Part 1 - Direct Taxes

Exempt income 1.29 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Section Type of assessee Type of income Exempt amount Remarks 10(36) All assessees LTCG on transfer of equity shares purchased between 1st March 2003 and 1st March 2004 No limit • Such equity shares should be of a company which is part of BSE-500 Index as on 1st March, 2003 or where shares are allotted through public issue after 1st March, 2003 and listed on a recognised stock exchange in India before 1st March, 2004 • Transactions of purchase/ sale are entered through recognised stock exchanges in India 10(37) Individual or HUF Capital Gains arising from transfer by way of compulsory acquisition under any law of agricultural land in urban area referred to in Section. 2(14) (iii)(a) or (b) for which consideration is determined or approved by the Central Govt. or the RBI No limit • Land should have been used for agricultural purposes by the individual or his parent or the HUF for at least last 2 years immediately preceding the date of transfer • Exemption applies to compensation /consideration / additional compensation received on or after 1st April, 2004 10(37A) Individual or HUF Capital Gains on transfer of specified capital assets No limit Specified capital assets refers to • Land or building or both owned as on 2nd June, 2014 and transferred under the Land Pooling scheme • Land pooling ownership certificate issued under the scheme in respect of land or building or both referred to at point 1 above

Direct Taxes 1.30 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Section Type of assessee Type of income Exempt amount Remarks • Reconstituted plot or land received in lieu of land or building or both (referred to at point 1 above) under the scheme and such plot or land is transferred after 2 years from the end of the financial year in which the possession of such land or plot was handed over to the assessee 10(46) Notified body or authority or Board, Trust or Commission or[w.e.f. 1st April 2024(other than those covered under clause (46A)] or a the class thereof which is established by a Central/ State on provincial Act or by Central or State Government Specified income Specified Income • The entity has object of regulating or administering any activity for the benefit of the general public • The entity does not engage in any commercial activity • Entity is notified by the Central Government in the Official Gazette 10(46A) w.e.f. 1st April 2024 Notified body or authority or Board, Trust or Commission which is established or constituted by a Central/State Act Specified Income Specified Income Body or authority or Board, Trust or Commission is established or constituted with one or more of the following purposes: • dealing with and satisfying the need for housing accommodation; • planning, development or improvement of cities, towns and villages;

Exempt income 1.31 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Section Type of assessee Type of income Exempt amount Remarks • regulating, or regulating and developing, any activity for the benefit of the general public; or • regulating any matter, for the benefit of the general public, arising out of the object for which it has been created; 10(47) Infrastructure Debt Fund set up in accordance with prescribed guidelines Any income No limit The fund has to file its return of income 10(48A) Foreign company Income from: storage of crude oil in a facility in India and sale of crude oil therefrom to any person resident in India No limit • Storage and sale is pursuant to an agreement or arrangement between the foreign company and the Central Government • Foreign company and arrangement/agreement are notified by the Central Government 10(48B) Foreign company Income from: sale of leftover stock of crude oil from the facility in India No limit Sale is after expiry of agreement or arrangement referred in Section 10(48A) or on termination of the said agreement subject to such conditions as may be notified by the Central Government 10(48C) Specified company Any income accruing or arising as a result of arrangement for replenishment of crude oil stored in its storage facility in pursuance of directions of the Central Government in this behalf No limit Specified company means Indian Strategic Petroleum Reserves Limited, being a WOS of the Oil Industry Development Board under the Ministry of Petroleum and Natural Gas Exemption will not be available if the crude oil is not replenished in the storage facility within 3 years from the end of the FY in which the crude oil was removed from the facility for the first time

Direct Taxes 1.32 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Section Type of assessee Type of income Exempt amount Remarks 10(48D) Specified institution Any income No limit Institution established for financing the infrastructure and development, set up under an Act of the Parliament AND notified by the Central Government for the purposes of this clause. Exemption available for 10 consecutive assessment years beginning from the assessment year relevant to the previous year in which such institution is set up. 10(48E) Specified institution Any income No limit Development financing institution licensed by the RBI under an Act of the Parliament (referred to in clause 48D above) AND notified by the Central Government for the purposes of this clause. Exemption available for 5 consecutive assessment years beginning from the assessment year relevant to the previous year in which such institution is set up. Central Government may by a notification extend the period of exemption for a further period not exceeding 5 consecutive years subject to fulfilment of conditions as may be specified 10(50) Non-resident Income from specified services which is subject to equalisation levy No limit • Any income arising from any e-commerce supply or services made or provided or facilitated on or after the 1st day of April 2020 and chargeable to equalisation levy will also be exempted • Exemption will not be available with respect to any income chargeable to tax as royalty or fees for technical services in India

