Chapter 3: Profits and Gains of Business or Profession (PGBP) | CA Final Direct Tax Notes

Sec 26 Chargeability of Profits & Gains of Business or Profession

Charging Section

Statutory Scope under Section 26 (Formerly Section 28)

Under Section 26 of the Income-tax Act, 2025, income is chargeable to income-tax under the head "Profits and gains of business or profession" under the following 10 statutory heads:

Profits & Gains: Profits and gains of any business or profession carried on by the assessee at any time during the tax year.
Management Compensation [Sec 26(b)]: Any compensation or payment due to or received by any person managing the whole or substantially the whole of the affairs of an Indian company or other entity at or in connection with the termination or modification of the terms and conditions of their appointment.
Trade / Professional Associations [Sec 26(c)]: Income derived by a trade, professional or similar association from specific services performed for its members.
Export Incentives [Sec 26(d)]:
- Profits on sale of a licence granted under the Imports (Control) Order, 1955.
- Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India.
- Any duty of customs or excise repaid or repayable as drawback to any person against exports.
- Profits on the transfer of Duty Entitlement Pass Book (DEPB) Scheme or Duty Free Tariff Preference Scheme.
Perquisites in Business/Profession [Sec 26(e)]: The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession (e.g., group incentive holiday trips given by vendors).
Partner Remuneration & Interest [Sec 26(f)]: Any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by a partner of a firm from the firm, to the extent allowable under Section 36(5).
Non-Compete & Exclusivity Fees [Sec 26(g)]: Any sum received or receivable under an agreement for not carrying out any activity in relation to any business or profession, or not sharing any know-how, patent, copyright, trademark, licence or franchise.
Keyman Insurance Policy [Sec 26(h)]: Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
Conversion of Inventory to Capital Asset [Sec 26(i)]: The Fair Market Value (FMV) of inventory on the date of its conversion or treatment into a capital asset, determined in the prescribed manner.
Recovery against Section 35AD Assets [Sec 26(j)]: Any sum received or receivable on account of demolition, destruction or transfer of any capital asset in respect of which 100% deduction was allowed under Section 35AD.

Business Carried on at Any Time During the Year: It is not necessary that the business or profession must have been carried on throughout the tax year. If it was carried on for even a single day during Tax Year 2026-27, the profits are assessable under Section 26. Furthermore, where an allowance or deduction has been granted in an earlier year, subsequent recovery is deemed to be business profits under Section 38, even if the business is discontinued before the commencement of the tax year.

Sec 27 & ICDS Method of Accounting & ICDS I to X Exhaustive Framework

Statutory Standards

Under Section 276(1) [formerly Section 145(1)], income chargeable under the head PGBP must be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The Central Government has notified 10 Income Computation and Disclosure Standards (ICDS) to be followed by all assessees (other than individuals/HUFs not subject to tax audit) following the mercantile system.

Legal Status of ICDS: ICDS are for computation of income and not for maintenance of books of account. In case of conflict between the provisions of the Income-tax Act, 2025 and ICDS, the provisions of the Act shall prevail.

ICDS Standard	Title & Core Scope	Mandatory Tax Treatment & ICAI Exam Rules
ICDS I	Accounting Policies	• Marked-to-Market (MTM) Loss: Marked-to-market loss or expected loss is disallowed unless permitted by other ICDS. • Prudence: Concept of prudence is modified; anticipated losses cannot be recognized unless explicitly provided. • Change in Accounting Policy: Permitted only for reasonable cause without intention of tax avoidance.
ICDS II	Valuation of Inventories	• Inclusive Method [Sec 54]: Costs of purchase must include duties, taxes, freight and other expenditure directly attributable to acquisition (even if credit is claimed). • Cost or NRV: Valued at lower of cost or net realizable value (NRV). NRV comparison must be done item-by-item, not category-wise. • Dissolution of Firm: Inventory must be valued at FMV on the date of dissolution, whether business continues or not.
ICDS III	Construction Contracts	• Percentage of Completion Method (POCM) Mandatory: Completed Contract Method is prohibited. • Early Stage: Revenue recognized only when stage of completion exceeds 25%. Prior to 25%, revenue equals costs incurred. • Retention Money: Retention money is included in contract revenue as part of POCM billing. • Incidental Income: Contract cost cannot be reduced by incidental interest, dividends or capital gains.
ICDS IV	Revenue Recognition	• Service Contracts: Mandatory POCM if service duration exceeds 90 days. For contracts ≤ 90 days, straight-line method permitted. • Interest Income: Accrues on time basis determined by the effective rate of interest. • Dividend Income: Taxable in accordance with Section 8 on date of declaration. • Royalties: Accrue in accordance with terms of relevant agreement.
ICDS V	Tangible Fixed Assets	• Actual Cost: Includes purchase price, import duties, and directly attributable costs of bringing asset to working condition. • Administration/Start-up Costs: Expenses incurred after trial run or commercial production cannot be capitalized. • Exchange of Assets: Asset acquired in exchange for another is recorded at FMV of asset given up.
ICDS VI	Foreign Exchange Rates	• Monetary Items: Translated at closing exchange rate; exchange difference recognized as PGBP income/expense. • Non-Monetary Items: Carried at historical cost using exchange rate on transaction date. • Capital Assets [Sec 43A]: Adjustments to actual cost of imported capital assets take precedence over ICDS VI.
ICDS VII	Government Grants	• Depreciable Asset Grant: Deducted from actual cost of the asset or written down value (WDV) of the block. • Non-Depreciable Asset Grant: Credited as PGBP income over the period of fulfillment of conditions. • Compensation/Revenue Grant: Recognized in P&L in the period it becomes receivable.
ICDS VIII	Securities	• Bucket-Wise Valuation: Securities held as stock-in-trade are valued at lower of cost or NRV category-wise (Shares, Debt securities, Convertible securities, Any other securities). • Individual security comparison is not allowed for securities.
ICDS IX	Borrowing Costs	• Qualifying Asset: Tangible/intangible asset taking 12 months or more to get ready for intended use. • Capitalization Period: Commences from date funds are borrowed and ends when asset is first put to use. • Inventory: Borrowing costs capitalized only if inventory takes 12+ months to bring to saleable condition.
ICDS X	Provisions & Contingent Assets	• Provision Recognition: Allowed when there is a present obligation resulting from past event, and it is reasonably certain that outflow of resources will be required. • Contingent Assets: Recognized as income when inflow of economic benefits is reasonably certain (different from AS 29 'virtually certain').

Sec 26 & 113 Speculation Business: Definition, Exceptions & Loss Rules

Loss Ring-Fencing

Statutory Definition [Section 26, Explanation 2]

A speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.

Statutory Exceptions (Transactions NOT Treated as Speculative):

Hedging of Raw Materials: A contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him.
Hedging of Stocks & Shares: A contract in respect of stocks and shares entered into by a dealer or investor to guard against loss in his holdings of stocks and shares through price fluctuations.
Forward Arbitrage Contracts: A contract entered into by a member of a forward market or stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business.
Exchange-Traded Derivatives: An eligible transaction in respect of trading in derivatives carried out in a recognized stock exchange where Securities Transaction Tax (STT) is paid and supported by time-stamped contract notes.
Commodity Derivatives: An eligible transaction in respect of trading in commodity derivatives carried out in a recognized association chargeable to Commodities Transaction Tax (CTT).

Loss Set-Off Restriction [Section 113 / formerly Section 73]: Losses incurred in a speculation business cannot be set off against any profits other than profits of another speculation business under Section 113. Speculation loss can be carried forward for a maximum of 4 tax years immediately succeeding the tax year in which the loss was first computed.

ICAI Illustration 1: Pension Fund Contribution under Section 124 & 29(1)(b) ICAI Illustration 1

Question: X Ltd. contributes 20% of basic salary for each employee under a pension scheme referred to in Section 124. Dearness Allowance (DA) is 40% of basic salary and it forms part of pay of the employees.
Compute the amount of deduction allowable under Section 29(1)(b), if the basic salary of the employees aggregates to ₹10,00,000.

Particulars	Amount (₹)	Statutory Explanation & Basis
Aggregate Basic Salary of employees	10,00,000	Basic salary paid during the tax year
Dearness Allowance (DA) (40% of basic salary)	4,00,000	Forms part of salary for retirement benefits
Total Salary for Pension Scheme Computation	14,00,000	Basic (₹10,00,000) + DA forming part (₹4,00,000)
Actual Contribution made by X Ltd. (20% of ₹10,00,000)	2,00,000	Actual employer contribution debited to P&L
Statutory Deduction Allowable [Sec 29(1)(b) / 36(1)(iva)]	1,40,000	Capped at 10% of salary: 10% of ₹14,00,000 = ₹1,40,000. (For State/Central Govt, cap is 14%).
Excess Disallowed & Added Back to Business Income	60,00,000	₹2,00,000 - ₹1,40,000 = ₹60,000 disallowed u/s 36(7) / 40A(9).

Sec 30 - 33 Statutory Scheme of Depreciation & Block of Assets

Schedule IX

Core Principles of Depreciation [Section 30 & 33]

Depreciation under the Income-tax Act, 2025 is calculated on the Written Down Value (WDV) of a Block of Assets under the Reducing Balance Method (except for power-generating undertakings opting for SLM under Section 31).

Mandatory Allowance: Depreciation is mandatory; it cannot be waived by the assessee to artificially manipulate profits.
Ownership & Business Use: The asset must be owned, wholly or partly, by the assessee and used for the purpose of the business or profession during the tax year.
Goodwill Excluded: Goodwill of a business or profession is NOT an eligible depreciable asset.

