Income Tax Law and Accounts (COM5CJ301) — Module 4: Profits and Gains of Business or Profession (PGBP)

Unit 1: Meaning, Definition & Scope of Business and Profession

The Income Tax Act deliberately defines business and profession with broad statutory inclusiveness to capture all commercial, industrial, vocational, and professional economic pursuits.

Unit 2: Incomes Chargeable under the Head PGBP (Section 28)

Section 28 represents the charging section for this head. The following categories of receipts are specifically assessable under the head "Profits and Gains of Business or Profession":

Unit 3: Provisions Relating to Depreciation (Section 32)

Depreciation under the Income Tax Act is a statutory allowance granted for the diminution in value of business assets caused by wear and tear, obsolescence, or efflux of time. Unlike commercial accounting, the Income Tax Act mandates the "Block of Assets" system under the Written Down Value (WDV) method (except for power-generating units with an SLM option u/s 32(1)(i)).

3.1 Concept of "Block of Assets" [Section 2(11)] & Statutory Conditions

A "Block of Assets" means a group of assets falling within a class comprising:

• Tangible Assets: Buildings, Machinery, Plant, Furniture, and Fittings.
• Intangible Assets: Know-how, patents, copyrights, trademarks, licenses, franchises, or commercial rights of similar nature (acquired on or after 01-04-1998, excluding goodwill).
• Mandatory Condition: All assets within the block must carry the exact same statutory percentage rate of depreciation.

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

3.3 The Half-Rate Rule (Put to Use for Less than 180 Days)

Under the first proviso to Section 32(1), where an asset is acquired during the previous year and is put to use for less than 180 days, depreciation is restricted to 50% of the prescribed depreciation rate. In a standard financial year, an asset put to use on or after October 4th (or October 3rd in a leap year) is eligible for only half the normal rate.

3.4 Statutory Depreciation Rates Table

Unit 4: Allowable Deductions under Sections 30 to 37

4.1 Expenditure on Scientific Research (Section 35) & Preliminary Expenses (Section 35D)

• In-House Scientific Research [Section 35(1)]: 100% deduction of revenue expenditure and capital expenditure incurred on research related to the business (except cost of land). Pre-commencement expenses on salaries and materials incurred within 3 years prior to commencement are deductible in the year of commencement.
• Contributions to Outside Research Bodies: 100% deduction for sums paid to approved research associations, universities, IITs, or National Laboratories.
• Amortization of Preliminary Expenses [Section 35D]: Specified preliminary expenditures (feasibility reports, MoA/AoA printing, registration fees, public issue underwriting commissions) are deductible in 5 equal annual installments (1/5th each year), capped at 5% of Cost of Project (or Capital Employed for Indian companies).

4.2 Specific Deductions under Section 36

4.3 General / Residuary Deduction [Section 37(1)] & Negative List

Section 37(1) acts as the omni-bus residuary clause allowing deduction for all business expenses not covered under Sections 30 to 36. An expenditure is deductible under Section 37(1) only if it fulfills four cumulative statutory tests:

Unit 5: Specific Statutory Disallowances (Sections 40, 40A, and 43B)

Expenses Disallowable in Certain Circumstances (Section 40A)

• Payments to Relatives / Associates [Section 40A(2)]: Assessing Officer has statutory power to disallow expenditure to the extent it is excessive or unreasonable compared to fair market value.
• Cash Payments Exceeding ₹10,000 [Section 40A(3)]: Where an assessee makes payment or aggregate payments to a person in a single day exceeding ₹10,000 otherwise than by account payee cheque, bank draft, or electronic transfer (ECS/NEFT/RTGS/UPI), the entire 100% is disallowed. (Limit is relaxed to ₹35,000 for payments to goods transport operators). Exceptions under Rule 6DD: payments to RBI/banks, payments to Government, payments for agricultural/dairy produce to direct cultivators.
• Provision for Unapproved Gratuity [Section 40A(7)]: Deduction disallowed for any provision made for gratuity, unless it is a contribution to an approved gratuity fund.

Statutory Deductions Allowed Only on Actual Payment Basis (Section 43B)

Section 43B specifies that certain expenditures (taxes/GST, employer PF/gratuity, employee bonus/commission, loan interest to banks/NBFCs, leave encashment provision, and railway asset fees) are allowable only in the year actually paid. These items are allowable in the year of accrual provided actual payment is made on or before the due date of filing the return of income under Section 139(1).

Unit 6: Presumptive Taxation Regimes (Sections 44AD, 44ADA, & 44AE)

To relieve small businesses and professionals from the administrative burden of maintaining books of accounts under Section 44AA and undergoing audit under Section 44AB, the Act provides special presumptive schemes:

Unit 7: Practical Computation of Income from Business

When financial statements are prepared under standard commercial accounting, the Net Profit in the Profit & Loss Account does not reflect statutory taxable income. It must be adjusted through the Net Profit Adjustment Method [Section 29]:

Unit 8: Practical Computation of Income from Profession

Professionals typically maintain accounts under the Cash System. Income from profession is determined using the Receipts and Payments Statement, isolating professional receipts from personal or capital receipts and deducting bona fide professional expenses:

Unit 9: Summary Reference Matrix: Allowable vs. Disallowable Business Deductions