Exempt income 1.33 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Section Type of assessee Type of income Exempt amount Remarks 10A Industrial undertaking in • Free Trade Zone (FTZ) • Electronic Hardware Technology Park (EHTP) or Software Technology Park (STP) w.e.f. A.Y. 1994-95 W.e.f. A.Y. 2000- 01 income for 10 years from the year of Commercial Production W.e.f. A.Y. 2000- 01 income for 10 years from the year of Commercial Production. 100% (90% for A.Y. 2003-04) of the profits from export computed as profits of the business in proportion to export turnover to total turnover 100% (90% for A.Y. 2003-04) of the profits from export computed as profits of the business in proportion to export turnover to total turnover • Not formed by splitting up or reconstruction of existing business or by transferring used plant and machinery • Manufactures/produces articles or things (including computer software) and cutting and polishing of precious and semi-precious stones • No deduction under Section 80-IA, under Section 80- IB, under Section 80HH, and under Section 80HHA in relation to the profits and gains of the industrial undertaking • FTZ/EHTP/STP/SEZ to be notified by Central Government • Deduction shall be allowed only up to A.Y. 2011-12. However, for SEZ unit this limitation does not apply • Report of a Chartered Accountant certifying deduction to be furnished 3. Special Economic Zone (SEZ) w.e.f. A.Y. 2001-02 W.e.f. A.Y. 2001- 02, income from exports eligible for deduction for 10 years from the year of Commercial Production Undertakings in SEZ which begins to manufacture or produce on r after 1 April 2003, exempt amount would be 100% of profits from export for first 5 assessment years, 50% • Profit from domestic sales up to 25% of total sales would be deemed to be profits from exports only for the A.Y. 2001-02 • Availing the concession is at the option of the assessee • Profits from onsite development of computer software outside India would be deemed to be profits from export

Direct Taxes 1.34 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Section Type of assessee Type of income Exempt amount Remarks of or next two assessment years and for subsequent three assessment years, amount transferred to Special Economic Zone Reinvestment Allowance Reserve Account not exceeding 50% of such profit • In the event of transfer of undertaking under amalgamation or demerger, the deduction shall continue to be allowed to the amalgamated or the resulting company • No deduction shall be admissible to amalgamating or demerged company in the year of amalgamation or demerger • Deduction not allowable if return not filed by due date under Section 139(1) and prescribed form is not filed by the due date referred to in section 44AB. • Does not apply to any undertaking being unit referred to in Section 2(zc) of the SEZ Act, 2005, which begins to manufacture or produce articles or things or computer software after 1 April, 2005 in any SEZ • The amount transferred to Reserve Account should be utilised for purposes specified in sub-section (1B) 10AA Undertaking set up in Special Economic Zone w.e.f. A.Y. 2006-07 Income from export eligible for deduction starting from the year of commercial production 100% of profit from export for first 5 A.Ys. 50% for next 5 A.Ys., & for subsequent 5 A.Ys. amount transferred. to SEZ Reinvestment reserve A/c not exceeding 50% of such • Not formed by splitting up or reconstruction of existing business or by transferring used plant and machinery. • In the event of transfer of undertaking under amalgamation or demerger, the deduction shall continue to be allowed to the amalgamated or the resulting company • No deduction shall be admissible to amalgamating

Exempt income 1.35 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Section Type of assessee Type of income Exempt amount Remarks profit. Profits from export computed as profits of the undertaking in proportion to export turnover to total turnover of the under-taking. or demerged company in the year of amalgamation or demerger. • No deduction shall be allowed where no return of income is furnished on or before the due date under section 139(1). • Applicable if the proceeds from sale of goods or provision of services is received in or brought into, India in convertible foreign exchange within a period of 6 months from the end of the previous year or within such further period as competent authority may permit. • Report of a CA certifying deduction to be furnished. • The amount transferred to Reserve Account should be utilised for purposes specified in sub-section (2). • Assessee engaged in ‘specified business’ as specified in Section 35AD, to choose between deduction under Section 10AA and Section 35AD. W.e.f 1 April 2018 deduction shall be allowed from total income of the assessee, before giving effect to provision of Section 10AA and the • Deduction will not be available from A.Y. 2021-22 Exemption will not be available if the Assessee being, • an individual or HUF opts for new tax regime under Section 115BAC • a resident co – operative society opts for new tax regime under Section 115BAD

Direct Taxes 1.36 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Section Type of assessee Type of income Exempt amount Remarks deduction shall not exceed total income. • a domestic company opts for new tax regime under Section 115BAA • a new manufacturing domestic company opts for new tax regime under Section 115BAB 10B Undertaking approved as a 100% Export Oriented Undertaking under Section 14 of IDRA (100% EOU) Same as Industrial undertaking in Free Trade Zone Same as Industrial undertaking in Free Trade Zone Same as Section 10A above, except No. 4 List of Bonds, Certificates, etc. specified for the purposes of Section 10(15)(i) Sr. No. Particulars of securities, etc. Maximum amount ` Notification Ref. 1 12 years National Savings Annuity Certificates Whole of the amount No. SO 607(E) dated 9 June 1989 2 National Defence Gold Bonds, 1980 Whole of the amount — do — 3 Special Bearer Bonds, 1991 Whole of the amount — do — 4 Treasury Savings Deposit Certificates (10 years) Whole of the amount — do — 5 Post Office Cash Certificates (5 years) Whole of the amount — do — 6 National Plan Certificates (10 years) Whole of the amount — do — 7 National Plan Savings Certificates (12 years) Whole of the amount — do — 8 Post Office National Savings Certificates (12 years/7 years) Whole of the amount — do —

