INTRODUCTION

Income can be classified into Three categories as per provisions of this

Act. These categories are :
I.

Income Forming part of Total Income and subject to Tax :

--These incomes are treated u/s 14 to 80 of the Act and have been

explained in detail in Part II of this book.

II

Incomes forming part of Total Income but entitled to Rebate

or Relief :
-- These incomes are given u/s 86.
III

Income Exempted from Tax

-- These incomes do not form part of total income either fully or

partially.
EXEMPTED INCOMES
Section 10 of Income Tax Act has given a long list of incomes which are
totally exempt from tax and so these incomesare not included in
the gross total income of the assessee. In other words, such incomes are
totally Tax-Free.
While calculating Total Income in any previous year of any person,
any income coming under the following clauses shall be exempted.

 Agricultural Income fully exempted.

10(1)

Any sum received from Hindu Undivided Family (HUF) 10(2)

Share of Income from a Partnership Firm
Interest on Government Securities for non-resident.

Leave Travel Concession provided by an employer to

his Indian Citizen employee

Exemptions for Foreigners.

(i) Passage Money
(ii) Remuneration of officials of Foreign embassies,
High Commissions, Legations, Commissions,
Consultants or Trade Representatives.
(vi) Remuneration of Employees of certain Foreign
Enterprises.
(via) Remuneration of Employees of Foreign
Philanthropic Institutions
(viia) Salaries of Technician on scientific research of
the Government , local Authorities or Special
Corporations.
(viii) Salaries to non-residents employed on a foreign
ship
(ix) Salaries to non-resident teachers
(x) Income of individual engaged in research work in
certain cases.

10(2A)
10(4) &
4(B)
10(5)
10(6)

(xi) Remuneration to certain trainee foreigners.

Foreign Companies receiving approved royalty or Fees

for Technical Services.
Income Tax paid by Government or companies on
behalf of certain non-residents.

10(6A)

10(6B)

Income Tax paid by an Indian Company engaged in the

business of operation of aircraft on behalf of

10(6BB)

Government of foreign State or a foreign enterprises.

Income of all notified foreign company providing
services within or outside India in any project connected 10(6C)
with the security of India.

Foreign Allowance granted by the Government of India

to its employees posted abroad.

10(7)

Employees of Foreign Countries working in India under

Cooperative

Technical

Assistance

Programme

including income of any member of the family of

10(8) & (9)

employees.

Remuneration

Fees

received

by

non-resident 10(8A), (8B)

consultants and their foreign employees

Death cum Retirement Gratuity :

Gratuity is a retirement benefit. It is generally payable at
the time of cessation o0f employment and on the basis
of duration of service. Tax treatment of Gratuity is given
below :
Status if employee

Whether Gratuity is

& (9)
10(10)

taxable
Government employee
Non-Government
employee covered by the
Payment of Gratuity Act,
1972.
Non-Government
employee not covered by
the Payment of Gratuity
Act, 1972
For other employees :

It is fully exempt from

taxu/s10(10)(i)
It is fully or partially
exempt from tan u/s10(10)
(ii)

It is fully or partially
exempt from tan u/s10(10)
(iii)
Exempt up to least of the
following :
1. 15 days salary ( 7
days salary in the
case of employees
of a seasonal
establishment )
based on salary last
drawn for each year
of service (i.e. 15
days salary X
Length of service).
2. Rs. 3,50,000
3. Actual Gratuity

received.
Commuted value of Pension received :
1. The full amount is Exempted if it is received from
the Government , a Local Authority or a Statutory
corporation
2. It does not exceed the following limit if any
payment in commutation of person receive under
any scheme from any other employer:

10(10A)

1. in case where the employee receives any

Gratuity, then commuted value of 1/3 rd of
Pension he receive ; and
2. in any other case the commuted value
of such pension.
Amount received as leave encashment or retirement : 10(10AA)
1. Central & State Government Employee any
payment received as leave salary in respect of the
earned leave at his credit at the time of his
retirement shall be fully exempt
2. Other employees any payment received as the
cash equivalent of the leave salary at his credit at
the time of superannuation shall be exempt up to
least of the following four amounts :

