Category: Income from Business & Profession

As per section 36 (1) (iii), Interest is allowable only when loan is taken for the purpose of business/profession i.e. interest on personal loan is disallowed but interest on working capital loan, factory construction, to pay dividend, sales tax, excise, etc allowable because related to business.

Treatment if loan is taken to acquire capital asset of business

1. Interest upto put to use of capital asset: Add in block with cost of asset and claim depreciation
   
2. Interest of the period after put to use of capital asset: It is of revenue nature so deductable from net profit
   

    

   Reference: Section 36 of The Income Tax Act: Other deductions
   

   (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—
   

   (i)  The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession;
   

   (ia)  the amount of any premium paid by a federal milk co-operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk raised by its members to such federal milk co-operative society;]
   

   (ib)  the amount of any premium [paid by any mode of payment other than cash] by the assessee as an employer to effect or to keep in force an insurance on the health of his employees under a scheme framed in this behalf by—
   

   (A)  the General Insurance Corporation of India formed under section 9 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972) and approved by the Central Government; or
   

   (B)  any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999);]
   

   (ii)  Any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission;
   

   (iia) [Omitted by the Finance Act, 1999, w.e.f. 1-4-2000.]
   

   (iii)  the amount of the interest paid in respect of capital
   borrowed for the purposes of the business or profession:
   

   [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.]
   

   Explanation.—Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;
   

   (iiia)  the pro rata amount of discount on a zero coupon bond having regard to the period of life of such bond calculated in the manner as may be prescribed.
   

   Explanation.—For the purposes of this clause, the expressions—
   

    (i)  “discount” means the difference between the amount received or receivable by the infrastructure capital company or infrastructure capital fund or public sector company [or scheduled bank] issuing the bond and the amount payable by such company or fund or public sector company[or scheduled bank] on maturity or redemption of such bond;
   

   (ii)  “period of life of the bond” means the period commencing from the date of issue of the bond and ending on the date of the maturity or redemption of such bond;
   

   (iv)  any sum paid by the assessee as an employer by way of contribution towards a recognized provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognizing the provident fund or approving the super-Annuation fund, as the case may be; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head “Salaries” or to the contributions or to the number of members of the fund;
   

   [(iva)
   any sum paid by the assessee as an employer by way of contribution towards a pension scheme, as referred to in section 80CCD, on account of an employee to the extent it does not exceed ten per cent of the salary of the employee in the previous year.
   

   Explanation.—for the purposes of this clause, “salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites;]
   

   (v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust;
   

   [(va)  any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.
   

   Explanation.—For the purposes of this clause, “due date” means the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued there under or under any standing order, award, contract of service or otherwise;]
   

   (vi)  in respect of animals which have been used for the purposes of the business or profession otherwise than as stock-in-trade and have died or become permanently useless for such purposes, the difference between the actual cost to the assessee of the animals and the amount, if any, realised in respect of the carcasses or animals;
   

   (vii)  subject to the provisions of sub-section (2), the amount of [any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year]:
   

   [Provided that in the case of [an assessee] to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.]
   

   [Explanation.—For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee;]
   

   [(viia) in respect of any provision for bad and doubtful debts made by—
   

   (a)  a scheduled bank [not being] a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount [not exceeding seven and one-half per cent] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding [ten] per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner :
   

   [Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year:]
   

   [Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words “five per cent”, the words “ten per cent” had been substituted :]
   

   [Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government:
   

   Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head “Profits and gains of business or profession.”]
   

   [Explanation.—For the purposes of this sub-clause, “relevant assessment years” means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005;]
   

   (b)  a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA);]
   

   [(c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A):]
   

   [Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year.]
   

   Explanation.—For the purposes of this clause,—
   

   [(i)  “non-scheduled bank” means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank;]
   

   [(ia)]  “rural branch” means a branch of a scheduled bank [or a non-scheduled bank] situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year;
   

   [(ii)  “scheduled bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934)
   

   [(iii)”public financial institution” shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);
   

   (iv)  “State financial corporation” means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);
   

    (v)”State industrial investment corporation” means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and [eligible for deduction under clause (viii) of this sub-section];]
   

   [(vi)”co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P;]
   

   [(viii)  in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head “Profits and gains of business or profession” (before making any deduction under this clause) carried to such reserve account:
   

   Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess.
   

   Explanation.—In this clause,—
   

   (a)  “specified entity” means,—
   

     (i)  a financial corporation specified in section 4A of the Companies Act, 1956 (1 of 1956);
   

    (ii)  a financial corporation which is a public sector company;
   

   (iii)  a banking company;
   

   (iv)  a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank;
   

    (v)  a housing finance company; and
   

   (vi)  any other financial corporation including a public company;
   

   (b)  “eligible business” means,—
   

   [(i) in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), the business of providing long-term finance for—
   

   (A)  industrial or agricultural development;
   

   (B)  development of infrastructure facility in India; or
   

   (C) development of housing in India;]
   

    (ii)  in respect of the specified entity referred to in sub-clause (v) of clause (a), the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and
   

   (iii)  in respect of the specified entity referred to in sub-clause (vi) of clause (a), the business of providing long-term finance for development of infrastructure facility in India;
   

   (c)  “banking company” means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;
   

   (d)  “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P;
   

   (e)  “housing finance company” means a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes;
   

   (f) “public company” shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);
   

   (g)  “infrastructure facility” means—
   

     (i)  an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed;
   

    (ii)  an undertaking referred to in clause (ii) or clause (iii) or clause (iv) or clause (vi) of sub-section (4) of section 80-IA; and
   

   (iii)  an undertaking referred to in sub-section (10) of section 80-IB;
   

   (h)  “long-term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;]
   

    

   [(ix) any expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees:
   

   Provided that where such expenditure or any part thereof is of a capital nature, one-fifth of such expenditure shall be deducted for the previous year in which it was incurred; and the balance thereof shall be deducted in equal installments for each of the four immediately succeeding previous years:
   

   Provided further that the provisions of sub-section (2) of section 32 and of sub-section (2) of section 72 shall apply in relation to deductions allowable under this clause as they apply in relation to deductions allowable in respect of depreciation:
   

   Provided further that the provisions of clauses (ii), (iii), (iv) and (v) of sub-section (2) [and sub-section (5)] of section 35, of sub-section (3) of section 41 and of Explanation 1 to clause (1) of section 43 shall, so far as may be, apply in relation to an asset representing expenditure of a capital nature for the purposes of promoting family planning as they apply in relation to an asset representing expenditure of a capital nature on scientific research;]
   

    

   [(x)  any expenditure incurred by the assessee, on or after the 1st day of April, 1999 but before the 1st day of April, 2000, wholly and exclusively in respect of a non-Y2K compliant computer system, owned by the assessee and used for the purposes of his business or profession, so as to make such computer system Y2K compliant computer system :
   

   Provided that no such deduction shall be allowed in respect of such expenditure under any other provisions of this Act:
   

   Provided further that no such deduction shall be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this clause.
   