Prescribed Depreciation Rates under Schedule IX

Class of Assets	Description of Assets in the Block	Rate
I. Buildings	Residential buildings other than hotels and boarding houses	5%
	General commercial/office buildings, factory buildings, hotels, boarding houses	10%
	Purely temporary erections such as wooden structures	40%
II. Furniture & Fittings	Furniture and fittings including electrical fittings	10%
III. Plant & Machinery	General plant and machinery (residual rate)	15%
	Motor cars (other than those used in a business of running them on hire)	15%
	Commercial motor vehicles (buses, lorries, taxis used in hiring business)	30%
	Computers including computer software, printers, laptops; Books (professional/non-professional); Pollution control equipment; Renewable energy devices (windmills installed after 01.04.2017)	40%
IV. Ships	Ocean-going ships, vessels, speed boats, barges	20%
V. Intangible Assets	Know-how, patents, copyrights, trademarks, licences, franchises, or any other business or commercial rights of similar nature (Goodwill excluded)	25%

Computation of WDV of a Block [Section 41(1)]

$$ ext{Closing WDV} = ext{Opening WDV as on 1st April} + ext{Actual Cost of Assets Acquired during Year} - ext{Moneys Payable on Assets Sold/Discarded}$$

• 180-Day Rule: Where an asset acquired during the tax year is put to use for less than 180 days (i.e. put to use on or after 4th October in a 365-day year), depreciation on such asset is restricted to 50% of normal rate.
• When Depreciation is Zero: Depreciation is NIL if (a) the closing WDV reduces to zero (or negative), or (b) the block ceases to exist because all assets in the block are sold/transferred during the year (triggering Short-Term Capital Gain/Loss under Section 50).

Additional Depreciation under Section 33(8) & Carry-Forward under Section 33(9)(b)

An assessee engaged in the manufacture or production of any article or thing or in the business of generation, transmission or distribution of power is entitled to an Additional Depreciation of 20% on the actual cost of new plant and machinery acquired and installed.

Parameter	Statutory Rule & Practical Application
Standard Rate	20% of actual cost of eligible new plant and machinery.
Put to use < 180 days	Restricted to 10% (50% of 20%) in the year of acquisition.
Carry-Forward of Balance	The balance 10% additional depreciation is allowable in the immediately succeeding tax year [Section 33(9)(b)].
Ineligible Assets for Addl. Depr.	• Ships and aircraft. • Any machinery or plant previously used either in India or abroad (second-hand). • Any machinery or plant installed in any office premises or residential accommodation/guest house. • Office appliances or road transport vehicles. • Any plant/machinery where 100% deduction is allowed under any other provision (e.g. Sec 35, 35AD).

SLM Method for Power Generating Undertakings [Section 31]

Undertakings engaged in generation or generation and distribution of power have the option to claim depreciation on Straight Line Method (SLM) on the actual cost of each individual asset, instead of the WDV block system.

Event on Disposal	Tax Treatment & Section	Mathematical Formula
Sale Price < WDV	Terminal Depreciation [Sec 31(1)]: Fully deductible from business profits.	$$ ext{Terminal Depreciation} = ext{WDV} - ext{Sale Price}$$
Sale Price > WDV but ≤ Cost	Balancing Charge [Sec 38(2)]: Taxable as PGBP business profits.	$$ ext{Balancing Charge} = ext{Sale Price} - ext{WDV}$$
Sale Price > Actual Cost	Balancing Charge + Short-Term Capital Gains: Balancing charge up to original cost (PGBP); excess over cost is STCG.	$$\text{PGBP} = \text{Cost} - \text{WDV}; \quad \text{STCG} = \text{Sale Price} - \text{Cost}$$

Priority Order of Set-Off [Section 32(2) & Section 72]:

When profits are insufficient to absorb allowances and losses, set-off must strictly follow this statutory hierarchy:

Current Year Depreciation: Set off against any head of income (except Salaries).
Brought Forward Business Loss [Sec 72]: Set off only against business profits (subject to 8-year carry-forward limit).
Unabsorbed Depreciation [Sec 32(2)]: Set off against any taxable income (except Salaries); can be carried forward indefinitely.

ICAI Illustration 2: Comprehensive Depreciation & Additional Depreciation Calculation ICAI Illustration 2

Question: XYZ (P) Ltd., engaged in manufacturing business since 2016, furnishes the following particulars:
1. Opening WDV of plant and machinery (15%) as on 1.4.2026: ₹30,00,000
2. New plant and machinery purchased and put to use on 08.06.2026: ₹20,00,000
3. New plant and machinery acquired and put to use on 15.12.2026: ₹8,00,000
4. Computer acquired and installed in office premises on 02.01.2027: ₹3,00,000
Compute the depreciation allowable under Section 33 for Tax Year 2026-27.

Particulars	P&M (15%) (₹)	Computer (40%) (₹)	Working Notes & Law
Opening WDV as on 01.04.2026	30,00,000	Nil	Brought forward WDV
Add: Additions put to use ≥ 180 days (08.06.2026)	20,00,000	-	Eligible for full 15% depreciation
Add: Additions put to use < 180 days (15.12.2026 / 02.01.2027)	8,00,000	3,00,000	Eligible for 50% of prescribed rate
Total WDV before Depreciation	58,00,000	3,00,000	Base for normal depreciation
Normal Depreciation:	-	-	-
• On additions < 180 days (50% of rate)	60,000	60,000	P&M: 7.5% of ₹8L = ₹60,000; Comp: 20% of ₹3L = ₹60,000
• On balance WDV (full rate)	7,50,000	-	15% of ₹50,00,000 = ₹7,50,000
Total Normal Depreciation (A)	8,10,000	60,000	Total normal allowance = ₹8,70,000
Additional Depreciation [Sec 33(8)]:	-	-	-
• On new P&M put to use ≥ 180 days (20%)	4,00,000	-	20% of ₹20,00,000 = ₹4,00,000
• On new P&M put to use < 180 days (10%)	80,000	-	10% of ₹8,00,000 = ₹80,000 (Bal. ₹80k c/f to TY 2027-28)
• On Computer installed in office premises	-	Nil	Ineligible: Installed in office premises
Total Additional Depreciation (B)	4,80,000	Nil	Total additional allowance = ₹4,80,000
Total Depreciation Allowable (A + B)	12,90,000	60,000	Grand Total: ₹13,50,000

ICAI Illustration 3: Professional Assets Depreciation for Chartered Accountant ICAI Illustration 3

Question: Mr. Dhaval, a newly qualified CA, commenced practice and acquired the following assets in his office during T.Y. 2026-27 by account payee cheques:
1. Computer including software (acquired 27.09.2026, put to use 01.10.2026): ₹35,000
2. Computer software (acquired & put to use 15.10.2026): ₹8,900
3. Books: (a) Annual publications (put to use 01.08.2026): ₹12,000; (b) Other books (put to use 01.08.2026): ₹20,000
4. Office furniture (put to use 01.04.2026): ₹2,00,000
5. Motor car (put to use 01.12.2026): ₹3,00,000
Calculate the depreciation allowable from professional income for T.Y. 2026-27.

Block of Assets & Description	Cost (₹)	Rate	Depreciation (₹)	Reasoning & Statutory Basis
Block 1: Computers & Software (40%) • Computer (put to use 01.10.2026 ≥ 180 days) • Computer software (put to use 15.10.2026 < 180 days)	35,000 8,900	40% 20%	14,000 1,780 15,780	Computer put to use for 182 days (full rate 40%). Software put to use for 168 days (half rate 20%).
Block 2: Books (40%) • Annual publications (put to use ≥ 180 days) • Other professional books (put to use ≥ 180 days)	12,000 20,000	40% 40%	4,800 8,000 12,800	Under Schedule IX, all books used for profession are eligible for depreciation @ 40%. Both put to use ≥ 180 days.
Block 3: Furniture & Fittings (10%) • Office furniture (put to use 01.04.2026)	2,00,000	10%	20,000	Used throughout the year; full rate 10%.
Block 4: Motor Car (15%) • Motor car (put to use 01.12.2026 < 180 days)	3,00,000	7.5%	22,500	Put to use for 121 days (< 180 days); restricted to 50% of 15% = 7.5%.
Total Depreciation Allowable to Mr. Dhaval			71,080	Note: Additional depreciation is not allowable for professional assessees.

ICAI Illustration 4: Block of Assets Sale & Capital Gains under Section 50 ICAI Illustration 4

Question: Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose WDV as on 1.4.2026 was ₹40 lakhs. It purchased another asset (second-hand machinery) on 18.12.2026 for ₹10 lakhs and put it to use immediately.
Examine the tax consequences if the company sells:
(a) Entire block of assets on 28.03.2027 for ₹50 lakhs.
(b) Entire block of assets on 28.03.2027 for ₹55 lakhs.
(c) Part of block of assets on 28.03.2027 for ₹42 lakhs.

Scenario	WDV before Sale (₹)	Sale Proceeds (₹)	Depreciation (₹)	Tax Consequences under Section 50
(a) Entire Block sold for ₹50L	50,00,000	50,00,000	Nil	Closing WDV becomes Nil. Since all assets are sold, block ceases to exist. No Capital Gain / Loss and No Depreciation.
(b) Entire Block sold for ₹55L	50,00,000	55,00,000	Nil	Moneys payable exceed WDV. Short-Term Capital Gain (STCG) of ₹5,00,000 arises under Section 50. Closing WDV is Nil.
(c) Part Block sold for ₹42L	50,00,000	42,00,000	60,000	Block still contains assets. Balance WDV = ₹8,00,000. Since new machine (₹10L) was put to use < 180 days, depreciation is restricted to 7.5% of ₹8,00,000 = ₹60,000. Closing WDV = ₹7,40,000.

ICAI Illustration 5: SLM Power Generating Undertaking & Balancing Charge ICAI Illustration 5

Question: Lights and Power Ltd., engaged in power generation, acquired a boiler on 1.4.2024 for ₹25,00,000 (eligible for 10% SLM). WDV on 1.4.2026 was ₹20,00,000. The asset is sold on 15.10.2026.
Compute the tax treatment if the boiler is sold for:
Case (i): ₹22,00,000 | Case (ii): ₹28,00,000 | Case (iii): ₹14,00,000.

