🏢
What is PGBP? — Starting from Zero
Who gets taxed under this head and how the whole system works
Head of Income — III · Sections 28 to 44AB
Profits and Gains of Business or Profession (PGBP)
If you earn money by running a shop, factory, consulting firm, hospital, law firm or any trade — that income is taxed under this head. PGBP has the most complex rules about what expenses you can deduct and what you cannot. Every business owner, freelancer or professional must understand this chapter.
🏪 Business — Sec 2(13)
Includes any trade, commerce or manufacture, or any adventure in the nature of trade. No profit motive required. Even a single one-time transaction qualifies if it has the character of trade.
TradeCommerceManufactureAdventure
🩹 Profession — Sec 2(36)
Requires specialised knowledge or skill from education or training. The skill itself is the source of income, not just buying and selling goods.
DoctorLawyerCA/CMA/CSArchitectEngineer
🎲 Speculative Business — Sec 43(5)
Purchase/sale where delivery is NOT taken or given — settlement on price difference only. E.g., intraday equity trading, cash-settled commodity futures.
Critical RuleSpeculative loss sets off ONLY against speculative profit. Carry forward limited to 4 years.
📋 The 5 Heads of Income — PGBP is Head III
Salaries
Sec 15–17
Job income, perks
House Property
Sec 22–27
Rental income
PGBP ◀ HERE
Sec 28–44
Business/profession
Capital Gains
Sec 45–55
Profit on selling assets
Other Sources
Sec 56–59
Interest, dividends
Mercantile vs Cash BasisBusiness income normally uses mercantile (accrual) basis — income when earned, expenses when incurred. But Section 43B overrides this for specific payments (taxes, PF, bonus, leave salary) — those are deductible ONLY when actually paid.
Previous Year → Assessment YearIncome earned in the Previous Year (Apr 2024–Mar 2025) is assessed and taxed in the Assessment Year (2025–26). General rule — PY income taxed in the following AY.
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Section 28 — Basis of Charge
ALL incomes taxable under PGBP — far wider than just your trading profit
"Section 28 is the charging section. It defines WHAT is taxable as PGBP. Many one-off or unusual receipts are captured here — compensation, non-compete fees, partner income from his own firm."— Section 28, Income Tax Act 1961
| Sub-sec | What is Charged? | Plain-English Explanation | Example |
|---|---|---|---|
| 28(i) | Profits from business or profession | Core rule — all profit from carrying on your business/profession in the previous year | Shopkeeper’s annual profit; CA firm’s fees |
| 28(ii)(a) | Compensation for termination of business/agency | Paid to STOP running your business or agency — that payment is PGBP income | Distributor paid ₹10L to terminate dealership |
| 28(ii)(b) | Compensation for modifying business/agency terms | Payment for changes in your agency arrangement, even without termination | Agent given ₹2L for reduced territory |
| 28(ii)(c) | Compensation when govt takes over management | Government nationalises your company and pays compensation | Compensation on nationalisation of factory |
| 28(iii) | Income of trade/professional association from specific services | Associations serving members for fees — those fees are taxable business income, not mutual | Bar Association fees for referral services |
| 28(iv) | Value of any benefit or perquisite from business | Non-cash benefit received BECAUSE of your business relationship — taxable at Fair Market Value | Supplier gives free car ₹3L to dealer — ₹3L = PGBP income |
| 28(v) | Salary/bonus/commission/interest paid by firm to partner | Partner’s remuneration from his own firm — taxed under PGBP, NOT under Salaries head | Working partner drawing ₹6L salary from firm |
| 28(va) | Non-compete fee — for NOT carrying on business | Amount received to agree NOT to compete — fully taxable as PGBP income | ₹25L received to not open rival shop for 5 years |
| 28(vb) | Non-compete fee — for NOT practising profession | Same concept for a professional agreeing not to practise in an area | Doctor paid ₹8L not to practise in same city |
| 28(vi) | Export incentives / cash assistance | Government cash subsidies or incentives for exports | Export Promotion Cash Assistance from DGFT |
| 28(viia) | Profit on sale of DEPB licence | Duty Entitlement Pass Book sold at a profit — profit is PGBP income | DEPB bought ₹1L, sold ₹3.5L — ₹2.5L taxable |
| 28(viiaa) | FMV of stock converted to personal/capital asset | Taking business inventory for personal use — FMV on conversion date is PGBP income | Trader takes goods worth ₹40,000 for personal use |
| 28(viib) | Profit on sale of DFRC | Duty Free Replenishment Certificate sold at premium — profit is PGBP income | Exporter sells DFRC above face value |
🎯 Speculative vs Non-Speculative Business — Full Comparison
🎲 Speculative [Sec 43(5)]
DefinitionPurchase/sale where delivery NOT taken or given. Settlement on price difference only.
- Intraday share trading (same-day square off)
- Cash-settled commodity futures
Loss TreatmentSets off ONLY against speculative profit. Cannot absorb normal business income. Carry forward: 4 years max.
✅ Non-Speculative (Normal)
All other businessActual delivery takes place, or deemed non-speculative by the Act.
- Delivery-based share trading
- Physical goods trade
- F&O (Futures & Options) — non-speculative since AY 2006-07
NOT Speculative even without deliveryHedging contracts · Stock broker’s own trades · F&O on recognised stock exchange · Electronic eligible transactions
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Sections 30 & 31 — Building, Plant & Machinery Expenses
Specifically permitted deductions for premises and equipment used in business
🔑 Golden Rule Behind ALL PGBP DeductionsFor any expense to be deductible it must be: (1) Revenue in nature — not capital, (2) Wholly and exclusively for business/profession, (3) Not personal, and (4) Not specifically disallowed by any section. Sections 30–37 list specific items; Sec 37 covers all others.
Section 30 Rent, Rates, Taxes, Repairs — Building
| Ownership | What is Deductible? |
|---|---|
| Building OWNED by business | Current repairs + Insurance premium only. Capital repairs NOT allowed. |
| Building RENTED / LEASED | Rent paid to landlord + Current repairs + Insurance premium — all allowed |
| Land revenue, local rates, municipal taxes | 100% deductible — statutory levies on business property |
Current Repair vs Capital RepairCurrent repair = maintenance to keep asset working → Sec 30 ALLOWED.
Capital repair = adds new structure or significantly extends life → Block of Assets → Sec 32 depreciation.
Capital repair = adds new structure or significantly extends life → Block of Assets → Sec 32 depreciation.
Section 31 Repairs & Insurance — Plant, Machinery & Furniture
- Current repairs (routine maintenance) of plant & machinery
- Current repairs of furniture used for business
- Insurance premium on plant & machinery and furniture
- Capital expenditure / major overhaul → Block of Assets
- Component replacement that extends machine life significantly
- New additions to existing machinery (capital in nature)
Quick TestSmall fix on existing machine → Sec 31 ✓. Major part replaced that doubles remaining life → Sec 32 depreciation (NOT Sec 31).
📉
Section 32 — Depreciation (Biggest Deduction in PGBP!)
Assets lose value over time — deduct that loss from profit every year
Section 32 · WDV (Written Down Value) Method
What is Depreciation?
A machine you buy today will be worth less in 5 years — it wears out and becomes obsolete. The Income Tax Act lets you deduct this fall in value from your profit every year. India uses the Written Down Value (WDV) Method — depreciation is computed on the reducing balance each year, so the deduction shrinks as the asset ages.
📦 Block of Assets — The Core Concept
What is a "Block"?All assets of the same type with the same depreciation rate are pooled into one "block." Depreciation is computed on the entire block’s WDV, not on each individual asset separately.
Why Blocks? — SimplificationWhen you sell one machine and buy another of the same category, only the block’s WDV changes. No need to track each asset individually. Makes computation much simpler.