   Explanation.—For the purposes of this clause,—
   

   (a)  “computer system” means a device or collection of devices including input and output support devices and excluding calculators which are not programmable and capable of being used in conjunction with external files, or more of which contain computer programmes, electronic instructions, input data and output data, that performs functions including, but not limited to, logic, arithmetic, data storage and retrieval, communication and control;
   

   (b)  “Y2K compliant computer system” means a computer system capable of correctly processing, providing or receiving data relating to date within and between the twentieth and twenty-first century;]
   

   [(xii)   any expenditure (not being in the nature of capital expenditure) incurred by a corporation or a body corporate, by whatever name called, if,—
   

   (a)  it is constituted or established by a Central, State or Provincial Act;
   

   (b)  such corporation or body corporate, having regard to the objects and purposes of the Act referred to in sub-clause (a), is notified by the Central Government in the Official Gazette for the purposes of this clause; and
   

   (c) the expenditure is incurred for the objects and purposes authorised by the Act under which it is constituted or established;]
   

   [(xiii) any amount of banking cash transaction tax paid by the assessee during the previous year on the taxable banking transactions entered into by him.
   

   Explanation.—For the purposes of this clause, the expressions “banking cash transaction tax” and “taxable banking transaction” shall have the same meanings respectively assigned to them under Chapter VII of the Finance Act, 2005;]
   

   [(xiv) any sum paid by a public financial institution by way of contribution to such credit guarantee fund trust for small industries as the Central Government may, by notification in the Official Gazette, specify in this behalf.
   

   Explanation.—For the purposes of this clause, “public financial institution” shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);]
   

   [(xv)  an amount equal to the securities transaction tax paid by the assessee in respect of the taxable securities transactions entered into in the course of his business during the previous year, if the income arising from such taxable securities transactions is included in the income computed under the head “Profits and gains of business or profession”.
   

   Explanation.—For the purposes of this clause, the expressions “securities transaction tax” and “taxable securities transaction” shall have the meanings respectively assigned to them under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004).
   

    

   (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply—
   

   [(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee;]
   

   (ii)  if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made;
   

   (iii)  any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year [(being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year)], but the [Assessing] Officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year;
   

   (iv)  where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year [(being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year)] and the [Assessing] Officer is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, the provisions of sub-section (6) of section 155 shall apply;
   

   [(v)  where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause.]
   

    

    

   
    

Any reasonable payment made to the relatives during the normal business circumstances /conditions is allowed as deduction under the income tax act. Section 40A of the Income tax Act deals with disallowance of excessive payment to relatives. “The Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction”.

Condition for Claiming Deduction

1. Payment is made
   
2. To specified persons
   
3. Not an Excess/unreasonable payment
   
4. Payment of should be made through account payee cheque to avoid any problem from Assessing officer.
   

   According to this section if any payment made to a specified person then we have to check that payment is reasonable. In case where payment is in excess then such excess amount will be disallowed.
   

   Meaning of Specified Persons
   

5. Nature of assessee- individual, HUF , company
   
6. Specified persons for him
   

• His relatives- spouse, brother-sister, ascendant, descendent, members of HUF and their relatives, director/their relatives
  
• An entity in which he/ his relative has substantial interest (i.e. profit share/ voting power >= 20%)
  
• If a company has substantial interest in the business of individual then such co., its directors, and relative of such directors are Specified persons
  
• If a firm/ HUF has substantial interest in the business of individual then such firm/ HUF, partners/ members of it and relatives of partners/ members
  
• If an AOP/BOI has substantial interest in the business of individual then such AOP/BOI, it’s all members and relatives of members
  
• If an individual has substantial interest in the business of individual then such individual, his relatives and all the companies in which such individual is a director and other directors of that companies and relatives of other directors
  
• All the firm/HUF/AOP/BOI in which such individual is partner/ member as well as other partners/ members and their relatives are also specified.
  

  Reference: Section 40A of the Income Tax Act 1961: Expenses or payments not deductible in certain circumstances.
  

  40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head “Profits and gains of business or profession”.
  

  (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.
  

  The following proviso shall be inserted in sub-section (2)(a) of section 40A by the Finance Act, 2012, w.e.f. 1-4-2013 :
  

  Provided that no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm’s length price as defined in clause (ii) of section 92F.
  

  (b) The persons referred to in clause (a) are the following, namely:—
  

1. where the assessee is an  individual: any relative of the assessee
   
2. where the assessee is a company, firm, association of persons or Hindu un-divided family : any director of the company, partner of the firm, or member of the association or family, or any relative of  such director, partner or member;
   
3. any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;
   
4. a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member or any other company carrying on business or profession in which the first mentioned company has substantial interest];
   
5. a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member;
   
6. any person who carries on a business or profession,—
   

   (A)  where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or
   

   (B)  where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person.
   

   Explanation.—For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,—
   

   (a)  in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and
   

   (b)  in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession.
   

   (3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.
   

   (3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds twenty thousand rupees:
   

   Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors :]
   

   Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words “twenty thousand rupees”, the words “thirty-five thousand rupees” had been substituted.]
   

   (4) Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by an account payee cheque drawn on a bank or account payee bank draft] in order that such expenditure may not be disallowed as a deduction under sub-section (3), then the payment may be made by such cheque or draft; and where the payment is so made or tendered, no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner.
   

   (7) (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason.
   

   (b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year.
   

   Explanation.—For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.]
   

   (9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (iva) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force.
   