Disposal Case	Sale Value (₹)	Balancing Charge [Sec 38(2)] (₹)	Terminal Depr. [Sec 31(1)] (₹)	Capital Gain (₹)
Case (i): Sold for ₹22 Lakhs (Sale > WDV, but ≤ Original Cost)	22,00,000	2,00,000	Nil	Nil
Case (ii): Sold for ₹28 Lakhs (Sale Proceeds > Original Cost)	28,00,000	5,00,000	Nil	3,00,000 (STCG)
Case (iii): Sold for ₹14 Lakhs (Sale Proceeds < WDV)	14,00,000	Nil	6,00,000	Nil

ICAI Illustration 20: Depreciation Apportionment in Bank Amalgamation ICAI Illustration 20

Question: Alpha Co-operative Bank amalgamated with Beta Co-operative Bank on 01.12.2026. The depreciation for the year ended 31.03.2027 calculated as per Income-tax Rules allowable to Alpha Co-operative Bank had the amalgamation not taken place amounts to ₹2,40,000.
Compute the deduction on account of depreciation allowable in the hands of Alpha Co-operative Bank and Beta Co-operative Bank for T.Y. 2026-27.

Statutory Apportionment Formula [Section 33]: $$ ext{Apportioned Depreciation} = ext{Total Year Depreciation} imes rac{ ext{Number of days asset used by bank}}{ ext{Total days in the tax year (365)}}$$

Entity	Period of Usage in Tax Year 2026-27	Days Used	Allowable Depreciation (₹)
Alpha Co-operative Bank (Amalgamating Bank)	01.04.2026 to 30.11.2026 (Apr: 30, May: 31, Jun: 30, Jul: 31, Aug: 31, Sep: 30, Oct: 31, Nov: 30)	244 days	1,60,438 (2,40,000 × 244 / 365)
Beta Co-operative Bank (Amalgamated Bank)	01.12.2026 to 31.03.2027 (Dec: 31, Jan: 31, Feb: 28, Mar: 31)	121 days	79,562 (2,40,000 × 121 / 365)
Total Apportioned Depreciation		365 days	2,40,000

Sec 34 & Sched X Scientific Research Expenditure (In-House & External Contributions)

100% Weighted Deduction

Statutory Framework under Section 34 (Formerly Section 35)

Deduction is allowable for expenditure incurred on scientific research related to the business or profession:

In-House Revenue Expenditure [Sec 34(1)(i)]: 100% deduction of revenue expenditure incurred on scientific research related to the business. Pre-commencement salary (excluding perquisites) and material expenses incurred within 3 years prior to commencement are allowed in the year of commencement.
In-House Capital Expenditure [Sec 34(1)(iv)]: 100% deduction of capital expenditure incurred on scientific research (including buildings). However, expenditure on acquisition of LAND is strictly NOT allowable. Pre-commencement capital expenditure incurred within 3 years is also allowed 100% in the year of commencement.
Contributions to External Bodies [Sec 34(1)(ii)/(iii)]: 100% deduction for sums paid to approved research associations, universities, colleges, or National Laboratories/IITs.
No Depreciation: Where 100% capital deduction is claimed under Section 34, no depreciation is allowable under Section 33 for the same or any subsequent year.
Sale of Research Asset [Sec 38(3)]: When a scientific research asset is sold without having been used for other purposes, the sale proceeds or deduction allowed (whichever is less) is taxable as PGBP business income in the year of sale. Excess of sale price over cost is chargeable as Capital Gains.

Sec 35AD / Sec 46 Deduction for Specified Businesses (14 Statutory Sectors)

100% Capex Write-Off

Under Section 35AD (referred to as Section 46 in the unified code), an assessee is entitled to a 100% deduction of capital expenditure incurred wholly and exclusively for the purpose of any "specified business" during the tax year.

Excluded Capital Expenditures: No deduction is permissible in respect of expenditure incurred on the acquisition of:
(1) Land, (2) Goodwill, or (3) Financial Instruments.
All payments for eligible capital expenditure exceeding ₹10,000 must be made by account payee cheque, bank draft, or electronic clearing system (ECS).

Category	14 Eligible Specified Businesses under Section 35AD
Logistics & Agri	1. Setting up and operating a cold chain facility. 2. Setting up and operating a warehousing facility for storage of agricultural produce. 3. Setting up and operating a warehousing facility for storage of sugar. 4. Laying and operating a cross-country natural gas or petroleum crude or petroleum oil pipeline network.
Infrastructure & Hospitality	5. Building and operating a new hotel of two-star or above category anywhere in India. 6. Building and operating a hospital with at least 100 beds for patients. 7. Developing and building a housing project under a notified affordable housing scheme. 8. Developing and building a housing project for slum redevelopment. 9. Developing and maintaining or operating an infrastructure facility (ports, airports, roads, water supply).
Industry & Production	10. Production of fertilizer in India. 11. Setting up and operating an inland container depot or container freight station. 12. Bee-keeping and production of honey and beeswax. 13. Setting up and operating a warehousing facility for storage of edible oil is NOT specified (storage of food grains & sugar only). 14. Setting up and operating a semiconductor wafer fabrication manufacturing unit.

Ring-Fenced Loss Rules & 8-Year Asset Lock-in

• Loss Set-Off [Section 73A]: Loss of any specified business can be set off ONLY against profits of any other specified business. It cannot be set off against non-specified business profits or any other head of income. Unabsorbed specified business loss can be carried forward indefinitely.
• 8-Year Asset Lock-In [Section 35AD(7B) / 46(9)(b)]: Any asset for which deduction is claimed under Section 35AD must be used exclusively for the specified business for a period of 8 years. If used for any non-specified purpose within 8 years, the deduction allowed (less depreciation allowable) is deemed to be PGBP income of the year in which it is so transferred.

Sec 39 - 51 Amortization Schemes, Specific Deductions & General Tests

Equal Installments

Section	Nature of Expenditure	Statutory Mechanism & Conditions
Section 39 (Old Sec 35D)	Amortization of Preliminary Expenses	Allowed in 5 equal annual installments (1/5th each year). Aggregate expenditure capped at 5% of Cost of Project (or at company's option, 5% of Capital Employed).
Section 40 (Old Sec 35DD)	Amalgamation / Demerger Expenses	Incurred by an Indian company wholly and exclusively for amalgamation or demerger; allowed in 5 equal annual installments.
Section 41 (Old Sec 35DDA)	Voluntary Retirement Scheme (VRS)	Expenditure incurred on voluntary retirement scheme allowed in 5 equal annual installments beginning from the year of payment.
Section 44 (Old Sec 35ABB / 35ABA)	Telecom Licence & Spectrum Fees	Amortized in equal annual installments over the remaining balance life of the licence/spectrum. Excess of sale price over WDV is PGBP income; excess over original cost is Capital Gains.
Section 46 / Sched XI (Old Sec 35E)	Prospecting of Certain Minerals	Allowed in 10 equal annual installments against commercial profits of mineral operations.
Section 47 / 48 (Old Sec 36)	Specific Deductions	• Interest on Borrowed Capital [Sec 36(1)(iii)]: Interest for acquisition of asset for period up to the date asset is put to use must be capitalized; allowed as revenue thereafter. • Bad Debts [Sec 36(1)(vii) & 36(2)]: Allowed only if written off as irrecoverable in accounts and debt was included in income of current or previous tax year. • Employer Contribution to PF/Gratuity: Allowable only for recognized/approved funds. • STT & CTT: Allowable as business expenditure if related transactions form part of business turnover.
Section 51 (Old Sec 37)	General Commercial Deductions	Expenditure laid out wholly and exclusively for the purposes of the business or profession, not being capital or personal expenditure. Express Statutory Bars: • CSR Expenditure Disallowed: Explanation 2 to Section 51 clarifies Corporate Social Responsibility (CSR) expenditure is NOT business expenditure. • Penalties & Infractions: Fines, penalties for infraction of law, or payments for purposes which are offences are strictly disallowed. • Political Souvenir Ads [Sec 37(2B) / Sec 51]: Disallowed under PGBP (allowed under Sec 80GGB/80GGC from GTI).

ICAI Illustration 6: Scientific Research, Patent Acquisition & Preliminary Expenses ICAI Illustration 6

Question: A Ltd., engaged in manufacturing since 2015, furnishes the following particulars for T.Y. 2026-27:
1. Incurred in-house scientific research expenditure: Revenue ₹3,00,000; Capital ₹5,00,000 (including land ₹2,00,000).
2. Acquired patent rights on 01.07.2026 for ₹4,00,000 and put to use immediately.
3. Incurred preliminary expenses of ₹2,50,000 on 01.04.2026. The cost of the project is ₹40,00,000.
Compute the total deduction allowable under Chapter IV-D for T.Y. 2026-27.

Item of Expenditure	Amount Incurred (₹)	Deduction (₹)	Governing Section & Statutory Basis
In-house R&D Revenue Expenditure	3,00,000	3,00,000	100% deduction under Section 34(1)(i).
In-house R&D Capital Expenditure: • Cost of Land • Other Capital Equipment/Building	2,00,000 3,00,000	Nil 3,00,000	Land strictly disallowed: Capital expenditure on land is excluded under Section 34(1)(iv). Other capital assets get 100% deduction.
Patent Rights Acquired (Intangible Block)	4,00,000	1,00,000	Depreciation @ 25% under Schedule IX (put to use ≥ 180 days: 25% of ₹4,00,000 = ₹1,00,000).
Preliminary Expenses [Sec 39]	2,50,000	40,000	Qualifying cap: 5% of ₹40,00,000 = ₹2,00,000. Allowable in 5 equal installments: ₹2,00,000 / 5 = ₹40,00,000.
Total Deductions Allowable for Tax Year 2026-27		7,40,000	₹3,00,000 + ₹3,00,000 + ₹1,00,000 + ₹40,000 = ₹7,40,000.