Block WDV — Annual Computation
(+) Opening WDV of Block (1st April)₹ X,XX,XXX
(+) New assets added during year₹ XX,XXX
(+) Capital expenditure on existing assets₹ XX,XXX
(−) Sale proceeds / insurance / scrap received₹(XX,XXX)
= WDV before depreciation₹ XX,XXX
(−) Depreciation @ applicable rate₹(XX,XXX)
= Closing WDV (next year’s opening WDV)₹ XX,XXX
📊 Depreciation Rates — All Asset Categories
| Block | Asset Category | Examples | Rate (WDV) |
|---|---|---|---|
| 1 | Buildings — Residential | Staff quarters, employees’ accommodation | 5% |
| 2 | Buildings — Non-residential | Factory sheds, offices, warehouses | 10% |
| 3 | Temporary / wooden structures | Thatched, bamboo, temporary sheds | 40% |
| 4 | Furniture & Fittings | Chairs, tables, cabinets, showroom fittings | 10% |
| 5 | Plant & Machinery — General | Factory machinery, tools, equipment (general) | 15% |
| 6 | Motor vehicles — not for hire | Company cars, delivery vans | 15% |
| 7 | Buses, lorries, taxis for hire | Goods transport vehicles, passenger buses | 30% |
| 8 | Ships | Cargo vessels, ferries, tugboats | 20% |
| 9 | Computers & computer software | Laptops, desktops, servers, accounting software | 40% |
| 10 | Aeroplanes & aero engines | Aircraft, helicopters | 40% |
| 11 | Intangible assets | Patents, copyrights, trademarks, licences, know-how, franchises | 25% |
| Sp | Life-saving medical equipment | MRI, X-ray, dialysis machine, CT scanner | 40% |
| Sp | Annual publications (professionals) | Law reporters, medical journals (annual) | 100% |
| Sp | Renewable / energy-saving equipment | Solar panels, wind turbines, ETP plant | 40% |
✅ Four Conditions to Claim Depreciation
1
Asset OWNED by Assessee
Only the owner can claim depreciation. A tenant using a rented machine gets no depreciation — the owner does. Exception: hire-purchase buyer claims depreciation.
2
Used for Business or Profession
Asset must have been used to earn PGBP income. Purely personal assets — no depreciation at all.
3
Asset Put to USE
Merely purchasing or installing is not enough — the asset must have been actually used at least once in the year. Idle asset in godown = no depreciation.
4
Tangible or Specified Intangible Asset
Tangible: Buildings, P&M, Furniture, Vehicles, Ships, Aircraft. Intangible: ONLY patents, copyrights, trademarks, licences, franchises, know-how — no other intangibles.
⏳ Half-Year Rule — Very Commonly Tested!
The RuleAsset acquired AND put to use for less than 180 days in year of purchase → only 50% of normal depreciation in Year 1. Full rate from Year 2 onwards.
| Put to use from | Days used | Dep Allowed |
|---|---|---|
| Before 1st October | ≥ 180 days | 100% of rate |
| On or after 1st October | < 180 days | 50% of rate only |
ExampleMachine costs ₹4,00,000, rate 15%, bought 20 November.
Less than 180 days → Dep = 50% × 15% × ₹4L = ₹30,000.
Closing WDV = ₹3,70,000. Year 2: full 15% on ₹3,70,000 = ₹55,500.
Less than 180 days → Dep = 50% × 15% × ₹4L = ₹30,000.
Closing WDV = ₹3,70,000. Year 2: full 15% on ₹3,70,000 = ₹55,500.
Additional Depreciation [Sec 32(1)(iia)]NEW plant & machinery used in manufacturing gets an EXTRA 20% on actual cost in year of purchase (10% if <180 days; balance 10% in next year). Backward areas (AP, Telangana, Bihar, WB): 35%. NOT eligible: ships, aircraft, office appliances, road transport vehicles, second-hand machinery.
⚡ Special Situations in Depreciation
| Situation | Rule / Treatment | Section |
|---|---|---|
| Block WDV becomes NEGATIVE (all sold, sale > WDV) | No depreciation. Excess = Short-Term Capital Gain — NOT PGBP income | Sec 50 |
| Block becomes NIL (all sold, sale < WDV) | Shortfall (WDV − sale proceeds) = Terminal Depreciation — allowed as deduction/loss | Sec 32(1)(iii) |
| Asset used partly personal, partly business | Depreciation only on business proportion of cost | Rule 5 |
| Asset destroyed — insurance received | Insurance receipt reduces block WDV. Negative block → STCG under Sec 45(1A) | Sec 45(1A) |
| Amalgamation / Demerger of companies | Transferee gets WDV = transferor’s WDV — no step-up; continues depreciation | Sec 32 + 72A |
| Power sector / electricity undertakings | May opt for Straight Line Method (SLM) instead of WDV | Sec 32(1) proviso |
| Goodwill from slump sale or amalgamation | From AY 2021-22 — NO depreciation on goodwill at all | Finance Act 2021 |
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Sections 33–35E — Special Sector & R&D Deductions
Agriculture, petroleum, telecom, scientific research, and new business start-up deductions
Section 33AB Tea / Coffee / Rubber Development Account
PurposeEncourage plantation companies to reinvest — deposit profits before tax to get a deduction.
| Feature | Rule |
|---|---|
| Who qualifies? | Person growing AND manufacturing tea/coffee/rubber in India |
| Deposit to | NABARD account OR Tea/Coffee/Rubber Board scheme account |
| Deduction = LOWER of | (a) Amount actually deposited, OR (b) 40% of profit before this deduction |
| Deadline | Before due date of filing income tax return |
| Wrong withdrawal | Taxable as PGBP income in year of withdrawal [Sec 41] |
| Audit required? | Yes — CA certificate is mandatory |
Section 33ABA Site Restoration Fund
PurposePetroleum/gas companies must restore land/seabed after extraction ends. Build a tax-deductible fund now for that future cost.
| Feature | Rule |
|---|---|
| Who qualifies? | Petroleum/natural gas extraction in India under agreement with Central Govt |
| Deposit to | SBI special account OR Central Govt notified Site Restoration Account |
| Deduction = LOWER of | (a) Amount deposited, OR (b) 20% of profit before this deduction |
| Purpose of use | Only for site restoration as per exploration agreement |
| Wrong withdrawal | Entire withdrawn amount = taxable PGBP income in year of withdrawal |
Section 35 Scientific Research Expenditure — Deductions ABOVE 100%!
Why “Weighted” Deduction?To boost India’s R&D, the government allows deductions more than the actual amount spent. Spend ₹1 lakh on qualifying R&D and you may deduct ₹1.5 lakh from your income. This is called a “weighted” or “enhanced” deduction.
| Type of Expenditure | Section | Rate | Key Conditions |
|---|---|---|---|
| Revenue exp on in-house R&D by assessee | 35(1)(i) | 100% | Research related to assessee’s own business; paid to own employees/department |
| Capital exp on in-house R&D — excluding land | 35(1)(iv) r/w 35(2) | 100% | 100% deducted upfront; no separate depreciation; must relate to own business |
| Contribution to approved scientific research association | 35(1)(ii) | 150% | DSIR-approved; must carry on research in natural or applied sciences |
| Contribution to approved university/college for research | 35(1)(iii) | 100% | University must be approved; social/natural sciences research |
| Contribution to National Laboratories / IITs / NITs | 35(2AA) | 100% | Natural or applied sciences only; government-approved institution |
| In-house R&D — manufacturing / software company | 35(2AB) | 150% | R&D facility DSIR-approved; company must be in manufacturing or software development |
⚠️ R&D Asset Sold Later? — Section 41(3) Kicks In!If a capital asset on which 100% was deducted u/s 35 is later sold, the entire sale proceeds are taxable as PGBP income — NOT capital gain. This prevents claiming the full deduction and then selling at favourable capital gains rates.