3. Actual amount received.

4. Amount calculated at average salary of 10 months
5. Cash equivalent to Leave Salary due at the time
of retirement.
6. Notified Limit Rs.3,00,000
Excess of amount received over the least of the
above shall be taxable.
Retrenchment

compensation

paid

to

workmen : Compensation received by a workman at the

time of retrenchment is exempt from tax to the extent of
the lower of the following :
1. Amount calculated in accordance with the
provisions of Sec 25F(b) of the Industrial Dispute

10(10B)

Act, 1947 ; or
2. Such amount as notified by the Government ( i.e.
Rs.5,00,000 ) ; or
3. The amount received.
Payment on Voluntary Retirement of employees of
public sector company, any other company, Authorities
of Gove. , Local Authority or Co-operative Society, 10(10C)
specific

university,

IIT,

notified

institution

of

management.
Any sum received under Life Insurance Policy , 10(10D)

including the sum allocated by way of Bonus on such

policy.
Payment from Statutory Provident Fund : Any
amount withdrawn from the Statutory Provident Fund
is exempt from tax. This provision is applicable on

10(11)

Public Provident Fund also.

Payment from Recognized Fund : the accumulated
balance due and payable to an employee in case of a 10(12)
recognized provident fund.
Payment from an approved superannuation fund
made (i) to the legal heirs on the death of a beneficiary;
or
(ii)to an employee in lieu of or in commutation
of an annuity on his retirement at or after a specified age
or on his becoming incapacitated prior to such
retirement; or
(iii)by way of refund of contributions on the
death of a beneficiary; or
(iv)by way of refund of contributions to an
employee on his leaving the service in connection with
which the fund is established otherwise than by
retirement at or after a specified age or on his becoming
incapacitated prior to such retirement, to the extent to
which such payment does not exceed the contributions
made prior to the commencement of this Act and any

10(13)

interest thereon;]
House Rent Allowance :
(a) Persons living in Rented House Any amount of
House Rent Allowance (HRA) received by the
employee form his employer is exempt up to the least of
the following limits :
(i) excess of actual Rent paid over 10% of Salary.
(ii) an amount equal to 50% of Salary where such
accommodation is situated in any one of the following 10(13A)
places, namely, Bombay, Calcutta, Delhi, Chennai and
40% of Salary in other towns ; or
(iii) actual amount of House Rent Allowance received.

(b) Person living in their own houses or not paying

any rent but getting HRA : Full HRA received is
taxable. NO exemption under this provision.
Any

allowance

given

for

meeting

Business

Expenditure :
any such special allowance or benefit, not being in the
nature of a perquisite, specifically granted to meet
expenses wholly, necessarily and exclusively incurred in 10(14)
the performance of

the

duties

of

an

office

or

employment of profit, to the extent to which such

expenses are actually incurred for that purpose;

 Scholarships granted to meet the cost of education;

10(16)

Allowance of M.P. / M.L.A. / or M.L.C.

any income by way of(i) daily allowance received by any Membership of
Parliament (MP) or of any State Legislature or of any
Committee thereof;
(ii) any allowance received by any person by reason of

10(17)

his membership of Parliament under the Members of

Parliament (Constituency Allowance) Rules, 1986;
(iii) any constituency allowance received by any person
by reason of his membership of any state Legislature
under any act or rules made by the state legislature
Award instituted by Government :
any payment made, whether in cash or in kind,(i) under any award instituted in the public
interest by the Central Government or any State
Government or instituted by any other body and
approved by the Central Government in this behalf shall

10(17a)

be fully exempted; or
(ii)any other reward given by the Central
Government or any State Government for such purposes
as may be approved by the Central Government in this
behalf in the public interest shall also be fully
exempted.;]
Payment received by the winners of Vir Chakra etc.