ICAI Illustration 7: Section 35AD Warehousing for Food Grains, Sugar & Edible Oil ICAI Illustration 7

Question: Mr. A commenced operations of setting up warehousing facilities for storage of food grains, sugar, and edible oil on 01.04.2026.
• Food Grains: Building ₹30L (Land ₹50L excluded); Building extension ₹20L. Profit before Sec 35AD/33: ₹16L.
• Sugar: Building ₹20L (Land ₹40L excluded); Building extension ₹15L. Profit before Sec 35AD/33: ₹14L.
• Edible Oil: Building ₹20L (Land ₹30L excluded); Building extension ₹10L. Profit before Sec 35AD/33: ₹31L.
Compute PGBP income and loss carry-forward for T.Y. 2026-27.

Business Unit	Status under Sec 35AD	Eligible Capex (₹)	Profit (₹)	Taxable / (Loss) (₹)
Food Grains Warehousing	Specified Business	50,00,000 (30L + 20L)	16,00,000	(34,00,000)
Sugar Warehousing	Specified Business	35,00,000 (20L + 15L)	14,00,000	(21,00,000)
Edible Oil Warehousing	Non-Specified (Sec 35AD inapplicable)	Depreciation: 3,00,000 (10% of 30L)	31,00,000	28,00,000 (31L - 3L depr)
Taxable PGBP Income (Edible Oil Unit Only)				28,00,000
Loss from Specified Businesses Carried Forward u/s 73A indefinitely				(55,00,000)

*Note: Under Section 73A, losses of ₹34L + ₹21L = ₹55L from specified businesses CANNOT be set off against non-specified profit of ₹28L.

ICAI Illustration 8: 3-Star Hotel in Madurai vs Existing Hotel Set-Off ICAI Illustration 8

Question: XYZ Ltd. commenced operations of a new 3-star hotel in Madurai on 01.04.2026.
• Pre-commencement capex capitalized as on 01.04.2026: ₹50 lakhs.
• Capex incurred during T.Y. 2026-27: ₹2 crores (including ₹1.50 crores for acquisition of land).
• Profit from Madurai hotel (before Sec 35AD): ₹25 lakhs.
• Existing 4-star hotel in Coimbatore profit: ₹120 lakhs.
Compute PGBP income for Tax Year 2026-27.

Hotel Business	Capital Exp. (₹)	Sec 35AD Deduction (₹)	Net Income / (Loss) (₹)
Madurai 3-Star Hotel: • Pre-commencement capex • Capex during year (₹2 Cr - ₹1.5 Cr land)	50,00,000 50,00,000	50,00,000 50,00,000 Total: 1,00,00,000	(75,00,000) (₹25L - ₹100L)
Coimbatore 4-Star Hotel: • Existing eligible specified business	-	-	1,20,00,000
Net Taxable PGBP Income [Sec 73A Intra-Specified Business Set-off]			45,00,000

*Note: Under Section 73A, loss from one specified business (Madurai hotel ₹75L) CAN be set off against profits of another specified business (Coimbatore hotel ₹120L). Net PGBP = ₹45,00,000.

ICAI Illustration 9: Section 35AD Asset Transfer within 8 Years (Deemed Profit) ICAI Illustration 9

Question: ABC Ltd. has Unit A (specified business: sugar warehousing) and Unit B (non-specified: edible oil warehousing). Unit A claimed 100% deduction of ₹50,00,000 for a building in T.Y. 2025-26 under Section 35AD. In February 2027 (within 8 years), Unit A transferred this building to Unit B.
Examine the tax implications under Section 35AD(7B) / Section 46(9)(b).

Particulars	Amount (₹)	Statutory Working & Tax Treatment
Deduction allowed under Section 35AD for T.Y. 2025-26	50,00,000	100% capex deduction claimed on building
Less: Depreciation allowable had Sec 35AD not been claimed	(5,00,000)	10% of ₹50,00,000 for T.Y. 2025-26
Deemed PGBP Income for T.Y. 2026-27 [Sec 35AD(7B)]	45,00,000	Taxable as PGBP in the year of transfer (T.Y. 2026-27).
Cost of Acquisition for Unit B [Sec 43(1), Expl. 13]	45,00,000	Treated as WDV for claiming normal depreciation in Unit B.

ICAI Illustration 10: Telecom Licence Amortization & Disposal under Section 44 ICAI Illustration 10

Question: X Ltd. acquired a telecom licence on 01.04.2024 for ₹50 lakhs for 10 years. Amortization for 2024-25 and 2025-26 was ₹5L each. WDV on 01.04.2026 is ₹40 lakhs (balance 8 years). In T.Y. 2026-27, the whole licence is transferred for: (a) ₹32 lakhs; (b) ₹43 lakhs; or (c) ₹52 lakhs.
Compute the tax treatment under Section 44 (Old Section 35ABB).

Transfer Scenario (Whole Licence)	Sale Value (₹)	PGBP Deduction (₹)	PGBP Profit (₹)	Capital Gain (₹)
(a) Sold for ₹32 Lakhs (Sale < WDV of ₹40L)	32,00,000	8,00,000	Nil	Nil
(b) Sold for ₹43 Lakhs (Sale > WDV, but ≤ Original Cost)	43,00,000	Nil	3,00,000	Nil
(c) Sold for ₹52 Lakhs (Sale > Original Cost of ₹50L)	52,00,000	Nil	10,00,000	2,00,000 (STCG)

ICAI Illustration 11: Biotechnology Research & P&L Adjustments ICAI Illustration 11

Question: Isac Ltd., engaged in biotechnology, reports net profit of ₹35,25,890. It debited:
1. In-house R&D raw materials: ₹11,80,000; 2. Land for R&D: ₹5,00,000; Building for R&D: ₹3,00,000.
3. Notified agricultural extension project: ₹25,50,000; 4. Skill development land: ₹40,00,000, training: ₹32,50,000.
5. Souvenir published by political party: ₹75,000; 6. Right shares issue: ₹80,000.
Compute business income for Tax Year 2026-27.

Particulars of Computation	Amount (₹)	Governing Tax Provisions
Net Profit as per Profit & Loss Account	35,25,890	Starting book profit
Add: Items Disallowed / Capitalized:	-	-
• Land for in-house scientific research	5,00,000	Disallowed u/s 34: Capital exp on land is not eligible.
• Land for skill development project	40,00,000	Disallowed: Capital exp on land is strictly excluded.
• Political party souvenir advertisement	75,000	Disallowed u/s 51 / 37(2B): Deductible from GTI u/s 80GGB.
• Right shares issue expenses	80,000	Capital expenditure: Creates enduring capital structure.
Taxable Profits and Gains of Business or Profession	81,80,890	(₹35,25,890 + ₹5,00,000 + ₹40,00,000 + ₹75,000 + ₹80,000)

Sec 35 Statutory Disallowances: TDS Defaults & Tax Payments

Strict Compliance

Section Reference	Nature of Payment	Disallowance Quantum & Cure Mechanism
Section 35(1)(a) (Old Sec 40(a)(i))	Payments to Non-Residents (Interest, Royalty, FTS, etc.)	100% Disallowance: If tax is not deducted at source or, after deduction, is not paid on or before the due date of filing return under Section 263(1) [formerly Section 139(1)]. Allowed in the year in which such tax is subsequently paid.
Section 35(1)(b) (Old Sec 40(a)(ia))	Payments to Residents (Contractors, Commission, Rent, Interest)	30% Disallowance: 30% of the expenditure is disallowed if tax is not deducted or not paid on or before the return filing due date. The disallowed 30% is allowed in the tax year of subsequent deposit.
Section 35(1)(c) (Old Sec 40(a)(ii))	Income-tax, Surcharge & Cess	100% Disallowance: Any sum paid on account of income-tax, surcharge, or Health & Education Cess is strictly not deductible.
Section 35(1)(e) (Old Sec 40(a)(iii))	Salaries Payable Outside India	100% Disallowance: Any salary payable outside India or to a non-resident where tax has not been paid or deducted at source.

Sec 36(3) & 36(5) Cash Payment Restrictions, Rule 6DD & Firm Remuneration Limits

Ceilings & Caps

Cash Payments Exceeding ₹10,000 [Section 36(3) / Old Sec 40A(3)]

• Threshold Limit: Where an assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a single day, otherwise than by an account payee cheque, account payee bank draft, or electronic clearing system, exceeds ₹10,000, 100% of such expenditure is disallowed.
• Plying, Hiring or Leasing Goods Carriages: Enhanced limit of ₹35,000 applies for payments made to transport operators.
• Subsequent Year Cash Payments [Sec 36(4) / 40A(3A)]: If an expenditure was allowed on accrual basis in an earlier year, and payment exceeding ₹10,000/₹35,000 is made in cash in a subsequent year, the payment is deemed to be PGBP income of the year of payment.
• Rule 6DD Statutory Exceptions: Cash payments are allowed without disallowance in specific cases: (a) Payments to RBI, SBI, banks, LIC; (b) Payments to Government for taxes/duties; (c) Payments through letters of credit, telegraphic transfers; (d) Payments made on a day when banks are closed (bank holidays/Sundays); (e) Payments to producers for agricultural/forest produce, animal husbandry, dairy, poultry, fish; (f) Payments to cottage industry manufacturers; (g) Payment to an employee on temporary posting exceeding 15 days; (h) Terminal retirement gratuity/leave salary up to ₹50,000.

Partnership Firm Remuneration & Interest Limits [Section 36(5) / Old Sec 40(b)]

Particulars	Statutory Ceiling under Income-tax Act, 2025
Interest on Capital to Partners	Allowable only if authorized by partnership deed, capped at maximum 12% simple interest per annum. Excess is disallowed.
Remuneration to Working Partners: • On first ₹6,00,000 of book profit (or loss) • On balance of book profit	₹3,00,000 or 90% of book profit, whichever is greater. 60% of the balance book profit.

Sec 37 & Cl 54(h) MSME 15/45-Day Payment Rule & Statutory Actual Payment Basis

Strict Actual Payment

MSME Strict Mandate under Clause 54(h) / Section 43B(h):

Any sum payable by the assessee to a Micro or Small Enterprise beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is disallowed in the year of accrual.

