Profits and Gains of Business or Profession

Profits and Gains of Business or Profession

Profits and gains of business or profession are an important part of the total income of an assessee. This is one of the most important heads of tax collection and, therefore, it is necessary to understand the terminologies used under this head.

Business

It refers to any economic activity that is carried out to earn profits. According to Section 2(13), business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Business is a continuous activity. However, profit from a single venture would also be assessable if the venture had come to an end after the entire cost had been recovered.

Profession

According to Section 2(36), profession includes vocation. Profession can be defined as any job requiring some thought, skill and expert knowledge. For example, lawyer, doctor, engineer, architect, etc., are professionals who earn their livelihood through expert skill sets. Therefore, profession denotes any activity which requires special skills to be performed.

Profits and Gains

The words ‘profits and gains’ are defined as the surplus by which the receipts from the business or profession exceed the expenditure necessary for the purpose of earning those receipts. These words should be understood to include losses also in such a manner that ‘profits and gains’ represent plus income while ‘losses’ represent minus income. Profit is recognised in terms of money or money’s worth like cash, etc. When profit is realised in any form of money other than cash, the cash equivalent must be taken as the value of income received in kind on the date of receipt.

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Profits and Gains of Business or Profession (Section 28)

Section 28 is the charging section of profits and gains of business or profession. The items of income which are chargeable to tax under the head ‘Profits and Gains of Business or Profession’ include the following as discussed in Table:

Nature of Income	Explanation
Profits and gains	Any profits and gains arising from any business or profession carried on by the assessee during the previous year.
Compensation due to or received in connection with specified cases under Section 28(ii)	Any compensatory payment due to or received by a person in relation to termination/ modification of his management in the affairs of an Indian company, termination/modification of his office in the affairs of an Indian company, termination/modification of conditions of any contract related to his business, etc.
Income earned by trade or similar association	Any income derived by a professional, trade or similar association from some specific services rendered for the members.
Export incentives	Export incentives derived by an assessee carrying on an export business, such as profit on sale of import entitlements, customs or excise duty repayable as a drawback, cash assistance against exports, and profit on transfer of duty-free replenishment certificate.
Benefits or perquisites from business or profession	Value of benefits or perquisites arising from business or profession, whether such perquisites are convertible into money or not.
Interest, bonus, commission, salary or remuneration received by partner	Any interest, bonus, commission, salary or remuneration due to or received by a partner from a firm is taxable in his hands to the extent it can be claimed as a deduction in the hands of the firm under Section 40(b).
Sum received under Keyman Insurance Policy	Any sum received under Keyman Insurance Policy including sums allocated by way of bonus.
Sum received on capital asset being discarded or demolished	Any sum, whether received or receivable, in relation to a capital asset being transferred, demolished, destroyed or discarded, for which whole expenditure has been allowed as deduction under Section 35AD.
FMV of inventory	The fair market value of inventory as on the date on which it is treated as or converted into a capital asset
Sum received under an agreement for not carrying out an activity	Any sum, whether received or receivable, in respect of an agreement for not carrying out any activity related to a business or profession, or for not sharing any know-how, copyright, patent, commercial right, etc.

Speculation Business

If speculative transactions are carried on by the assessee, which constitute a business, then such business has to be considered as a distinct and separate business for the purpose of computation of income under the head ‘Profits and Gains of Business or Profession’. Here, a speculative transaction means a transaction under which a contract for sale or purchase of commodities including shares and stocks is periodically and ultimately settled through modes other than actual delivery or transfer of such commodities or shares.

Moreover, in case where both speculative and non-speculative transactions are carried out by the assessee on a composite basis, it is imperative to determine the income or loss from such speculative business and non-speculative business separately and distinctly.

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Computation of Income From Profits and Gains of Business or Profession (Section 29)

While computing income under the head ‘Profits and Gains of Business or Profession’, certain important principles should be kept in mind, which are:

• Business carried on by the assessee: As per Section 28, the person who is in charge of running the business is always charged. Therefore, it is not of much importance whether the assessee is doing the business himself or through some of his employees, agents or managers.
  
  The important point is that the business should have been carried by the assessee at any time during the previous year, but not necessarily throughout the year or in the assessment year. The assessee must have the right to carry on the business.
  
  
• Tax is levied on aggregate income from all businesses/professions carried out by the assessee during the previous year: The net outcome of any business or profession carried out by an assessee is calculated separately. However, when tax is imposed, outcomes of all businesses are combined together and on that income, tax is levied.
  
