivable) in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD; and m. income from speculative transaction. Income from the aforesaid activities is computed in accordance with the provisions laid down in sections 29 to 44DB. 77.1 Meaning of business - In view of section 2(13), business includes any (a) trade, (b) commerce, (c) manufacture, or (d) any adventure or concern in the nature of trade, commerce or manufacture. Though the definition is not exhaustive, it covers every facet of an occupation carried on by a person with a view to earning profit. p Significance of profit motive - The word business is one of large and indefinite import and connotes something which occupies attention and labour of a person for the purpose of profit. p Business cannot be carried on with oneself - Business arises out of commercial transactions between two or more persons. One cannot enter into a business transaction with oneself. 1. Benefit or perquisite arising from business, or the exercise of profession, is taxable whether such benefit or perquisite is in cash or in kind or partly in cash or partly in kind.
180
181
Tax incidence arises in respect of all businesses or professions
Para 78.4
77.2 Business income not taxable under the head Profits and gains of business or profession - In the following cases, income from trading or business is not taxable under section 28, under the head Profits and gains of business or profession : Nature of income
Head under which it is chargeable to tax
Rental income in the case of dealer in property
Rent of house property is taxable under section 22 under the head Income from house property , even if property constitutes stock-in-trade of recipient of rent or the recipient of rent is engaged in the business of letting properties on rent.
Dividend on shares in the case of a dealer-in-shares
Dividends on shares are taxable under section 56(2)(i), under the head Income from other sources , even if they are derived from shares held as stock-in-trade or the recipient of dividends is a dealer-in-shares.
Winnings from lotteries, etc.
Winnings from lotteries, races, etc., are taxable under the head Income from other sources (even if derived as a regular business activity).
Interest received on compensation or enhanced compensation
Such interest is always taxable in the year of receipt under the head Income from other sources (even if it pertains to a regular business activity). A deduction of 50 per cent is allowed and effectively only 50 per cent of such interest is taxable under the head Income from other sources .
Profits derived from the aforesaid business activities are not taxable under section 28, under the head Profits and gains of business or profession . Profits and gains of any other business are taxable under section 28, unless such profits are exempt under sections 10 to 13A. 77.3 Taxation on certain incomes [Sec. 145B] - Section 145B provides mode of taxation of the following incomes 1. Interest received by an assessee on compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received (however, it is taxable under section 56 under the head Income from other sources ). 2. The claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved. 3. Assistance in the form of subsidy (or grant or cash incentive or duty drawback or waiver or concession or reimbursement) as referred to in section 2(24)(xviii) shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year. 77.4 Distinction between business, profession or vocation, not significant - As per section 2(36), profession includes vocation. As profits and gains of a business, profession or vocation are chargeable to tax under the head Profits and gains of business or profession , distinction between business , profession and vocation does not have any material significance while computing taxable income. What does not amount to profession may amount to business and what does not amount to business may amount to vocation .
nn WHAT ARE THE BASIC PRINCIPLES FOR ARRIVING AT BUSINESS INCOME 78. One has to keep in mind the following general principles while computing income taxable under the head Profits and gains of business or profession : 78.1 Business or profession carried on by the assessee - Business or profession should be carried on by the assessee. However, any income from letting out of a residential house or a part of the house by the owner, shall not be chargeable under the head Profits and gains of business or profession and shall be chargeable to tax under the head Income from house property . 78.2 Business or profession should be carried on during the previous year - Income from business or profession is chargeable to tax under this head only if the business or profession is carried on by the assessee at any time during the previous year (not necessarily throughout the previous year). There are a few exceptions to this rule. 78.3 Income of previous year is taxable during the following assessment year - Income of business or profession carried on by the assessee during the previous year is chargeable to tax in the next following assessment year. There are, however, certain exceptions to this rule. 78.4 Tax incidence arises in respect of all businesses or professions - Profits and gains of different businesses or professions carried on by the assessee are not separately chargeable to tax. Tax incidence arises on aggregate income from all businesses or professions carried on by the assessee. If, therefore, an assessee earns profit in one