Section 35ABB Telecom Licence Fees
Telecom companies pay huge upfront spectrum licence fees. Spread this cost evenly over the licence period — similar to tax amortisation.
| Rule | Detail |
|---|---|
| Annual deduction | Licence fee ÷ remaining licence years (equal instalments) |
| Starts from | Year when the telecom service actually commences |
| Licence transferred | Remaining unallowed amount spread over residual years for transferee |
| Licence cancelled | Remaining balance deducted in one shot in year of cancellation |
Section 35AD 100% Capital Expenditure — Specified Businesses
Big Incentive: Capital Exp Deductible in Year 1!Normally capital exp is depreciated over years. Sec 35AD gives 100% deduction in Year 1 for specified infrastructure/development businesses — no depreciation needed.
| Specified Businesses (100% Capital Deduction) |
|---|
| Cold chain facility for agricultural produce |
| Warehousing facility for agricultural produce |
| Hospital with 100 or more beds |
| Hotel of 2-star category and above |
| Affordable housing project development |
| Fertilizer manufacturing unit |
| Inland container depot (ICD) or container freight station (CFS) |
| Slurry pipeline for transporting iron ore |
| Semiconductor wafer fabrication manufacturing unit |
Excluded from 35ADCost of land, goodwill, and financial instruments are NOT covered.
Section 35D Preliminary Expenses — Pre-Start Costs of a New Business
What Are Preliminary Expenses?Costs incurred BEFORE a business starts or before expansion — legal/printing of MOA/AOA, feasibility reports, market surveys, engineering services, underwriting commission. Capital in nature but allowed as deduction spread over 5 years.
- Legal charges for company formation (MOA, AOA preparation)
- Printing of Memorandum & Articles of Association
- Feasibility study / project report preparation costs
- Market survey before starting the business
- Engineering services / technical know-how for the project
- Underwriting commission on first public issue of shares
Sec 35D — Annual Deduction Rule
Total preliminary expenses incurred₹ X,XX,XXX
Spread over 5 years: Annual = Total ÷ 5₹ XX,XXX
Cap A = 5% of cost of project₹ XX,XXX
Cap B = 5% of capital employed in business₹ XX,XXX
Deductible = Min(Annual, Cap A, Cap B)₹ XX,XXX
ExamplePrelim expenses ₹5L. Project cost ₹50L.
Annual = ₹5L÷5 = ₹1L. Cap = 5%×₹50L = ₹2.5L.
Deductible = ₹1L (the lower amount).
Annual = ₹5L÷5 = ₹1L. Cap = 5%×₹50L = ₹2.5L.
Deductible = ₹1L (the lower amount).
Section 35DDA VRS Expenditure (Golden Handshake)
VRS payments to downsize are deductible — but spread over 5 years, not all at once.
| Rule | Detail |
|---|---|
| Deduction spread | 1/5th (20%) per year for 5 years from year of payment |
| Business succession / merger | Successor company inherits and continues claiming balance |
| Business closure | Remaining unclaimed balance is LOST — no acceleration allowed |
Section 35E Mineral Prospecting Expenditure
Indian companies exploring non-petroleum minerals — heavy exploration costs spread over 10 years.
| Rule | Detail |
|---|---|
| Deduction spread | 1/10th (10%) per year for 10 years |
| Starts from | Year in which commercial production begins |
| Eligible expenditure | Drilling, survey, exploration costs (NOT petroleum — that is Sec 33ABA) |
| Who qualifies? | Indian company or resident individual doing mining in India |
📋
Section 36 — Other Specific Deductions
Expenses not in Secs 30–35 but specifically permitted by the Act
| Sub-section | Expenditure Type | Deduction Rule | Key Conditions |
|---|---|---|---|
| 36(1)(i) | Insurance premium on stocks or stores | 100% of premium paid | Must be on business stocks/stores only, not personal assets |
| 36(1)(ib) | Health insurance for employees | 100% of premium paid | Group mediclaim policy paid by employer for employees |
| 36(1)(ii) | Bonus or commission to employees | 100% of amount paid | Cannot be disguised dividend to employee-shareholders |
| 36(1)(iii) | Interest on capital borrowed for business | 100% of interest incurred | Loan must be for business purpose. Interest on loan to pay income tax itself = NOT allowed. |
| 36(1)(iiia) | Discount on zero-coupon bonds | Pro-rata over life of bond | Spread on time basis over bond life — not full discount in year of issue |
| 36(1)(iv) | Employer contribution to Recognised PF / approved gratuity fund | 100% as per scheme rules | Must be Recognised PF or approved Gratuity Fund; URPF not allowed |
| 36(1)(iva) | Employer contribution to NPS for employees | Up to 10% of employee salary | National Pension System — employer share to employee’s NPS account only |
| 36(1)(v) | Contribution to approved gratuity fund | Annual premium/contribution allowed | Must be approved by Chief Commissioner; invested with LIC or approved trustee |
| 36(1)(vi) | Write-off of animals used for business | Cost minus disposal value | When business animals die or become permanently useless; not animals raised for sale |
| 36(1)(vii) | Bad debts actually written off in books | Actual amount written off | Debt must have been included in income earlier; actually written off — provision NOT enough; no need to prove irrecoverability |
| 36(1)(viia) | Provision for bad & doubtful debts by banks | Up to 7.5% of GTI + 10% of rural advances | Only for Scheduled banks, co-operative banks — NOT ordinary businesses |
| 36(1)(viii) | Special reserve by financial corporations | Up to 20% of profits transferred to reserve | NABARD, SIDBI, NHB etc. for long-term lending business |
| 36(1)(ix) | Family planning expenditure by companies | 100% if revenue; 1/5th per year if capital | Only for companies; for family planning among employees |
| 36(1)(xii) | Securities Transaction Tax (STT) | 100% of STT paid | Only when the securities transaction = PGBP income (trader, not investor) |
| 36(1)(xvi) | Commodities Transaction Tax (CTT) | 100% of CTT paid | Only when CTT-paid commodity trade = PGBP income |
💳 Bad Debts [Sec 36(1)(vii)] — Deep Dive
What Is a Bad Debt?Money owed to your business that will never be recovered. E.g., customer owes ₹60,000 but has become insolvent.
- Debt must have been included in income in an earlier year
- Must be actually written off in the books of accounts
- No need to prove irrecoverability (Travancore Rubber & Tea Co. case law)
- Provision for bad debt ≠ actual bad debt deduction
Bad Debt Recovery — Section 41(4)If a written-off bad debt is later recovered, that recovered amount is taxable as PGBP in the year of recovery — even if the business has closed.
⚠️ Capital vs Revenue DebtOnly revenue debts (trade debtors from business transactions) qualify. A loan given to someone = capital debt. Its write-off = capital loss, NOT deductible under Sec 36.
🔍
Section 37 — General / Residuary Deduction
The catch-all — if an expense is not in Sec 30–36, it may still qualify here
Section 37(1) — Residuary Provision
General Deduction
Any expenditure (other than capital or personal) laid out wholly and exclusively for the purposes of the business or profession is deductible — even if not specifically mentioned in Sections 30–36. This is the “residuary” or “catch-all” deduction.
✅ Five Conditions Under Section 37
1
NOT Capital Expenditure
Capital = creates an asset or gives enduring benefit beyond 1-2 years. Revenue = recurring, consumed in same year. Capital goes to Sec 32 depreciation.
2
NOT Personal Expenditure
Purely for business. If mixed, only the business portion is allowed. Owner’s household expenses — never allowed.
3
Wholly and Exclusively for Business
Wholly = entirely. Exclusively = only for business. If any private element exists, deduction may be fully or partially rejected.
4
Business Must Already Exist
Pre-commencement expenses cannot use Sec 37. Those go to Sec 35D (preliminary expenses). The business must be up and running.
5
Not Prohibited Elsewhere
If specifically disallowed by Sec 40, 40A, or 43B, Sec 37 cannot rescue it. Specific disallowance always overrides general allowance.
🚫 NOT Allowed Under Section 37
✗ Illegal payments / BribesSec 37(1) Explanation: Any expense that is an OFFENCE or prohibited by law → NOT deductible. Bribe to government official, penalty for illegal activity.
