Profits and Gains from Business/Profession
Section 28 gives the list of income, which are taxable under the head 'Profits and
Gains from Business/Profession'
1. Profits and Gains arising from business, profession or vocation carried on by the
assessee at any time during the previous year.
The term business has been defined by Section 2(13) as follows :'Business
includes any trade, commerce or manufacture or any adventure or concern in the
nature of trade, commerce, or manufacture'. Trade implies buying and selling of
goods. Trade repeated on a large scale is called as commerce. Manufacture is a
process, which results in a commercially different and new article being
produced. Any irregular or occasional activity (adventure) can also be
considered as business activity, if such activity is of the nature of trade,
commerce or manufacture. However an adventure in the nature of trade has to
be distinguished from an investment. Providing service to others is also a form
of business. Generally, any activity done with an intention of earning profit may
be termed as a business activity. Business arises out of the transaction between
two or more persons.
Profession implies attainments in special knowledge. Special Knowledge is
acquired only after patient study and application. Profession includes vocation.
Vocation implies natural ability/liking/aptitude of a person for some particular
However, distinction between 'business', 'profession' and 'vocation' does not
have any significance while computing taxable income. The method of
computation would be same for all cases.
Profits are taxable in the hands of the person who carries on the business, i.e
person who takes all the business decisions and controls the activities of the
business either himself or through his agent.
It is not necessary that business/profession should be carried on throughout the
previous year. It is enough even if the business is carried on for some time
during the previous year.
2. Compensation received/receivable by
a) A person managing the affairs of an Indian Company at the time of his
termination or modification of terms and conditions of his office.
b) A person managing the affairs in India of any other Company at the time
of his termination or modification of terms and conditions of his office.
c) An agent, holding an agency in India for any part of the activities relating
to the business of any other person (principal) at the time of his
termination or modification of terms and conditions of his agency.
d) Any person in connection with vesting of the management of any
property or business, in the Government /Corporation owned by
It is to be noted that, compensation received, even though being a capital receipt
3. Income derived by any trade, professional or similar associations from specific
services rendered by them to their members.
4. Following export incentives are taxable under this Section in the hands of the
a) Profit on sale of an import license.
b) Cash assistance received against exports.
c) Custom Duty or Excise Duty Drawback (i.e. refund)
d) Profit on transfer of Duty Entitlement Pass Book Scheme / Duty Free
Replenishment Certificate. (These are duty remission schemes)
5. The value of any benefit or perquisite whether convertible into money or not,
arising from business or exercise of any profession.
6. Any interest, salary bonus , commission or remuneration received or receivable
by a partner from the firm. It is to be however noted that the amount is taxable,
only if it has been allowed as a deduction in the hands of the firm.
7. Any sum received or receivable (termed as non compete fees) in cash or kind
under an agreement
a) For not carrying out any activity in relation to any business or
b) Not to share any know how, patent, copyright, trademark, license,
franchise or any other business or commercial right of similar nature or
information or technique likely to assist in the manufacture or processing
of goods or provision of services.
It is to be however noted that sum received on account of the transfer of the
right to manufacture/produce/process any article or the right to carry on any
business is chargeable under 'Capital Gains' because it is amount received on
sale of an asset.
Similarly amount received as compensation from the multilateral fund of the
Montreal Protocol on 'Substances that Deplete the Ozone Layer' are not taxable.
8. Any sum received under a Key man insurance policy including he sum allocated
by way of bonus on such policy.
9. Any sum received or receivable in cash or in kind on account of any capital
asset (in respect of which deduction has been allowed under Section 35 AD)
being demolished, destroyed, discarded or transferred.
The income referred in Section 28, shall be computed in accordance with the
provisions contained in Section 30 to Section 43D.
It is to be noted that gross receipts generated from the business or profession is
never taxable. It is always the net income that is chargeable to tax.
'Gross Receipts minus expenses incurred = Net Taxable Income'
Income can be classified as Taxable Income and Exempt income. Similarly
Expenses can be classified as 'Allowed Expenses' and 'Disallowed Expenses'
Allowed Expenses refer to those expenses which are allowed (permitted) to be
subtracted from the gross receipts while computing the net income, whereas
Expenses Disallowed refer to those expenses which are not allowed to be
deducted/subtracted from the gross receipts while computing the net income.
Section 30 to Section 43D speak about various expenses allowed and expenses
disallowed. Taking into consideration all these provisions, we need to compute the
net income taxable under 'Profits and Gains from Business/Profession'.
According to Section 30, following expenses incurred in relation to the building
/premises used for the purpose of business/profession is allowed as a deduction.
1. Rent of the premises, if the businessman (assessee) has occupied the premises as
a tenant. It is to be noted that when the assessee is himself the owner of the
premises, notional rent is disallowed.
2. Amount of current repairs ( not being capital expenditure) incurred by the
assessee whether as a tenant (if cost of repairs have been agreed to be borne by
the tenant) or as an owner.