Exempt income 1.37 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Sr. No. Particulars of securities, etc. Maximum amount ` Notification Ref. 9 Post Office Savings Bank Accounts ` 3,500 in the case of individual account ` 7,000 in the case of joint account No. SO 1296(E) dated 3 June 2011 10 Public Account of the nature referred to in item (6) in the Table below rule 4 of the Post Office Savings Account Rules, 1981 ` 5,000 No. SO 607(E) dated 9 June 1989 11 Post Office Cumulative Time Deposits Rules, 1981 Whole of the amount — do — 12 Scheme of Fixed Deposits governed by the Government Savings Certificates (Fixed Deposits) Rules, 1968 Whole of the amount — do — 13 Scheme of Fixed Deposits governed by the Post Office (Fixed Deposits) Rules, 1968 Whole of the amount — do — 14 Special Deposit Scheme, 1981 Whole of the amount — do — 15 Non-Resident (Non-repatriable) Rupee Deposit Scheme Whole of the amount No. SO 653(E) dated 31 August 1992 16 Resurgent India Bonds issued by the State Bank of India Whole of the amount No. SO 844(E) dated 21 September 1998 17 8.5% Tax Free SLR Power Bonds issued by Reserve Bank of India Whole of the amount No. SO 742(E) of 2003 dated 27 June 2003 18 India Millennium Deposits Whole of the amount No. SO 1114(E) dated 10 August 2005 2

Direct Taxes 1.38 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication III. Charitable Trusts Exemption Income derived from property held under trust or of an institution (‘trust’) wholly for charitable/religious purpose is exempt, if 85% of the income is spent on the objects of the trust, during the year. If the amount spent is less than 85% of the income, the shortfall is taxable, unless the trust has complied with the conditions mentioned in the table below. ‘Charitable purpose’ includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any object of general public utility. However, if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to trade, commerce or business for a cess or fee or any other consideration, irrespective of the nature of use or application or retention, of the income from the said activity, the same will not be regarded as advancement of any object of general public utility unless • Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility, and • The aggregate receipts from such activity/activities during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities of that previous year Reasons for not spending 85% of income Form and Time Limit for its submission Conditions Consequences, if conditions not satisfied Trust intends to accumulate its income for specific purpose Form 10 - at least two months prior to the due date for furnishing the return of income as specified in section 139(1) To be spent within period of accumulation as specified (maximum 5 years). Pending application of income, it needs to be invested in manner as specified in section 11(5). It cannot be spent by way of donation to another charitable trust or institution except if the Assessing Officer permits the same in the year in which the trust or institution is dissolved. • Failure to submit the form within the time limit as provided, benefit of accumulation will not be available. • Such income deemed to be income of the previous year in which any of the conditions not satisfied. • No benefit of accumulation, if the return of income filed after the due date of filing of return of income. • If income not spent within stipulated time, for the purpose of accumulation, deemed to be income of the previous year in which the period of accumulation

Charitable Trusts 1.39 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Reasons for not spending 85% of income Form and Time Limit for its submission Conditions Consequences, if conditions not satisfied Period for which unable to apply income for that purpose due to court order/injunction to be excluded expires, unless Assessing Officer’s permission obtained to spend it on other objects of the trust. Non-receipt of income during previous year Form 9A - at least two months prior to the due date for furnishing the return of income as specified in section 139(1) To be spent in the year of receipt, or in the next year Such income deemed to be income of previous year immediately following year of receipt Any other reason To be spent in the next year Such income deemed to be income of next year Where a trust/institution has been granted registration for the purpose of availing exemption under section 11 it will not be entitled to claim exemption under section 10 [other than agricultural income and income exempt under section 10(23C)]. In determining income for the purpose of application under section 11, deduction or allowance by way of depreciation will not be available on any asset, which has been claimed as application of income and provisions of section 40(a)(ia), section 40A(3) and section 40A(3A), shall apply. Registration The trust is required to be registered under the new section 12AB by making an application before the Principal Commissioner or Commissioner, within the below mentioned timelines: • In case of trust provisionally registered under section 12AB – at least 6 months prior to expiry of period of provisional approval, or within 6 months of commencement of its activities, whichever is earlier • For renewal of registration the trust registered under section 12AB – at least 6 months prior to expiry of the period of approval • In case where registration of trust becomes inoperative [due to proviso to section 11(7)] – at least 6 months prior to commencement of the assessment year from which said registration is sought to be made operative • In case where the trust or institution has adopted or undertaken modifications of its objects and such modification does not conform to the conditions of registration – within 30 days from the date of said adoption or modification • In any other case, at least 1 month prior to the commencement of the previous year relevant to the assessment year from which said registration is sought if the activities of the trust have not yet commenced. In case if the trust has already commenced its activities, then the application may be made at any time after the commencement of the activities. On receipt of application from all the categories of trust mentioned above except in a case where the application has been made prior to commencement of the activities as specified