  
• Speculation business: The speculation business of an assessee is kept separate. If there is a profit, it will be taxed with other business incomes. On the other hand, if there is a loss, it can be set off against the profit of speculation business and not with other business’s profit.
  
  
• Incurrence of expenditure: For claiming deductions under this head, expenditure should have been incurred during the previous year and incurred for the purpose of business or profession. Contingent expenses and expenses which are incurred prior to setting up of business are not allowed as deductions unless specifically prescribed under the Act.
  
  
• Tax on real owner: Under Section 28, the legal ownership needs to be considered with beneficial ownership. The income is taxable to a person to whom it actually accrues.
  
  
• Tax on real earned profits: Tax is imposed only on the previous year’s real earned profits. If there is an expectation of profit, tax cannot be levied only on notional basis or assumption. Therefore, profit can be taxed only if it actually occurs.
  
  
• Business/profession may be legal or illegal: The income from legal as well as illegal business is taxable under this head.
  
  
• Business/professional income to be computed for each previous year: The profits and gains must be taxed in relation to the previous year.
  
  
• Negative income from business/profession: As per the prescribed rules, negative income or loss from business/profession can be set off against other incomes.

As per Section 29, the profits and gains of a business or profession are computed in accordance with the provisions contained in Sections 30 to 43D. Apart from specific allowances and deductions stated in Sections 30 to 36, the act also permits the allowance of items of expenses under residuary Section 37(1) (which extends the allowance to items of business expenditure not covered by Sections 30 to 36).

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Deductions Expressly Allowable Under Section 30-43d

According to Section 29 of the Act, the income from profits and gains of business and profession is calculated after accounting for allowances/disallowances as per provisions of Sections 30-43D. Let us now study provisions of Sections 30-43D in the upcoming text.

Deduction for Rent, Rates, Repairs and Insurance of Building (Section 30)

An assessee is allowed a deduction for any amount paid by him in relation to rent, rates, repairs, taxes and insurance for buildings, provided the buildings are used for the purpose of business or profession. However, no expenditure is allowed as a deduction if the expenditure is of capital nature.

Where the assessee has occupied the premises as a tenant, then the amount of repair can be claimed as a deduction only if the assessee has undertaken to bear the cost of such repairs to the premises. If some part of the premises is sub-let by the assessee, then the amount of deduction under this section would be limited to rent paid by the assessee as reduced by rent recovered from sub-tenant.

Deduction for Repairs and Insurance of Machinery, Plant and Furniture (Section 31)

Section 31 of the Act relates to the deductions in respect of expenses incurred on the repairs and insurance of machinery, plant and furniture used for the purpose of business or profession. As per this Section, following deductions are allowed:

• amount spent on current repairs
  
  
• amount spent on premium paid with respect to insurance against risk of damage or destruction
  
  
• amount paid on account of current repairs shall not include any expenditure in the nature of capital expenditure

Deduction for Depreciation Including the Concept of Block of Assets (Section 32)

Section 32 of the Act relates to the deductions in respect of depreciation or diminution or exhaustion in the value of certain capital assets. Depreciation refers to a decrease in the value of an asset as a result of normal wear and tear or due to obsolescence. In other words, depreciation means depletion in real value of assets over a period of time. As per the Act, there are two methods for calculating the value of depreciation. They are the Straight Line Method (SLM) and the Written Down Value (WDV) Method.

Depreciation can be charged as a percentage of the value of asset by either of the above two methods. The WDV method is used for depreciation calculations under the income tax barring the power generation and distribution companies which use the SL method. Depreciation under Section 32(1) is mandatory. It means that even if the assessee does not claim deduction in respect of depreciation, it will still be allowed while calculating the total income of the assessee. In such a case, the assessing officer must allow depreciation as per the law.

For a thorough understanding of depreciation and its computation, you must be aware of the following concepts:

• Conditions for claiming depreciation
• Block of assets [Section 2(11)]
• Actual cost [Section 43(1)]
• Written Down Value (WDV) [Section 43(6)]
• Rates of depreciation [Appendix I (Rule 5)]
• Types of depreciation
• Unabsorbed depreciation [Sec. 32(2)]

Let us now discuss these concepts in detail:

Conditions for Claiming Depreciation

For claiming deduction in respect of depreciation, following conditions must be met:

• Assessee must be the owner of the asset. Fractional ownership of the asset is also recognised. In other words, the asset must be owned by the assessee who wants to claim depreciation. However, co-owners can also claim depreciation according to their ownership.
  