3. Amount paid on account of land revenue or municipal taxes.
4. Insurance Premium paid against risk of damage or destruction of the premises.
In respect of plant, machinery and furniture used for business purposes, following
expenses are allowed as a deduction.
1. Expenditure incurred on repairs (not being capital expenditure) of the above
2. Insurance premium paid for insuring the above assets.
Depreciation is allowed as a deduction. It is to be noted that capital expenditure is
disallowed and hence depreciation is allowed. However the method of computing
depreciation under Income Tax is totally different from the method followed under
accounts. The rate at which depreciation is to be charged is prescribed under
Income Tax Rules. Following conditions are to be satisfied in order to claim
depreciation as a deduction.
1. Asset must be owned by the assessee. Assessee may even be co-owner of the
asset. if person acquires a building by satisfying conditions of Section 53A of
Transfer of Property Act, depreciation is available even if he is not the
registered owner of the building. if assessee occupies a building in the capacity
of lessee, he is entitled to depreciation in respect of capital expenditure incurred
by him on construction of any structure or on any improvement, renovation or
extension. Even though, AS 19 requires capitalization of financial lease in the
books of the lessee, under Income Tax Act the benefit of depreciation would be
available only to the person who actually exercises the ownership rights. Under
a transaction of hire purchase, the benefit of depreciation will be available to the
hire purchaser right from the year in which the asset is taken on hire purchase,
even though he has not yet paid all the installments.
2. The asset must be used for the purpose of business of profession. According to
Section 38, if the asset is partly used for business purposes and partly for
personal purposes, only proportionate part of the depreciation can be claimed as
deduction. Asset may be either actively or passively used for the purpose of
business/profession. Active use means actual use of the asset, whereas passive
use means the asset is kept ready for use in the business/profession but not
actually used. In case of residential quarters owned by the employer and let out
to the employee, it will be assumed that the property is used for purpose of the
3. The asset must be used (either active or passive use) at least for some time
during the previous year.
4. Depreciation is available in respect of the following tangible as well as
Tangible assets : Building, Furniture, Plant & Machinery
Intangible assets (acquired after 31.03.1998) : Know how, Patents, Copyright,
Trademark, License, Franchise, or any other
business or commercial right of similar nature.
Plant and Machinery should be interpreted in a broad sense to include ship,
aeroplanes, car, commercial vehicles, computer, books, scientific apparatus etc
It is to be noted that, if the above conditions are satisfied, depreciation is a must.
It is not at the option of the assessee to claim or not to claim depreciation.
Under Income Tax, depreciation is admissible for block of assets. Method of
computation of depreciation is written down value method.
Block of assets is a group of assets. Two conditions to be met while grouping
the assets under a block are :
1. The rate of depreciation prescribed should be the same.
2. The class or nature of assets to be grouped together should be same. i.e
Building may be grouped with Building and not with Furniture even
though the rate may be the same.
The different blocks of assets and applicable rate of depreciation are :
The method of computation of depreciation is :
Opening WDV of the block as on 01.04.2010 xxx
Add: Actual Cost of any asset falling in the block acquired xxx
during the previous year 2010-11
Less: Sale proceeds ( together with scrap value)of asset xxx
falling within the block sold, discarded, demolished or
destroyed during the previous year 2010-11
Less : Depreciation allowed for the previous year 2010 - 11 xxx
Closing WDV of the block as on 31.03.2011 xxx
Depreciation allowed = Balance * Rate of depreciation prescribed.
It is to be noted that in case of sale, the selling price of the asset (less expenses
incurred for sale) has to be deducted and not the cost/WDV of the asset sold.
The date of sale is irrelevant. However the date on which the newly purchased
asst is put to use is relevant. if the date on which the asset is put to use is not
separately given, it is to be assumed that date of purchase and date on which
asset is put to use is the same.
Example: Calculate depreciation : There is a block of Plant, comprising of
three assets A, B and C, subject to 15% depreciation. The WDV of the block on
01.04.2010 is Rs 10,40,000. During the year 10-11, Plant H (15%) costing Rs
18,000 and Car (15%) costing Rs 2,56,000 were purchased on 11.05.2010 and
07.07.2010 respectively. Plant B was sold on 20.12.2010 for Rs 12,00,000.
There are two situations, when depreciation cannot be claimed. They are :
1. Block becomes empty: When all the assets in the block are physically
sold, we can say that the block has become empty.
2. WDV of the block becomes zero: In the format given above, the
amount of sale proceeds to be deducted cannot be more than the sum of
opening WDV and the additions. if the sale proceeds are more, we say
that the WDV of the block has become zero.
It is to be noted that in the above two situations, i.e. when depreciation cannot
be claimed, there shalla rise either short term capital gains or short term capital
Example: The WDV of block of assets (15%) on 01.04.2010 is Rs 80,000. It
consists of Plants A and B. New asset Plant C is purchased during the previous
year 2010-11 for Rs 30,000. Plant A is sold on 03.05.2010 for Rs 1,80,000.