Para 78.5
Profits and gains of business or profession
182
business and sustains loss in another business, income chargeable to tax is the net balance after setting off loss against income. However, profits and losses of a speculative business are kept separately. 78.5 Legal ownership vs. Beneficial ownership - Under section 28, it is not only the legal ownership but also the beneficial ownership that has to be considered. The courts can go into the question of beneficial ownership and decide who should be held liable for the tax after taking into account the question as to who is, in fact, in receipt of the income which is going to be taxed. 78.6 Real profit vs. Anticipated profit - Anticipated or potential profits or losses, which may occur in future, are not considered for arriving at taxable income of a previous year. This rule is, however, subject to one exception : stock-in-trade may be valued on the basis of cost or market value, whichever is lower. 78.7 Real profit vs. Notional profit - The profits which are taxed under section 28 are the real profits and not notional profits. For instance, no person can make profit by trading with himself in another capacity. 78.8 Recovery of sum already allowed as deduction - Any sum recovered by the assessee during the previous year in respect of an amount or expenditure which was earlier allowed as deduction, is taxable as business income of the year in which it is recovered [sec. 41 see para 83.1]. 78.9 Mode of book entries not relevant - The mode or system of book-keeping cannot override the substantial character of a transaction. 78.10 Illegal business - The income-tax law is not concerned with the legality or illegality of a business or profession. It can, therefore, be said that income of illegal business or profession is not exempt from tax. 78.11 Losses incidental to trade - Commercial principles for computing business income - Trading losses of revenue nature incurred in carrying out the business are deductible, if they are incidental to the operation of business. This rule is applicable even if it is not specially coded anywhere under the Act. p Instances of losses deductible from business income : 1. Loss of stock-in-trade as a result of enemy action, or arising under similar circumstances. 2. Loss of stock-in-trade due to destruction by an act of God. 3. Loss arising on account of failure on the part of the assessee to accept delivery of goods. 4. Depreciation in funds kept in foreign country for purchase of stock-in-trade. 5. Loss due to exchange rate fluctuations of foreign currency held on revenue account. 6. Loss arising from sale of securities held in the regular course of business. 7. Loss of cash and securities in a banking company on account of dacoity (maybe after banking hours.) 8. Loss incurred on realisation of amount advanced in connection with business. 9. Loss of security deposited for the purposes of acquisition of stock-in-trade. 10. Loss due to forfeiture of a deposit made by the assessee for properly carrying out of contract for supply of commodities. 11. Loss on account of embezzlement by an employee. 12. Loss incurred due to theft or burglary in factory premises during or after working hours. 13. Loss of precious stones or watches of a dealer while bringing them from business premises to his house. 14. Loss arising from negligence or dishonesty of employees. 15. Loss incurred on account of insolvency of banker with which current account is maintained by the assessee. 16. Loss incurred due to freezing of the stock-in-trade by enemy action. 17. Loss incurred by a sugar manufacturing company by foregoing advance made to sugarcane growers who used to sell sugarcane crop exclusively to the company. 18. Loss on account of non-recovery of advances given by the assessee-company (engaged in the business of financing its subsidiaries) to its 100 per cent subsidiary company. 19. Loss incurred by a holding company which has guaranteed a loan taken by its subsidiary company. 20. Loss arising as a result of seizure and confiscation of illegal stock-in-trade is allowable as a business loss against income from illegal business T.A. Qureshi v. CIT [2006] 157 Taxman 514 (SC). 21. Loss arising as a result of rejection of goods by the importer (as goods are unfit for human consumption). p Instances of losses not deductible from business income : 1. Loss which is not incidental to trade or profession, carried on by the assessee. 2. Loss incurred due to damage, destruction, etc., of capital assets. 3. Loss incurred due to sale of shares held as investment. 4. Loss of advances made for setting up of a new business which ultimately could not be started.
183
What is the scheme of business deductions/allowances
Para 80
5. Depreciation of funds kept in foreign currency for capital purposes. 6. Loss arising from non-recovery of tax paid by an agent on behalf of the non-resident. 7. Anticipated future losses. 8. Provision made by assessee in respect of non-performing assets. 9. Loss relating to any business or profession discontinued before the commencement of previous year.