10(18)

any income by way of(i)pension received by an individual who has

been in the service of the Central or State Government
and has been awarded "Param Vir Chakra" or "Maha Vir
Chakra" or "Vir Chakra" or such other gallantry award
as the Central Government may approved ;
Family Pension received by family members of
Armed Force :
Family pension received by the widow or children or
nominated heirs, as the case may be, of a member of the

10(19)

armed forces (including para-military forces) of the

Union, where the death of such member has occurred in
the course of operational duties, in such circumstances
and subject to such conditions, as may be prescribed;
Income of a local authority : The following types of
incomes in the hands of a local authority are exempt
from tax--1. Income from house property,
10(20)
2. Capital gains or
3. Income from other sources or from a trade or
business carried on by it which accrues or arises
from the supply of a commodity or service
Any income of an approved Scientific Research
Association :

10(21)

 Income of News Agency :

any income of such news agency set up in India solely
for collection and distribution of news as the Central 10(22B)
Government may, by notification in the Official Gazette,
specify in this behalf:
Income of some Professional Institutions :
any income of an association or institution established in
India having as its object the control, supervision,
regulation or encouragement of the profession of law,

10(23A)

medicine, accountancy, engineering or architecture or

such other profession as the Central Government may
specify in this behalf, from time to time, by notification
in the Official Gazette
Income of a

Fund set-up for the welfare of

employees or their dependents :

any income received by any person on behalf of a fund
established, for such purposes as may be notified by the 10(23AAA)
Board in the Official Gazette, for the welfare of
employees or their dependants and of which fund such
employees are also members
Income of a Pension Fund set up by LIC or other 10(23AB)
Insurer :
any income of a fund set up by the Life Insurance
Corporation of India (LIC) on or after the 1st day of
August, 1996 175[or any other insurance under a
pension scheme],-

(i)to which contribution is made by any person

for the purpose of receiving pension from such fund;
(ii)which is approved by the Insurance
Regulatory and Development Authority Act, 1999.
Income of Institutions established for development of
Khadi and Village Industries :
any income of an institution constituted as a public
charitable trust or registered under the Societies
Registration Act, 1860 (21 of 1860), or under any law
corresponding to that Act in force in any part of India, 10(23B)
and existing solely for the development of khadi or
village industries or both, and not for the purposes of
profit, to the extent such income is attributable to the
business of production, sale, or marketing, of khadi or
products of village industries:
Income of State Level Kahdi Village Industries
Board :
any income of an authority (whether known as the
Khadi and Village Industries Board or by any other
name) established in a State by or under a State or
Provincial Act for the development of Khadi or Village
Industries in the State.

10(23BB)

Income of certain Authorities set up to manage

Religious
maths,

and

Charitable

temples,

synagogues, agiaries )

gurdwaras,

Institutions (including
wakfs,

churches,

10(23BBA)

 Income of Insurance Regulatory and Development

Authority :
any

income

of

the

Insurance

regulatory

and

10(23BBE)

Development Authority established under of the

Insurance Regulatory and Development Authority Act,
1999]
Any Income received by a person on behalf of
following Funds:
any income received by any person on behalf of(i) the Prime Minister's National Relief Fund; or
(ii)the Prime Minister's Fund (Promotion of Folk Art);
or
(iii)the Prime Minister's Aid to Students Fund; [or]
(iiia)

the National Foundation for Communal

Harmony; or

10(23C)

(iiiab) any university or other educational institution

which is wholly or substantially financed by the
Government; or
(iiiac)any hospital or other institution which is
wholly or substantially financed by the Government; or
(iv) any other fund or institution established for
charitable purposes which may be notied by the Central
Government in the Official Gazette
Income of Mutual Fund :