No Written Agreement: Payment must be made within 15 days from the day of acceptance or deemed acceptance.
With Written Agreement: Payment must be made within the agreed period, not exceeding 45 days.
Crucial Difference from other 43B items: The general proviso allowing deduction if payment is made on or before the due date of filing return under Section 263(1) [formerly Section 139(1)] DOES NOT APPLY to MSME payments! It is allowed strictly in the tax year of actual payment.

Deemed Profits under Section 38 (Formerly Section 41)

Section 38(1) - Remission or Cessation of Liability: Where an allowance or deduction has been made in respect of any loss, expenditure or trading liability, and subsequently the assessee obtains any amount or benefit by remission or cessation thereof, the amount obtained is deemed to be PGBP income (even if business is discontinued).
Section 38(2) - Balancing Charge: Power undertakings on SLM selling asset above WDV up to cost.
Section 38(3) - Scientific Research Asset Sale: Sale proceeds up to deduction allowed taxable as PGBP.
Section 38(4) - Recovery of Bad Debts: Subsequent recovery of bad debt allowed earlier is taxable in year of recovery.

Provision	Statutory Mandate & Safe Harbor Rule
Section 43CA Real Estate Stock-in-Trade	Where land or building held as stock-in-trade is transferred for a value less than the Stamp Duty Value (SDV), the SDV is deemed to be the full value of consideration. Safe Harbor: If SDV does not exceed 110% of actual consideration, actual consideration is accepted.
Section 43A Foreign Exchange Fluctuations	Exchange differences on foreign currency loans acquired for importing capital assets are adjusted against the actual cost of the asset, altering future depreciation.

ICAI Illustration 12: Resident TDS Defaults & 30% Disallowance under Section 35(1)(b) ICAI Illustration 12

Question: Delta Ltd. credited the following amounts to resident payees in March 2027 without deducting tax at source:
1. Salary to employees (credited and paid in March 2027): ₹14,00,000.
2. Directors' remuneration (credited in March 2027 and paid in April 2027): ₹28,000.
What are the consequences of non-deduction of tax during T.Y. 2026-27? Would the answer change if tax on director remuneration was deducted in April 2027 and paid in July 2027 (before return filing due date)?

Item of Expenditure	Amount (₹)	Disallowance (₹)	Tax Consequences under Section 35(1)(b)
Salary to resident employees	14,00,000	4,20,000	Tax was deductible u/s 192. Failure to deduct tax attracts 30% disallowance under Section 35(1)(b): 30% of ₹14,00,000 = ₹4,20,000.
Directors' remuneration (Case 1: No tax deducted)	28,000	8,400	Tax was deductible u/s 194J. Failure to deduct attracts 30% disallowance: 30% of ₹28,000 = ₹8,400.
Directors' remuneration (Case 2: Deducted Apr 27, Paid Jul 27)	28,000	Nil	No Disallowance: Since tax was deducted before payment and deposited before the return due date under Section 263(1) [formerly Section 139(1)] (July 2027), no disallowance arises in T.Y. 2026-27.

ICAI Illustration 13: Turnover Threshold for Individual TDS Obligations ICAI Illustration 13

Question: Mr. Yuvan Raja, a resident individual whose business turnover during preceding year ended 31.03.2026 was ₹99 lakhs, made payments during T.Y. 2026-27 without TDS:
(i) Interest of ₹45,000 paid to Rehman & Co. (resident partnership firm);
(ii) Salary of ₹15,00,000 paid to a resident individual;
(iii) Commission of ₹26,000 paid to Mr. Vidyasagar on 02.07.2026.
Discuss disallowance under Section 35(1)(b).

Payment Particulars	Amount (₹)	Disallowance (₹)	Statutory Explanation
Interest to Rehman & Co.	45,00,000	Nil	Under Section 194A, an individual is liable to deduct TDS only if turnover in preceding financial year exceeded ₹1 Crore. Since turnover was ₹99 lakhs, no TDS liability; hence no disallowance.
Salary to resident individual	15,00,000	4,50,000	Section 192 applies to all employers irrespective of turnover. Non-deduction attracts 30% disallowance: 30% of ₹15,00,000 = ₹4,50,000.
Commission to Mr. Vidyasagar	26,000	Nil	Section 194H applies to individuals only if preceding turnover exceeded ₹1 Crore. Preceding turnover was ₹99 lakhs, so no TDS requirement; no disallowance.

ICAI Illustration 14: Firm Remuneration Limits under Section 36(5) / 35(e) ICAI Illustration 14

Question: A firm paid ₹8,50,000 as remuneration to its partners for T.Y. 2026-27 as authorized by its partnership deed. Its book profit computed under Section 36(5) is ₹10,00,000.
Compute allowable remuneration and disallowance.

Book Profit Slabs	Base Amount (₹)	Statutory %	Allowable Limit (₹)
On first ₹6,00,000 of book profit	6,00,000	90%	5,40,000
On balance ₹4,00,000 of book profit	4,00,000	60%	2,40,000
Maximum Statutory Remuneration Permissible			7,80,000
Actual Remuneration Paid to Partners			8,50,000
Excess Disallowed under Section 36(5)			70,000

ICAI Illustration 15: Book Profit & Allowable Partner Salary for Rao & Jain ICAI Illustration 15

Question: Rao & Jain reports net profit of ₹17,00,000 before deducting:
1. Salary of ₹40,000 each per month payable to 2 working partners;
2. Depreciation on plant and machinery under Section 33: ₹1,50,000;
3. Interest on capital at 15% p.a. on capital of ₹5,00,000.
Compute Book Profit and allowable working partner salary for T.Y. 2026-27.

Particulars	Amount (₹)	Statutory Basis
Net Profit before deductions	17,00,000	Reported book profit
Less: Tax Depreciation under Section 33	(1,50,000)	Fully deductible in computing book profit
Less: Allowable Interest on Capital (12% of ₹5,00,000)	(60,000)	Capped at 12% simple interest. Excess 3% (₹15,000) disallowed.
Book Profit under Section 36(5)	14,90,000	Base for computing partner salary ceiling
Computation of Maximum Allowable Salary:	-	-
• On first ₹6,00,000 @ 90%	5,40,000	Higher of ₹3L or 90% of ₹6L
• On balance ₹8,90,000 @ 60%	5,34,000	60% of (₹14,90,000 - ₹6,00,000)
Maximum Allowable Remuneration Limit	10,74,000	Statutory ceiling
Actual Salary Payable (₹40,000 × 12 × 2 partners)	9,60,000	Authorized by partnership deed
Allowable Salary Deduction in T.Y. 2026-27	9,60,000	Entire ₹9,60,000 is allowable since it is within the ceiling of ₹10,74,000.

ICAI Illustration 16: Loan Restructuring & Interest Disallowance under Section 37 / 43B ICAI Illustration 16

Question: Hari unpaid interest of ₹15,00,000 to APSFC and ₹30,00,000 to Indian Bank was restructured and converted into loans repayable in 60 equal installments. Hari paid 5 installments to APSFC and 3 installments to Indian Bank during T.Y. 2026-27. Hari claimed the entire ₹45,00,000 as deduction. Examine validity.

Lender	Converted Loan (₹)	Monthly Inst. (₹)	Paid Inst.	Allowable [Sec 37] (₹)
APSFC	15,00,000	25,000	5	1,25,000
Indian Bank	30,00,000	50,000	3	1,50,000
Total Interest Deductible on Actual Payment Basis				2,75,000
Disallowed Interest under Section 37 / Section 43B				42,25,000

*Note: Explanations 3C & 3D to Section 43B clarify that conversion of unpaid interest into a loan is NOT deemed to be actual payment. Deduction is allowed only as and when installments are actually paid.

Sec 58, 59 & 60 Presumptive Taxation Schemes for Small Businesses & Professionals

Relief from Audit

Scheme	Eligible Assessee & Business	Turnover / Receipt Limit	Deemed Presumptive Profit Rate
Section 58 (Old Sec 44AD)	Resident Individual, HUF, or Partnership Firm (excluding LLP) carrying on any business (except plying/hiring goods carriages, agency, or commission/brokerage).	₹2 Crores (Enhanced to ₹3 Crores if aggregate cash receipts ≤ 5% of total turnover).	• 8% of turnover/gross receipts. • Reduced to 6% for turnover received by account payee cheque, bank draft, or electronic clearing system (ECS) on or before the return filing due date.
Section 59 (Old Sec 44ADA)	Resident Individual or Partnership Firm (excluding LLP) engaged in specified professions (legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration).	₹50 Lakhs (Enhanced to ₹75 Lakhs if aggregate cash receipts ≤ 5% of gross receipts).	50% of total gross receipts from the profession, or higher sum declared by assessee.
Section 60 (Old Sec 44AE)	Any assessee owning not more than 10 goods carriages at any time during the tax year engaged in plying, hiring or leasing goods carriages.	Max 10 goods vehicles owned at any time during the year.	• Heavy Goods Vehicle (> 12,000 kg / 12 MT): ₹1,000 per ton of gross vehicle weight for every month or part of a month. • Other Goods Vehicle (≤ 12 MT): ₹7,500 for every month or part of a month.

5-Year Lock-in Rule under Section 58(4): Where an eligible assessee declares profit on presumptive basis under Section 58 for any tax year, and subsequently declares profit lower than the presumptive rate in any of the next 5 consecutive tax years, he is barred from availing the Section 58 benefit for the subsequent 5 tax years, and must compulsorily maintain books of account and undergo tax audit.