✗ Capital ExpenditureCreating new fixed asset or enduring right → not here. Goes to depreciation under Sec 32.
✗ Personal / Domestic ExpensesOwner’s personal rent, family expenses — no business nexus whatsoever.
✗ Income Tax PaidSec 40(a)(ii) specifically disallows income tax from being a business expense — ever.
✗ Advertisement in Political Party Publication [Sec 37(2B)]Payment for advertisement in any publication of a political party — NOT deductible at all.
⚖️ Revenue vs Capital — How to Tell Them Apart (Heavily Tested!)
| Test | Revenue — ✅ Deductible | Capital — ❌ Depreciate |
|---|---|---|
| Duration of benefit | Short-lived — consumed within 1-2 years | Enduring benefit — lasts many years |
| Creates new asset? | No new fixed asset created | Creates or acquires a new fixed asset |
| Recurrence | Recurring — happens every year | Non-recurring — one-time large payment |
| Business capacity | Does NOT expand capacity | Expands or creates fresh capacity |
| Examples | Repairs, salaries, monthly rent, consumables | New machine, factory extension, patent purchase |
Tricky Classification Cases
Non-compete payment MADE
Usually capital — creates enduring protection
Loan processing fees
Revenue — periodic cost of borrowing
Software — perpetual licence
Capital — depreciate @ 40%
Software — SaaS subscription
Revenue — no asset created, consumed yearly
Payment to terminate tenancy
Revenue — no new asset, avoids future rent
Know-how — royalty for use
Revenue — temporary, periodic right
Know-how — lump sum purchase
Capital — depreciate @ 25%
Employee training costs
Revenue — no asset created
🚫
Section 40 — Amounts Expressly Disallowed
Expenses the law specifically forbids — even if genuinely incurred for business
| Section | What is Disallowed? | Why? | Amount Disallowed |
|---|---|---|---|
| 40(a)(i) | TDS not deducted/deposited — payment to NON-RESIDENT | Paying non-resident for interest/royalty/FTS without deducting TDS | 30% of payment (100% if TDS not deposited at all) |
| 40(a)(ia) | TDS not deducted/deposited — payment to RESIDENT | Salary, rent, interest, commission to resident without TDS deduction/deposit | 30% of such payment disallowed |
| 40(a)(ib) | Equalisation levy not paid on online services | Paying foreign e-commerce for online advertising without equalisation levy | 100% of such payment |
| 40(a)(ii) | Income Tax / Wealth Tax paid | Your own income tax is NOT a business expense — it is computed after profit | 100% disallowed always |
| 40(a)(iii) | Salary paid outside India without TDS | Salary to employees abroad without required TDS deduction | 100% disallowed |
| 40(b) | Partner salary / interest beyond prescribed limits | Firms reduce profit by paying excess salary/interest to partners — Sec 40(b) caps this | Excess over limits disallowed at firm level |
| 40(ba) | Interest / salary to members of AOP or BOI | Association of Persons paying remuneration or interest to its members | 100% of such payments |
Section 40(b) Partner Salary & Interest — The Critical Limits
Why Does This Matter?Without limits, firms could pay all profits as “salary” to partners and pay zero firm-level tax. Section 40(b) sets maximum caps — any excess paid is added back to firm income.
💰 Interest to Partners — Maximum
| Rule | Limit |
|---|---|
| Maximum rate allowed | 12% per annum |
| Interest above 12% | Disallowed |
| Must be authorised by | Partnership Deed — must specifically allow payment of interest |
| On what? | Partner’s capital account or loan given by partner to firm |
| Only working partners? | No — interest allowed to all partners (working and sleeping) |
📊 Salary to Working Partners — Slab Limits
| Book Profit Slab | Maximum Salary Deductible (Total) |
|---|---|
| First ₹3,00,000 of Book Profit OR if there is a Loss | ₹1,50,000 OR 90% of Book Profit — whichever is HIGHER |
| Balance Book Profit above ₹3,00,000 | 60% of the balance amount |
What is “Book Profit”?Net profit as per P&L + all amounts added back under Sec 40/40A/43B + partner salary already charged to P&L = profit BEFORE deducting partner salary but after other adjustments.
⚠️ ONLY Working PartnersSalary deduction allowed only for working partners actively working in the firm. Sleeping partners get no deductible salary — only interest up to 12%.
⚠️
Section 40A — Payments Subject to Special Restrictions
Controls excessive payments to relatives and mandates digital payments for business
Section 40A(2) Excessive Payments to Related / Specified Persons
The Rule — Simple VersionIf you pay an excessive or unreasonable amount to a related person (versus what you would pay an unrelated person in the open market), the excess amount is DISALLOWED as a deduction.
Who Are "Related Persons"?
- Individual: Spouse, siblings, parents, children, HUF of which individual is a member
- Company: Director, relative of director, shareholder holding 20%+ voting power
- Firm: Any partner and relatives of each partner
- Any entity: Where above persons hold 20%+ beneficial interest
ExampleArjun’s company pays ₹5,00,000 rent to his wife for a warehouse. Fair market rent for that property = ₹2,00,000. Excess = ₹3,00,000 → DISALLOWED. Only ₹2,00,000 is deductible.
Who Decides “Excessive”?The Assessing Officer (AO) determines fair market value. The assessee must be able to justify the payment was reasonable given market conditions.
ResultOnly the fair/reasonable portion is allowed. The excess is added back to business income and taxed.
Section 40A(3) Cash Payments Exceeding ₹10,000 — Fully Disallowed!
The RuleIf any payment to a single person on a single day exceeds ₹10,000 in CASH (or bearer cheque), that expense is completely disallowed as a deduction. Government wants all business payments through banking channels to reduce black money.
| Payment Scenario | Mode | Deductible? |
|---|---|---|
| ₹8,000 to vendor | Cash | ✓ Allowed (<₹10,000) |
| ₹12,000 to vendor | Cash | ✗ Fully Disallowed |
| ₹12,000 to vendor | Account payee cheque | ✓ Allowed |
| ₹12,000 to vendor | NEFT / IMPS / UPI | ✓ Allowed |
| ₹12,000 to vendor | Bearer cheque | ✗ Disallowed (= cash) |
| ₹8,000 AM + ₹5,000 PM to SAME party | Cash | ✗ Total ₹13,000 same day → disallowed |
| Transporters (lorry hire) — ₹40,000 | Cash | ✓ Allowed (limit ₹35,000 for transporters) |
Exceptions — Cash above ₹10,000 Still Allowed [Rule 6DD]
- Payment to RBI, government, banking company, co-operative bank
- Payment in village/town with no bank within 10 km
- Payment for agricultural produce to cultivator/producer
- Payment where banking hours/facilities unavailable
- Payment on bank holiday or banking strike
- Payment in foreign country where bank payment not practical
- Payments by book adjustment (no actual cash)
Section 40A(3A) — Cash Payment in a Subsequent YearExpense accrued in Year 1 (deduction taken on accrual basis) but paid in CASH above ₹10,000 in Year 2 → the deduction given in Year 1 is reversed and becomes deemed PGBP income in Year 2. Prevents gaming the system.