10(23D)

any income of
(i) a Mutual Fund registered under the Securities and
Exchange Board of India Act, 1992 or regulations made
there under;
(ii) such other Mutual Fund set up by a public sector
bank or a public financial institution or authorised by
the Reserve Bank of India and subject to such
conditions as the Central Government may, by
notification in the Official Gazette, specify in this
behalf]

Income of investor protection fund

Income of Credit Guarantee Funds Trust for Small
Industries

10(23EA)
10(23EB)

Income of Investor Protection Fund by way of

contributions from commodity exchange and the 10(23EC)
members thereof.
Income by way of Dividend or Long-Term Capital
Gain of venture Capital Fund / undertaking.
Income of Registered Trade Unions :
any income chargeable under the heads
(i) "Income from house property" and
(ii) "Income from other sources" ofThe Trade Union must be a registered union within the
meaning of the Trade Unions Act, 1926 formed

10(23FA)
10(24)

primarily for the purpose of regulating the relations

between workmen and employers or between workmen
and workmen;
Income of Provident and Superannuation Fund :
Any income received by a person on behalf of approved
Gratuity Fund, Statutory Provident Fund, approved coal- 10(25)
mines provident funds, Recognized Provided Fund and
Approved Superannuation Fund.
Income of Schedule Tribe Members :
Certain type of incomes of the members of Schedule
Tribes living in tribal areas are exempted from tax of
those incomes which accrue or arise to him :

10(26)

1. from any source in the areas

2. by way of dividend or interest on securities
Income of Child clubbed u/s 64(1A) :
In case income of a minor child is clubbed with the
income of his parent, the parent can claim exemption

10(32)

upto actual income of child clubbed or Rs.5,000

whichever is less in respect of each minor child whose
income is included.
NCOME UNDER THE HEAD" PROFITS AND GAINS OF
BUSINESS OR PROFESSION AND COMPUTATION "

INCOME UNDER THE HEAD PROFITS AND GAINS OF

BUSINESS OR PROFESSION AND ITS COMPUTATION.
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 perquisite, whether convertible into money

or not, arising from business or the exercise of a profession.

e.
f.

Any profit on transfer of the duty free replenishment certificate.

Any profit on the transfer of the Duty Entitlement Pass Book Scheme.

g.

Export incentive available to exporters.

h.

Any interest, salary, bonus, commission or remuneration received by a

partner from firm.

i.

Any sum received for not carrying out any activity in relation to any
business or not to share any know how , patent, copyright, trademark etc.

j.

Any sum received under a Keyman insurance policy including bonus.

k.

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 applicable from the assessment year 2010-11
onwards

l.

Profit and gains of managing agency

m. Income from speculative transaction.

In view of section 2(13) business includes any (a) trade, (b) commerce,
(c) manufacturer 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 with a view to earning profit. Production of goods from raw
material, buying and selling of goods to make profit and providing
services to others are different forms of business, profits arising
therefrom are, therefore, chargeable to tax under the head Profits and
gains of business or profession. The term business is a word of wide
import and in fiscal statutes in must be constructed in a broad rather than
a restricted sense.

Business income not taxable under the head Profit 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 :1.

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.

2.

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
as the recipient of dividends is a dealer-in shares. However, dividend
received from an Indian company is not chargeable to tax in the hands of
shareholders.

3.

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.)
One has to keep in view the general commercial principles while
determining real and true profits of a business or profession. For instance,
capital receipts are not taxable. Profits can arise only out of a trading
receipt. Even if a transaction is on trading or revenue account, only its
profit element is taxable and not the entire receipt.

TRADING LOSS
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. A
trading loss is allowable as deduction while computing business income
only in the year in which it is incurred. Moreover, in order to avail
deduction of trading loss, it should have been incurred by the assessee in
the character of a trader and the same should fall on him in that character.
As capital receipts are not chargeable to tax as business income , capital
losses are not deductible while computing under the head Profit and
gains of business or profession . In other words, business losses can be
allowed as deduction only if the following conditions are satisfied :
1.