nn METHOD OF ACCOUNTING - HOW FAR RELEVANT FOR COMPUTING BUSINESS INCOME 79. Income under the heads Profits and gains of business or profession and Income from other sources shall be computed in accordance with method of accounting regularly employed by the assessee 2. p There are two main methods of accounting mercantile system and cash system. p In the case of mercantile system, net profit or loss is calculated after taking into consideration all income and expenditure of a particular accounting year irrespective of the fact whether income is not received or expenditure is not actually paid during the accounting period. Therefore, if books of account are kept by an assessee on the basis of mercantile system, income of a business or profession, accrued during the previous year, is taxable whether it is received during the previous year or in a year preceding or following the previous year. Similarly, expenditure of business or profession, relating to the previous year, is deductible even if it is not paid during the previous year. p In the case of cash system of accounting, on the other hand, a record is kept of actual receipts and actual payments of a particular year. If books of account are kept by an assessee on the basis of cash system of accounting, income actually collected during the previous year is taxable whether it relates to the previous year or some other year(s). Similarly, expenditure actually paid during the previous year is deductible irrespective of the fact whether it relates to the previous year or some other year(s). p In order to further clarify the same principle, section 43(2) defines the word paid , to mean actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head Profits and gains of business or profession . 79.1 Tax accounting standards [Sec. 145] - The Central Board of Direct Taxes has notified the Income Disclosure and Tax Accounting Standards (ICDS) vide Notification No. 87/2016, dated September 29, 2016. These standards are applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of account. These standards are applicable from the assessment year 2017-18. 79.2 Method of accounting in certain cases [Sec. 145A] - For the purpose of determining the income chargeable under the head Profits and gains of business or profession , the following valuation rules are applicable 1. The valuation of inventory shall be made at lower of actual cost or net realizable value computed in the manner provided in ICDS. 2. The valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation. 3. Inventory (being securities not listed, or listed but not quoted, on a recognised stock exchange) shall be valued at actual cost initially recognised in the manner provided in ICDS. 4. Inventory (being securities held by a scheduled bank or financial institution) shall be valued in accordance with ICDS after taking into account extant guidelines issued by the RBI. 5. Inventory (being listed securities) shall be valued at lower of actual cost or net realisable value in the manner provided in ICDS and for this purpose the comparison of actual cost and net realisable value shall be done category-wise. 6. Any tax, duty, cess or fee, by whatever name called, under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence of such payment for the purposes of the said section.
nn WHAT IS THE SCHEME OF BUSINESS DEDUCTIONS/ALLOWANCES 80. Section 28 defines various income which are chargeable to tax under the head Profits and gains of business or profession . Section 29 permits deductions and allowances laid down by sections 30 to 43D while computing 2. However, interest received by an assessee on compensation (or on enhanced compensation), shall be deemed to be the income of the year in which it is received and it is chargeable to tax under the head Income from other sources (50 per cent of such interest is deductible and effectively 50 per cent is chargeable to tax).
Para 80.1
Profits and gains of business or profession
184
profits or gains of a business or profession. Loss of revenue nature, which is incidental to business, is allowable as deduction while computing taxable business income, even though it is not codified specifically under any of these sections. Sections 40, 40A and 43B give a list of expenses which are not deductible. Before studying the nature and amount of permissible and non-permissible deductions under sections 30 to 43D, it will be useful if one keeps in view the following principles governing admissibility of these deductions : 80.1 Onus of proof - It is the responsibility of the assessee to prove that a particular deduction is admissible in his case. 80.2 Allowances are cumulative - The allowances laid down under sections 30 to 37 are cumulative and not alternative. For instance, if a particular expense is expressly dealt with by a particular section, its admissibility under the residual section 37 cannot be denied unless the particular section prohibits any allowance under any other provision. 80.3 Expenditure should relate to the previous year - It is necessary to claim deduction that the expenditure should relate to the previous year. In order to ascertain whether the expenditure relates to the relevant previous year or not, one has to examine method of accounting generally adopted by the assessee. If the assessee keeps his books of account on the basis of mercantile system, expenses of the previous year would be deductible irrespective of the fact whether they are actually paid during the previous year or not. If the assessee, on the other hand, keeps his books of account on the basis of cash system, expenses actually paid during the previous year are deductible, whether or not they are in respect of previous year. The rule described in this para is, however, subject to one exception. 80.4 Business should be carried on during the previous year - In order to avail deduction of expenditure, it is necessary that the business in respect of which expenses are incurred, should be carried on by the assessee during the previous year. If the business has been closed or discontinued before the commencement of the previous year, no deduction in respect of such discontinued business is permissible while computing taxable income of the previous year from other sources. Sections 41 and 176 [see para 83] bring into charge certain receipts relating to a business or profession, not in existence during the previous year. 80.5 Expenditure should have been incurred in connection with assessee s business - An expenditure is allowable as deduction in computation of taxable income only if it is incurred for the purpose of assessee s own business. For instance, parent company cannot be allowed a deduction in respect of an expenditure incurred for the benefit of its subsidiary company (even if it is a wholly-owned subsidiary company). 80.6 Benefit of expenditure may extend to somebody else - If the expenditure is incurred primarily in connection with assessee s own business, it would still be allowed as deduction even if it enured to the benefit of someone else. For instance, insurance premium, repairs and other expenditure incurred on leased out business assets are deductible from the income of the lessor, even though the expenditure enures to the benefit of the lessee. 80.7 Benefit of expenditure may extend beyond the relevant previous year - It is not necessary that benefit of the expenditure should be limited to the previous year in which the expenditure is incurred. A revenue expenditure incurred during the previous year is deductible even if benefit of expenditure is extended beyond the year of expenditure. 80.8 No allowance in respect of exhaustion of wasting assets - No deduction is admissible in respect of diminution or exhaustion of the capital asset from which income is derived. Wasting assets such as mines and quarries, timber-bearing land, leasehold interest are capital assets and their diminution or exhaustion in value represents capital loss which is not allowable as deduction, as the Act permits deduction of revenue loss. 80.9 No allowance in respect of expenditure incurred before the setting up of a business - In the case of a new business the first previous year commences on the date when the business or profession is set-up. Expenditure incurred prior to setting up of a business falls outside the previous year. Section 28 applies only in respect of business carried on during the previous year. As a consequence, expenditure incurred before setting up of a business would not be deductible, while computing income of the previous year. However, there is sometimes a time-lag between setting up a business and its actual commencement. Expenditure incurred after setting up of a business may be allowed as deduction under sections 30 to 37, even if it is incurred before the actual commencement of business. 80.9-1 EXCEPTION - To the aforesaid general rule that expenditure incurred before setting up of a business is not permissible as deduction, some exceptions are provided. If business is commenced by promoters of a company before its incorporation, tax incidence on profit earned during pre-incorporation period, falls on the company and in arriving at taxable profit, expenditure incurred during pre-incorporation period is allowable as deduction. Three more instances when expenditure incurred before setting up of a business are allowable as deductions are found in sections 35A, 35D and 35E.