Section 40A(7) Provision for Gratuity — NOT Deductible
The RuleA mere PROVISION (journal entry) for gratuity in the accounts is NOT deductible. Only ACTUAL PAYMENT of gratuity is allowed.
| Treatment | Deductible? |
|---|---|
| Provision / reserve for gratuity created in books | ❌ NOT deductible |
| Actual gratuity paid directly to departing employee | ✓ Deductible u/s 37 |
| Contribution to LIC-approved gratuity fund | ✓ Deductible u/s 36(1)(v) |
Section 40A(9) Contributions to Non-Statutory Funds
The RuleContribution to any fund NOT recognised or approved by law is DISALLOWED. Only statutory/approved fund contributions are deductible.
| Fund | Deductible? |
|---|---|
| Recognised Provident Fund (RPF) | ✓ u/s 36(1)(iv) |
| Unrecognised PF (URPF) | ❌ Disallowed u/s 40A(9) |
| Approved Gratuity Fund (LIC-backed) | ✓ u/s 36(1)(v) |
| Informal gratuity reserve (no approval) | ❌ Not allowed |
🔄
Section 41 — Deemed Profits (Recoveries Taxed as Income)
When you get back something you previously deducted — it comes back as taxable income
"Section 41 is the mirror image of deductions. You deducted an expense in Year 1. In Year 5, you recover it or someone writes off your liability. That recovery is taxable PGBP income in Year 5 — even if the business has closed."— Section 41, Income Tax Act 1961
| Section | Situation | What Becomes Taxable? | Example |
|---|---|---|---|
| 41(1) | Recovery of any previously deducted expense — by any means (cash receipt, liability waiver, write-back) | Entire amount recovered, remitted or written back = PGBP income in year of recovery. Business closure does NOT help — still taxable. | Supplier waives payable of ₹80,000 that was earlier deducted → ₹80,000 now taxable |
| 41(2) | Balancing Charge — entire block sold and sale proceeds exceed WDV | Excess of sale over WDV = taxable PGBP income (treated as Sec 50 Short-Term Capital Gain) | Entire P&M block WDV = ₹1L; all sold for ₹1.6L → ₹60,000 = balancing charge |
| 41(3) | Sale of asset used for scientific research (100% deducted u/s 35) | Entire sale proceeds = taxable PGBP income — NOT capital gain. No cost allowed as offset. | R&D machine ₹3L (fully deducted u/s 35); sold for ₹1.8L → ₹1.8L fully taxable PGBP |
| 41(4) | Recovery of bad debt written off in an earlier year | Amount recovered = PGBP income in year of recovery — even if business has closed | Bad debt ₹40,000 written off Year 1; customer pays ₹40,000 in Year 4 → ₹40,000 PGBP income Year 4 |
| 41(4A) | Withdrawal from special reserve created u/s 36(1)(viii) | Withdrawn amount = taxable in year of withdrawal for non-specified use | Financial institution withdraws ₹15L from special reserve for non-qualifying purpose |
🔑 KEY: Business Closure Does NOT Escape Sec 41(1)Even after permanently closing the business, if a previously deducted liability is waived off or a previously written-off debt is recovered, Section 41(1) still makes it taxable as PGBP income. There is NO escape through closure.
Balancing Charge vs Terminal DepreciationBalancing Charge [Sec 41(2) / Sec 50]: All assets in block sold; sale proceeds exceed WDV → excess is Short-Term Capital Gain.
Terminal Depreciation [Sec 32(1)(iii)]: All assets in block sold/discarded; WDV exceeds sale proceeds → shortfall is allowed as a loss deduction.
Terminal Depreciation [Sec 32(1)(iii)]: All assets in block sold/discarded; WDV exceeds sale proceeds → shortfall is allowed as a loss deduction.
📖
Section 43 — Key Definitions
The building blocks — definitions used in every PGBP calculation
Section 43(1) Actual Cost — What is the Tax "Cost" of an Asset?
Section 43(1)
Actual Cost
Actual cost = the real cost incurred to acquire and bring the asset to its present condition and location, minus any portion covered by government grants or subsidies. It is the starting point for WDV and depreciation calculations.
| Situation | How Actual Cost is Determined |
|---|---|
| Normal purchase | Invoice price + freight + insurance in transit + installation charges + professional fees − trade discount received |
| Government subsidy received for specific asset | Actual cost = Invoice price − Subsidy amount (subsidy is never part of cost) |
| Asset purchased by taking over a seller’s liability | Cost = cash paid + value of liability assumed from seller |
| Asset transferred by related person below FMV | AO can substitute FMV as actual cost to prevent tax manipulation |
| Personal asset introduced into business | Actual cost = FMV on date of introduction into business |
| Asset acquired via amalgamation/demerger | Cost = WDV in hands of transferor company — no step-up allowed |
| Pre-use interest on loan for buying the asset | Interest on loan from date of loan to date asset first put to use → ADDED to actual cost of asset |
| Post-use interest on same loan | Interest after asset is put to use → deductible u/s 36(1)(iii) as revenue expenditure |
Sec 43(3) "Plant"
DefinitionPlant includes ships, vehicles, books, scientific apparatus, surgical equipment — any article or object used for carrying on business. Does NOT include land, buildings or living beings.
- Machinery, factory equipment
- Ships, aircraft
- Computers, printers
- Surgical instruments, lab apparatus
- Land and Buildings
- Animals (bullocks, horses)
Sec 43(5) Speculative Transaction
DefinitionPurchase/sale of commodity (including stocks/shares) settled otherwise than by actual delivery — only price difference changes hands.
Deemed NON-Speculative1. Hedging contracts
2. Stock broker’s routine trades
3. F&O on recognised exchange (since AY 2006-07)
4. Eligible electronic transactions on exchange
2. Stock broker’s routine trades
3. F&O on recognised exchange (since AY 2006-07)
4. Eligible electronic transactions on exchange
Sec 43(6) Written Down Value (WDV)
WDV = Actual Cost − All Depreciation AllowedThe “tax book value” of an asset after deducting all prior depreciation. Used as the base for next year’s depreciation.
WDV Illustration
Actual Cost of Machine₹1,00,000
(−) Dep Year 1 @ 15%₹15,000
(−) Dep Year 2 @ 15% on ₹85,000₹12,750
= WDV at start of Year 3₹72,250
💳
Section 43B — Deduction Only on Actual Payment
These specific expenses are deductible ONLY when actually paid — accrual is NOT enough
"Section 43B is a powerful override. Even if you follow mercantile (accrual) accounting, for these specific items, the deduction is allowed ONLY in the year you actually make the payment."— Section 43B, Income Tax Act 1961
| Clause | Item Covered | Rule | Exception / Grace Period |
|---|---|---|---|
| 43B(a) | Any tax, duty, cess or fee payable to government (GST, customs, excise, stamp duty) | Deductible ONLY in year of actual payment to government | If paid before due date of filing ITR → allowed in year of accrual itself |
| 43B(b) | Employer’s contribution to PF, ESI, gratuity fund, superannuation fund | Deductible ONLY when actually deposited to the fund | If deposited before due date of return filing → same year deduction |
| 43B(c) | Bonus or commission payable to employees | Deductible ONLY when actually paid (cash/cheque/transfer) to employee | If paid before due date of ITR filing → same year deduction |
| 43B(d) | Interest on loan from public financial institution or state finance corporation | Deductible ONLY on actual payment — NOT on accrual | Converting interest to a new loan is NOT treated as payment |
| 43B(e) | Interest on loan from scheduled bank or co-operative bank | Deductible ONLY on actual payment | Same rule as clause (d) above |
| 43B(f) | Leave encashment (earned leave salary) payable to employees | Deductible ONLY when actually paid to employee | Provision for leave encashment in books = NOT deductible until paid |
| 43B(g) | Sum payable to Indian Railways for use of railway assets | Deductible ONLY on actual payment to Railways | Accrued amount not deductible until actually paid |
| 43B(h) | Payment to Micro or Small enterprises (MSME) — NEW from FY 2023-24 | Deductible ONLY if paid within 45 days (written agreement) or 15 days (no agreement) of delivery | Medium enterprises NOT covered; only Micro and Small under MSMED Act |
⏰ The “Due Date” Exception — Grace Period Explained
The Grace Period RuleIf you accrue an expense in Year 1 but pay it AFTER 31 March yet BEFORE the due date of filing your ITR, you still get the deduction in Year 1. You don’t lose it merely because the financial year ended.
| Scenario | Deductible In? |
|---|---|
| Bonus accrued FY 24-25. Paid 10 May 2025 (before ITR due date) | FY 2024-25 ✓ |
| PF accrued FY 24-25. Paid 20 September 2025 (before due date) | FY 2024-25 ✓ |
| Tax accrued FY 24-25. Paid November 2025 (AFTER due date) | FY 2025-26 only ✗ |
| Provision made — bonus NOT actually paid at all | Not deductible until paid ✗ |
🏭 Section 43B(h) — MSME Payment Rule (From FY 2023-24)
What Changed?From April 2023, if a buyer purchases from a Micro or Small enterprise and doesn’t pay within the time limit under MSMED Act, the expense is NOT deductible until actually paid.
| Type of Agreement | Payment Deadline |
|---|---|
| Written agreement specifying payment terms | 45 days from delivery of goods/services |
| No written agreement (oral/implied) | 15 days from delivery of goods/services |
| Medium enterprise supplier | Not covered — normal accrual rules apply |
ImpactA large company buying from a small vendor and delaying payment beyond 45 days loses the purchase deduction until it pays. Forces faster payment to small businesses.