   (10) Notwithstanding anything contained in sub-section (9), where the Assessing Officer is satisfied that the fund, trust, company, association of persons, body of individuals, society or other institution referred to in that sub-section has, before the 1st day of March, 1984, bona fide laid out or expended any expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee referred to in sub-section (9) out of the sum referred to in that sub-section, the amount of such expenditure shall, in case no deduction has been allowed to the assessee in respect of such sum and subject to the other provisions of this Act, be deducted in computing the income referred to in section 28 of the assessee of the previous year in which such expenditure is so laid out or expended, as if such expenditure had been laid out or expended by the assessee.]
   

   (11) Where the assessee has, before the 1st day of March, 1984, paid any sum to any fund, trust, company, association of persons, body of individuals, society or other institution referred to in sub-section (9), then, notwithstanding anything contained in any other law or in any instrument, he shall be entitled—
   

    (i)  to claim that so much of the amount paid by him as has not been laid out or expended by such fund, trust, company, association of persons, body of individuals, society or other institution (such amount being hereinafter referred to as the unutilized amount) be repaid to him, and where any claim is so made, the unutilized amount shall be repaid, as soon as may be, to him;
   

   (ii) to claim that any asset, being land, building, machinery, plant or furniture acquired or constructed by the fund, trust, company, association of persons, body of individuals, society or other institution out of the sum paid by the assessee, be transferred to him, and where any claim is so made, such asset shall be transferred, as soon as may be, to him.]
   

Section 40(a) of the Income Tax Act disallowed certain expenditure if no TDS is deducted while making payment for them.

1. Payment to a non resident : Payment of interest, royalty, technical fees is disallowed if:
   

• TDS has not been deducted
  
• TDS Deducted but not deposited: For expenditure from April to February till 31^st March of previous year end. Expenditure of March on or before 30^th April of assessment year.
  

  Note: if TDS deposited after above date then disallowed in this year and this exp. Will be allowed in previous year when TDS deposited to govt. on this exp.
  

1. Salary paid to a non resident: Salary Expenditure Will be disallowed if TDS neither deducted nor deposited. Once Salary to NR is disallowed under this sec then it will never be allowed even assessee rectifies his mistake.
   
2. Payment to a resident for Interest, royalty, rent, contract, commission, fees will be disallowed if
   

• TDS has not been deducted
  
• Deducted but not deposited upto the due date of return 30^th September.
  
• If TDS not deposited upto the due date of return then above expenditure will be disallowed and will be allowed in previous year when TDS deposited to govt. on this exp.
  

   

  Reference: Section 40 of the Income Tax Act 1961 Amounts not deductible.
  

  Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,—
  

  (a)   In the case of any assessee—
  

  i)  Any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,—
  

  (A)  Outside India; or
  

  (B)  In India to a non-resident, not being a company or to a foreign company,
  

  On which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200:
  

  Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
  

  Explanation.—for the purposes of this sub-clause,—
  

  (A)  “Royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;
  

  (B)  “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;
  

  (ia)  any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, [has not been paid on or before the due date specified in sub-section (1) of section 139
  

  Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
  

  The following second proviso shall be inserted in sub-clause (ia) of clause (a) of section 40 by the Finance Act, 2012, w.e.f. 1-4-2013:
  

  Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.
  

  Explanation.—for the purposes of this sub-clause,—
  

   (i)  “Commission or brokerage” shall have the same meaning as in clause (i) of the Explanation to section 194H;
  

   (ii)  “Fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;
  

  (iii)  “Professional services” shall have the same meaning as in clause (a) of the Explanation to section 194J;
  

  (iv)  “Work” shall have the same meaning as in Explanation III to section 194C;
  

  (v)  “Rent” shall have the same meaning as in clause (i) to the Explanation to section 194-I;
  

  (vi)  “Royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;
  

  [(ib) any sum paid on account of fringe benefit tax under Chapter XIIH;]
  

  (ii)  any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.
  

  [Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.]
  

  [Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;]
  

  (iia)  any sum paid on account of wealth-tax.
  

  Explanation.—For the purposes of this sub-clause, “wealth-tax” means wealth-tax chargeable under the Wealth-tax Act, 1957 (27 of 1957), or any tax of a similar character chargeable under any law in force in any country outside India or any tax chargeable under such law with reference to the value of the assets of, or the capital employed in, a business or profession carried on by the assessee, whether or not the debts of the business or profession are allowed as a deduction in computing the amount with reference to which such tax is charged, but does not include any tax chargeable with reference to the value of any particular asset of the business or profession;]
  

  (iii)  any payment which is chargeable under the head “Salaries”, if it is payable—
  

  (A)  outside India; or
  

  (B)  to a non-resident,
  

  and if the tax has not been paid thereon nor deducted there from under Chapter XVII-B;]
  

  (iv)  any payment to a provident or other fund established for the benefit of employees of the assessee, unless the assessee has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are chargeable to tax under the head “Salaries”;
  

  [(v) any tax actually paid by an employer referred to in clause (10CC) of section 10;]
  

  [(b) in the case of any firm assessable as such,—
  

   (i)  any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as “remuneration”) to any partner who is not a working partner; or
  

  (ii)  any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorized by, or is not in accordance with, the terms of the partnership deed; or
  

  (iii)  any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorized by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorized by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorization for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or
  

  (iv)  any payment of interest to any partner which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of [twelve] per cent simple interest per annum; or
  

  (v)  any payment of remuneration to any partner who is a working partner, which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder:—
  

  [(a)  on the first Rs. 3,00,000 of the book-profit or in case of a loss	Rs. 1,50,000 or at the rate of 90 per cent of the book-profit, whichever is more;
  (b)  on the balance of the book profit	at the rate of 60 per cent :]

  Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment.
  

  Explanation 1.—Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as “partner in a representative capacity” and “person so represented”, respectively),—
  

    (i)  interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause;
  

   (ii)  interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause.
  

  Explanation 2.—Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person.
  

  Explanation 3.—For the purposes of this clause, “book-profit” means the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.
  

  Explanation 4.—For the purposes of this clause, “working partner” means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner;]
  

  (ba)  in the case of an association of persons or body of individuals [other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India, any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such association or body to a member of such association or body.
  

  Explanation 1.—Where interest is paid by an association or body to any member thereof who has also paid interest to the association or body, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the association or body to the member exceeds the payment of interest by the member to the association or body.
  

  Explanation 2.—Where an individual is a member of an association or body on behalf, or for the benefit, of any other person (such member and the other person being hereinafter referred to as “member in a representative capacity” and “person so represented”, respectively),—
  

   (i)  interest paid by the association or body to such individual or by such individual to the association or body otherwise than as member in a representative capacity, shall not be taken into account for the purposes of this clause;
  

  (ii)  interest paid by the association or body to such individual or by such individual to the association or body as member in a representative capacity and interest paid by the association or body to the person so represented or by the person so represented to the association or body, shall be taken into account for the purposes of this clause.
  