185
Depreciation allowance
Para 81.3
80.10 No allowance in respect of non-assessable business - If an assessee carries on a non-taxable business (such as agricultural income in India), no deduction on account of expenditure relating to such non-taxable business can be claimed. 80.11 Expenditure relating to illegal business - As said earlier, profits of illegal business are chargeable to tax. In arriving at chargeable profits, ordinary business expenditure incurred in carrying on an illegal business is allowable as deduction. However, infringements of law including breaches of obligations are not ordinary incidence of business and penalty or damages paid in connection with such infringement do not constitute expenditure, wholly and exclusively laid out for the business of the assessee; such expenses are, therefore, not deductible. 80.12 No allowance in respect of anticipated losses - Under the present scheme of the Act, anticipated loss cannot be deducted, though the loss is certain. The only exception to this rule is that stock-in-trade may be valued at cost or market value, whichever is lower. 80.13 No deduction in respect of depreciation of investment - A deduction in respect of depreciation of investment in shares and securities is not allowable. 80.14 Relevance of distinction between capital and revenue expenditure - The question whether the expenditure is capital expenditure or revenue expenditure is relevant only in the case of expenditure falling under sections 30, 31 and 37(1) which expressly exclude the items of the nature of capital expenditure from being allowed as permissible deduction. However, expenditure falling under other sections may fall either under the category of capital expenditure or revenue expenditure.
nn WHAT ARE SPECIFIC DEDUCTIONS UNDER THE ACT 81. Sections 30 to 37 cover expenses which are expressly allowed as deduction while computing business income, sections 40, 40A and 43B cover expenses which are not deductible. The following expenses are expressly allowed as deductions against profits and gains of business or profession : 81.1 Rent, rates, taxes, repairs and insurance for building [Sec. 30] - Under section 30, the following deductions are allowed in respect of rent, rates, taxes, repairs and insurance for premises used for the purpose of business or profession : a. the rent of premises, the amount of repairs (not being capital expenditure), if he has undertaken to bear the cost of repairs (this is applicable if the assessee has occupied the property as a tenant) ; b. the amount of current repairs (not being capital expenditure) (if the assessee has occupied the premises otherwise than as a tenant) ; c. any sum on account of land revenue, local rates or municipal taxes ; and d. amount of any premium in respect of insurance against risk of damage or destruction of the premises. p Application of section 43B - Land revenue, local rates or municipal taxes are deductible subject to the conditions as specified by section 43B [see para 82.9]. p Judicial rulings - The following judicial ruling one should keep in view 1. If an assessee takes premises on lease for carrying on a business or profession and agrees to pay arrears of rent of previous tenant, such arrears of rent cannot be deducted, whether arrears of rent are paid under legal obligation or voluntarily. 2. A fluctuating item like a share in profit cannot be treated as rent. 3. Painting the outside of a house is repair. 81.2 Repairs and insurance of machinery, plant and furniture [Sec. 31] - The expenditure incurred on current repairs (not being capital expenditure) and insurance in respect of plant, machinery and furniture used for business purposes is allowable as deduction under section 31. p Current cannot be interpreted to mean petty. The section does not say anything about the magnitude of the expenditure. However, the expenditure should not be capital expenditure. 81.3 Depreciation allowance [Sec. 32] - Depreciation shall be determined according to the provisions of section 32. 81.3-1 CONDITIONS FOR CLAIMING DEPRECIATION - In order to avail depreciation, one should satisfy the following conditions : Condition 1
Asset must be owned by the assessee.