Direct Taxes 1.40 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication in (v) above, the Principal Commissioner or Commissioner shall call for such documents and information to satisfy himself about the genuineness of the activities of the applicant and also satisfy himself about the compliance requirements of any other law material for attaining the applicant’s objects. On being satisfied, an order shall be passed in writing registering the trust or institution for a period of 5 years. If not satisfied, an order shall be passed in writing, rejecting the application and also cancelling its registration after affording a reasonable opportunity of being heard. Further, a trust or institution which has already been registered under Section 12AB shall be required to apply for re-registration at least six months prior to the expiry of the period of registration i.e. 5 years. Thus, there will be an obligation on trust registered to apply for reregistration at least six months prior to the expiry of the period of registration of 5 years. When the application is made prior to the commencement of activities as mentioned in point (vi) above, an order shall be passed in writing provisionally registering the trust or institution for a period of 3 years. Such trust or institution which has been provisionally registered shall apply for regular registration at least six months prior to the expiry of the provisional registration or within six months of commencement of its activities whichever is earlier. On application so filed by such trust or institution, the Commissioner will follow the same process as is for re-registration i.e. calling for document and information, making enquiry and after satisfying himself about the genuineness of the activities and the objects of the trust or institution and the compliance of such requirement of any other law as is material for the purpose of achieving the objects of the trust or institution, he shall grant regular re-registration which shall be for a period of five years. All the provisions of section 11 and section 12 shall apply to the trusts registered under section 12AB from the assessment year from which such trust was granted registration or provisionally registered. Cancellation of Registration The registration or the provisional registration granted to any trust may be cancelled upon occurrence of one or more specified violation as mentioned below – • Where the income has been applied other than for the objects of the trust • Where the trust is carrying on a business which is not incidental to the attainment of its objects or seprate books of account are not maintained in respect of the business • Where income has been applied for private religious purposes which does not enure for the benefit of the public • Where income has been applied for the benefit of any particular religious community or caste • Where activity carried on by the trust is not genuine or is not being carried out in accordance with all or any of the conditions subject to which the registration was granted • Where the trust has not complied with the required of any other law and the order, direction or decree holding that such noncompliance has occurred has attained finality. • Where the application for registration was incomplete or it contained false or incorrect information Maintenance of Accounts and Audit To qualify for exemption under Section 11 and Section 12, a trust having total income (before exemption under Section 11 and Section 12) exceeding the maximum amount not chargeable to tax must maintain the books of account and other documents. Kindly refer to Rule 17AA for more details. Further, such trust is also required to get its accounts audited by a C.A. The audit report in Form 10B / 10BB is required to be furnished one month prior to the due date for furnishing the return of income under section 139(1). Kindly refer to Rule 17B for more details.

Charitable Trusts 1.41 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Filing of tax return The provisions of Section 11 and Section 12 shall not be applicable in relation to the income of any trust or institution unless they file their tax return for the previous year in accordance with the provisions of section 139(4A) and within the time allowed under section 139(1) or 139(4). Investments All investments of the trust must be in modes provided in Section 11(5). If not, they must be brought in conformity within 1 year from the end of the previous year in which such investments are acquired, or 31 March 1993, whichever is later. Contravention results in income and wealth of the trust being taxed at maximum marginal rate. This restriction does not apply to: • Any asset held as part of the corpus as on 1 June 1973; • Any accretion to shares, forming part of the corpus as on 1 June 1973, by way of bonus shares; • Any debentures acquired before 1 March 1983. If debentures acquired after 28 February 1983 and before 25 July 1991, exemption is denied only in respect of income from such debentures, provided debentures are disinvested by 31 March 1992. Modes of investment specified in Section 11(5) • Investment in Government savings certificates/other securities/certificates issued by Central Government under Small Savings Schemes; • Deposit in any account with the Post Office Savings Bank; • Deposit in any account with a scheduled/cooperative bank; • Investment in units of the Unit Trust of India; • Investment in any security of the Central/ State Government; • Investment in debentures whose principal and interest are fully and unconditionally guaranteed by Central/State Government; • Investment or deposit in any public sector company (PSC); Shares of PSC may be retained for three years and other investments or deposits till its maturity once PSC ceases to be a PSC; • Deposits with or investment in any bonds issued by an approved financial corporation engaged in providing long-term finance for industrial development in India; • Deposits with or investment in any bonds issued by an approved public company with main object of carrying on business of providing long-term finance for construction/ purchase of houses in India for residential purposes or for urban infrastructure; • Investment in immovable property; • Deposits with the Industrial Development Bank of India; • Any other prescribed form or mode of investment or deposit (for example, Units of mutual funds referred to in section 10(23D), investment by way of acquiring equity shares of a ‘depository’ prescribed). • Investment in “Indira Vikas Patra” and “Kisan Vikas Patra” are in accordance with the norms and modes specified in Section 11(5) – Circular No. 566, dated 17 July, 1990. Corpus donations Under Section 11(1)(d), voluntary contributions with specific direction that they shall form part of the corpus of the trust (i.e. corpus donations) are not includible in the total income of the trust. However, it is subject to the condition that such corpus donations are invested or deposited in one or more of the eligible modes of investments as specified in section 11(5) and which is maintained specifically for such corpus i.e. earmarked for investment of corpus.