  Explanation 3.—Where an individual is a member of an association or body otherwise than as member in a representative capacity, interest paid by the association or body to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person.]
  

  (c)  [Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. Earlier, it was amended by the Finance Act, 1963, w.e.f. 1-4-1963, Finance Act, 1964, w.e.f. 1-4-1964, Finance Act, 1965, w.e.f. 1-4-1965, Finance Act, 1968, w.e.f. 1-4-1969, Finance (No. 2) Act, 1971, w.e.f. 1-4-1972, Finance Act, 1984, w.e.f. 1-4-1985 and Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988.]
  

  (d)  [Omitted by the Finance Act, 1988, w.e.f. 1-4-1989.]

As per this section 43B of the Income Tax Act, Deduction is allowed only on ‘Actual Payment’ upto the due date of return i.e. not allowed on accrual basis. So Income Tax will disallow  expenses if they are not paid before due date of Income tax return. So assessee can claim the disallowed expenses in the assessment year in which they are actually paid.

Following payments should be made till the date of return otherwise expenses will be disallowed for computation of profit & loss under business income head of income tax. How to Claim Deduction for Payment made to relatives as Business Expenditure under section 40A (2) of Income Tax Ac

1. Govt. dues e.g. VAT, excise duty, custom duty municipal tax, etc.
   
2. Bonus/ commission to employees
   
3. Employer’s contribution to approved/ recognized funds
   
4. Interest on loan taken from bank/ financial institutions
5. Leave salary payable to an employee

Read  How to save Income Tax by Investing in Different Deduction Schemes under section 80C, 80CCG, 80D, 80DD, 80E,80G, 80GG to 80U 

Conditions for Claiming Deduction under section 43B of Income Tax Act, 1961

1. If above 5 payments are not made till the date of return then above expenditure will be disallowed and it will be allowed in the previous year when actually paid. 
2. Due Date of Return: is date as per income tax act or actual date of return filling- whichever is earlier.
3. Municipal tax: if it is related to house property then allowed as deduction if payment is made in the previous year itself and if it is related to B & P then allowed as deduction if paid upto the due date of return.Payment in excess of Rs. 20000/35000 in cash / cross cheque is disallowed under Section 40A (3) of Income Tax Act

Reference: section 43B of The Income Tax Act 1961, certain deductions to be only on actual payment.

Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or

 (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or

(c) any sum referred to in clause (ii) of sub-section (1) of section 36, or (Read How to Claim Deduction for Interest Expenses from Business Income under Section 36(1)(iii))

(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution [or a State financial corporation or a State industrial investment corporation], in accordance with the terms and conditions of the agreement governing such loan or borrowing , or

(e) any sum payable by the assessee as interest on any [loan or advances] from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances, or

(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee,]

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :

Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

Explanation [1].—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 2.—For the purposes of clause (a), as in force at all material times, “any sum payable” means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.]

Explanation 3.—For the removal of doubts it is hereby declared that where a deduction in respect of any sum referred to in clause (c) [or clause (d)] of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 3A.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

[Explanation 3B.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (f) of this section is allowed in computing the income, referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2001, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.]

[Explanation 3C.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid.]

[Explanation 3D.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (e) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or advance shall not be deemed to have been actually paid.]

[Explanation 4.—For the purposes of this section,—

 (a) “public financial institutions” shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);

[(aa) “scheduled bank” shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of section 11;]

 (b) “State financial corporation” means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);

 (c) “State industrial investment corporation” means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and [eligible for deduction under clause (viii) of sub-section (1) of section 36]

Unabsorbed depreciation is the depreciation which is not charged to profit and loss account in its relevant previous year due to inadequate profit or due to loss in business:

1. Under income tax act, depreciation is deductible to the extent of profit available just before sec 32 i.e. profit after all adjustments but before depreciation.
   
2. If whole depreciation cannot be adjusted from net profit then it is known as unabsorbed depreciation
   

Tax treatment of unabsorbed depreciation

1. Treatment in the same year in which Unabsorbed depreciation arises
   
   1. Set off this amount from other business or professional income i.e. within the head
      
   2. If within the head not possible then set off among the head but excluding salary head
      
   3. If among the head is also not possible then carry forward this amount to the next year
      
2. Treatment in the subsequent years
   
   1. Set off last year’s unabsorbed with the income of B & P i.e. within the head
      
   2. If within the head not possible then set off among the head but excluding salary head
      
   3. If among the head is also not possible then carry forward upto infinite years
      

Reference: Section 32 of the Income Tax Act 1961: Depreciation

Other Information

As per section 32 depreciation in respect of-

 (i) Buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—

1. In the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed
   
2. In the case of any block of assets, such percentage on the written down value thereof as may be prescribed
   

   Provided that no deduction shall be allowed under this clause in respect of—
   

   (a)  Any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975 [but before the 1st day of April, 2001], unless it is used—
   

    (i)  In a business of running it on hire for tourists; or
   

   (ii)  Outside India in his business or profession in another country; and
   

   (b)  any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42
   

   
   Provided further that where an asset referred to in clause (i) or clause (ii) [or clause (iia)], as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) [or clause (iia)], as the case may be
   

   
   Provided also that where an asset being commercial vehicle is acquired by the assessee on or after the 1st day of October, 1998 but before the 1st day of April, 1999 and is put to use before the 1st day of April, 1999 for the purposes of business or profession, the deduction in respect of such asset shall be allowed on such percentage on the written down value thereof as may be prescribed.
   

   Explanation.—for the purposes of this proviso,—
   

   (a)  the expression “commercial vehicle” means “heavy goods vehicle”, “heavy passenger motor vehicle”, “light motor vehicle”, “medium goods vehicle” and “medium passenger motor vehicle” but does not include “maxi-cab”, “motor-cab”, “tractor” and “road-roller”;
   

   (b)  the expressions “heavy goods vehicle”, “heavy passenger motor vehicle”, “light motor vehicle”, “medium goods vehicle”, “medium passenger motor vehicle”, “maxi-cab”, “motor-cab”, “tractor” and “road roller” shall have the meanings respectively as assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988):]
   

   [Provided also that, in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall, in the case of a company, be restricted to seventy-five per cent of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of the Taxation Laws (Amendment) Act, 1991:]
   

   [Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in [clause (xiii), clause (xiiib) and clause (xiv)] of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.]
   