Condition 2
It must be used for the purpose of business or profession.
Condition 3
It should be used during the relevant previous year.
Condition 4
Depreciation is available on tangible as well as intangible assets.
Para 81.3
Profits and gains of business or profession
186
81.3-1a ASSET SHOULD BE OWNED BY THE ASSESSEE - The asset should be owned by the assessee or the assessee should be the co-owner of the asset. The following points should be noted 1. It is not necessary that the assessee should be the registered owner of the asset. If a person acquires a building by satisfying conditions of section 53A of the Transfer of Property Act [i.e., under a Power of Attorney Transaction], depreciation is available even if he is not the registered owner of the building. 2. Where an assessee carries on a business or profession in a building not owned by him but in respect of which he holds a lease or right of occupancy, he is entitled to depreciation3, in respect of capital expenditure incurred by him on construction of any structure or any work in relation to the building by way of improvement, renovation or extension. 3. If an assessee acquires an asset under financial lease, he can claim depreciation. 4. Generally, in the case of a hire purchase agreement, the hirer has an uninterrupted right over the asset for all practical purposes, if he discharges his obligation (i.e., payment of all instalments). In such a case, the hirer (and not seller) can claim depreciation from the year in which the asset is taken on hire. 81.3-1b ASSET MUST BE USED FOR THE PURPOSE OF BUSINESS OR PROFESSION - The asset, in respect of which depreciation is claimed, must have been used for the purpose of business or profession. Even if an asset is put to use for trial production, depreciation can be claimed. The user of the asset should be understood in a wide sense so as to embrace passive as well as active user. If a machine is kept ready for use at any moment in a particular factory, the machinery can be said to be used for the purpose of the business and depreciation is available. Any forced idleness of the machinery cannot disentitle the assessee from getting the benefit of depreciation allowance. If an asset is used partly for business purposes and partly for other purposes, proportionate depreciation is available. 81.3-1c USER OF THE ASSET IN THE PREVIOUS YEAR - The asset, in respect of which depreciation is claimed, must have been used for the purpose of business during the relevant previous year. Even if an asset is used for a few days (or even for a few hours) during the previous year, depreciation for the entire year is available. However, in the first year, in which an asset is acquired, the asset should be used at least for 180 days to claim fully year s depreciation (if it is used for less than 180 days, half year s depreciation is available in the first year in which the asset is acquired). 81.3-1d DEPRECIATION IS AVAILABLE ON TANGIBLE AS WELL AS INTANGIBLE ASSETS - Under the Income-tax Act, one can claim depreciation in respect of the following assets Tangible assets
Building, machinery, plant or furniture
Intangible assets acquired after March 31, 1998
Know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature (not being goodwill of a business or profession).
Building means the superstructure only and does not include site. Plant includes ships, vehicle, books (including technical know-how report), scientific apparatus and surgical equipment used for the purpose of business or profession. It does not include tea bushes or livestock or buildings or furniture and fittings. 81.3-2 BASIC CONCEPTS FOR COMPUTATION OF DEPRECIATION ALLOWANCE IN RESPECT OF UNITS OTHER THAN POWER UNITS 4 Depreciation is admissible for block of assets. Method of computation of depreciation is written down value method. However, depreciation is available (at the option of assessee) in respect of tangible assets according to straight-line method in the case of an undertaking engaged in generation or generation and distribution of power in some cases [see para 81.3-9]. To understand method of computation of depreciation, one must know the meaning of the following terms : p Block of assets [sec. 2(11) see para 81.3-3]. p Written down value [sec. 43(6) see para 81.3-4]. p Actual cost [sec. 43(1) see para 81.3-7]. 81.3-3 BLOCK OF ASSETS [SEC. 2(11)] - The term block of assets means a group of assets falling within a class of assets comprising a. tangible assets, being buildings, machinery, plant or furniture ; b. intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature (and from the assessment year 2021-22) not being goodwill of a business or profession, in respect of which the same percentage of depreciation is prescribed. 3. Expenditure on construction of road/bridge by an assessee on leased land provided by a State Government is qualified for depreciation. 4. For computation of depreciation in the case of power units, see para 81.3-9.