🎯
Sections 44AD, 44ADA, 44AE — Presumptive Taxation
Simplified tax for small businesses — declare a fixed % of turnover as profit, no detailed books needed
Sections 44AD, 44ADA, 44AE
What is Presumptive Taxation?
Maintaining detailed books and proving every expense is difficult for small businesses. The government says: “Just declare a minimum percentage of your turnover as profit and pay tax on it. We’ll presume that is your income.” No need to maintain books or get a tax audit.
Section 44AD Presumptive Taxation for Business
| Feature | Details |
|---|---|
| Who can use? | Resident Individual, HUF, or Partnership Firm (NOT LLP, NOT Company, NOT AOP/BOI) |
| Excluded businesses | Transporters (use 44AE) · Commission/brokerage agents · Professions under 44ADA |
| Turnover limit (digital ≤5%) | Up to ₹3 crore (where cash receipts ≤ 5% of total receipts) |
| Turnover limit (cash >5%) | Up to ₹2 crore (where cash receipts exceed 5%) |
| Deemed profit — CASH receipts | 8% of gross turnover |
| Deemed profit — DIGITAL receipts | 6% of gross turnover |
| Declare higher profit? | YES — if actual profit > 8%/6%, declare actual profit |
| Declare lower profit? | Only by maintaining full books + getting tax audit done |
| Books of accounts | NOT required — biggest benefit! |
| Tax audit (Sec 44AB) | NOT required |
| Advance tax instalments | Entire advance tax in ONE instalment by 15th March only |
8%
CASH TURNOVER
6%
DIGITAL TURNOVER
⚠️ 5-Year Lock-Out After Opting Out!If you use 44AD in Year 1 and later opt out (declare profit below 8%/6%) in a later year, you are BARRED from using Sec 44AD for the next 5 assessment years. Think carefully before opting out.
ExampleMohan’s grocery shop. Turnover = ₹1.8 crore.
Cash = ₹40L; Digital = ₹1.4 crore.
Deemed income = (40L × 8%) + (1.4Cr × 6%)
= ₹3,20,000 + ₹8,40,000 = ₹11,60,000.
No books. No audit. Tax on ₹11,60,000.
Cash = ₹40L; Digital = ₹1.4 crore.
Deemed income = (40L × 8%) + (1.4Cr × 6%)
= ₹3,20,000 + ₹8,40,000 = ₹11,60,000.
No books. No audit. Tax on ₹11,60,000.
Section 44ADA Presumptive Taxation for Professionals
| Feature | Details |
|---|---|
| Who can use? | Resident Individual or Partnership Firm in NOTIFIED professions |
| Eligible professions | Legal, Medical, Engineering, Architecture, Accountancy (CA/CMA/CS), Technical Consultancy, Interior Decoration, and other notified professions |
| Gross receipts limit | Must NOT exceed ₹75 lakh per year |
| Deemed profit rate | 50% of gross professional receipts |
| The other 50%? | Deemed to have been spent on expenses — no proof needed at all |
| Books of accounts | NOT required |
| Tax audit | NOT required |
| Advance tax | Entire amount in ONE instalment by 15th March |
50%
of Gross Receipts = Taxable Income
The other 50% is deemed expenses. No bills required.
Example — Doctor using 44ADADr. Priya’s clinic gross receipts = ₹60 lakh.
Deemed income = 50% × ₹60L = ₹30 lakh.
Tax on ₹30L. No books. No audit.
Other ₹30L = deemed expenses (staff, rent, medicines, equipment).
Deemed income = 50% × ₹60L = ₹30 lakh.
Tax on ₹30L. No books. No audit.
Other ₹30L = deemed expenses (staff, rent, medicines, equipment).
Section 44AE Presumptive Taxation for Goods Transport Vehicles
| Feature | Details |
|---|---|
| Who can use? | Any person plying, hiring or leasing goods carriages (trucks, lorries) |
| Vehicle limit | Must NOT own more than 10 goods vehicles at any time during the year |
| Deemed profit — Heavy goods vehicle | ₹1,000 per ton of gross vehicle weight per month (or part of month owned) |
| Deemed profit — Other goods vehicle | ₹7,500 per vehicle per month (or part of month owned) |
| Declare higher profit? | YES — if actual income is higher, can declare actual |
| Declare LOWER profit? | NO — ₹1,000/ton/month is the MINIMUM floor |
| Books of accounts | NOT required |
| Advance tax | One instalment by 15th March |
Example — Truck Owner under 44AERamesh owns 3 heavy trucks, each weighing 12 tons. All owned for full year (12 months).
Deemed income = 3 × 12 tons × ₹1,000 × 12 months
= ₹4,32,000
Tax on ₹4,32,000. No books needed.
Deemed income = 3 × 12 tons × ₹1,000 × 12 months
= ₹4,32,000
Tax on ₹4,32,000. No books needed.
11+ Vehicles = Cannot Use 44AEIf you own 11 or more goods vehicles at any point in the year, Sec 44AE is unavailable. Must maintain full books and compute actual profit.
📊 Side-by-Side Comparison — 44AD vs 44ADA vs 44AE
| Feature | 44AD (Business) | 44ADA (Profession) | 44AE (Transport) |
|---|---|---|---|
| Applicable to | Individual, HUF, Firm (NOT company/LLP) | Individual/Firm (notified professions) | Any person |
| Limit | ₹3 Cr (₹2 Cr if cash >5%) | ₹75 lakh gross receipts | Max 10 goods vehicles |
| Deemed profit | 8% cash / 6% digital | 50% of gross receipts | ₹1,000/ton/month or ₹7,500/vehicle |
| Books required? | No | No | No |
| Tax audit? | No | No | No |
| Advance tax | One — 15 March | One — 15 March | One — 15 March |
| Declare lower? | Only with books+audit (5-yr bar follows) | Only with books+audit | No — floor is minimum |
| Opt-out consequence | 5-year bar from using 44AD again | No specific bar | No specific bar |
📚
Sections 44AA & 44AB — Books of Accounts & Tax Audit
Who must maintain records? When does a CA audit become compulsory?
Section 44AA Maintenance of Books of Accounts
| Category | Who Must Maintain? | Books Required | Retention Period |
|---|---|---|---|
| Specified Professions | Legal, Medical, Engineering, Architecture, Accountancy, Technical Consultancy, Interior Decoration (or any notified profession) | Cash Book, Journal, Ledger, Carbon copies of bills above ₹25, original vouchers for expenses above ₹50 | 6 years from end of relevant AY |
| Specified Profession — above income threshold | Income > ₹1.20 lakh (₹2.5 lakh for individuals) OR Gross Receipts > ₹10 lakh (₹25 lakh) in any 3 preceding years | All of above + P&L Account, Balance Sheet | 6 years |
| Other business (non-specified) | If turnover/gross receipts > ₹10 lakh in any 3 preceding years | Books enabling AO to compute income — no rigid prescription | 6 years |
| New business — first year | Expected income > ₹1.2 lakh OR expected turnover > ₹10 lakh | Maintain from commencement | 6 years |
Section 44AB Tax Audit — When Is a CA Audit Compulsory?