Direct Taxes 1.42 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication If the trust has made application out of the corpus donations then it shall not be considered as application of income for charitable or religious purposes for the purpose of computation of exemption under section 11(1). If the corpus so utilized for the purpose of application has been restored back in any previous year by investing it back in the investments which were earmarked for corpus, then it shall be treated as application for charitable or religious purpose in such previous year for the purpose of computation of exemption under section 11(1). However, it is subject to the condition that the relevant conditions like complying with the provisions of section 40A(3) etc. were not violated at the time when the corpus was originally applied. Further, the trust having temple, mosque, gurdwara, church or other place notified under Section 80G(2)(b) may, at its option, treat the voluntary contribution received for the purpose of renovation or repair of such temple, mosque, gurdwara, church or other notified place as forming part of its corpus subject to certain specified conditions. Donation to other trusts When one registered trust gives donation to the other registered trust, the donation so given can be considered as application of income in the hands of the donor trust as follows – Case Amount which can be considered as application Where donation is given with a specific direction that it shall form part of corpus of the recipient trust i.e. corpus donation Nil Where donation is not given with such a specific direction that it shall form part of corpus of the recipient trust i.e. other than a corpus donation 85% Business income Exemption is not available in relation to any profit and gains of business of a trust, unless the business is incidental to the attainment of the objectives of the trust and separate books of account are maintained in respect of such business. The benefit of exemption to a trust, having the object of advancement of general public utility, would be lost if any business is carried on with gross receipt in excess of 20% of the total receipts. This restriction does not apply to a trust having object other than the object of advancement of general public utility. Further, the registration granted to the trust can be cancelled if it is found that the trust is carrying on a business which is not incidental to the attainment of its objects or separate books of account are not maintained in respect of the business carried on by the trust. Capital Gains The gains arising from transfer of a capital asset, is deemed to have been applied to charitable/ religious purposes, if the whole net consideration is used to acquire new capital assets. If only part of the net consideration is so utilised, such gains, as equals the excess of the amount so utilised over the cost of the transferred asset is deemed to have been applied for charitable/ religious purposes. There is no period of holding of the asset for availing such exemption by reinvestment. Anonymous donations The term “anonymous donation” is defined to mean any voluntary contribution, where the person receiving such contribution does not maintain a record consisting of the identity of the person making such contribution indicating the name and address of the person and such other particulars as may be prescribed. Such

Charitable Trusts 1.43 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication anonymous donations will be taxed @ 30%. However, the following anonymous donations are not covered: • Donations received by a trust or institution which is created or established wholly for religious purposes; • Donations received by any trust or institution created or established wholly for religious and charitable purposes other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution. • However, in case of partly religious and partly charitable institutions where the anonymous donations are directed towards medical or educational institutions run by such entities or anonymous donations are received by wholly charitable institutions, it will be taxable to the extent such donations exceeds 5% of the donations received or ` 100,000 whichever is more. Electoral Trust Electoral Trust to be approved by the Central Board of Direct Taxes. Voluntary contributions received by Electoral Trust to be treated as income with effect from 1 April 2010. Income of Electoral Trust by way of voluntary contribution will be exempt subject to fulfilment of following conditions: • Such Electoral Trust distributes to the political parties (registered under Section 29A of the Representation of the People Act, 1951) 95% of the aggregate donation received by it during the previous year along with the surplus, if any brought forward from any earlier years, and; • Electoral Trust functions in accordance with the rules made by the Central Government. Contribution to Electoral Trust eligible for deduction while computing taxable income under section 80GGB for Indian Companies or under section 80GGC for any assessee except local authority and every artificial juridical person wholly or partly funded by the Government. Tax on Accreted Income A trust or institution registered under Section 12AA/12AB is liable to pay additional incometax in the form of tax on its accreted income at the maximum marginal rate. It is payable when a default of the nature as specified in section 115TD has occurred. The accreted income means the difference between the fair market value of the total assets of the trust as on the specified date and its total liability. Further, it needs to be computed in accordance with the method as prescribed in Rule 17CB. This tax on accreted income is payable under the following circumstances – • Conversion into non-eligible form i.e. the trust has converted itself into any form which is not eligible for grant of registration under Section 12AA/12AB