Sec 62 & 63 Maintenance of Books of Account & Mandatory Tax Audit

Compliance Thresholds

Maintenance of Books of Account [Section 62 / Old Sec 44AA]

Specified Professions (Legal, Medical, Engineering, Architecture, Accountancy, Technical Consultancy, Interior Decoration, Film Artists, Company Secretaries, IT Professionals):
Must maintain prescribed books of account under Rule 6F (Cash book, Journal, Ledger, serially numbered carbon copies of machine-numbered bills > ₹25, original expense vouchers, and for medical practitioners: Daily Case Register in Form 3C and inventory of medicines) only if gross receipts exceed ₹1,50,000 in ALL 3 preceding tax years.
Non-Specified Professions & Businesses:
Must maintain such books of accounts as will enable the AO to compute total income if:
• Total income exceeds ₹1,20,000 (₹2,50,000 for Individual/HUF), OR
• Total turnover/gross receipts exceed ₹10,00,000 (₹25,00,000 for Individual/HUF) in any one of the 3 preceding tax years.

Tax Audit Mandate under Section 63 (Old Sec 44AB) & Penalties under Section 454

Category of Assessee	Mandatory Audit Threshold Limit
Business Assessee (Standard)	Total sales, turnover or gross receipts in business exceed ₹1 Crore.
Business Assessee (Digital Promotion)	Enhanced to ₹10 Crores, provided aggregate cash receipts and aggregate cash payments during the year do not exceed 5% of total receipts/payments.
Professional Assessee	Gross receipts in profession exceed ₹50 Lakhs (enhanced to ₹75 Lakhs if cash receipts ≤ 5%).
Presumptive Exit Cases	Assessee claiming lower profits than presumptive rates whose total income exceeds basic exemption limit.

Audit Due Date & Penalty: Tax audit report must be furnished one month prior to the due date of filing return (i.e. on or before 30th September of the Assessment Year). Failure to get accounts audited attracts a penalty under Section 454 (Old Sec 271B) equal to 0.5% of turnover/gross receipts or ₹1,50,000, whichever is less.

Apportionment of Composite Incomes (Rules 7, 7A, 7B & 8)

Nature of Composite Plantation / Industrial Operation	Business % (PGBP)	Agricultural % (Exempt)
Rule 7A: Sale of centrifuged latex or cenex manufactured from rubber plants grown by seller in India	35%	65%
Rule 7B(1): Sale of coffee grown and cured by seller in India	25%	75%
Rule 7B(1A): Sale of coffee grown, cured, roasted and grounded by seller in India (with or without chicory/flavouring)	40%	60%
Rule 8: Sale of tea grown and manufactured by seller in India	40%	60%

ICAI Illustration 17: Film Artist Books of Account under Section 62 & Rule 6F ICAI Illustration 17

Question: Vinod is a film artist. His gross receipts from profession are:
FY 2023-24: ₹1,15,000 | FY 2024-25: ₹1,80,000 | FY 2025-26: ₹2,10,000.
What is his obligation regarding maintenance of books of accounts for Tax Year 2026-27 under Section 62?

Rule 6F Statutory Threshold: A person carrying on a specified profession (including film artist) is required to maintain specified books of account (Cash book, Journal, Ledger, machine-numbered bills) only if his gross receipts exceed ₹1,50,000 in ALL the three years immediately preceding the relevant tax year.

Preceding Tax Year	Gross Receipts (₹)	Exceeds ₹1,50,000?	Rule 6F Analysis
Financial Year 2023-24	1,15,000	No	Does not exceed threshold limit of ₹1,50,000
Financial Year 2024-25	1,80,000	Yes	Exceeds threshold
Financial Year 2025-26	2,10,000	Yes	Exceeds threshold
Conclusion on Maintenance of Books under Rule 6F			Not required to maintain prescribed Rule 6F books: Since gross receipts did not exceed ₹1,50,000 in FY 2023-24 (not in all 3 years). However, he must maintain general records under Section 62(1) to enable AO to compute total income.

ICAI Illustration 18: Section 58 Presumptive Tax with ₹3 Crore Enhanced Limit ICAI Illustration 18

Question: Mr. Praveen, retail trader, reports turnover of ₹2,98,50,000. Cash receipts are ₹14,00,000 and balance via digital mode before 31st August 2027. Book profits are ₹15,00,000. He declared income under Section 58 in T.Y. 2025-26.
(i) Is he eligible for Section 58? (ii) Determine presumptive income. (iii) Obligations if declaring profit as per books (₹15L). (iv) Return due date.

Aspect	Figures / Working	Statutory Provision & Analysis
Eligibility for Section 58	Cash: 4.69% (≤ 5%)	5% of ₹2,98,50,000 = ₹14,92,500. Since actual cash receipts (₹14,00,000) are ≤ 5%, the enhanced turnover limit of ₹3 Crores applies. Hence, he is eligible.
Presumptive Income:	-	-
• On Cash Receipts @ 8%	1,12,000	8% of ₹14,00,000
• On Digital Receipts @ 6%	17,07,000	6% of ₹2,84,50,000 (₹2,98,50,000 - ₹14,00,000)
Total Presumptive Income (ii)	18,19,000	Statutory deemed profit under Section 58
Obligations if declaring ₹15 Lakhs (iii)	Audit Mandate	Opting out triggers 5-year lock-in ban under Section 58(4). He must maintain books u/s 62 and obtain tax audit report u/s 63.
Return Due Date (iv)	31st July / 31st Oct	Under presumptive tax: 31st July 2027. If declaring as per books (subject to tax audit): 31st October 2027 (audit report by 30th September).

ICAI Illustration 19: Presumptive Income for Goods Carriages Fleet under Section 60 ICAI Illustration 19

Question: Mr. X commenced goods transport business on 1.4.2026. He purchased 10 vehicles during T.Y. 2026-27:
1. 2 vehicles (7,000 kg) on 10.04.2026 | 2. 1 vehicle (6,500 kg) on 15.03.2027
3. 3 vehicles (10,000 kg) on 16.07.2026 | 4. 1 vehicle (11,000 kg) on 02.01.2027
5. 2 vehicles (15,000 kg) on 29.08.2026 | 6. 1 vehicle (15,000 kg) on 23.02.2027
Compute presumptive income under Section 60. Does date of putting to use alter the answer?

Vehicle Category & Weight	No.	Date of Purchase	Months	Computation Rate Basis	Income (₹)
Non-Heavy (7,000 kg)	2	10.04.2026	12	2 vehicles × 12 mos × ₹7,500	1,80,000
Non-Heavy (6,500 kg)	1	15.03.2027	1	1 vehicle × 1 mo × ₹7,500	7,500
Non-Heavy (10,000 kg)	3	16.07.2026	9	3 vehicles × 9 mos × ₹7,500	2,02,500
Non-Heavy (11,000 kg)	1	02.01.2027	3	1 vehicle × 3 mos × ₹7,500	22,500
Heavy (15,000 kg = 15 MT)	2	29.08.2026	8	2 veh × 8 mos × 15 MT × ₹1,000	2,40,000
Heavy (15,000 kg = 15 MT)	1	23.02.2027	2	1 veh × 2 mos × 15 MT × ₹1,000	30,000
Total Presumptive Income under Section 60 (Old Sec 44AE)					6,82,500

*Note: Section 60 is based on ownership of goods carriages, not date of putting to use. Even if vehicles purchased in April 2026 were put to use in July 2026, the presumptive income remains unchanged at ₹6,82,500.

ICAI Illustration 21: Composite Plantation Incomes & Nursery Valuation ICAI Illustration 21

Question: Miss Vivitha, a resident and ordinarily resident in India, derived the following income in T.Y. 2026-27:
1. Sale of centrifuged latex from rubber plants grown in Darjeeling: ₹3,00,000
2. Coffee grown and cured in Yercaud: ₹1,00,000
3. Coffee grown, cured, roasted and grounded in Colombo (sale proceeds received in Chennai): ₹2,50,000
4. Tea grown and manufactured in Shimla: ₹4,00,000
5. Saplings and seedlings grown in nursery at Cochin (without basic agricultural operations): ₹80,000
Compute Business Income and Agricultural Income.

Operation / Stream	Gross (₹)	Governing Rule & Provision	Business [PGBP] (₹)	Agri [Exempt] (₹)
Centrifuged Latex (Rubber)	3,00,000	Rule 7A: 35% Business / 65% Agricultural	1,05,000	1,95,000
Coffee Grown & Cured (Yercaud)	1,00,000	Rule 7B(1): 25% Business / 75% Agricultural	25,000	75,000
Coffee Grown & Roasted in Colombo	2,50,000	Foreign Operations: Grown outside India; Rule 7B inapplicable. Entire income is 100% Business Income.	2,50,000	Nil
Tea Grown & Manufactured (Shimla)	4,00,000	Rule 8: 40% Business / 60% Agricultural	1,60,000	2,40,000
Saplings & Seedlings Nursery (Cochin)	80,000	Section 2(5)(d): Deemed agricultural income regardless of basic operations on land.	Nil	80,000
Total Taxable Business Income (PGBP)	11,30,000	Chargeable to tax under Section 26	5,40,000	5,90,000

TYK 1 Test Your Knowledge: Practical Problems (Questions 1 to 5)

ICAI Exam Standards

Problem 1(a): Discarded Obsolete Machinery in Block & 1(b): Upfront Debenture Interest TYK Question 1

Question 1(a): Mr. Janak, proprietor of M/s. Yash Texnit (garment manufacturing), has 20 machinery items in the 15% block as on 31.03.2027. One packing machine became obsolete and was discarded in July 2026. Return claimed total depreciation of ₹40 lakhs including ₹4 lakhs on the discarded machine. The A.O. disallowed ₹4 lakhs in scrutiny assessment. Comment on the validity of the A.O.'s action.

Question 1(b): X Ltd. issued 5-year debentures in T.Y. 2026-27 with an upfront interest option of ₹60 per debenture. Company paid upfront interest in year 1 and claimed full deduction, but in accounts deferred it over 5 years. A.O. allowed only 1/5th. Examine correctness of A.O.'s action.