   [Explanation 1.—Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.
   

   Explanation 2.—for the purposes of this [sub-section] “written down value of the block of assets” shall have the same meaning as in clause (c) of sub-section (6) of section 43.]
   

   [Explanation 3.—for the purposes of this sub-section, [the expression “assets”] shall mean—
   

   (a)  Tangible assets, being buildings, machinery, plant or furniture;
   

   (b)  intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.
   

   Explanation 4.—For the purposes of this sub-section, the expression “know-how” means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto).
   

   [Explanation 5.—For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income;]
   

   [(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing [or in the business of generation or generation and distribution of power], a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii):
   

   Provided that no deduction shall be allowed in respect of—
   

   (A)  Any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or
   

   (B)  Any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or
   

   (C)  Any office appliances or road transport vehicles; or
   

   (D) Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year;]
   

   [(iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof :
   

   Provided that such deficiency is actually written off in the books of the assessee.
   

   Explanation.—for the purposes of this clause,—
   

   (1) “Moneys payable” in respect of any building, machinery, plant or furniture includes—
   

   (a)  Any insurance, salvage or compensation moneys payable in respect thereof;
   

   (b)  Where the building, machinery, plant or furniture is sold, the price for which it is sold,
   

   so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause (1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso;
   

   (2) “sold” includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is [an Indian company or in a scheme of amalgamation of a banking company, as referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a banking institution as referred to in sub-section (15) of section 45 of the said Act, sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of that Act, of any asset by the banking company to the banking institution.]]
   

   [(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.]
   

As per section 36(1)(vii) of the Income Tax Act, 1961 deduction for bad debt is allowable only if following 2 conditions are satisfied:

1. Bad debts is written off in books of accounts
   
2. Bad debts is related to an amount, which is a taxable income i.e. if an amount is exempt from tax and there is a Bad debt of it, it is disallowed because if income is exempt then its expense are also disallowed.
   

    

   Exception: 2^nd condition is not necessary in case of ‘money lending business’ because there is a bad debt of loan amount and loan amount is an asset, not taxable income.
   

    

   Conclusion:
   

   1. In case of money lending business check only first condition
      
   2. PBDD is disallowed. But PBDD created by bank/FI is allowable because it is necessary as per RBI norms.
      

   Deduction of PBDD to bank & financial institutions only Section 36 (1) (viia) of Income Tax Act
   

    

   1. Deduction amount for Indian banks including cooperative banks
      
      1. 7.5%of gross total income (GTI=before this section)
         
      2. 10% of total average advances (loan) made by its rural branch
         

         a+b= total deduction
         

   2. Foreign banks and financial institutions
      

      5%of gross total income (GTI=before this section)
      

   Notes:
   

   1. Rural branch means a branch which is situated at a place where population as per 2001 census is less than equal to 10000
      
   2. Average advances per rural branch:
      
      1. Take outstanding balance of advance account at the end of each month
         
      2. Now divide by number of months
         
      3. This is Average advances per rural branch
         
      4. Now make total of Average advances of all rural branches
         
      5. Now calculate its 10%
         

         Clause (viia) + Clause (vii) i.e. PBDD + bad debts
         

      If actual bad debt is more than PBDD a/c then excess amount can be claimed as bad debt u/s 36 (1) (vii)
      

    

    

    

   Reference: Section 36 of the Income Tax Act 1961: Other deductions.
   

   (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—
   

   (i)  The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession;
   

   (ia)  the amount of any premium paid by a federal milk co-operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk raised by its members to such federal milk co-operative society;
   

   (ib)  the amount of any premium [paid by any mode of payment other than cash] by the assessee as an employer to effect or to keep in force an insurance on the health of his employees under a scheme framed in this behalf by—
   

   (A)  the General Insurance Corporation of India formed under section 9 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972) and approved by the Central Government; or
   

   (B)  any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999);
   

   (ii)  Any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission;
   

   (iia)   [Omitted by the Finance Act, 1999, w.e.f. 1-4-2000.]
   

   (iii)  the amount of the interest paid in respect of capital
   borrowed for the purposes of the business or profession:
   

   [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.]
   

   Explanation.—Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;
   

   (iiia)  the pro rata amount of discount on a zero coupon bond having regard to the period of life of such bond calculated in the manner as may be prescribed
   

   Explanation.—For the purposes of this clause, the expressions—
   

    (i)  “discount” means the difference between the amount received or receivable by the infrastructure capital company or infrastructure capital fund or public sector company [or scheduled bank] issuing the bond and the amount payable by such company or fund or public sector company [or scheduled bank] on maturity or redemption of such bond;
   

   (ii)  “period of life of the bond” means the period commencing from the date of issue of the bond and ending on the date of the maturity or redemption of such bond;
   

   (iv)  any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognizing the provident fund or approving the super-Annuation fund, as the case may be; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head “Salaries” or to the contributions or to the number of members of the fund;
   

   (iva) any sum paid by the assessee as an employer by way of contribution towards a pension scheme, as referred to in section 80CCD, on account of an employee to the extent it does not exceed ten per cent of the salary of the employee in the previous year.
   

   Explanation.—For the purposes of this clause, “salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites;]
   

   (v)  any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust;
   

   (va)  any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.
   

   Explanation.—For the purposes of this clause, “due date” means the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise;]
   

   (vi)  in respect of animals which have been used for the purposes of the business or profession otherwise than as stock-in-trade and have died or become permanently useless for such purposes, the difference between the actual cost to the assessee of the animals and the amount, if any, realised in respect of the carcasses or animals;
   

   (vii)  subject to the provisions of sub-section (2), the amount of any bad debt or part thereof this is written off as irrecoverable in the accounts of the assessee for the previous year]:
   

   [Provided that in the case of [an assessee] to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.]
   

   [Explanation.—For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee;]
   

   (viia)  in respect of any provision for bad and doubtful debts made by—
   

   (a)  a scheduled bank [not being a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount [not exceeding seven and one-half per cent] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding [ten] per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner :
   

   [Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year:]
   

   [Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words “five per cent”, the words “ten per cent” had been substituted :]
   

   [Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government:
   

   Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head “Profits and gains of business or profession.” ]
   

   [Explanation.—For the purposes of this sub-clause, “relevant assessment years” means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005;]
   

   (b)  a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA);]
   

   (c)  a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) :]
   

   [Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year.]
   