Direct Taxes 1.44 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Deemed cases of conversion Specified Date on which the accreted income needs to be computed Time period within which the tax on accreted income needs to be paid i.e. 14 days from the following dates The registration granted to it under Section 12AA/12AB has been cancelled Date of cancellation order If no appeal has been filed against the cancellation order, then the date on which period for filing the appeal expires If the appeal has been filed, then the date on which the order confirming the cancellation is received The trust has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it has not applied for fresh registration under Section 12AA/12AB Date of such adoption or modification End of the previous year in which such objects were adopted or modified The trust has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it has filed application for fresh registration under Section 12AA/12AB but the said application has been rejected Date of such adoption or modification If no appeal has been filed against the cancellation order, then the date on which period for filing the appeal expires If the appeal has been filed, then the date on which the order confirming the cancellation is received The trust has failed to make the application for registration in accordance with the provisions of sub-clauses (i) or (ii) or (iii) of section 12A(1)(ac) within the specified time period Last date for making the application End of the previous year in which such last date falls • Merger i.e. the trust is merged with any entity other than an entity which is a trust or institution having similar objects and registered under Section 12AA. In such case, the accreted income needs to be computed as on the date of merger and tax on it needs to be paid within a period of 14 days from the date of merger. • Dissolution i.e. the trust is dissolved and assets of such trust/institution is not transferred to any charitable institution registered under Section 12AA/12AB or approved under Section 10(23C) within a period of 12 months from the end of the month in which the dissolution, takes place. In such case, the accreted income needs to be computed as on the date of dissolution and tax on it needs to be paid within a period of 14 days from the date on which the period of 12 months expires.

Charitable Trusts 1.45 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication While computing the accreted income, the value of the following assets (and liability, if any related to such assets) shall not be taken into consideration - • Any asset directly acquired by a trust or institution out of its agricultural income; • Any asset acquired by the trust or institution during the period from the date of its creation or establishment and ending on the date from which the registration under Section 12AA/12AB became effective provided that the trust or institution has not been granted any benefit of Section 11 and Section 12 during the said period. However, in case the benefit of Section 11 and Section 12 has been allowed to the trust or institution in any previous year or years beginning prior to the date from which the registration under Section 12AA/12AB is effective, then for the purposes of excluding the assets as aforesaid, the date of registration shall be said to be effective from the first day of the earliest previous year. • The assets and liabilities of the charitable institution which have been transferred to another charitable institution within a specified time limit will be excluded while calculating accreted income. Tax on accreted income is the final tax and no credit is available for such tax paid. In case of failure of payment additional tax within prescribed time, simple interest @1% per month or part thereof leviable. In case of default in payment of additional tax and interest thereon, trust or institution to be regarded as assessee in default. Recipient of the assets of the trust is also liable in such cases (to the extent of the assets received). If the capital asset which has been taken into consideration for the purpose of computing accreted income on which the tax has been paid is subsequently transferred, then the cost of acquisition of such asset is deemed to be the FMV of the asset considered for computation of accreted income as on the specified date. Taxability of certain incomes at 30% Section 115BBI provides that the following incomes of the trust shall be taxed at 30% - • Income accumulated or set apart in excess of 15% where such accumulation is not allowed under any specific provisions of the Act • Deemed income referred to in Section 11(3) i.e. where the income in respect of which option to apply it in the subsequent year has been exercised or is accumulated or set apart in accordance with section 11(2) is becoming taxable due to violation of the applicable conditions • Income which is not exempt as per the provisions of Section 13(1)(d) i.e. where the income has been invested in any impermissible mode of investment • Income which is not exempt as per the provisions of Section 13(1)(c) i.e. where the income is applied for the benefit of any specified person • Income which is not exempt under Section 11(1)(c) i.e. where the income is applied outside India Further, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed under any provisions in computing the aforesaid income. 2

Direct Taxes 1.46 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication IV. Income from Salaries (1) Chargeability — Section 15 and Section 17 Salary is chargeable to tax on “due” or “receipt” basis whichever is earlier and includes wages, annuity or pension, gratuity, fees, commission, perquisites or profits in lieu of salary, advance salary, leave encashment, contribution made by the Central Government to the Agniveer Corpus Fund account, etc. (2) Deductions from Salary — Section 16 • Standard Deduction [section 16(ia)] ` 50,000 or amount of salary whichever is less (earlier 40000). (This benefit is also available in respect of pension). • Entertainment Allowance [Section 16(ii)] For Government employees, the least of — — ` 5,000; or — 20% of salary; or — Actual amount of entertainment allowance. • Tax on employment (Profession Tax) on paid basis (Section 16(iii)). If an assessee opts to pay tax under the new tax regime i.e. under section 115BAC, then he will have to forego all the deductions under section 16 mentioned above, except Standard deduction upto ` 50.000/- and Family pension income upto ` 15,000/- w.e.f AY 2024-25. (3) Profits in lieu of Salary [Section 17(3)] • Any compensation from employer or former employer on termination or modification of the terms of employment. • Any receipt from employer/former employer or from provident/other fund (other than gratuity, commuted pension, retrenchment compensation, house rent allowance, provident fund or such other funds) to extent not consisting of contributions by assessee and interest on such contributions. • Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. • Any sum received before joining any employment or after cessation of employment. (4) Allowances and exemptions Pension [Section 10(10A)] Commuted value of pension is exempt under section 10(10A). • For Government employees, fully exempt • For other employees, following is exempt — — If employee has received gratuity then commuted value of 1/3rd of the pension which he is entitled to receive, and — In any other case, commuted value of 1/2 of the pension which he is entitled to receive • Any payment in commutation of pension received from fund set up by LIC is exempt under section 10(23AAB)