Example: X Ltd owns two plants, A and B. WDV of the block on 01.04.10 is
Rs 2,37,000. The Company purchases Plant C for Rs 20,000 on 31.05.2010. All
the three Plants, A, B and C are sold for Rs 49,000 on 01.03.2011.
Depreciation is also not admissible in case of the following:
1. The asset is an imported car.
2. The imported car was acquired after 28.02.1975 but before 01.04.2001.
However if the imported car is used in the business of running it on hire for
tourist in India or for the purpose of business/profession outside India,
depreciation can be claimed.
It is to be noted that in respect of imported car acquired after 31.03.2001,
depreciation is available irrespective of the purpose for which it is used.
If there is a change in the ownership of an asset because of the following
1. Conversion of firm or sole proprietary concern, HUF into Company
2. Business of HUF taken over by member.
3. Business of Firm taken over by partner.
4. amalgamation of a company
5. de merger of a company
6. amalgamation or de merger of cooperative banks.
Depreciation would be computed in the normal way and then it would be
apportioned between the predecessor and the successor in the ratio of number of
days for which the assets are used by them during the previous year in which the
Example: A firm owns Plants A and B. The WDV of the block on 01.04.2010
(15%) is Rs 30,000. It purchases Plant C on 01.04.2010 for Rs 20,000. The firm
is converted into a Company with effect from 26.06.2010. Calculate
depreciation available to firm and to the company.
If the asset is acquired during the previous year and is put to use (either passive
or active use) for a period of less than 180 days during the previous year, then
deduction in respect of depreciation would be restricted to 50% of the normal
rate of depreciation prescribed.
The above rule is applicable only in the year in which an asset is purchased and
not in subsequent years. i.e. In the subsequent year, even if the asset is used for
less than 180 days, usual depreciation would be available. However it is to be
noted that, if an asset is not used at all, no depreciation is available.
1. X Ltd purchases a plant (15%) on 10.05.2010. It is put to use on
2. Y Ltd purchases a plant (15%) on 10.05.2010. It is put to use on
3. X Ltd owns two buildings A and B. WDV of the block (10%) on
01.04.2010 is Rs 14,15,700. It purchases Building C for Rs 3,10,000.
Building A is sold during 10-11 for Rs 8,70,000.
What will be your answer, if the building is sold for Rs 15,87,000
Additional Depreciation means depreciation which can be claimed by the
assessee in addition to normal depreciation.
Following conditions need to be satisfied in order to claim additional
1. The assessee must be engaged in manufacture/production of any
2. New plant and machinery should be acquired and installed after
3. It should be an eligible plant & machinery.
It is to be noted that additional depreciation is not available in respect of
building or furniture even if the other conditions are satisfied.
Following are not eligible plant & machinery:
1. Ships and aircrafts.
2. Second hand plant & machinery. i.e plant & machinery which was used
either within or outside India by any other person.
3. Office appliances or road transport vehicles.
4. Plant or machinery installed in any office premises or any other
5. Any plant /machinery, whole of the cost of which is allowed as a
deduction in computing the taxable income of a previous year
Additional Depreciation is available @ 20% of the actual cost of new
plant & machinery acquired and installed. However, if the asset is put to
use for less than 180 days in the year in which it is acquired, additional
depreciation would be entitled to @ 10%.
Example: X Ltd is engaged in the business of manufacture of computer
hardware. During the year 10-11, following assets are acquired and put to
(Rs in thousands)
Block 1 Block 2 Block 3
Rate of depreciation 15% 30% 60%
WDV of the block on 01.04.2010 1,800 2,500 500
Additions during the PY 2010-11 5,700 400 1,700
Sale of old plant 8 2,870 4,200
Plants A, B and C are acquired during May 2010 and put to use during
September 2010. However Plant B is put to use in the last week of March
2011. Find out amount of depreciation and additional depreciation
Actual Cost : It means the actual cost to the assessee as reduced by the
amount if any, that has been met directly or indirectly by any other
person. A machinery purchased for Rs 70,000, cash subsidy received Rs
10,000 from the Government. Actual Cost would be Rs 60,000.
Apart from the cost price of the asset, following are examples of expenses
incurred which are treated to be a part of the actual cost of the asset.
1. Interest on money borrowed for purchase of the asset. Only interest
pertaining to the period till the asset is put to use should be added
to the actual cost of the asset.