Losses should be revenue in nature.

2.

Losses should be incurred during the previous year.

3.

Losses should be incidental to the business or profession carried on by

the assessee.

4.

It should not be notional or fictitious.

5.

It should have been actually incurred and not merely anticipated to

incur in future.

6.

There should not be any, direct or indirect , restriction under the Act
against the deductibility of such loss.

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 assesses 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

( may be 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 assesses for properly
carrying out of contract for supply of commodities.
11. Loss on account of misuse 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 assesses
company to its 100 percent subsidiary company.
19. Loss incurred by a holding company which has guaranteed a loan taken
by its subsidiary company.

Instances of losses not deductible from business income

1.

Loss which is not incidental to trade or profession, carried on by the

assesses.

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.

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.

Loss relating to any business or profession discontinued before the

commencement of previous year.

9.

Loss arising as a result of capture and subtraction of illegal stock in

trade is allowable as a business loss against income from illegal
business.

What is the scheme of business deductions / allowances?

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 profits or gains of a business or profession. Loss of revenue
nature, which is incidental to business, is allowable as deductions while
computing taxable business income, even though it is not codified
specially under any of these sections, Section 40, 40A, and 43B give a list
of expenses which are not deductible.
It will be useful if we keeps in view the following principles governing
admissibility of these deductions under section 30 to 43D:1.

Onus of proof: - It is the responsibility of the assessee to prove that a

particular deduction is admissible in his case.

2.

Allowances are cumulative: - The allowances laid down under sections

30 to 37 are cumulative and not alternative. For example, 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.

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 is however, subject to one exception.

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. Section 41 and 176 bring
into charge certain receipts relating to a business or profession, not in
existence during the previous year.

5.

Expenditure should have been incurred in connection with assessees

business: -An expenditure is allowable as deduction in computation of
taxable income only if it is incurred for the purpose of assessees own
business. For example, 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.

6.

Benefit of expenditure may extend to somebody else:- If the

expenditure is incurred primarily in connection with assessees own
business. It would still be allowed as deduction even if it endured to the
benefit of someone else. For example, insurance premium, repairs and
other expenditure incurred on leased out business assets are deductible
from the income of the lesser; even though the expenditure endures to the
benefit of the lessee.

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.

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 quarried,
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.

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 applied only in respect of business carried on
during the previous year. As consequences, 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
section 30 to 37, even if it is incurred before the actual commencement of
business.
10. 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.
11. No allowance in respect of non assessable business:- Section 28 applies
only in respect of business profits which are assessable under the Income
Tax Act. Therefore, the question of deduction of expenditure under
section 30 to 37 arises only if profits of a business are assessable to tax
under the Act. For example, if the assessee carries on a non taxable
business such as agricultural income in India, then no deduction on
account of expenditure relating to such non taxable business can be
claimed.
12. 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.
13. No allowance in respect of anticipated losses:- Under the present
scheme of the Act anticipated loss cannot be deducted, though the loss is
certain. In other words, a loss which is neither suffered nor incurred in the
previous year is not deductible against the actual receipts of the year. The
only exception to this rule is that stock in trade may be valued at cost or
market value whichever is lower.
14. No deduction in respect of depreciation of investment:- A deduction in
respect of depreciation of investment in shares and securities is not
allowable.
15. 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 section may fall either under
the category of capital expenditure or revenue expenditure.
What are specific deductions under the Act?
Section 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:

1.

Rent, rates, taxes, repairs and insurance for building (Sect 30):- Under
the section 30, the following deductions are allowed in respect of rent,
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.

Applicable to section 43B:- Land revenue , local rates or municipal

taxes are deductible subject to the conditions as specified by section 43B .

Judicial rulings:- The following judicial ruling one should keep in

view 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.
A fluctuating item like a share in profit cannot be treated as rent.
Painting the outside of a house is repair.

2.