What Is a Tax Audit?When your business/profession crosses size thresholds, a Chartered Accountant (CA) must audit your accounts and give a report in Form 3CA/3CB + Form 3CD. This is separate from the statutory audit under Companies Act. The CA independently verifies the income declared.
| Who Needs Tax Audit? | Threshold | Form |
|---|---|---|
| Business — normal | Turnover > ₹1 crore | 3CB + 3CD |
| Business — 95%+ digital receipts AND 95%+ digital payments | Turnover > ₹10 crore (enhanced limit) | 3CB + 3CD |
| Profession | Gross receipts > ₹50 lakh | 3CB + 3CD |
| Business opting OUT of 44AD (declaring profit below 8%/6%) | Income below 8%/6% threshold — must get audit done | 3CA + 3CD |
| Profession opting OUT of 44ADA (declaring below 50%) | Income below 50% — must get audit done | 3CA + 3CD |
⏰ Due Date for Tax Audit Report30th September of the Assessment Year (i.e., 6 months after financial year ends).
If assessee has international / specified domestic transactions → 31st October of the AY.
If assessee has international / specified domestic transactions → 31st October of the AY.
🔏 Penalty for Not Getting Audit — Section 271BPenalty = 0.5% of turnover/gross receipts, OR ₹1,50,000 — whichever is LOWER.
No penalty if there is a reasonable cause shown by the assessee.
No penalty if there is a reasonable cause shown by the assessee.
🧮
Complete Worked Examples
Step-by-step — see how all the sections come together in practice
📝 Example 1 — Adjusting Net Profit per P&L to Compute PGBP Income
Given FactsRahul runs a trading business. Net Profit as per P&L = ₹9,00,000. Already debited in P&L:
(a) Income tax paid ₹80,000 (b) Cash payment ₹18,000 to supplier (c) Penalty for late GST filing ₹6,000 (d) Wife’s salary ₹40,000 (market rate ₹20,000) (e) Books depreciation ₹1,00,000 (IT dep = ₹1,50,000) (f) Personal home loan interest ₹50,000 (g) Bad debt provision ₹30,000 (not written off) (h) Bonus accrued but not paid ₹40,000
(a) Income tax paid ₹80,000 (b) Cash payment ₹18,000 to supplier (c) Penalty for late GST filing ₹6,000 (d) Wife’s salary ₹40,000 (market rate ₹20,000) (e) Books depreciation ₹1,00,000 (IT dep = ₹1,50,000) (f) Personal home loan interest ₹50,000 (g) Bad debt provision ₹30,000 (not written off) (h) Bonus accrued but not paid ₹40,000
| Particulars | Add Back (+) | Deduct (−) | Section & Reason |
|---|---|---|---|
| Net Profit as per books of accounts = ₹9,00,000 | |||
| (a) Income tax paid ₹80,000 | +₹80,000 | Sec 40(a)(ii) — income tax is NEVER a business deduction | |
| (b) Cash payment ₹18,000 to single party (exceeds ₹10,000) | +₹18,000 | Sec 40A(3) — cash payment > ₹10,000 to same party on same day = disallowed | |
| (c) Penalty for late GST filing ₹6,000 | +₹6,000 | Sec 37(1) Explanation — penalty for legal infraction = NOT deductible | |
| (d) Excess wife’s salary ₹20,000 (paid ₹40K, market ₹20K) | +₹20,000 | Sec 40A(2) — excess payment to related person (spouse) disallowed | |
| (e) Books depreciation added back | +₹1,00,000 | Remove books dep; replace with IT dep (always do BOTH) | |
| (e) IT depreciation deducted | −₹1,50,000 | Sec 32 — actual IT depreciation on WDV basis | |
| (f) Personal home loan interest ₹50,000 | +₹50,000 | Sec 37(1) — personal expense, no business nexus whatsoever | |
| (g) Bad debt provision ₹30,000 (not actually written off) | +₹30,000 | Sec 36(1)(vii) — only ACTUAL write-off in books allowed; provision is not sufficient | |
| (h) Bonus accrued but not yet paid ₹40,000 | +₹40,000 | Sec 43B(c) — bonus deductible ONLY on actual payment, not on accrual | |
| ✅ PGBP Income = 9,00,000 + 3,44,000 − 1,50,000 | +₹3,44,000 | −₹1,50,000 | = ₹10,94,000 |
📝 Example 2 — Block of Assets & Depreciation Computation
Given FactsXYZ Ltd. P&M block (rate 15%). Opening WDV = ₹5,00,000.
During year: (a) Machine A bought 1 May ₹2,00,000 (used from day 1), (b) Machine B bought 10 October ₹1,50,000 (used from day 1 — less than 180 days), (c) Old machine sold ₹60,000.
Also: Computer bought 1 June ₹80,000 (used >180 days).
During year: (a) Machine A bought 1 May ₹2,00,000 (used from day 1), (b) Machine B bought 10 October ₹1,50,000 (used from day 1 — less than 180 days), (c) Old machine sold ₹60,000.
Also: Computer bought 1 June ₹80,000 (used >180 days).
P&M Block (15%) Computation
Opening WDV (1 April)₹5,00,000
(+) Machine A (1 May, full year)₹2,00,000
(+) Machine B (10 Oct, <180 days)₹1,50,000
(−) Old machine sold₹(60,000)
WDV before depreciation₹7,90,000
(−) Dep on (5L+2L−0.6L) = ₹6,40,000 @ 15%₹(96,000)
(−) Dep on Machine B ₹1.5L @ 15% × 50% (half rate)₹(11,250)
Closing WDV of P&M Block₹6,82,750
Total P&M Depreciation = 96,000 + 11,250₹1,07,250
Computer Block (40%) Computation
Opening WDV₹ 0
(+) Computer bought 1 June (used >180 days)₹80,000
WDV before dep₹80,000
(−) Dep @ 40% (full rate)₹(32,000)
Closing WDV₹48,000
Total Depreciation Deduction
P&M Block depreciation₹1,07,250
Computer Block depreciation₹32,000
Total Depreciation (PGBP deduction)₹1,39,250
Why Machine B gets 50% only?Bought 10 October → From Oct 10 to Mar 31 = approx 173 days <180 days → Half rate = 7.5% instead of 15%.
📝 Example 3 — Presumptive Taxation
44AD — Mohan’s Grocery WholesaleTurnover = ₹2.4 crore. Cash = ₹60L, rest digital.
Section 44AD
Cash receipts ₹60L @ 8%₹4,80,000
Digital receipts ₹1.8Cr @ 6%₹10,80,000
Deemed PGBP Income₹15,60,000
No books. No audit. Tax on ₹15,60,000. One advance tax instalment by 15 March.
44ADA — Dr. Rajan (Cardiologist)Gross professional receipts = ₹55 lakh. (Well below ₹75L limit.)
Section 44ADA
Gross professional receipts₹55,00,000
(−) Deemed expenses @ 50%₹(27,50,000)
Deemed PGBP Income₹27,50,000
No books. No audit. Tax on ₹27.5L. The other ₹27.5L covers clinic rent, staff, medicines etc.