187
Depreciation allowance
Para 81.3
There are 10 different blocks5 of assets as given below Number
Nature of asset
Rate of depreciation
Block 1
Buildings - Residential buildings other than hotels and boarding houses
5%
Block 2
Buildings - Office, factory, godowns or buildings which are not mainly used for residential purpose [it covers hotels and boarding houses but does not cover those which are covered under Blocks 1 and 3] Buildings - The following buildings : a. buildings acquired on or after September 1, 2002 for installing machinery and plant forming part of water supply project or water treatment system and which is put to use for the purpose of business of providing infrastructure facilities under section 80-IA(4)(i); b. temporary erections such as wooden structures Furniture - Any furniture/fittings including electrical fittings
10%
Plant and machinery - Any plant or machinery [not covered by Block 6, 7, 8 or 9], motor cars (other than those used in a business of running them on hire) acquired or put to use on or after April 1, 1990, oil well (not covered under any other block) Plant and machinery - Ocean - going ships, vessels ordinarily operating on inland waters including speed boats Plant and machinery - Block includes the following 6 p Buses, lorries and taxies used in the business of running them on hire p Motor cars (other than those used in a business of running them on hire) acquired on or after August 23, 2019 but before the April 1, 2020 and is put to use before April 1, 2020 p Moulds used in rubber and plastic goods factories p Machinery and plant, used in semi-conductor industry
15%
Block 3
Block 4 Block 5 Block 6 Block 7
Block 8
Plant and machinery - Block includes the following p Aeroplanes. It also includes commercial vehicle acquired after September 30, 1998 but before April 1, 1999 and put to use before April 1, 1999 and life saving medical equipment and plant and machinery which satisfy conditions of rule 5(2). p Containers made of glass or plastic used as refills and the following a. new commercial vehicle acquired during 2001-02 and put to use before March 31, 2002 for the purpose of business or profession; b. machinery/plant used in weaving, processing and garment sector of textile industry which is purchased under Technology Upgradation Fund Scheme during April 1, 2001 and March 31, 2004 and put to use up to March 31, 2004; and c. new commercial vehicle which is acquired during January 1, 2009 and September 30, 2009 and is put to use before October 1, 2009 for the purposes of business or profession. p Computers7 including computer software and new commercial vehicle acquired in replacement of condemned vehicle of 15 years of age which is put to use before April 1, 1999 (if acquired during October 1, 1998 and March 31, 1999) or before April 1, 2000 (if acquired during 1999-2000). It also includes books (other than annual publications) owned by a professional. It also includes gas cylinders; plant used in field operations by mineral oil concerns; direct fire glass melting furnaces. p Energy saving devices; renewal energy devices; rollers in flour mills, sugar works and steel industry (however, it does not include windmills or any special device, which run on windmills installed after March 31, 2012 but before April 1, 2014). p Air pollution control equipment; water pollution control equipment; solid waste control equipment, recycling and resource recovery systems; machinery acquired and installed on or after September 1, 2002 in a water supply project or water treatment system or for the purpose of providing infrastructure facility; wooden parts used in artificial silk manufacturing machinery; cinematograph films, bulbs of studio
40%
10%
20% 30%
40%
5. It may be noted that block of assets means assets of all units of the assessee having the same rate of depreciation and not assets of only one unit. 6. This block is applicable only when the assessee is in the business of hiring out its/his buses, lorries or taxies. If lorries are used by a timber merchant for delivery of goods to his customers, this block is not applicable even if transportation income is included in business income. 7. Printers, scanners, NT server, UPS, router, are part of computer and eligible for depreciation at the rate of 40 per cent. However, EPABX and mobile phones are not computers.
Para 81.3
Profits and gains of business or profession
Number
188
Nature of asset
Rate of depreciation
lights; wooden match frames; some plants used in mines, quarries and salt works; and books (being annual publications) owned by assessees carrying on a profession or books (may or may not be annual publications) owned by a person carrying on business in running lending libraries. Block 9
Plant and machinery - Motor buses, motor lorries and motor taxis (used in a business of running them on hire) acquired on or after August 23, 2019 but before the April 1, 2020 and is put to use before April 1, 2020
45%
Block 10
Intangible assets (acquired after March 31, 1998) - Know-how, patents, copyrights, trademarks, licences, franchises and any other business or commercial rights of similar nature but not being goodwill of a business or profession8
25%
Note : In section 2(11), it is not necessary that the asset should be used for purpose of business during the year under consideration. The user of the asset is important for the purpose of actual allowability of depreciation, but not for determining whether the asset falls within the block of assets or not.