Case	Governing Legal Principle & Landmark Jurisprudence	Conclusion & Validity
1(a) Discarded Machine in Block	• Under Section 33 read with Section 41(1), once an asset enters a block, it loses its individual identity. • In CIT v. Yamaha Motor India Pvt. Ltd. (2010) (Delhi HC), it was held that the expression "used for the purpose of business" includes discarded machinery if it was used in earlier years, provided the block continues. • Merely discarding obsolete machinery physically available does not attract "moneys payable" to reduce WDV.	A.O.'s action is INVALID. Depreciation is allowable on the entire WDV of the block; disallowance of ₹4 lakhs is unjustified.
1(b) Upfront Debenture Interest	• In Madras Industrial Investment Corp. Ltd. v. CIT (1997) (SC) and Taparia Tools Ltd. v. CIT (2015) (SC), interest paid upfront is allowable in the year of payment if the liability is fully incurred. • Accounting treatment in books (deferring over 5 years) cannot override statutory entitlement under the Income-tax Act.	A.O.'s action is INCORRECT. Entire upfront interest paid is deductible in T.Y. 2026-27 under Section 36(1)(iii) / Section 37.

Problem 2: PQR Textile Ltd. – Normal & Additional Depreciation on ₹128 Crores Fleet TYK Question 2

Question: Compute the quantum of depreciation available under Section 33 for PQR Textile Ltd. (engaged in manufacture of textile fabrics) for year ended 31.03.2027 (Account payee cheques paid, Section 200 not opted):
• New machinery installed on 01.05.2026: ₹84 Cr | New Windmill purchased & installed on 18.06.2026: ₹22 Cr
• Lorries for transporting goods to depots (put to use July 2026): ₹3 Cr
• Items purchased after 30th November 2026 (< 180 days): Fork-lift trucks inside factory: ₹4 Cr | Computers in office: ₹1 Cr | Computers in factory: ₹2 Cr.

Class of Assets & Details	Cost (₹ Cr)	Normal Rate	Normal Depr. (₹ Cr)	Addl. Rate	Addl. Depr. (₹ Cr)
New Machinery installed 01.05.2026 (≥ 180 days)	84.00	15%	12.60	20%	16.80
New Windmill installed 18.06.2026 (≥ 180 days)	22.00	40%	8.80	20%	4.40
Goods Transport Lorries (≥ 180 days)	3.00	30%	0.90	-	Nil (Vehicles Ineligible)
Fork-lift Trucks in factory (< 180 days)	4.00	7.5%	0.30	10%	0.40
Computers installed in office (< 180 days)	1.00	20%	0.20	-	Nil (Office Premises)
Computers installed in factory (< 180 days)	2.00	20%	0.40	10%	0.20
Sub-Total Allowances	116.00	-	23.20	-	21.80
Total Depreciation Available under Section 33 for T.Y. 2026-27			₹45.00 Crores

*Note: Balance 50% additional depreciation of ₹0.60 Crores (₹0.40 Cr on Fork-lift + ₹0.20 Cr on factory computers) is carried forward to Tax Year 2027-28 under Section 33(9)(b).

Problem 3: Secret Commission, Foreign Agent, Bank Guarantee & GST Interest TYK Question 3

Question: Examine taxability/allowability for T.Y. 2026-27:
(A)(i) Secret commission paid during T.Y. 2026-27.
(A)(ii) P Ltd. paid $ equivalent to ₹50 lakhs sales commission without TDS to Mr. Rodrigues (UK citizen, non-resident) for booking orders from foreign customers.
(B)(i) Bank guarantee given by company towards disputed tax liabilities.
(B)(ii) Interest payable to GST Department but not paid before due date u/s 263(1) [formerly Section 139(1)].

Transaction	Statutory Mandate & Case Law	Tax Treatment
(A)(i) Secret Commission	Explanation 1 to Section 51 (Old Sec 37) prohibits deduction of any expenditure incurred for any purpose which is an offence or prohibited by law. Secret commission violates commercial morality and law.	Strictly Disallowed. Added back to business profits.
(A)(ii) Foreign Agent Commission	Services rendered outside India by non-resident agent; income does not accrue or arise in India under Section 9. No tax deductible under Section 195.	Fully Allowable. No disallowance under Section 35(1)(a).
(B)(i) Bank Guarantee for Disputed Taxes	Providing bank guarantee does not constitute payment of tax, but bank guarantee charges/margin money are incurred for normal commercial protection.	Fully Allowable business expenditure; Section 37 / 43B not violated.
(B)(ii) GST Interest Unpaid	Interest on statutory dues is compensatory in nature (Mahalakshmi Sugar Mills). However, under Section 37 / 43B, statutory interest is deductible ONLY on actual payment basis on or before return filing due date.	Disallowed in T.Y. 2026-27. Deductible in year of actual payment.

Problem 4: ILT Limited – Comprehensive P&L Adjustments (Net Profit ₹405 Lakhs) TYK Question 4

Question: ILT Limited (manufacturing pipes and tubes) reports Net Profit of ₹405 lakhs. Compute total income for T.Y. 2026-27:
1. Free group air ticket encashed for ₹10 lakhs credited to General Reserve.
2. Supplier debt waiver of ₹2 lakhs (settled ₹8L vs ₹10L) not adjusted in books.
3. Term loan interest ₹15L converted into equity shares by Andhra Bank.
4. Remitted ₹5 lakhs interest to USA company without deducting TDS.
5. Sandeep sales executive tour in Bangalore: ₹45,000 hotel stay paid in cash.
6. Cheque contribution of ₹50,000 to electoral trust debited to P&L.

Particulars of Computation	Amount (₹ Lakhs)	Statutory Working Notes
Net Profit as per Profit & Loss Account	405.00	Starting point
Add: Incomes not credited to P&L / Disallowances:	-	-
• Free group air ticket encashed	10.00	Taxable u/s 26(e): Business perquisite.
• Remission of supplier debt (₹10L - ₹8L)	2.00	Deemed Profit u/s 38(1): Cessation of trading liability.
• Conversion of interest into equity shares	Nil	No actual payment under Section 37 / 43B. If not debited to P&L, no adjustment.
• Foreign interest paid to USA without TDS	5.00	100% Disallowed u/s 35(1)(a) for TDS default.
• Hotel cash payment by Sales Executive	Nil	Protected by Rule 6DD: Employee on official tour.
• Electoral Trust contribution debited to P&L	0.50	Disallowed under PGBP [Sec 51]: Deductible from GTI.
Gross Total Income (GTI) / Business Profits	422.50	Sub-total
Less: Deduction under Section 80GGB (Electoral Trust)	(0.50)	100% deduction for political contributions by Indian company
Total Taxable Income of ILT Limited	422.00	₹422.00 Lakhs

Problem 5: G Ltd. – Tea Growing & Manufacturing & Section 33AB Deposit Scheme TYK Question 5

Question: G Ltd. (growing and manufacturing tea) deposited ₹11,00,000 in Tea Development Account on 01.09.2026. On 10.04.2026, it withdrew ₹10,00,000 and utilized:
• ₹6,00,000 for purchase of non-depreciable asset as per specified scheme.
• ₹3,00,000 for purchase of office appliances.
• ₹1,00,000 remained unutilized up to 31.03.2027.
Determine business income for T.Y. 2026-27 and tax consequences if the ₹6L asset is sold for ₹8L in April 2027.

Utilization of Withdrawn Funds	Amount (₹)	Tax Consequences under Section 33AB
Purchase of specified non-depreciable asset	6,00,000	Not Taxable: Utilized in accordance with approved scheme.
Purchase of office appliances	3,00,000	Taxable as Business Income: Office appliances are ineligible assets under Section 33AB(4).
Unutilized balance at year-end	1,00,000	Taxable as Business Income: Not spent in the tax year of withdrawal.
Total Chargeable Amount from Withdrawal	4,00,000	Base for Rule 8 apportionment
Business Income under Rule 8 (40%)	1,60,000	40% of ₹4,00,000 = ₹1,60,000 (Balance 60% ₹2,40,000 is Agricultural Income).
Consequence of Sale in April 2027: Under Section 33AB(8), if asset acquired out of deposit is sold within 8 years, the cost is treated as NIL. Entire ₹6,00,000 is deemed business profit (40% PGBP = ₹2.4L; 60% Agri = ₹3.6L) and excess ₹2,00,000 is Capital Gain.

TYK 6 - 10 Test Your Knowledge: Practical Problems (Questions 6 to 10)

Comprehensive Workings

Problem 6: Pingu Trading Pvt. Ltd. – Comprehensive P&L Adjustments & Section 35AD Loss TYK Question 6

Question: Pingu Trading Pvt. Ltd. discloses net profit of ₹33,90,000 for year ended 31.03.2027. Adjustments include:
• IT refund of ₹20,000 credited (including interest ₹4,570).
• Rented premises repair ₹5,500 (no tenant obligation, but business efficiency).
• Political party souvenir advertisement ₹2,500.
• Director's wife (junior lawyer) paid ₹1,00,000 (market rate ₹25,000).
• Electoral trust cheque ₹1,00,000.
• GST late return filing penalty ₹5,300.
• Book depreciation ₹71,500 (Tax depreciation ₹65,000).
• Resident loan interest ₹80,000 paid to Mr. X without TDS.
• Warehousing charges credited ₹15,00,000 (Investment in warehouse ₹25,00,000 u/s 35AD).
• Survey u/s 253 on 31.03.2027 revealed ₹1,50,000 unexplained stock difference.