📝 Example 4 — Section 41 Deemed Profits
Given Facts(a) Bad debt ₹50,000 written off in FY 2020-21; customer pays ₹40,000 in FY 2024-25. (b) Entire P&M block WDV = ₹2,00,000; all machines sold for ₹2,60,000 in FY 2021-22. (c) R&D machine bought for ₹3,00,000 in FY 2022-23 (100% deducted u/s 35); sold for ₹1,80,000 in FY 2024-25.
| Event | Section | Tax Treatment | Amount Taxable |
|---|---|---|---|
| (a) Recovery of bad debt ₹40,000 | Sec 41(4) | Amount recovered = PGBP income in FY 2024-25 (year of recovery). Business closure doesn’t matter. | ₹40,000 PGBP in FY 24-25 |
| (b) Entire P&M block sold ₹2,60,000 (WDV ₹2,00,000) | Sec 50 + 41(2) | Block WDV goes negative → excess ₹60,000 = Short-Term Capital Gain (NOT PGBP) | ₹60,000 STCG in FY 21-22 |
| (c) R&D machine (₹3L, 100% deducted) sold for ₹1,80,000 | Sec 41(3) | Entire sale proceeds = PGBP income — NOT capital gain. Cost was already 100% deducted. | ₹1,80,000 FULLY taxable PGBP in FY 24-25 |
📋
Master Quick Reference — All Key Limits at a Glance
Every important number from the entire PGBP chapter in one table
| Item | Section | Key Limit / Rate | Note |
|---|---|---|---|
| Buildings — Residential | 32 | 5% WDV | Staff quarters, employee accommodation |
| Buildings — Non-residential | 32 | 10% WDV | Factory, office, warehouse |
| Furniture & fittings | 32 | 10% WDV | All furniture and fittings |
| Plant & Machinery — general | 32 | 15% WDV | Most factory/industrial machinery |
| Motor vehicles — not for hire | 32 | 15% WDV | Company cars, delivery vehicles |
| Buses, lorries, taxis for hire | 32 | 30% WDV | Goods and passenger transport vehicles |
| Ships | 32 | 20% WDV | Sea-going cargo vessels, ferries |
| Computers & software | 32 | 40% WDV | Laptops, servers, accounting software |
| Aeroplanes | 32 | 40% WDV | Aircraft and aero engines |
| Intangible assets | 32 | 25% WDV | Patents, copyrights, trademarks, licences, know-how |
| Annual publications (professionals) | 32 | 100% | Law reporters, medical journals |
| Half-year rule | 32 | 50% of normal rate | If put to use for less than 180 days in year of purchase |
| Additional depreciation (new P&M) | 32(1)(iia) | 20% of cost (10% if <180 days) | Manufacturing businesses only; new P&M only |
| Additional dep — backward areas | 32(1)(iia) | 35% of cost | AP, Telangana, Bihar, West Bengal |
| Cash payment limit per party per day | 40A(3) | ₹10,000 | ₹35,000 for transporters (lorry hire) |
| Partner interest — maximum | 40(b) | 12% per annum | Excess disallowed at firm level |
| Partner salary — first ₹3L book profit | 40(b) | ₹1,50,000 or 90% (higher of the two) | To all working partners combined |
| Partner salary — above ₹3L book profit | 40(b) | 60% of balance book profit | Applied to book profit above ₹3L |
| Tea / Coffee / Rubber — deposit deduction | 33AB | 40% of profit (lower of deposit or 40%) | NABARD or Board scheme account |
| Site Restoration Fund — deduction | 33ABA | 20% of profit | SBI or Govt account; petroleum only |
| Scientific Research — approved association | 35(1)(ii) | 150% of contribution | DSIR-approved; natural/applied sciences |
| Scientific Research — in-house company | 35(2AB) | 150% of expenditure | DSIR-approved R&D facility; manufacturing/software |
| Preliminary Expenses — deduction | 35D | 1/5th per year for 5 years | Capped at 5% of project cost or capital employed |
| VRS Expenditure — deduction | 35DDA | 1/5th per year for 5 years | From year of payment |
| Mineral Prospecting — deduction | 35E | 1/10th per year for 10 years | From year commercial production begins |
| Sec 44AD — Business turnover limit (digital) | 44AD | ₹3 crore | Cash receipts ≤5%; Individual/HUF/Firm only |
| Sec 44AD — Business turnover limit (cash) | 44AD | ₹2 crore | Cash receipts >5% |
| Sec 44AD — Deemed profit (digital payments) | 44AD | 6% of turnover | Cheque, NEFT, UPI, digital modes |
| Sec 44AD — Deemed profit (cash) | 44AD | 8% of turnover | Cash receipts portion |
| Sec 44ADA — Professional receipts limit | 44ADA | ₹75 lakh | Notified professions; Individual/Firm |
| Sec 44ADA — Deemed profit | 44ADA | 50% of gross receipts | Balance 50% = deemed expenses |
| Sec 44AE — Vehicle limit | 44AE | Max 10 goods vehicles | At any time during the year |
| Sec 44AE — Deemed profit (heavy vehicle) | 44AE | ₹1,000 per ton per month | Per gross vehicle weight |
| Sec 44AE — Deemed profit (other vehicle) | 44AE | ₹7,500 per vehicle per month | Non-heavy goods vehicles |
| Tax Audit — Business (normal) | 44AB | Turnover > ₹1 crore | CA report in Form 3CB + 3CD |
| Tax Audit — Business (95%+ digital) | 44AB | Turnover > ₹10 crore | Enhanced limit for fully digital businesses |
| Tax Audit — Profession | 44AB | Gross receipts > ₹50 lakh | CA report in Form 3CB + 3CD |
| Tax Audit due date | 44AB | 30 September of AY | 31 October if international transactions |
| Penalty for no tax audit | 271B | 0.5% of turnover or ₹1,50,000 (lower) | Subject to reasonable cause exception |
| Books retention period | 44AA | 6 years from end of AY | From relevant assessment year |
| 43B(h) — MSME payment (written agreement) | 43B(h) | 45 days from delivery | From FY 2023-24; Micro & Small enterprises only |
| 43B(h) — MSME payment (no written agreement) | 43B(h) | 15 days from delivery | Oral / implied agreement |
| Speculative loss carry forward | 43(5) + 74 | 4 assessment years max | Only against speculative profit |
⚠️ Common Mistakes to Avoid + Key Tips
❌ Common Mistakes
✗ Treating F&O as SpeculativeF&O on recognised exchange = NON-SPECULATIVE since AY 2006-07. Very common error in exams.
✗ Sec 41(1) — Business Closure Escapes TaxCompletely wrong. Even after closure, recovery of deducted expense is taxable. No escape.
✗ Claiming Provision as Bad DebtOnly ACTUAL write-off in books is allowed. Provision = not deductible under Sec 36.
✗ Ignoring the Half-Year RuleAlways check if asset was used for <180 days. Purchased on or after 1 October = half rate.
✗ Not Doing Both — Add Books Dep + Deduct IT DepAlways do BOTH steps. Adding back without deducting (or vice versa) is wrong.
✗ Cash Limit Forgetting Per Day Per PersonTwo cash payments of ₹7,000 each to same person same day = ₹14,000 = disallowed.
✗ Partner Salary on Net ProfitMust be computed on BOOK PROFIT (before partner salary, after other adjustments) — not simple net profit.
✗ Forgetting 5-Year Bar After 44AD Opt-OutIf client exits 44AD by declaring below 8%/6%, they cannot use 44AD for next 5 AYs.
✓ Key Tips
✓ Sec 43B — “Due Date” Grace PeriodPF/bonus not paid before 31 March? If paid before ITR due date → still allowed in same year. Use this rule.
✓ Revenue vs Capital — Always Apply “Enduring Benefit” TestCapital = enduring benefit beyond 1-2 years. Revenue = consumed in same year. Apply consistently.
✓ Depreciation SequenceOpening WDV → Add purchases → Deduct sales → Apply half-year rule → Compute dep → Get closing WDV.
✓ Non-Compete: Two Different AnglesRECEIVED = Sec 28(va) PGBP income for recipient. PAID = usually capital expenditure for payer.
✓ Sec 41(3) vs Capital GainR&D asset sold → always PGBP under Sec 41(3), NEVER capital gain. Common confusion.
✓ Balancing Charge vs Terminal DepreciationNegative block → STCG (Sec 50). Nil block with WDV > proceeds → terminal dep loss (Sec 32(1)(iii)).
✓ Sec 43B(h) — Note Applicable YearApplies from FY 2023-24. Questions for years before that do not have this clause.
✓ Sec 33AB vs 33ABA Rates33AB (tea/coffee/rubber) = 40%. 33ABA (petroleum site restoration) = 20%. Don’t mix them up.