81.3-4 WRITTEN DOWN VALUE [SEC. 43(6)] - Written down value for the assessment year 2026-27 will be determined as under : Step 1 Step 2 Step 3
Find out the depreciated value of the block on April 1, 2025. To this value, add actual cost [see para 81.3-7] of the asset (falling in the block) acquired during the previous year 2025-26. (whether put to use or not) From the resultant figure, deduct money received/receivable (together with scrap value) in respect of that asset (falling within the block of assets) which is sold, discarded, demolished or destroyed during the previous year 2025-26.
p Other points - The following points should be noted 1. The resulting amount is the written down value of the block of assets on March 31, 2026 relevant for the assessment year 2026-27. 2. The amount of reduction under Step 3 cannot exceed the value of assets computed under Step 1 and Step 2. 3. One may determine written down value for any other assessment years on similar basis. 4. In some cases, computation of written down value is based upon notional figures. 5. Under Step 3, only actual money (received or receivable in cash or by cheque or draft) is deductible. In other words, any other things or benefit (which can be converted in terms of money) cannot be deducted under Step 3. Value to be reduced from the block of asset shall be the actual sale consideration received and not the fair market value of the asset transferred. 6. In the case of a slump sale, the method of computation of the amount deductible under Step 3 is different.
Problems 81.3-4P1 Compute the written down value from the following information for the assessment year 2026-27 Blocks of asset
1. Plant A, B and C .................................................................................................... 2. Plant D and E ......................................................................................................... 3. Plant F .................................................................................................................... 4. Building A, B, C and D .......................................................................................... 5. Building E, F and G ............................................................................................... 6. Building H, I, J and K ............................................................................................
Rate of depreciation (per cent)
Depreciated value on April 1, 2025 Rs.
15 40 30 10 5 40
10,40,000 2,60,000 70,000 10,90,600 7,10,200 16,90,000
8. Stock exchange membership card, licence granted by a Government to collect toll, website, non-compete rights acquired by payment of noncompete fees, licences/approvals/registrations acquired for operating hotels, etc., are qualified for depreciation under this provision. Goodwill of a business/profession is not eligible for depreciation under section 32 from the assessment year 2021-22 onwards (even if goodwill is purchased from an outsider). Depreciation rate cannot be more than 40 per cent in the case of an assessee who has to pay tax under the new tax regime.
189
Depreciation allowance
Para 81.3
After April 1, 2025, the company purchases the following assets Assets
Date of purchase
Rate of depreciation (per cent)
Actual cost Rs.
Plant G Plant H Furniture Car Building L Computer Copyright
April 6, 2025 May 11, 2025 June 6, 2025 July 7, 2025 September 26, 2025 September 27, 2025 September 30, 2025
30 15 10 15 5 40 25
6,000 18,000 56,000 2,56,000 7,28,700 90,000 17,50,000
The following assets are transferred Assets Plant B Plant D Building L
Date of sale December 20, 2025 January 31, 2026 March 6, 2026
Sale consideration Rs. 25,10,900 12,000 6,00,000
Solution : Block 1 - Plant and machinery (rate of depreciation 15%) Rs. Depreciated value of the block consisting of Plants A, B and C ...................................................................................... 10,40,000 Add : Actual cost of Plant H and car ................................................................................................................................. (+)2,74,000 Total .......................................................................................................................................................................................... 13,14,000 Less : Sale proceeds of Plant B [although sale proceeds of Plant B is more than Rs. 13,14,000, amount to be deducted is restricted to Rs. 13,14,000] .................................................................................................. ( )13,14,000 Written down value of the block consisting of Plants A, C and H on March 31, 2026 ........................................................... Nil Block 2 - Plant and machinery (rate of depreciation : 40%) Depreciated value of the block consisting of Plants D and E on April 1, 2025 ............................................................... 2,60,000 Add : Cost of computer purchased during 2025-26 ................................................................................................................ 90,000 Less : Sale proceeds of Plant D sold during 2025-26 .......................................................................................................... ( )12,000 Written down value of the block consisting of Plant E on March 31, 2026 ..................................................................... 3,38,000 Block 3 - Plant and machinery (rate of depreciation : 30%) Depreciated value of the block consisting of Plant F on April 1, 2025 ................................................................................ 70,000 Add : Cost of Plant G purchased during 2025-26 ...................................................................................................................... 6,000 Written down value of the block consisting of Plants F and G on March 31, 2026 ........................................................... 76,000 Block 4 - Building (rate of depreciation : 10%) Depreciated value of the block on April 1, 2025 consisting of Buildings A, B, C and D ............................................. 10,90,600 Written down value on March 31, 2026 .............................................................................................................................. 10,90,600 Block 5 - Buildings (rate of depreciation : 5%) Depreciated value of the block consisting of Buildings E, F and G .................................................................................. 