2. Bank Charges incurred in relation to the above loan taken.
3. Expenses necessary to bring the asset to site and install it like
carriage inwards, loading/unloading charges, installation charges
4. Expenses on insurance incurred before commencement of business.
5. Expenses on essential construction work like cold storage rooms.
6. Training expenses of the staff before the use of the plant.
7. Cost of repairs and modification prior to use of the asset to make it
8. Expenditure on traveling incurred for acquiring depreciable asset.
The Income Tax Act differentiates unabsorbed depreciation from
business loss. For example : if the Gross Receipts in a business are Rs
5,00,000 and all other expenses (except depreciation) allowed are Rs
5,80,000. Current Year depreciation is Rs 1,35,000
The accounts would show a net income of Rs (2,15,000)
According to Income Tax, Rs 5,00,000 minus Rs 5,80,000 = Rs 80,000 is
business loss. (loss arising on account of reasons other than depreciation)
and unabsorbed depreciation is Rs 1,35,000 (Depreciation which could
not be adjusted /written off due to inadequacy/absence of profits)
Unabsorbed depreciation should be adjusted in the same year
against income under other heads except income from salary. If
adjustment in the same year is not possible, it has to be carried forward to
the next year. In the next year, it cab be adjusted against income under
any head except income from Salaries. There is no time limit for carrying
forward unabsorbed depreciation. It can be carried forward indefinitely.
Continuity of business is also not necessary for the purpose of carry
forward and set off.
On the other hand it is to be noted that business loss incurred in
any year would also be adjusted in the same year against other
heads(except salary) and if adjustment in the same year is not possible, it
will be carried forward u/s 72. However, in the next year it can be
adjusted only against income under the head ‘Profits/Gains From
business/profession’. Also it can be carried forward only for 8 years.
In the subsequent years, following should be the order of
1. Current Year Depreciation.
2. Brought Forward Business Loss
3. Brought Forward Unabsorbed Depreciation.
In the absence of business loss, we can conclude that the unabsorbed
depreciation can be added to the current year depreciation for the purpose
of claiming deduction.
Example: X submits the following particulars
PY 2010-11 PY 2011-12
Income from Salary 1,00,000 2,00,000
Business Profits (Before depreciation) 16,000 18,000
Current Depreciation 1,34,000 1,32,000
Income From Other Sources 10,000 80,000
Determine taxable income for both years.
Example: X submits the following particulars
PY 2010-11 PY 2011-12
Business Profits (Before depreciation) (50,000) 45,000
Current Depreciation 18,000 20,000
Income From Other Sources 20,000 70,000
Determine taxable income for both years.
Straight Line Method of Depreciation
1. Only undertakings engaged in generation or generation and
distribution of power can claim depreciation on SLM basis.
2. It is not necessary that the above units have to compulsorily
follow SLM basis of depreciation. Alternatively, the units may
follow WDV method like other assessees. Option once
exercised shall be final.
3. This option is available only in case of tangible assets acquired
4. Depreciation is to be calculated at the prescribed percentage on
the actual cost of the individual asset. It is to be taken care that
aggregate depreciation claimed in different years cannot exceed
actual cost of the asset.
5. if the asset is put to use for less than 180 days in the year of
acquisition, only 50% of the normal depreciation would be
6. Additional depreciation will not be available.
7. Tax Consequence when the asset is sold
Compare the WDV value of the asset on the first day of the
previous year in which such asset is sold, demolished, discarded
or destroyed with the Sale Consideration of the asset (including
a) if WDV > Sale Consideration
Difference would be termed as ‘Terminal Depreciation’ and
would be allowed as deduction in the year of sale. However
terminal depreciation would be allowed only if the asset has
been used at least for some time during the previous year.
b) if Sale Consideration > WDV
Difference would be termed as ‘Balancing Charge’ and
taxable u/s 41(2) under the head ‘Profits and Gains of
Business/Profession. Balancing Charge is taxable in the year
in which the sale consideration becomes due, irrespective of
whether the business is in existence in that year or not.
However, if the sale consideration is more than the actual
cost of the asset, the difference between the sale
consideration and the actual cost is taxable under the head
The tax consequences would be different if the asset is sold
immediately after purchase, i.e year of purchase = year of sale. In such
a) No Terminal depreciation would be available.
b) There would be no Balancing Charge. The difference would be
taxable under Capital Gains.
Example: X Ltd is a power generating unit. On 20.12.2009, it
purchases a plant for Rs 20,00,000. It is eligible for depreciation @
12.77% on SLM basis. The plant is sold on 20.05.2010. What would
be the tax consequence if the sale consideration is:
a) Rs 30,000 b) Rs 18,72,300 c) Rs 19,00,000 d) Rs
Section 33AB : Tea/Coffee/Rubber development account
In order to claim deduction under this Section, an assessee has to
fulfill the following conditions:
1. The assessee must be engaged in the business of growing and
manufacturing tea/coffee/rubber in India.
2. The assessee must deposit amount in a special account with
NABARD or in a ‘Deposit Account’ in accordance with and for the
purpose specified in the scheme framed/approved by Tea
3. The amount shall be deposited within 6 months from the end of the
previous year or before the due date of furnishing the return of
income, whichever is earlier.
4. The accounts of the taxpayer should be audited by a chartered
The amount of deduction shall be lower of
1. Sum deposited in special/deposit account or
2. 40% of the profits of the business before deduction u/s 33AB and
before adjusting the brought forward losses.
It is to be noted that, if deduction is claimed and allowed under this
section to an AOP/firm, no deduction shall be allowed to any
member/partner of such AOP/firm in respect of the deposit.