  There are certain exceptions to this condition as follows:
  
  
  • In case an assessee is occupying a space as a tenant for the purpose of carrying on business or profession, any capital expenditure incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.
    
    
  • Legal ownership is not mandatory for claiming deduction. Beneficial ownership is sufficient.
    
    
  • For hire purchase contracts, depreciation can be claimed by capitalising the value equivalent to cash price of the asset.
    
    
• Assessee must use the asset for the purpose of carrying on the business or profession. The asset must be used for the purpose of business or profession of assessee. In case where the asset is used for both professional and personal purposes, the portion being used for the business purpose may be allowed for depreciation. The use here refers to active use, passive use and potential use.
  
  
• Asset must be used during the relevant previous year. If an asset is used for less than 180 days in a year, only 50% of depreciation can be claimed. Also, if a factory or plant is closed down for a whole year, no depreciation can be claimed.
  
  
• No depreciation can be claimed on land.
  
  
• Asset must fall under the eligible class of assets which includes:
  
  
  • Tangible assets, such as buildings, machinery, plant and furniture.
    
    
  • Intangible assets, such as know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998.

Illustration 1: Mirabai Pvt. Ltd. manufactures the fuel injection systems. The company has constructed restrooms and a gym for its employees. Can the restrooms and gym be considered for claiming depreciation?

Solution: Yes, Mirabai Pvt. Ltd. can claim deduction with respect to depreciation of restrooms and gym under Section 32 because any asset (irrespective of whether it is earning income or not) that helps in business or profession can be claimed for deduction.

Block of Assets [Section 2(11)]

As per the Income Tax Act, depreciation is allowed on the block of assets and not on individual assets. The term ‘block of assets’ refers to a group of tangible assets or a group of intangible assets in respect of which the same percentage of depreciation is prescribed. Block of assets has been defined in clause (11) of Section 2.

Tangible assets include buildings, machinery, plant or furniture. Intangible assets include know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed.

Know-how refers to any information or technique that may assist in the manufacturing or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits. Each block is differentiated as consisting of tangible and intangible assets on the basis of its unique rate of depreciation.

Actual Cost [Section 43(1)]

Section 43 of the Act defines actual cost. Actual cost means the actual cost of the assets to the assessee, reduced by that portion of the cost (if any) as has been met directly or indirectly by any other person or authority.

With effect from 1st April, 2020 (Assessment Year 2021-2022), if any assessee incurs any expenditure for the acquisition of any asset, the payment of which has been done by modes other than by cheque or bank draft or electronic clearing system and such payment exceeds ₹10,000 in a day, then such expenditure will be ignored for determining the actual cost. Computation of actual cost of any asset acquired during the previous year is significant because the WDV of the relevant block of asset would be enhanced by such amount.

Written Down Value (WDV) [Section 43(6)]

The percentage of depreciation as prescribed for each block of assets is applied on WDV computed at the end of the previous year relevant to the assessment year. The WDV can be calculated by following certain steps as shown in Table:

Particulars	Amount (₹)
Opening value of the block of assets at the beginning of the previous year	XXX
Add: Actual Cost of assets (P&M) acquired during the previous year and belonging to the same block of assets	XXX
Total	XXX
Less: Monies payable to the assessee with respect to any asset in the block which is sold, discarded, demolished, destroyed, together with scrap value (if any)
WDV (for purpose of depreciation)	XXX
Depreciation at the prescribed percentage – actually allowed (Depreciation for the year, i.e., depreciation on opening block and depreciation on additional P&M)	XXX
Closing Value of block	XXX

For a block of assets, there is little or no depreciation in the following cases:

• If a block exists, and the written down value for the block is zero. The block value below zero implies short-term capital gain.
  
  
• If a block ceases to exist, but the written down value still exists. The block value is considered to be a short-term capital loss.
  
  
• If the asset was used for less than 180 days in the year when it was acquired, it will be charged at 50% of normal rate for depreciation and deprecation rate will be normal if the asset is then used in the subsequent year.