Particulars	Amount (₹)	Statutory Explanation & Section
Net Profit as per Profit & Loss Account	33,90,000	Starting book profit
Less: Income-tax refund credited	(20,000)	Capital receipt; interest of ₹4,570 taxed under IFOS
Balance	33,70,000	Sub-total
Add: Inadmissible Expenses / Items to be Disallowed:	-	-
• Repairs to rented premises	Nil	Incurred for business efficiency; allowable u/s 51
• Political party souvenir advertisement	2,500	Disallowed u/s 51 / 37(2B): Deductible u/s 80GGB from GTI
• Excessive payment to director's wife [Sec 36(1) / 40A(2)]	75,000	Excess over FMV disallowed: ₹1,00,000 - ₹25,000 = ₹75,000
• Electoral Trust contribution by cheque	1,00,000	Disallowed under PGBP: Deductible u/s 80GGB from GTI
• GST delayed filing penalty	5,300	Disallowed u/s 51: Penalty for infraction of law
• Book depreciation debited	71,500	Added back to apply tax depreciation
• 30% TDS disallowance on loan interest to Mr. X [Sec 35(1)(b)]	24,000	30% of ₹80,000 disallowed for non-deduction of TDS
Less: Depreciation allowable under Income-tax Act, 2025	(65,000)	Depreciation computed under Section 33
Less: Warehousing income credited (Specified Business u/s 35AD)	(15,00,000)	Ring-fenced specified business stream segregated
Add: Stock discrepancy detected on survey u/s 253	1,50,000	Unrecorded closing stock taxable as business income
Profits and Gains of General Business	22,33,300	General PGBP Income
Computation of Specified Business Loss [Sec 35AD / 73A]: • Warehousing charges income: ₹15,00,000 • Less: 100% Capex deduction u/s 35AD: (₹25,00,000)	(10,00,000)	Specified Business Loss Carried Forward u/s 73A indefinitely: Cannot be set off against general business profit of ₹22,33,300.
Income from Other Sources (Interest on IT refund)	4,570	Taxable under Section 56
Gross Total Income (GTI)	22,37,870	₹22,33,300 + ₹4,570
Less: Chapter VIII-C Deductions u/s 80GGB (₹1,00,000 + ₹2,500)	(1,02,500)	Contributions to political party / electoral trust
Total Taxable Income of Pingu Trading Pvt. Ltd.	21,35,370	Rounded off u/s 288A: ₹21,35,370

Problem 7(a): IDBI Pre-payment Premium & 7(b): Emergency Spares Depreciation TYK Question 7

Question 7(a): A Ltd. paid IDBI Bank lump sum pre-payment premium of ₹1.2 lakhs on 7.4.2027 to restructure debts and lower interest rate. A.O. amortized it over 10 years (tenure of loan). Is company's claim for 100% deduction in year of payment valid?

Question 7(b): Explain tax treatment of emergency spares (of plant and machinery) acquired during the year, kept ready for use as standby, but not actually operated.

Issue	Statutory Provision & Landmark Jurisprudence	Ruling & Conclusion
7(a) Loan Pre-payment Premium	• In CIT v. Gujarat Guardian Ltd. (2009) (Delhi HC), pre-payment premium paid to financial institution for premature debt redemption is in the nature of interest under Section 2(28A) / Section 2(59). • Under Section 37 / Section 43B, interest paid to specified financial entities is allowable in full in the year in which it is actually paid, and cannot be amortized over the tenure of the loan.	A Ltd.'s contention is CORRECT. Entire ₹1.2 lakhs is deductible in the year of payment. A.O.'s amortization is invalid.
7(b) Emergency Standby Spares	• In CIT v. Viswanath Bhaskar (1989) (Bom HC), emergency spares kept ready for use to avoid breakdown of machinery constitute "passive use". • Once standby machinery/spares are ready for use in business operations, they satisfy the test of being "used for the purpose of business" under Section 33.	Depreciation is FULLY ALLOWABLE on emergency spares from the date they are kept ready for use, even if not actually operated during the year.

Problem 8: Easy Call Ltd. – Telecom Licence Fee Amortization under Section 52 / 44 TYK Question 8

Question: Easy Call Ltd. obtained a telecom licence on 01.04.2024 for 10 years ending 31.03.2034 for ₹27 lakhs payable in 3 installments of ₹9 lakhs each (April 2024, April 2025, April 2026). Business commenced on 01.04.2025.
Compute the deduction allowable for Tax Year 2026-27 under Section 52 / Section 44 (Old Sec 35ABB).

Installment Paid	Amount (₹)	Unexpired Life	Deduction in T.Y. 2026-27 (₹)	Governing Statutory Rule
1st Installment (April 2024)	9,00,000	9 years	1,00,000	Paid before commencement; amortized from year of commencement (2025-26) over 9 balance years (₹9L / 9).
2nd Installment (April 2025)	9,00,000	9 years	1,00,000	Paid in year of commencement; amortized over 9 balance years (₹9L / 9).
3rd Installment (April 2026)	9,00,000	8 years	1,12,500	Paid in T.Y. 2026-27; unexpired life is 8 years ending 31.03.2034 (₹9L / 8).
Total Telecom Licence Deduction Allowable for T.Y. 2026-27			3,12,500	(₹1,00,000 + ₹1,00,000 + ₹1,12,500 = ₹3,12,500)

Problem 9: Alpha Ltd. – Manufacturing Unit Net Profit Adjustments (₹12.50 Lakhs) TYK Question 9

Question: Alpha Ltd. reports net profit of ₹12,50,000. Compute taxable income for T.Y. 2026-27:
1. Advertisement in cash to sister concern of director: ₹60,000 (Market value: ₹52,000).
2. Machinery repairs: ₹1,80,000 for replacement of worn-out parts without increasing performance standard.
3. Creditor liability foregone ₹6,000 credited to General Reserve (purchases debited in T.Y. 2022-23).
4. Sale proceeds of import entitlements ₹1,00,000 credited to P&L (claimed as capital receipt).
5. In-house biotech R&D debited to P&L: Research equipments ₹1,50,000; Scientists' remuneration ₹50,000.

Particulars	Amount (₹)	Governing Legal Provisions & Treatment
Net Profit as per Profit & Loss Account	12,50,000	Starting book profit
Add: Adjustments & Disallowances:	-	-
• Advertisement in cash exceeding ₹10,000 [Sec 36(3) / 40A(3)]	60,000	Paid in cash exceeding ₹10,000; 100% disallowed. (Disallowance u/s 40A(3) overrides Sec 40A(2)).
• Replacement of worn-out parts (repairs)	Nil	Current repairs: Preserves existing performance without creating new asset (CIT v Saravana Spinning Mills). Fully allowable.
• Creditor liability foregone credited to Reserve	6,000	Deemed Profit u/s 38(1) / 41(1): Remission of trading liability allowed earlier. Added back.
• Sale proceeds of import entitlements	Nil	PGBP Income u/s 26(d) / 28(iiia): Correctly credited to P&L; no adjustment needed.
• In-house biotech research expenditure:	-	-
- Capital equipment (₹1,50,000)	Nil	100% deduction allowable u/s 34(1)(iv). Since debited to P&L, no adjustment.
- Scientists' remuneration (₹50,000)	Nil	100% revenue deduction allowable u/s 34(1)(i). Since debited to P&L, no adjustment.
Total Taxable Income of Alpha Ltd. for T.Y. 2026-27	13,16,000	₹12,50,000 + ₹60,000 + ₹6,000 = ₹13,16,000

Problem 10(i): State Bus Transfer Depreciation & 10(ii): Successor Bad Debt Deduction TYK Question 10

Question 10(i): A State Government transferred all its buses (consideration ₹75 lakhs) to a newly set up Corporation against equity shares. Corporation claimed depreciation. Can depreciation be denied because buses were not formally registered in Corporation's name?

Question 10(ii): Ravi succeeded to his father's business in 2024. In T.Y. 2026-27, Ravi wrote off bad debt of customer 'Y' relating to supplies made by his father. Can Ravi claim bad debt deduction?

Case	Governing Supreme Court Jurisprudence & Statutory Section	Decision & Entitlement
10(i) Depreciation without Bus Registration	• In Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775 (SC), the Supreme Court held that the term "owned by an assessee" in Section 33 assigns a wider meaning. • Anyone in possession of an asset in their own title, exercising dominion to the exclusion of others, and having the right to use and enjoy it, is the owner. • Formal registration under the Motor Vehicles Act is only a regulatory formality and does not bar ownership for tax depreciation.	Depreciation CANNOT be denied. Corporation is entitled to depreciation on the buses.
10(ii) Successor Bad Debt Write-Off	• In CIT v. T. Veerabhadra Rao, K. Koteswara Rao & Co. (1985) 155 ITR 152 (SC), the Supreme Court held that a successor in business who inherits debts along with assets is entitled to bad debt deduction under Section 36(1)(vii) / Section 36(2). • The condition that debt was taken into account in computing income is satisfied if it was included in the income of the business, even if by the predecessor.	Ravi IS ENTITLED to the deduction. Bad debt written off is fully allowable in T.Y. 2026-27.

📌 Chapter 3 Statutory Master Summary & Exam Keypoints

Charging Section 26: 10 distinct heads including export incentives, non-compete, Keyman insurance, perquisites, and inventory conversion FMV.
ICDS Framework: MTM losses strictly disallowed (ICDS I); inclusive valuation of inventory with taxes/duties (ICDS II); POCM mandatory for construction and services (ICDS III & IV); bucket-wise securities valuation (ICDS VIII).
Depreciation Architecture: Schedule IX rates (Buildings 5/10/40%, P&M 15/30/40%, Intangibles 25%, Goodwill excluded); 180-day rule restricts to 50% rate; Additional Depreciation 20% on new P&M for manufacturing/power; carry forward of balance 10% under Section 33(9)(b).
Special Deductions: Scientific Research 100% revenue/capex (land excluded); Section 35AD 100% capex on 14 specified businesses with 8-year lock-in and ring-fenced Section 73A loss carry forward.
Disallowances & MSME: 100% non-resident TDS defaults [Sec 35(1)(a)]; 30% resident TDS defaults [Sec 35(1)(b)]; Cash payments > ₹10k/₹35k [Sec 36(3)]; Firm remuneration slabs (90% on first ₹6L / 60% on balance); MSME Clause 54(h) allows deduction strictly on actual payment basis within 15/45 days (return due date extension inapplicable!).
Presumptive Taxation & Audit: Section 58 (Turnover ≤ ₹2 Cr / ₹3 Cr, deemed profit 8%/6%); Section 59 (Professionals receipts ≤ ₹50L / ₹75L, deemed profit 50%); Section 60 (Goods fleet ≤ 10 vehicles); Section 63 Tax Audit thresholds (₹1 Cr / ₹10 Cr).