   Explanation.—For the purposes of this clause,—
   

   (i)  “non-scheduled bank” means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank;]
   

   (ia)  “rural branch” means a branch of a scheduled bank [or a non-scheduled bank] situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year;
   

   (ii)  “scheduled bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934)
   

   (iii)  “public financial institution” shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);
   

   (iv)  “State financial corporation” means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);
   

    (v)  “State industrial investment corporation” means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and [eligible for deduction under clause (viii) of this sub-section];]
   

   (vi)  “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P
   

   (viii)  in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head “Profits and gains of business or profession” (before making any deduction under this clause) carried to such reserve account:
   

   Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess.
   

   Explanation.—In this clause,—
   

   (a)  “specified entity” means,—
   

     (i)  a financial corporation specified in section 4A of the Companies Act, 1956 (1 of 1956) (ii)  a financial corporation which is a public sector company;
   

   (iii)  a banking company;
   

   (iv)  a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank;
   

    (v)  a housing finance company; and
   

   (vi)  any other financial corporation including a public company;
   

   (b)  “eligible business” means,—
   

   (i)  in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), the business of providing long-term finance for—
   

   (A)  industrial or agricultural development;
   

   (B)  development of infrastructure facility in India; or
   

   (C)  development of housing in India;]
   

    (ii)  in respect of the specified entity referred to in sub-clause (v) of clause (a), the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and
   

   (iii)  in respect of the specified entity referred to in sub-clause (vi) of clause (a), the business of providing long-term finance for development of infrastructure facility in India;
   

   (c)  “banking company” means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;
   

   (d)  “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P;
   

   (e)  “housing finance company” means a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes;
   

   (f)   “public company” shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);
   

   (g)  “infrastructure facility” means—
   

     (i)  an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed;
   

    (ii)  an undertaking referred to in clause (ii) or clause (iii) or clause (iv) or clause (vi) of sub-section (4) of section 80-IA; and
   

   (iii)  an undertaking referred to in sub-section (10) of section 80-IB;
   

   (h)  “long-term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;]
   

   (ix)  any expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees :
   

   Provided that where such expenditure or any part thereof is of a capital nature, one-fifth of such expenditure shall be deducted for the previous year in which it was incurred; and the balance thereof shall be deducted in equal instalments for each of the four immediately succeeding previous years :
   

   Provided further that the provisions of sub-section (2) of section 32 and of sub-section (2) of section 72 shall apply in relation to deductions allowable under this clause as they apply in relation to deductions allowable in respect of depreciation :
   

   Provided further that the provisions of clauses (ii), (iii), (iv) and (v) of sub-section (2) [and sub-section (5)] of section 35, of sub-section (3) of section 41 and of Explanation 1 to clause (1) of section 43 shall, so far as may be, apply in relation to an asset representing expenditure of a capital nature for the purposes of promoting family planning as they apply in relation to an asset representing expenditure of a capital nature on scientific research;]
   

   (x)  any expenditure incurred by the assessee, on or after the 1st day of April, 1999 but before the 1st day of April, 2000, wholly and exclusively in respect of a non-Y2K compliant computer system, owned by the assessee and used for the purposes of his business or profession, so as to make such computer system Y2K compliant computer system :
   

   Provided that no such deduction shall be allowed in respect of such expenditure under any other provisions of this Act :
   

   Provided further that no such deduction shall be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this clause.
   

   Explanation.—For the purposes of this clause,—
   

   (a)  “computer system” means a device or collection of devices including input and output support devices and excluding calculators which are not programmable and capable of being used in conjunction with external files, or more of which contain computer programmes, electronic instructions, input data and output data, that performs functions including, but not limited to, logic, arithmetic, data storage and retrieval, communication and control;
   

   (b)  “Y2K compliant computer system” means a computer system capable of correctly processing, providing or receiving data relating to date within and between the twentieth and twenty-first century;]
   

   (xi)   any expenditure (not being in the nature of capital expenditure) incurred by a corporation or a body corporate, by whatever name called, if,—
   

   (a)  it is constituted or established by a Central, State or Provincial Act;
   

   (b)  such corporation or body corporate, having regard to the objects and purposes of the Act referred to in sub-clause (a), is notified by the Central Government in the Official Gazette for the purposes of this clause; and
   

   (c)  the expenditure is incurred for the objects and purposes authorised by the Act under which it is constituted or established;]
   

   (xii)  any amount of banking cash transaction tax paid by the assessee during the previous year on the taxable banking transactions entered into by him.
   

   Explanation.—For the purposes of this clause, the expressions “banking cash transaction tax” and “taxable banking transaction” shall have the same meanings respectively assigned to them under Chapter VII of the Finance Act, 2005;]
   

   (xiii)  any sum paid by a public financial institution by way of contribution to such credit guarantee fund trust for small industries as the Central Government may, by notification in the Official Gazette, specify in this behalf.
   

   Explanation.—For the purposes of this clause, “public financial institution” shall have the meaning assigned to it in section 4Aof the Companies Act, 1956 (1 of 1956);]
   

   (xiv)  an amount equal to the securities transaction tax paid by the assessee in respect of the taxable securities transactions entered into in the course of his business during the previous year, if the income arising from such taxable securities transactions is included in the income computed under the head “Profits and gains of business or profession”.
   

   Explanation.—For the purposes of this clause, the expressions “securities transaction tax” and “taxable securities transaction” shall have the meanings respectively assigned to them under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004).
   

   (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply—
   

   (i)  no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee
   

   (ii)  if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made;
   

   (iii)  any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year [(being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year)], but the [Assessing] Officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year;
   

   (iv)  where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year [(being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year)] and the [Assessing] Officer is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, the provisions of sub-section (6) of section 155 shall apply;
   

   (v)  where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause.
   