Income from Salaries 1.47 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Leave Travel Concessionor Assistance [Section 10(5) — Rule 2B] Available to Indian as well as foreign citizen for himself/spouse/children/ dependent parents, brothers and sisters. (restricted to two surviving children born after 1-10-1998) • Limited to amount actually spent on travelling in India. • During employment or on retirement or on termination. • Twice in a block of four calendar years. (Current block —2022-25). • Destination connected by air/rail is restricted to economy class air fare of national carrier/A.C. first class fare by shortest route. • For places not connected by rail, please refer Rule 2B. and carry over of the concession, please refer Rule 2B. If an assessee opts to pay tax under the new tax regime i.e. under section 115BAC, then he will have to forego this exemption. Gratuity [section 10(10)] Death-cum-retirement gratuity received by the Government employees or employees under Civil Services — wholly exempt from tax. • Employees covered by Payment of Gratuity Act. ` 20 lakh. Amount received on termination, after continuous service of not less than five years qualifies for exemption. Exemption is least of the following: (aggregate from all employers) — 15 days salary (denominator taken as 26) for every completed year/part thereof in excess of 6 months, or — ` 20,00,000/- — Gratuity actually received. • Other employees — Amount received on retirement, incapacitation, death or termination — Exemption is least of the following : (aggregate maximum from any number of employments) — ` 20,00,000/-. — Half month’s salary for each completed year of service; (based on last ten months’ average salary), or — Gratuity actually received. For meaning of “salary” refer para 6 below. Retrenchment Compensation [section 10(10B)] • Exempt lower of: Amount calculated in accordance with s. 25F(b) of the Industrial Disputes Act, 1947; or ` 5,00,000/- • Central Government approved schemes - the entire amount exempt.

Direct Taxes 1.48 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Voluntary Retirement Compensation [section 10(10C)] Any amount received or receivable by an employee of a public sector company, or any other company, or an authority established under a Central, State or Provincial Act, or local authority, co-operative society, university established under a Central, State or Provincial Act, An Indian Institute of Technology,Any State Government; or, The Central Government; or Notified institutions having importance throughout India or in any State or States xi. Notified Institute of Management at the time of his voluntary retirement or termination under a scheme framed in accordance with guidelines prescribed by Rule 2BA. Exemption allowable only in one A.Y. restricted to ` 5 lakhs. The said limit is relaxed w.e.f. A.Y. 2004- 05 to cover VRS payments received in instalments with an overall limit of ` 5,00,000. * The exemption is not available w.e.f. 1-4-2010 on the amount on which any relief has been allowed to the assessee under section 89 for any A.Y. in respect of any amount received or receivable on voluntary retirement or termination, etc. Tax on perquisite [Section 10 (10CC)] Paid by the employer, at his option is exempt from A. Y. 2003-04 House Rent Allowance [section 10(13A) & Rule 2A] The least of the following: • 50% of salary, (residential house situated at Mumbai, Kolkata, Delhi or Chennai) and 40% of salary where residential house is situated at any other place; • Actual house rent allowance received by the employee; • Excess of rent paid over 10% of salary. Exemption not available if opted new tax Regime. Leave Encashment [Section 10(10AA)] While in service will be treated as income. Section 17(1)(va). On retirement would however, be exempt to least of: • 10 months salary calculated on the basis of last 10 months average salary; or • ` 3,00,000/-* (aggregate from any number of employers) • Amount equivalent to earned leave; • Actual amount paid by the employer. Entitlement to earned leave not to exceed 30 days for every year of actual service. Encashment of earned leave on retirement would be wholly exempt for employees of Central/State Government. *In budget speech, exemption limit has been enhanced to ` 25,00,000/-, however there has been no amendment in Finance Act and notification may be issued enhancing the limit.

Income from Salaries 1.49 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Medical Benefits (Section 17) Medical treatment provided to an employee or any member of his family (spouse, children and dependent brothers, sisters and parents) will be exempt in the following cases: • Treatment in a hospital (including dispensary or clinic or nursing home) maintained by the employer. • Treatment in any hospital maintained by the Government, or any local authority or any other hospital approved by Government. • Treatment in respect of prescribed diseases in a hospital approved by the Chief Commissioner, provided certificate from the hospital specifying the disease and receipt for amount paid is attached along with the return of income. • Medical insurance only under a Central Government approved scheme. • Reimbursement of Insurance premium for mediclaim, etc. • Actual expenditure on medical treatment outside India, including expenditure on travel and stay abroad of one attendant, to the extent permitted by RBI if . the gross annual total income of the employee excluding this perquisite is ` 2 lakhs or less. Special Allowances [section 10(14)] • Allowance, not in the nature of perquisite, actual expenses exclusively incurred in the performance of duties • Allowance granted to meet personal expense at the place where duties of his office are ordinarily performed or at the place where he ordinarily resides or to compensate for increased cost of living as may be prescribed in Rule 2BB. If an assessee opts for new tax regime then no exemption Nature of allowance prescribed under Rule 2BB • cost of travel on tour or on transfer. • ordinary daily charges on account of absence from normal place of duty on tour or for journey in connection with transfer. • conveyance in performance of duties, where free conveyance is not provided. • expenditure on helper engaged for performance of office duties. • Encouraging academic research and training pursuits in educational and research institutions. • purchase or maintenance of uniform. • Special Compensatory Allowance in specified areas to extent specified. • Tribal Area Allowances in specified states up to ` 200/- p.m.