Rates of Depreciation [Appendix I (Rule 5)]

For the Assessment Year 2021-2022, the maximum ceiling of depreciation eligible for claim on assets has been restricted to 40% of the WDV. The block of assets and depreciation rates applicable for them are shown in Table:

A. TANGIBLE ASSETS
Asset Class	Asset Type	Depreciation
1. Buildings	Residential buildings except hotels and boarding houses Hotels and boarding houses Purely temporary erections such as wooden structures	5% 10% 40%
2. Furniture and fittings	Furniture – Any furniture/fittings including electrical fittings and air conditioners	10%
3. Plant and machinery	Motor car, motor cycle, bike, scooter other than those used in a business of running them on hire, mobile phone (General rate for plant and machinery is 15%) Motor buses/taxies/lorries used in a business of running them on hire Computer, laptop, computer software, printer, scanner, UPS and other peripheral devices Books owned by assessee, carrying on profession being annual publications Books owned by assessee, carrying on profession not being annual publications Books owned by assessee, carrying on business in running lending libraries Energy-saving devices, water-treatment plant, etc.	15% 30% 40% 40% 40% 40% 40%
B. INTANGIBLE ASSETS
Intangible assets	Know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature	25%

Illustration 2: An assessee determines the WDV of a particular trademark as ₹2,00,000. Find the amount of depreciation charged using the depreciation rate as applicable.

Solution: The rate of depreciation for intangible assets is 25%. Therefore, the depreciation charged is equal to 25% of WDV of trademark, i.e., 25% of ₹2,00,000 which comes down to ₹50,000.

Types of Depreciation

Two types of depreciation allowance that are allowed under the Income Tax Act are as follows:

• Normal depreciation for the block of assets: The usual depreciation that is allowed according to normal provisions of the Income Tax Act every year as per the prescribed rates.
  
  
• Additional depreciation: Even after providing for the normal depreciation, additional depreciation of 20% (or 35% in some prescribed cases) of the actual cost shall be allowed for new plant and machinery acquired and installed by an assessee who is engaged in:
  
  
  • manufacturing or production of articles or things; or
    
    
  • in the business of generation or generation, transmission and
    distribution of power

Cases Where Additional Depreciation is Not Allowed

• Ships and aircraft
• Second-hand machinery (machinery used earlier by other persons within or outside India)
• Any machinery installed in an office or residence including the guest house
• Any office appliances or road transport vehicles
• Any plant or machinery over which 100% depreciation is allowed

Cases Where Assets Are Put to Use for Less Than 180 Days in the Relevant Previous Year

In cases where a newly acquired asset is put to use for less than 180 days in a year, the assessee can claim only 50% of the total depreciation as deduction. Also, this restriction is also applicable in the case of additional depreciation of 20% or 35%, as the case may be. In the case of additional depreciation being charged at half of the rate, the rest half will be charged in the successive assessment year.

Illustration 3: The written down value of plant and machinery of IDD Ltd. on 1st April, 2020 is ₹40 crores. IDD purchases new plant and machinery worth ₹6 crores on 25th April, 2020. The purchase includes purchasing second-hand machinery equipment from the USA amounting to ₹2 crores. The company wants to increase its capacity from 1,200 tones per annum to 1,500 tones per annum. The new machinery commenced production from 1st December, 2020. Calculate the amount of depreciation allowed for A.Y. 2021-2022.

Solution:

Particulars	Amount (in ₹)	Amount (in ₹)
Opening WDV		40,00,00,000
Add: Actual cost of assets (P&M) acquired during the previous year and belonging to the same block of assets		6,00,00,000
Total		46,00,00,000
Less: Depreciation of the year a. Depreciation on opening block @ 15% of 40,00,00,000 b. Depreciation on additional P&M (Period of usage less than 180 days, i.e., from 1st December, 2020 till 31st March, 2021) @ 15% of 50% of 6,00,00,000	6,00,00,000 45,00,000
Total	6,45,00,000
Closing WDV		39,55,00,000

Please note that the second-hand machinery equipment purchased from the USA amounting to ₹2 crores is not an eligible asset for the purpose of computation of Additional Depreciation. Therefore, the cost of eligible assets = ₹4 crores. And the additional depreciation on eligible assets @ 10% = ₹40 lakhs.

Unabsorbed Depreciation [Section 32(2)]

If, owing to depreciation, there is a loss under business and profession, then it is called unabsorbed deprecation and it shall be allowed to be carried forward. Such unabsorbed depreciation shall be carried forward even if the business/profession to which it relates is not in existence. It is not mandatory to file a return of loss for carrying forward unabsorbed depreciation.