                                                                                                                                                                                                                                                                                                                             
    

   
   

Additional depreciation is the depreciation which is allowed by Income Tax Act over and above original depreciation of an asset subject to fulfillment of different condition as prescribe under the income tax act. So assessee can claiming total depreciation which is equal to Normal depreciation ₊ additional depreciation =total depreciation  Also read Rate of Depreciation under Income Tax Act

In following cases the assessee can claim additional depreciation of fixed assets, which are as follows (Also read How to Amortize Preliminary Expenses under section 35D of the Income Tax)

Conditions for claiming additional depreciation:

1. Assessee is engaged in manufacturing activity
2. Assessee has purchased new plant and machinery i.e. not second hand
3. plant and machinery is installed at factory premises

Rate of additional depreciation is 20% WDV (if put to use for less than 180 days then 10%)  (Also Read Depreciation on Goodwill and Goodwill is treated as asset under section 32 of the Income Tax Act, 1961)

Following assets are not eligible for additional depreciation

1. vehicles
2. aircrafts
3. ships
4. assets on which depreciation rate is 100%
5. building
6. furniture
7. intangible assets

Important to note:

1. Compute additional depreciation on cost- it means additional depreciation is allowable only once in a life of an asset in the year when asset is put to use
   

2. Even closing WDV (balance) is negative/zero or physical balance of block doesn’t exist then also deduction of additional depreciation from net profit is available
   

Reference: Section 32 of the Income Tax Act 1961: Depreciation

As per section 32 depreciation in respect of-

 (i) Buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—

1. In the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed
   

2. In the case of any block of assets, such percentage on the written down value thereof as may be prescribed
   

   Provided that no deduction shall be allowed under this clause in respect of—
   

   (a)  Any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975 [but before the 1st day of April, 2001], unless it is used—
   

    (i)  In a business of running it on hire for tourists; or
   

   (ii)  Outside India in his business or profession in another country; and
   

   (b)  any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42
   

   
   Provided further that where an asset referred to in clause (i) or clause (ii) [or clause (iia)], as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) [or clause (iia)], as the case may be
   

   
   Provided also that where an asset being commercial vehicle is acquired by the assessee on or after the 1st day of October, 1998 but before the 1st day of April, 1999 and is put to use before the 1st day of April, 1999 for the purposes of business or profession, the deduction in respect of such asset shall be allowed on such percentage on the written down value thereof as may be prescribed.
   

   Explanation.—for the purposes of this proviso,—
   

   (a)  the expression “commercial vehicle” means “heavy goods vehicle”, “heavy passenger motor vehicle”, “light motor vehicle”, “medium goods vehicle” and “medium passenger motor vehicle” but does not include “maxi-cab”, “motor-cab”, “tractor” and “road-roller”;
   

   (b)  the expressions “heavy goods vehicle”, “heavy passenger motor vehicle”, “light motor vehicle”, “medium goods vehicle”, “medium passenger motor vehicle”, “maxi-cab”, “motor-cab”, “tractor” and “road roller” shall have the meanings respectively as assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988):]
   

   [Provided also that, in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall, in the case of a company, be restricted to seventy-five per cent of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of the Taxation Laws (Amendment) Act, 1991:]
   

   [Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in [clause (xiii), clause (xiiib) and clause (xiv)] of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.]
   

   [Explanation 1.—Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.
   

   Explanation 2.—for the purposes of this [sub-section] “written down value of the block of assets” shall have the same meaning as in clause (c) of sub-section (6) of section 43.]
   

   [Explanation 3.—for the purposes of this sub-section, [the expression “assets”] shall mean—
   

   (a)  Tangible assets, being buildings, machinery, plant or furniture;
   

   (b)  intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.
   

   Explanation 4.—For the purposes of this sub-section, the expression “know-how” means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto).
   

   [Explanation 5.—For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income;]
   

   [(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing [or in the business of generation or generation and distribution of power], a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii):
   

   Provided that no deduction shall be allowed in respect of—
   

   (A)  Any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or
   

   (B)  Any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or
   

   (C)  Any office appliances or road transport vehicles; or
   

   (D) Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year;]
   

   [(iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof :
   

   Provided that such deficiency is actually written off in the books of the assessee.
   

   Explanation.—for the purposes of this clause,—
   

   (1) “Moneys payable” in respect of any building, machinery, plant or furniture includes—
   

   (a)  Any insurance, salvage or compensation moneys payable in respect thereof;
   

   (b)  Where the building, machinery, plant or furniture is sold, the price for which it is sold,
   

   so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause (1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso;
   

   (2) “sold” includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is [an Indian company or in a scheme of amalgamation of a banking company, as referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a banking institution as referred to in sub-section (15) of section 45 of the said Act, sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of that Act, of any asset by the banking company to the banking institution.]]
   

   [(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.]
   

When person is required maintain books of accounts under income tax act? This is the most common question for businessmen asks their tax advisors.

All the persons whether they are having an individual business or partnership firms or company or HUF or even they are professionals, are always required to maintain certain books of accounts in order to manage their budget and assess their total and taxable income.

As per this section all persons are required to maintain books of accounts depending on certain conditions which classify them into some categories based on their professions and businesses

1. Specified professional persons like CA, CS, CWA, Advocates, doctors, engineers, film artist, etc. are required to maintain sufficient books of accounts so that total income of the assessee can be calculated
   

   Following is the condition which is required to be satisfied in order to maintain Specified books of accounts-Gross receipts in all the preceding three previous years is greater than Rs. 150000
   

   Notes:
   

• In case of new business if in first year, gross receipt is greater than Rs. 150000 then maintain Specified books of accounts
  
• Specified books of accounts- are ledger, journal, cash book, carbon copy of receipts (counterfoils), invoices, etc.
  

1. Non Specified professions or all other businesses are not compulsorily required to maintain books of accounts, but only some conditions are there, which if get satisfied then they are required to maintain books of accounts
   

   Following are the conditions out of which if anyone get satisfied then maintain sufficient books
   

   1. Turnover/ gross receipts in any year out of prior 3 years is greater than 10 lakhs
      

      OR
      

      1. Net profit in any year out of prior 3 years is greater than Rs.120000
         

   Notes: In case of new business check the Turnover/ gross receipts of 10 lakhs/120000 of first year only because there is no prior years available
   

Reference: Rule 6F of the Income Tax Rules

Books of account and other documents to be kept and maintained under section 44AA(3) by persons carrying on certain professions.

6F. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or authorised representative or film artist shall keep and maintain the books of account and other documents specified in sub-rule (2):

Provided that nothing in this sub-rule shall apply in relation to any previous year in the case of any person if his total gross receipts in the profession do not exceed one lakh fifty thousand rupees in any one of the three years immediately preceding the previous year, or, where the profession has been newly set up in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said amount.