If the amount released from the special account in a year is not utilized
in the same year for the purpose for which it has been released, the
amount not utilized shall be taxable. Similarly any amount utilized for
a purpose not in accordance with the scheme, is also considered as
taxable business income.
The amount in the special/deposit account may be withdrawn (i.e
could not be utilized for the purpose mentioned in the scheme) in the
1. Closure of Business.
2. Dissolution of firm.
3. Death of the taxpayer.
4. Partition of HUF.
5. Liquidation of Company.
The amount withdrawn is considered taxable in the first two situations
The amount withdrawn from the special account should not be utilized
for the following purposes:
1. Machinery or plant to be installed in any office premises or
residential accommodation including guest houses.
2. Any office appliances (except computers).
3. Plant or Machinery installed in an undertaking producing low
priority items specified in the Eleventh Schedule.
4. Plant or Machinery entitled to 100% write off either by way of
depreciation or for any other reason in any one year.
The asset acquired out of the money withdrawn from the special
account should not be sold/ transferred within 8 years from the end of
the previous year in which the asset is acquired.
If the asset is sold within 8 years, deduction allowed earlier under
Section 33AB would be withdrawn. i.e. deduction allowed earlier shall
be deemed to be profits from business of the year in which the asset is
sold. However the amount will not become taxable, even if asset is
sold within 8 years in the following cases :
1. Transfer of asset to Central Government/State Government/Local
Authority/ Statutory Corporation/Government Company.
2. Transfer in a scheme of succession of a firm by Company.
Where any amount is withdrawn from the special account and utilized
by the assessee for the purpose of any expenditure in accordance with
the scheme, such expenditure shall not be allowed as deduction under
any other provision (in order to avoid double deduction).
The above business is a composite business which is partly
agricultural and partly non agricultural. Rules 7, 7A, 7B and 8 tells us
the rules for disintegration of composite income as follows:
Growing and Manufacturing Tea in 40% 60%
Sale of block rubbers manufactured 35% 65%
from rubber plants grown by the seller
Sale of coffee grown and cured by the 25% 75%
Sale of coffee grown, cured, roasted and 40% 60%
grounded in India
Example: Business Profit of X Ltd, a tea growing and
manufacturing Company is Rs 70 Lakhs. It deposits Rs 25 Lakhs in
the special account. It wants to claim set off of brought forward
business loss of Rs 12,00,000.
Section 33ABA : Site restoration Fund
This Section is very similar to Section 33AB. The points of difference
1. The assessee is engaged in the business of prospecting for, or
extraction or production of petroleum or natural gas or both in
2. The Central Government has entered into an agreement with the
assessee for association or participation in such business.
3. The amount should be deposited in a Special Account with SBI or
in an account opened by the assessee named as ‘Site Restoration
4. The amount shall be deposited in accordance with and for the
purpose specified in the scheme framed by the Ministry of
Petroleum and Natural Gas.
5. The amount shall be deposited before the end of the previous year.
6. The amount of deduction is equal to lower of
a. Amount deposited in special account/site restoration
b. 20% of the profits of such business computed before
deduction u/s 33ABA and before adjusting the brought
7. Out of the amount withdrawn on closure of Special Account/Site
Restoration Account, the amount payable to the Central
Government (in the form of share in the profit) in accordance with
the agreement referred in Section 42 is to be deducted and the
balance amount shall be treated as taxable.
Section 35 : Expenditure on scientific research
Scientific research means any activity for the extension of knowledge in
the fields of natural or applied sciences including agriculture, animal
husbandry or fisheries.
Deduction under this Section is available in respect of:
1. Expenditure incurred by the assessee himself on scientific
2. Contribution by the assessee to others who are involved in
1. The expenditure incurred by the assessee is a revenue expenditure.
2. The expenditure incurred is on scientific research carried on by the
3. The scientific research is related to the business of the assessee.
Amount of revenue expenditure incurred is allowed as a deduction.
If revenue expenditure has been incurred within 3 years immediately
before the commencement of business, it is allowed as a deduction in the
year of commencement, if it has been certified by the prescribed authority
(Director General (Income Tax Exemptions)). Purchase of materials used
in scientific research and payment of salary to employees engaged in
scientific research are examples of revenue expenditure incurred.
Contribution of an amount by the assessee to
a) Approved Research Association (whose object is
undertaking of scientific research) or
b) Approved university, college or other educational
institution to be used for scientific research.
The assessees are entitled to a weighted deduction of 175% of the
The only difference between 35(1)(ii) and 35(1)(iii) is that, in this case
the amount contributed to the approved research association, university,
college or educational institution would be utilized for research in social
science or for statistical research (in stead of scientific research
mentioned in 35(1)(ii).
However, the amount of deduction would be 125% of the amount
In case of Section 35(1)(ii) and (iii), the approval is given by the Central
Government. The deduction would not be taken back, even if after the
date of making the contribution, the approval granted to these institutions
The contribution should be made to a Company registered in India,
having it’s main object as scientific research and development and such
Company should be approved and should fulfill such other conditions as
may be prescribed.