In the case of unabsorbed losses, the assessee should set off the losses brought forward as follows:

• Adjust all the current year depreciations.
  
  
• Now, set off the brought forward business losses (speculative or non-speculative).
  
  
• Unabsorbed depreciation will now be set off against the business income.
  
  
• Unabsorbed depreciation can be carried forward for any number of years without any restriction.
  
  
• Unabsorbed depreciation can be set off against any income from any head except for the income from salary and capital gains.

Illustration 4: Calculate unabsorbed depreciation if you are given the following information:

Profit from business before depreciation = ₹7,00,000; Income from capital gains = ₹2,00,000; and Depreciation = ₹12,00,000

Solution:

Profit from business before depreciation = ₹7,00,000

Depreciation = ₹12,00,000

Income from capital gains = ₹2,00,000 (cannot be adjusted against unabsorbed depreciation)

Unabsorbed depreciation = ₹5,00,000

Expenditure on Scientific Research (Section 35)

Section 35 provides for deduction in respect of any expenditure of scientific research incurred by the assessee in relation to his business or profession. Various amounts of deductions allowed under Section 35 are discussed in Table:

Nature of Expenditure	Payment eligible for deduction	Deduction allowed
Inhouse Scientific Research	Inhouse scientific research expenditure of revenue nature is incurred by the assessee related to his business	100% of the expenditure is allowed as deduction
	Inhouse scientific research expenditure of capital nature is incurred by the assessee related to his business	100% of the expenditure is allowed as deduction (except expenditure on acquisition of land and building)
	Expenditure on an approved inhouse research and development facility incurred by a company engaged in the business of bio-technology or manufacturing/ production of an article other than those specified in the Eleventh Schedule	150% of the expenditure is allowed as deduction (except expenditure on acquisition of land and building)
Contribution to Outsiders	Amount paid by the assessee to an approved Indian company for the purpose of scientific research	100% of the expenditure is allowed as deduction
	Amount paid by the assessee to a notified approved college/ research association/university/ other institutions for the purpose of social science or statistical research	100% of the expenditure is allowed as deduction
	Amount paid by the assessee to a notified approved college/ research association/university/ other institutions for the purpose of scientific research	150% of the expenditure is allowed as deduction
	Amount paid by the assessee to an approved National Laboratory/IIT/university/other specified persons for the purpose of scientific research undertaken under a prescribed programme	150% of the expenditure is allowed as deduction

This Section provides for deductions in respect of certain specific expenses. The items of expenditure and their corresponding conditions for claiming deductions under Section 36(1) while computing income from business or profession are discussed in Table:

Section	Nature of Expenses	Quantum of Deduction Allowable
36(1)(i)	Insurance premium paid against risk of damage and destruction of stocks or stores of the business or profession	Whole amount is allowable
36(1)(ib)	Insurance premium paid by an employer otherwise than by way of cash to secure an insurance cover on the health of his employees	Whole amount is allowable
36(1)(ii)	Any sum paid by an employer by way of bonus or commission to employees	Whole amount is allowable subject to Section 43B. However, such amount should not have been otherwise payable as profits or dividends if it had not been paid as bonus or commission
36(1)(iii)	Interest payment on borrowed capital for the purpose of business or profession	Whole amount is allowable. However, interest paid on capital borrowed for acquisition of an asset for the period beginning from the date of borrowing of capital to the date on which the asset was first put to use is not allowed as a deduction
36(1)(iv)	Employer’s contribution by the assessee to Recognised Provident Fund or approved superannuation fund	Whole amount is allowable subject to Section 43B
36(1)(iva)	Employer’s contribution by the assessee towards a pension scheme referred to under Section 80CCD	Deduction of amount is allowable to the extent of 10% of salary of employee
36(1)(vii)	Bad debts written off as irrecoverable in the accounts of the assessee	Whole amount is allowable subject to following conditions: Debt is incidental to the business of the assessee It has been taken into account while computing the business income or represents money lent in the ordinary business of banking or money lending It has been written off in the books
36(1)(ix)	Bona fide expenditure incurred by a company on promoting family planning amongst its employees	Whole amount is allowable. However, expenditure of capital nature will be allowed in five equal instalments beginning from the previous year in which the expenditure was incurred
36(1)(xv)	Any amount of Securities Transaction Tax (STT) paid	Whole amount is allowable provided the income arising from such taxable securities transactions has been included in the income of business or profession
36(1)(xvi)	Any amount of Commodities Transaction Tax (CTT) paid	Whole amount is allowable provided the income arising from such taxable commodities transactions has been included in the income of business or profession

General Expenditure for the Purpose of Business or Profession (Section 37)

This Section allows for claiming deductions in respect of residuary expenses. To claim deduction under Section 37(1), following conditions should be satisfied:

• Expenditure should not be of the nature described under Section 30 to 36.
  