Repairs and insurance of machinery, plant and furniture (Sect 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.

Current can not 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.

3) Depreciation allowance (Sect 32):- Depreciation shall be

determined according to the provision of section 32.
4) Investment allowance (Sect 32A)- Investment allowance is not
available.
5) Investment deposit account scheme (Sect 32AB) :- Deduction
under section 32AB is not available form the assessment year 1991-92
onwards.
6) Tea / coffee / rubber development account (Sect 33AB):- An
assessee can claim deduction under section 33AB as per following
conditions :a) The assessee must be engaged in tea, coffee , or rubber
plantation.
b) It must make a deposit in special account.
c) The deposit should be made within specified time limit.
d) The accounts of the assessee should be audited.
7) Site restoration fund (Sect 33ABA) :- An assessee can claim
deduction under section 33ABA as follows:a) The assessee must be engaged in production of petroleum /
natural

gas in India.

b) The assessee has an agreement with the Central Government.

c) It must make a deposit in special account.
d) The deposit should be made within specified time limit.
e) The accounts of the assessee should be audited.
8) Reserves for shipping business ( Sec. 33AC ) :- No deduction under
section 33AC is available from the assessment year 2005-06.
9) Expenditure on scientific research (Sec 35) :- The term scientific
research means any activity for the extension of knowledge in the fields
of natural or applied sciences including agriculture, animal husbandry or

fisheries. With a view to accelerating scientific research, section 35

provides tax incentives.
10) Expenditure on acquisition of patent rights and copyrights (Sec 35A
):- For claiming deduction under section 35A, the following conditions
should be satisfied :a) The know-how, secret formula, designs and specifications are
either patent rights or copyrights.
b) The expenditure is of capital nature.
c) The expenditure is incurred on acquisition of the patents right /
copyrights.
d) Patents rights / copyrights are used for the purpose of business
or profession of the taxpayer
e) The capital expenditure is incurred prior to April 1, 1998.
If all the aforesaid conditions are satisfied, then deduction is
available under section 35A.
If all the aforesaid conditions are not satisfied then
a)

In respect of capital expenditure incurred on or after April 1, 1998 one

can claim depreciation under section 32.

b)

In respect of any other capital expenditure, no deduction is available.

c)

In respect of revenue expenditure, one can claim deduction under

section 37 (1).
11 ) Expenditure on know how ( Sec 35 AB ) :- If expenditure on
acquisition of

technical know how is incurred after March 31,1998,

depreciation is available under section 32. Now a days no deduction is

available under section 35AB.
12 ) Expenditure of telecom licence fees ( Sec 35 ABB ) :- the
provisions of section 35ABB are given below conditions :a)

The expenditure is capital in nature.

b)

It is incurred for acquiring any right to operate telecommunication

services.

c)

The expenditure is incurred either before the commencement of

business or thereafter at any time during any previous year.

d)

The payment for the above has been actually made to obtain licence.
13) Expenditure on eligible projects or scheme (Sec 35 AC) ;Deduction is available under section 35AC for promoting social and
economic welfare or uplift of the public.
14) Deduction in respect of expenditure on specified business ( Sec
35AD ) :- Section 35AD has been inserted with effect from the
assessment year 2010-11 to provide for investment linked tax incentive.
15) Payment to association and institutions for carrying out rural
development programmes (Sec 35CCA ) :- Section 35CCA provides
deduction of sums paid by an assessee to
a) any association or institution to be used for carrying out any
programme of rural development approved before March 1, 1983. ( Sec
35CCA (1) (a) )
b) an association or institution which has its object the training of
persons for implementation of a rural development programme approved
before March 1, 1983 (sec 35CCA (1) (b) )
c) the National Fund for Rural Development set up by the
Government.(sec 35CCA (1)(c) )
d) the National Urban Poverty Eradication Fund set up and notified
by the Central Government.

16) Amortisation of preliminary expenses (Sec 35D );- Certain

preliminary expenses are deductible under section 35D.