7,10,200 Add : Cost of Building L purchased during 2025-26 ............................................................................................................ 7,28,700 Less : Sale proceeds of Building L sold during 2025-26 .................................................................................................. ( )6,00,000 Written down value of the block consisting of Buildings E, F and G on March 31, 2026 ............................................. 8,38,900 Block 6 - Building (rate of depreciation : 40%) Depreciated value of the block consisting of Buildings H, I, J and K on April 1, 2025 ................................................ 16,90,000 Written down value ................................................................................................................................................................ 16,90,000 Block 7 - Furniture (rate of depreciation : 10%) Depreciated value on April 1, 2025 ................................................................................................................................................. Nil Add : Cost of furniture purchased during 2025-26 ................................................................................................................. 56,000 Written down value on March 31, 2026 ................................................................................................................................... 56,000 Block 8 - Copyright (rate of depreciation : 25%) Depreciated value on April 1, 2025 ................................................................................................................................................. Nil Add : Cost of copyright purchased during 2025-26 ........................................................................................................... 17,50,000 Written down value on March 31, 2026 .............................................................................................................................. 17,50,000
Para 81.3
Profits and gains of business or profession
190
81.3-5 COMPUTATION OF NORMAL DEPRECIATION ALLOWANCE - Depreciation allowance is of two types normal and additional. The rule for normal depreciation is given in this para. Additional depreciation is covered in para 81.3-6. To ascertain the amount of normal depreciation, one should find out the following : 9 p Written down value of block of assets [see para 81.3-4] . p Rate of depreciation [see para 81.3-3]. 81.3-5a RULE OF COMPUTATION - Normal depreciation is calculated as follows Written down value of the block of asset on the last day of the previous year × Rate of depreciation p For instance, if written down value of a block of assets [i.e., buildings, rate of depreciation : 10 per cent] is Rs. 3,19,400 for the previous year 2025-26, depreciation will be Rs. 31,940 for the said previous year and the depreciated value of the block on April 1, 2026 will be Rs. 2,87,460 (i.e., Rs. 3,19,400 Rs. 31,940)]. The aforesaid rule is, however, not applicable in the cases mentioned in para 81.3-5b. p Where an assessee incurs any expenditure for acquisition of a depreciable asset in respect of which a payment (or aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft or use of electronic clearing system through a bank account (or through prescribed electronic mode10), exceeds Rs. 10,000, such payment shall not be eligible for depreciation. 81.3-5b EXCEPTIONS TO THE RULE - In the cases given below, the above-mentioned rule is not applicable :
Exception one Exception two Exception three Exception four Exception five
If written down value of the block of asset is reduced to zero, though the block is not empty If the block of assets is empty or ceases to exist on the last day of the previous year (though the written down value is not zero) In the case of imported cars In the case of succession or amalgamation or business re-organisation or demerger If in the first year in which an asset is acquired, it is put to use for less than 180 days
See para 81.3-5b1. See para 81.3-5b2. See para 81.3-5b3. See para 81.3-5b4. See para 81.3-5b5.
81.3-5b1 When the written down value of a block of asset is reduced to zero - No depreciation is admissible where written down value has been reduced to zero, though the block of assets does not cease to exist on the last day of the previous year. Provisions illustrated On April 1, 2025, depreciated value of a block of assets (rate of depreciation : 15 per cent) is Rs. 80,000. It consists of Plants A and B. The assessee purchases Plant C (rate of depreciation: 15 per cent) during the previous year 2025-26 for Rs. 30,000 and sells Plant A on May 3, 2025 for Rs. 1,80,000. In this case on March 31, 2026, the assessee has Plant B and Plant C in the block of the assets, though the written down value of the block is zero. No depreciation will be admissible for the previous year 2025-26 (i.e., the assessment year 2026-27) as is evident from the computations given below : Rs. Depreciated value of the block consisting of Plants A and B 80,000 Add : Actual cost of Plant C 30,000 Total 1,10,000 Less : Sale consideration of Plant A [though the plant is sold for Rs. 1,80,000, the amount of reduction cannot exceed Rs. 1,10,000 ; the difference of Rs. 70,000 is short-term capital gain under section 50(1)11 1,10,000 Written down value of the block consisting of Plants B and C Nil Less : Depreciation for the previous year 2025-26 Nil Depreciated value of the block consisting of Plants B and C on April 1, 2026 Nil
81.3-5b2 If block of assets ceases to exist - If a block of assets ceases to exist or if all assets of the block have been transferred and the block of assets is empty on the last day of the previous year, no depreciation is admissible in such case. 9. In a few cases, one has to take actual cost in the case of an undertaking engaged in generation or generation and distribution of power [see para 81.3-9]. 10. As per rule 6ABBA, prescribed modes of electronic payment are : (a) credit card, (b) debit card, (c) net banking, (d) IMPS (Immediate Payment Service), (e) UPI (Unified Payment Interface), (f) RTGS (Real Time Gross Settlement), (g) NEFT (National Electronic Funds Transfer) and (h) BHIM (Bharat Interface for Money) Aadhaar Pay. 11. For section 50, one may refer to para 101.3.