  
• Expenditure should not be capital expenditure.
  
  
• Expenditure should not be assessee’s personal expenditure.
  
  
• Expenditure should have been incurred in the previous year.
  
  
• Expenditure must have been incurred in respect of business of an assessee.
  
  
• Expenditure must not have been incurred on any illegal or prohibited activity.
  
  
• Expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in Section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.

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Amounts Not Deductible Under Section 40

There are certain provisions under the Income Tax Act which hinder an assessee from claiming deduction of expenses while computing his income from business or profession if certain prescribed conditions are not fulfilled. The relevant sections of disallowance are discussed as follows:

Section 40(a) – Disallowance of Expenses for All Assessees

While computing the business income in the hands of any assessee, following expenses are not deductible as shown in Table:

Section	Nature of Expenses	Quantum of Deduction Allowable/Disallowable
40(a)(i)	Interest, royalty, fees for technical services or other sums payable outside India or to a non-corporate non-resident/ foreign company in India, on which TDS has not been deducted or after deduction has not been paid within the due date specified under Section 139(1)	Whole amount is disallowable. However, such sum shall be allowed in the previous year in which such TDS is paid subsequently
40(a)(ia)	Any sum payable to a resident in India, on which TDS has not been deducted or after deduction has not been paid within the due date specified under Section 139(1)	30% of such amount is disallowable. However, 30% of such sum shall be allowed in the previous year in which such TDS is paid subsequently
40(a)(ii)	Any sum paid on account of income tax on profits and gains of business or profession	Whole amount is disallowable
40(a)(iii)	Any amount chargeable under the head ‘Salaries’ payable outside India or to a non-resident in India, on which TDS has neither been deducted nor paid	Whole amount is disallowable
40(a)(iib)	Any amount of license fee, royalty, service fee or any other fee levied exclusively on or appropriated from a State Government Undertaking by the State Government	Whole amount is disallowable
40(a)(v)	Tax paid by an employer on non-monetary perquisites which are exempt under Section 10(10CC) in the hands of employees	Whole amount is disallowable

Section 40(B) – Disallowance in Case of Partnership Firms or LLPs

While computing the business income of a partnership firm or LLP, following amounts are inadmissible and not allowed to be claimed as a deduction in the hands of the firm:

• Payment of interest to a partner is not deductible. However, deduction shall be allowed only if all the following conditions are satisfied:
  
  
  • It is authorised by and in accordance with the terms of partnership deed.
    
    
  • It relates to period falling after the date of partnership deed.
    
    
  • The amount of admissible deduction is restricted to the amount calculated @ 12% simple interest p.a.
    
    
• Payment of salary, commission, bonus or any remuneration to a partner is not deductible. However, deduction shall be allowed only if all the following conditions are satisfied:
  
  
  • It is authorised by and in accordance with the terms of partnership deed.
    
    
  • It relates to period falling after the date of partnership deed.
    
    
  • The payment is made to a working partner.
    
    
  • The amount of admissible deduction of remuneration is restricted to the below-mentioned prescribed amounts, i.e.,

Section 40(ba) – Disallowance in Case of Association of Persons (AOP) or Body of Individuals (BOI)

While computing the business income of AOP or BOI, any interest, salary, commission, remuneration or bonus paid by AOP or BOI to its members shall not be allowed as a deduction.

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Section 40a, Section 40A(2), Section 40A(3) and Section 43B

Section 40A –Expenses Not Deductible in Certain Circumstances

Some inadmissible expenses are disallowable either on account of non-fulfilment of prescribed requirements or due to the reason of exceeding certain limits specified. The circumstances where certain payments or expenses are not allowed to be deductible are discussed as follows:

Section 40A(2) – Disallowance of unreasonable expenditure

If any expenditure has been incurred by an assessee and in respect of which payment is made to a related person or entity, then such payment shall be disallowed under Section 40A(2) to the extent to which it is considered excessive or unreasonable by the Assessing Officer. In other words, any payment made by an assessee for goods or services rendered or facilities provided by related parties is not allowed as a deduction subject to the extent that the assessing officer considers it unfair.