INCOME UNDER THE HEAD PROFITS AND GAINS FROM

BUSINESS AND PROFESSION
AND ITS COMPUTATION

1. NATURE OF INCOME :- Such Income Includes income from: Business,

Vocation and
Profession carried on by the assessee of whatsoever nature.
It is to be noted that the term income included losses
However Rental income in case of dealer, dividend on shares by
a dealer, winning from lotteries, etc. Are however not taxable
under this head.
2. BASIS OF CHARGEABILITY: - Any Business carried by the assessee
at any time during the previous year would attract tax provisions
under this in the assessment year. The following are usual types of
income under this head: a) Export incentives
b) Interest, remuneration, salary taxed with the firm
c) Perquisite while rendering service
d) Compensation
e) Sum received for not carrying out any activity in relation to any

business
f) Income from keyman insurance policy
3. GENERAL RULE OF TAXATION DURING PREVIOUS YEAR: Business is to be carried on during previous year to tax amount under
income under the head profits and gains from business and
profession otherwise taxed under income under the head income
from other sources.
Exceptions:
Balancing charge in case of electricity companies,
Scientific research expenditure,
Recovery against bad debts,
Recovery of any amount pertaining to discontinued business.
4. GENERAL ALLOWANCES UNDER THIS HEAD: - Losses related to
embezzlement by employee allowed under this head, loss of raw mat,
work-in-progress, finished goods, by robbery, natural calamities
covered under this head.
5. SOME DISALLOWANCES UNDER THIS HEAD: -After closing
down, loss on capital asset or an item not incidental to business,
reserve , provisions, contingencies not allowed as deduction
6. METHOD OF ACCOUNTING: As regularly employed can be cash

basis or accrual basis subject to provisions of section 43B.

In these notes word paid means either on cash or actual paid as per
method of accounting.
7. CENVAT CREDIT: - The amount of cenvat credit is not included in
stock valuation, and net amount of tax payable in this respect is
debited to profit and loss account which is allowed as a deduction
subject to provisions of section 43B.
8. RENT, RATES, TAXES, INSURANCE FOR BUILDING ( Sec. 30): Any rent, rates, taxes, insurance premium paid by the assessee during
the previous year in respect of the place for business purpose would
be allowed as a deduction. However when we talk of repairs only
current repairs are allowed and capital repairs are not allowed as
depreciation is allowed on capital repairs.
9. REPAIRS AND INSURANCE OF PLANT, MACHINARY,
FURNITURE (Sec. 31): -Any amount spent on repairs, insurance or
hire charges, etc. On Plant, machinery, furniture by a business
organisation is allowed as a deduction.
10. DEPRECIATION (Sec. 32): - Depreciation can be classified into 3
parts to deal in the subject of income tax.
Normal Depreciation

Additional Depreciation
Depreciation on SLM basis in case
of electricity companies
NORMAL DEPRECIATON

NORMAL DEPRECIATON: Normal depreciation is provided on block of assets method on

WDV of the block as on every 31 March
Block of assets means group of assets having same rate of
depreciation and falling under a specific class of assets. These
assets are grouped together and depreciation is provided on the
block as illustrated in the coming points.
Assets have been classified into 4 parts for the purpose of
depreciation. These are:-

Depreciation is provided at rates specified in income tax act on

the Actual cost incurred by the assessee.
Formula for computation of WDV of the block:WDV at the beginning of year xxx

Add:Actual cost incurred on assets xxx

Acquired during the year
Less:Money Payable during the year xxx
Equals:WDV of the block at the end xxx
This is the value on which depreciation would be provided.
Here the term money payable means actual cash
recovered from sale of asset.
Depreciation is provided for whole year except when, Asset
is Acquired and put to use during the year for less than 180
days during the year , in this case the depreciation is limited
to 50% of total depreciation, but if same asset acquired
during earlier years but put to use this year and usage