(2) The books of account and other documents referred to in sub-rule (1) shall be the following, namely:—

   (i)   a cash book;

  (ii)   a journal, if the accounts are maintained according to the mercantile system of accounting;

(iii)   a ledger;

(iv)    carbon copies of bills, whether machine numbered or otherwise serially numbered, wherever such bills are issued by the person, and carbon copies or counterfoils of machine numbered or otherwise serially numbered receipts issued by him:

Provided that nothing in this clause shall apply in relation to sums not exceeding twenty-five rupees;

(v)   original bills wherever issued to the person and receipts in respect of expenditure incurred by the person or, where such bills and receipts are not issued and the expenditure incurred does not exceed fifty rupees, payment vouchers prepared and signed by the person:

Provided that the requirements as to the preparation and signing of payment vouchers shall not apply in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred by him.]

Explanation : In this rule,—

Reference: Section 44AA of the Income Tax Act 1961: Maintenance of accounts by certain persons carrying on profession or business.

(1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the [Assessing] Officer to compute his total income in accordance with the provisions of this Act.

(2) Every person carrying on business or profession [not being a profession referred to in sub-section (1)] shall,—

  (i)  if his income from business or profession exceeds [one lakh twenty] thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds [ten lakh] rupees in any one of the three years immediately preceding the previous year; or

 (ii)  where the business or profession is newly set up in any previous year, if his income from business or profession is likely to exceed [one lakh twenty] thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed [ten lakh] rupees, [during such previous year; or

(iii) where the profits and gains from the business are deemed to be the profits and gains of the assessee under [section 44AE] [or section 44BB or section 44BBB], as the case may be, and the assessee has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, during such [previous year; or]]

[(iv) where the profits and gains from the business are deemed to be the profits and gains of the assessee under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the maximum amount which is not chargeable to income-tax during such previous year,]

Keep and maintain such books of account and other documents as may enable the [Assessing] Officer to compute his total income in accordance with the provisions of this Act.

(3) The Board may, having regard to the nature of the business or profession carried on by any class of persons, prescribe, by rules, the books of account and other documents (including inventories, wherever necessary) to be kept and maintained under sub-section (1) or sub-section (2), the particulars to be contained therein and the form and the manner in which and the place at which they shall be kept and maintained.

(4) Without prejudice to the provisions of sub-section (3), the Board may prescribe, by rules, the period for which the books of account and other documents to be kept and maintained under sub-section (1) or sub-section (2) shall be retained.]

Any payment in excess of Rs 20000/- to any person other than account payee cheque on single day will disallowed as expenditure under the Income tax act and such amount will added back to income of that person. Calculating Business Gain on Presumptive Basis under Section 44AD of the Income Tax Act: Deemed Income

 Condition for disallowance of Payment under Income Tax Act

1. Payment is made in excess of RS. 20000/35000
   
2. To a single person
   
3. On a single day
   
4. by cash / cross cheque/ bearer cheque/cross bank draft
   
5. Then whole payment will be disallowed.
   
6. In case of Transportation expenditure limit is 35000 i.e. in case of any other expenditure limit is 20000.
   

 Exception to above Section: Rule 6DD Allow Expenditure Read Income Tax Challan Correcttion, Rectification of Challan Details

In following cases, even payment in cash / cross cheque and exceeding the specified limit then also expenditure is allowable.Compulsory Audit of Business and Profession under Section 44AB of the Income Tax

1. Payment is made to RBI/ any bank/ govt.
   
2. Payment is made to cottage industries which run s without aid of power
   
3. Payment is made in a village/town where bank facility is not available
   
4. Payment is required to be made on a day on which banks were closed
   
5. Payment is made directly to the grower of agriculture products or to poultry, dairy, horticulture, pisci culture
   
6. Any capital expenditure
   
7. Payment is made to an agent who is required to make payment for goods, etc. on behalf of such person
   
8. Payment is made to an authorized money exchanger who is engaged in the business of conversion of foreign currency
   
9. VRS/ gratuity, etc. retirement benefits if paid to an employee whose taxable salary in the previous year just preceding the year of retirement is <= Rs.50000 i.e. lower paid employee.
   

Reference: Section 40A (3) of the Income Tax Act 1961: Expenses or payments not deductible in certain circumstances List of Income Taxable as Profits and Gains of Business or Profession

40A(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.

(3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds twenty thousand rupees:How to Claim Deduction for Interest Expenses from Business Income under Section 36(1)(iii)

Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors :How to Claim Deduction for Payment made to relatives as Business Expenditure under section 40A (2) of Income Tax Act

Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words “twenty thousand rupees”, the words “thirty-five thousand rupees” had been substituted.]

(4) Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by an account payee cheque drawn on a bank or account payee bank draft] in order that such expenditure may not be disallowed as a deduction under sub-section (3), then the payment may be made by such cheque or draft; and where the payment is so made or tendered, no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner.

Disallowance of Certain Expenses if TDS has not been Deducted or if Deducted then not Deposited to Government within time 

(1) Notwithstanding anything to the contrary contained in this Act, where the amount received during a previous year by any trade, professional or similar association [(other than an association or institution referred to in clause (23A) of section 10)] from its members, whether by way of subscription or otherwise (not being remuneration received for rendering any specific services to such members) falls short of the expenditure incurred by such association during that previous year (not being expenditure deductible in computing the income under any other provision of this Act and not being in the nature of capital expenditure) solely for the purposes of protection or advancement of the common interests of its members, the amount so fallen short (hereinafter referred to as deficiency) shall, subject to the provisions of this section, be allowed as a deduction in computing the income of the association assessable for the relevant assessment year under the head “Profits and gains of business or profession” and if there is no income assessable under that head or the deficiency allowable exceeds such income, the whole or the balance of the deficiency, as the case may be, shall be allowed as a deduction in computing the income of the association assessable for the relevant assessment year under any other head.

(2) In computing the income of the association for the relevant assessment year under sub-section (1), effect shall first be given to any other provision of this Act under which any allowance or loss in respect of any earlier assessment year is carried forward and set off against the income for the relevant assessment year.

(3) The amount of deficiency to be allowed as a deduction under this section shall in no case exceed one-half of the total income of the association as computed before making any allowance under this section.

(4) This section applies only to that trade, professional or similar association the income of which or any part thereof is not distributed to its members except as grants to any association or institution affiliated to it.