Some of the examples of related persons in this case are as shown in Table:

Individual	A relative of the individual A person in whose business or profession the individual or his relative has a substantial interest
Firm	A partner of the firm or any relative of such partner A person in whose business or profession the partner or his relative has a substantial interest
HUF or AOP	A member of the association or any relative of such member A person in whose business or profession the member or his relative has a substantial interest
Company	A director of the company or any relative of such director A person in whose business or profession the director or his relative has a substantial interest
All assessees	Any individual who has a substantial interest in the business or profession of the assessee; or any relative of such individual A company/firm/HUF/AOP whose director/partner/member has a substantial interest in the business or profession of the assessee, or any director/ partner/member of such entity, or any relative of such director/partner/member

Section 40A(3) and Rule 6DD – Disallowance of Payments Made Otherwise Than by Specific Modes

As per Section 40A(3), if both the following conditions are satisfied, the entire expenditure made by an assessee shall be disallowed:

• Payment is made otherwise than by account-payee cheque or account-payee bank draft or through electronic clearing system of a bank account, and
  
  
• The aggregate of payment or payments made to a person in one single day exceeds ₹10,000.

However, in case where payment is made by assessee to transport operators for plying/leasing/hiring goods carriages, the limit of ₹10,000 should be read as ₹35,000. Moreover, according to Section 40A(3A), if an expenditure had been claimed as a deduction on accrual basis in a previous year and the payment of such expenditure qualifies for the provisions of Section 40A(3) in the subsequent previous year, then such payment/aggregate payments shall be deemed to be the profits and gains of the business or profession and shall be taxable in the subsequent previous year to cancel the deduction as claimed earlier.

No disallowance under Section 40A(3) or 40A(3A) is attracted if such payment/aggregate of payments otherwise than by an account-payee cheque or bank draft is made in cases and circumstances as covered under Rule 6DD. The cases of expenses covered under Rule 6DD are as follows:

• Payment to RBI, SBI, LIC, Cooperative Bank or Primary Agricultural Credit Society
  
  
• Payment required to be made in legal tender to the Government
  
  
• Payment made by letter of credit arrangements of bank, telegraphic or mail transfer of bank, credit card, debit card, bills of exchange payable to bank, electronic clearing system of bank, or book adjustments in bank accounts
  
  
• Payment made to adjust a liability incurred by a payee in relation to goods or services rendered by the assessee to such payee
  
  
• Payment made to cultivator, producer or grower for the purchase of agricultural produce, produce of animal husbandry or dairy and poultry farming, fish products or horticulture products
  
  
• Payment made for purchase of goods manufactured or processed in a cottage industry without the aid of power
  
  
• Payment made to a person residing or carrying on business, profession or vocation in a village or town where such village or town is not served by any bank on the date of such payment
  
  
• Payment of gratuity, retrenchment compensation or any other terminal benefit to an employee of an aggregate amount not exceeding ₹50,000
  
  
• Payment of salary to an employee after deduction of TDS under Section 192 when the employee is posted for 15 days or more to a place or a ship and he does not maintain a bank account at such place or ship
  
  
• Payment required to be made on a day of bank holiday or bank strike
  
  
• Payment made by a person to his agent who is required to make payment in cash for any goods or services on his behalf.
  
  
• Payment made by an authorised dealer or money changer in the normal course of business against purchase of foreign currency

Section 43B – Certain Deductions to Be Allowed Only on Actual Payment

Following expenses will be allowed only if payment in respect of them is made by the assessee within the due date of filing return of income under Section 139(1). Otherwise, they will be disallowed.

• Tax, cess or duty under any law for the time being in force
  
  
• Contribution to provident fund, gratuity fund, superannuation fund or any other fund for employees’ welfare
  
  
• Bonus or commission paid as an employer for services provided by employees
  
  
• Interest on borrowings from Public Financial Institution, State Financial Corporation or State Industrial Investment Corporation
  
  
• Interest on borrowings from Scheduled Bank or Cooperative Bank except for Primary Agricultural and Rural Bank
  
  
• Payment as an employer in lieu of any leave standing at the credit of employees
  
  
• Any amount paid or payable to Indian Railways for the use of railway assets