The amount of deduction would be 125% of the amount contributed.
The Company, to which the contribution is made cannot take the benefit
of Section 35(2AB), but can continue to take the benefit of Section
35(1)(i) and 35(2).
In case of Section 35(ii),(iii), and (iia), the research undertaken may or
may not be related to the business of the assessee.
1. The expenditure incurred by the assessee is a capital
expenditure (except expenditure on acquisition of land)
2. The expenditure incurred is on scientific research carried on by
3. The scientific research is related to the business of the assessee.
Amount of Deduction = Amount of Capital Expenditure
Deduction is available, even if the asset is not put to use for research and
development purpose during the previous year in which the expenditure is
Examples of capital expenditure are:
1. Purchase of plant/equipment for research.
2. Constructing Building for research.
3. Expenses on purchase of bus to transport research personnel.
If capital expenditure has been incurred within 3 years immediately
before the commencement of business, it is allowed as a deduction in the
year of commencement.
It is to be noted that, once deduction in respect of capital expenditure has
been claimed u/s 35(2), no depreciation can be claimed u/s 32 in respect
of the same asset.
Tax Consequence on sale of such asset
If the asset is sold, once the research activity ceases, without using the
asset for any other purpose.
The following amount shall be chargeable to tax as business income of
the year in which the sale takes place.
1. Sale Price
2. Deduction allowed u/s 35(2)
Whichever is less.
However, if the selling price exceeds the cost of acquisition, the
difference is taxable under Capital Gains.
If the asset is used in the business, once the research activity ceases and
later on the asset is sold
The asset is treated to be a part of block of assets, once the assessee starts
using the asset in his business. The actual cost of the asset to be added to
the block is taken as NIL. Hence, even though the asset physically
becomes part of the block, the benefit of depreciation is not claimed.
Later on, when the asset is sold, the sale proceeds are deducted from the
block of asset as in case of a normal depreciable asset.
The amount of capital expenditure incurred on scientific research, which
could not be deducted wholly or partly on account of inadequacy or
absence of profits, the deficiency can be carried forward as if it is
Amount is contributed by the assessee to
a) National Laboratory
b) Indian institute of Technology (IIT)
d) Specified Person (approved by the prescribed authority)
The amount shall be contributed with a specific direction that the amount
shall be utilized for scientific research undertaken under a programme
approved by the prescribed authority.
National Laboratory means a scientific laboratory functioning at National
level under the aegis of Indian Council of Agricultural Research, Indian
Council of Medical Research etc.
Prescribed authority means head of the National laboratory, University,
IIT and in case of specified person shall mean Principal Scientific
Advisor to the Government of India.
The prescribed authority shall before granting approval satisfy itself
about the feasibility of carrying out scientific research.
Amount of Deduction = 175% of the amount of contribution
The deduction would not be taken back, even if after the date of making
the contribution, the approval granted to the programme by the prescribed
authority is withdrawn.
1. The assessee is a Company.
2. The Company is engaged in the business of Bio-Technology or
in any business of manufacture or production of any article or
thing (other than items specified in the Eleventh Schedule i.e.
low priority items).
3. The Company has an in house research and development
facility, which is approved by the prescribed authority
(Secretary, Department of Scientific and Industrial Research,
Government of India)
4. The Company has to enter into an agreement with the
prescribed authority for co-operation in such research and
development facility and for audit of the accounts maintained
for that facility.
5. No Deduction shall be allowed in respect of expenditure
incurred after 31.03.2012.
6. The expenditure on acquisition of land and building does not
qualify for deduction under this Section. All other revenue as
well as capital expenditure incurred on scientific research
qualifies for deduction under this Section.
7. Amount of deduction is equal to two times the expenditure
incurred i.e. 200%.
1. The expenditure is capital expenditure.
2. The expenditure is incurred on acquisition of patent
3. Patent Right/Copyrights are used for the purpose of
business/profession of the assessee.
4. The Capital expenditure is incurred before 01.04.1998.
Amount of capital expenditure is allowed as deduction in equal
installments over a period of 14 years.
For example: Patent Right has been purchased on 01.11.1997 for Rs
1,40,000, then Rs 10,000 would be allowed as deduction for the previous
Patent/Copyright purchased on or after 01.04.1998 is entitled to
depreciation u/s 32.
1. The expenditure is capital expenditure.
2. It is incurred for acquiring any right/license to operate
3. The payment should be actually made to obtain the license.
Deduction under Section 35ABB is available only if all the above three
conditions are satisfied.
The deduction shall be allowed in equal installments over the period
starting from the year in which such payment has been made and ending
in the year in which the license comes to an end.
It is to be noted that irrespective of the method of accounting followed by
the assessee, the deduction would commence from the year in which the
payment has been actually made.
Example: X Ltd obtains a telecom license on 20.04.2010 for a period of
10 years which ends on 31.03.2020. License Fee is Rs 18,00,000.
If entire amount is paid on 06.05.2010, deduction of Rs 1,80,000 can be
claimed every year u/s 35ABB from 2010-11 to 2019-2020.
If entire amount is paid on 01.04.2011, deduction of Rs 2,00,000 can be
claimed every year u/s 35ABB from 2011-12 to 2019-20.
Where the license fee is actually paid before the commencement of
business, then deduction is available for the period beginning with the
previous year in which such business is commenced and ending with the
previous year in which the license comes to an end.
Once deduction is allowed u/s 35ABB, benefit of depreciation u/s 32
cannot be claimed in respect of the same expenditure.
Tax Consequence on sale of license
Sale of Entire License :
Compare the WDV ( i.e. expenditure remaining un allowed) on the first
day of the previous year in which the license is sold with the sale
a) WDV > Sale Consideration : Difference allowed as deduction in
the year of sale.
b) WDV < Sale Consideration : Difference taxable as business
income in the year of sale.
For example : if license is acquired for Rs 35,00,000 and the validity
is 7 years, every year the deduction would be Rs 5,00,000. if the
license is sold in the 5th year, WDV at the beginning of the 5th year is
It is to be however noted that if the sale consideration is more than the
original expenditure on acquisition of the license, the difference is
taxable as capital gains.
Sale of Part of the License
a) WDV > Sale Consideration: Difference can be claimed as
deduction over the remaining years of license.
b) WDV < Sale Consideration: Difference taxable as business income
in the year of sale. However, no deduction u/s 35ABB can be
claimed in respect of the part of the license unsold for the
If a telecom license is transferred by the amalgamating Company to the
amalgamated company, provisions of Section 35ABB will continue to
apply to the amalgamated Company. i.e if deduction u/s 35ABB is
available for a total period of 10 years and amalgamating Company has
claimed the benefit for 6 years, the amalgamated Company can claim
benefit for 4 years.
A similar rule is applicable in case of demerger.
Benefit of deduction under this Section is available to :
1) Company : In respect of contribution made and in respect of direct
2) A person other than Company: Only in respect of contribution
made. Direct expenditure is not permitted.
The contribution shall be made to :
1. Public Sector Company.
2. Local Authority.
3. Association/Institution approved by the National Committee.
National Committee means Committee constituted by the Central
Government from among persons of eminence in public life.
The contribution made or the direct expenditure incurred (in case of
Company) should be for carrying out an eligible project/scheme.
Eligible Project/Scheme means such project/scheme for promoting the
social and economic welfare or the upliftment of the public as the Central
Government may by notification in the Official Gazette specify in this
behalf on the recommendations of the National Committee.
Amount of Deduction = Amount of expenditure/contribution
In order to claim deduction under this Section, a certificate has to be
obtained by the assessee (contributor) from the donee organization. In
case of Companies directly incurring the expenditure, certificate needs to
be obtained from the Chartered Accountant.
Deduction u/s 35AC will not be withdrawn even if after the date of
making contribution, the approval granted to the donee organization/
notification notifying the eligible project/scheme is withdrawn. However,
in case of withdrawal of approval/notification, the income (contributions
received) would become taxable in the hands of the recipient at
Maximum Marginal Rate of 30.9%.
Section 35AD has been inserted to provide for investment linked tax
Specified Business means any one of the following:
1. Setting up and operating a cold chain facility. (01.04.2009)
2. Setting up and operating a warehousing facility for storage
of agricultural produce. (01.04.2009)
3. Laying and operating a cross country natural gas
(01.04.2007) or crude or petroleum oil (01.04.2009) pipeline
network for distribution including storage facilities being an
integral part of such network.
4. Building and operating anywhere in India, a new hotel of
two star or above category as classified by the Central
5. Building and operating anywhere in India, a new hospital
with at least 100 beds for patients. (01.04.2010)
6. Developing and Building a housing project under a scheme
for slum redevelopment or rehabilitation framed by the
Central/State Government as the case may be and notified by
the Board in this behalf in accordance with the guidelines as
may be prescribed. (01.04.2010)
Cold Chain Facility means a chain of facilities for storage or
transportation of agricultural/forest produce, meat, poultry, marine/dairy,
products of floriculture, horticulture under scientifically controlled
conditions including refrigeration and other facilities necessary for the
preservation of the produce.
In case of business referred in point no 3 above :
1. It has to be owned by Company, consortium of Companies,
Authority/Corporation constituted under Central/State Act.
2. Business has been approved by Petroleum and Natural Gas
3. Such business should have made available for use on common
carrier basis, such proportion of it’s total pipeline capacity (as
specified in the regulations made by the Petroleum and Natural Gas
Regulatory Board) to any person other than associated person
4. fulfills other conditions as may be prescribed.
Associated Person means :
1. Who holds at least 26% of the voting power in the capital pf the
2. Who appoints more than half of the Board of Directors of the
governing Board of the assessee.
3. Who guarantees at least 10% of the borrowing of the assessee.
The specified business should have commenced its operations after the
dates mentioned above.
It has to be further ensured that the specified business:
1. It is not set up by splitting up or reconstruction of a business
already in existence.
2. It is not set up by transfer of plant or machinery previously used for
any other purpose. (It is OK, if value of plant/machinery previously
used for any other purpose transferred to specified business is 20%
or less of the total value of plant/machinery use din specified
business). This condition shall be deemed to be met if
plant/machinery previously used by any other person outside India
is imported by the assessee and used for specified business.
3. The books of account of the assessee should be audited.
The whole of the expenditure of capital nature incurred wholly and
exclusively for the purpose of specified business carried on by the
assessee shall be allowed as deduction.
The amount received on sale or destruction of the above asset shall be
taxable under Section 28.
If capital expenditure is incurred before the commencement of the
business, deduction shall be allowed in the previous year in which the
business commenced, provided it is capitalized in the books of account of
the assessee during that previous year.
Expenditure incurred on acquisition of land, goodwill or financial
instrument shall not be allowed even though it is a capital expenditure.
Once deduction u/s 35AB has been claimed and allowed, no deduction
shall be allowed under Chapter VIA/Section 80 in respect of such
specified business for the same or any other assessment year.
Loss incurred in specified business can be set off only against income
from specified business.
Contribution made by the assessee to the following is allowed as a
1. The National Fund for Rural Development set up by the
2. The National Urban Poverty Eradication Fund set up and
notified by the Central Government.
Following are entitled to deduction under Section 35D:
1. Indian Company.
2. Resident non corporate assessee.
Preliminary expenses may be incurred either :
1. Before commencement of business or
2. After commencement of business in connection with extension
of an undertaking or in connection with setting up a new unit.
Some of the examples of preliminary expenditure specified in this Section
1. Expenses in connection with preparation of feasibility report,
preparation of project report, conducting market survey,
engineering services relating to the business of the assessee.
(The work may be carried on by the assessee himself or by a
concern approved by the Board).
2. Legal charges for drafting an agreement between the assessee
and any other person in relation to setting up of business.
3. Legal Charges for drafting and printing of Memorandum and
Articles of Association of a Company.
4. Registration Fees of Company.
5. Expenses in connection with public issue of shares/debentures
like underwriting commission, brokerage, charges for drafting
and advertisement of prospectus etc.
The amount of preliminary expenditure incurred qualifies for deduction
under this Section, subject to the maximum limits as given below :
In case of corporate assessee : 5% of cost of project or 5% of capital
employed whichever is higher.
In case of non corporate assessee : 5% of cost of project.
Cost of Project means the actual cost of fixed assets which are shown in
the books of the assessee as on the last day of the previous year in which
the business of the assessee commences.
Capital Employed means the sum of share capital, debentures and long
term borrowings as on the last day of the previous year in which the
business of the Company commences.
Amount of deduction = 1/5th of the qualifying expenditure
Deduction is allowed for 5 successive years beginning with the year in
which business commences.
Books of account of the assessee have to be audited, if deduction u/s 35D
is to be claimed.
1. The assessee is an Indian Company.
2. It incurs expenditure for the purpose of amalgamation/
3. The expenditure is deductible in five successive years in five
equal installments, starting with the previous year in which
amalgamation/ demerger takes place.
1. Amount has been paid to an employee in connection with his
voluntary retirement under any voluntary retirement scheme.
2. The expenditure is deductible in five successive years in five
equal installments, starting with the previous year in which
expenditure towards voluntary retirement compensation has
In case of amalgamation/demerger or in case of reorganization of
business whereby, a firm or proprietary concern is succeeded by a
Company or a private Company/public unlisted Company is succeeded
by a limited liability partnership, the deduction shall be available to the
successor for the remaining period (i.e. in the year of
transfer/reorganization and subsequent years within the 5 year period)
Following are entitled to deduction under Section 35E:
1. Indian Company.
2. Resident non corporate assessee.
The expenditure should be incurred wholly and exclusively on any
operation relating to prospecting for the minerals or group of associated
minerals or on the development of a mine or other natural deposit of any
such minerals or group of associated minerals specified in the VII
However, the following expenditure do not qualify for deduction u/s 35E
1. Expenditure which us met directly or indirectly by any other
2. Expenditure on acquisition of the site of source of any of the
3. Expenditure of capital nature in respect of which depreciation is
admissible u/s 32.
The expenditure should be incurred during the year of commercial
production and four years immediately preceding that year.
Amount of deduction =1/10th of the qualifying expenditure or income of
the previous year (before Section 35E deduction)
from commercial exploitation of any mine,
whichever is less.
Deduction would be available for 10 years beginning with the year of
The unabsorbed amount of amortizable expenditure, arising on account of
insufficient income in any year shall be carried forward and adjusted
against subsequent year’s income. However such carry forward is
permissible only up to the tenth year.
Books of account of the assessee for the years in which expenditure is
incurred shall be audited.