Direct Taxes 1.50 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication • For meeting personal expenditure of employee of transport system running transport vehicle, up to 70% of allowance, maximum of ` 10,000 p.m., provided no daily allowance for the said duty is received. • Children educational allowance @ ` 100 p.m. per child, maximum of two children. • Children hostel allowance @ ` 300 p.m. per child, maximum of two children. • Compensatory field area allowance in specified areas, @ ` 2,600/- p.m. • Compensatory modified field area allowance in specified areas @ ` 1,000/- p.m. • Counter insurgency allowance @ ` 3,900 p.m. to members of armed forces. • Transport allowance (TA) received by blind or deaf and dumb or orthopaedically handicapped with disability of lower extremities granted to meet expenses for commuting between place of residence and place of duty is exempt up to ` 3,200/- per month. • Underground allowance granted to employee of underground mines: ` 800/- per month. • Special allowance in the nature of high altitude to members of armed forces: ` 1,060/- per month for altitude of 9,000 to 15,000 ft. or ` 1,600/- per month for altitude above 15,000 ft. • Special compensatory highly active field area allowance to members of armed forces – ` 4,200 per month. • Island (duty) allowance to members of armed forces (only in Andaman & Nicobar and Lakshwadeep Group of Islands) – ` 3,250/- per month. If an employee opts for new tax regime exemption will not be allowed for allowances prescribed under Rule 2BB. (5) Perquisites A. Perquisites taxable in hands of all employees • Value of rent-free accommodation computed in manner as may be prescribed. • Value of any accommodation provided at a concessional rate, calculated in prescribed manner. • Value of any benefit or amenity granted or provided free of cost or at concessional rate in certain cases.

Income from Salaries 1.51 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication • Amount paid by employer in respect of any obligation which otherwise would have been payable by employee. • Any sum payable either directly or through a fund by employer (other than recognised PF, approved superannuation fund, etc.) to effect an assurance on the life of the employee or to effect a contract for an annuity. • Value of any security or sweat equity shares allotted or transferred by employer/former employer as free or concessional cost. • An amount of contribution to an approved superannuation fund by the employer, to an extent it exceeds ` 1,50,000/- (upto AY 2020-21). W.e.f. AY 2021-22, section 17(2)(vii) is amended to provide aggregate contribution made by the employer to the account of the employee in a recognized Provident Fund, in a National Pension Scheme and in an approved superannuation fund, exceeding ` 7,50,000/- in a previous year would be taxable as perquisites in the hands of the employee. Any annual accretion by way of interest, dividend or any other amount of similar nature during the previous year to the balance at the credit of the fund or scheme will be treated as perquisite to the extent it relates to the employer’s taxable contribution. • Value of any other fringe benefit or amenity as prescribed. B. Determination of the value of prescribed fringe benefit or amenity i. Interest free or concessional loan Value of perquisite w.e.f. 1st April 2000, of the loan given to the employee or any member of his household shall be computed at the rates charged by State Bank of India in respect of the loans for the same purpose as advanced by the employer, on the maximum outstanding monthly balance as reduced by interest actually paid by employee – However, perquisite value for loans (net of amount reimbursed under medical insurance scheme) given for medical treatment of specified disease or petty loans up to ` 20,000/- is not taxable. ii. Use of movable assets Value of benefit shall be 10% p.a. of the actual cost of asset or the rent charges paid by the employer as reduced by amount paid by the employee. iii. Transfer of movable assets Value of benefit on transfer of movable asset shall be the actual cost of the asset to the employer as reduced by the amount calculated at 10% of such cost for each completed year of use by the employer and further reduced by the payments made by the employee. The normal wear and tear would be computed at 50% in case of computers and electronic items, and 20% in case of motor cars on the reducing balance method. C. Perquisites taxable only in hands of specified employees Other perquisites are taxable only in the hands of the following specified employees, i.e., • Director-employee. • Employee having substantial interest in employer-company. • Employee drawing salary in excess of ` 50,000/-. D. Perquisites not taxable in all cases The following perquisites are not taxable under CBDT instructions or by virtue of the Act/Rules: • The provision of medical facilities as per para 4(i). • Free meals provided to all employees in office up to ` 50 per day per employee provided by the employer through paid vouchers usable at eating joints.

Direct Taxes 1.52 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication • Telephone including mobile phone provided to the employee. • Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India. • Sum payable by an employer to pension or deferred annuity scheme. • Employer’s contribution to staff group insurance scheme. • Actual travelling expenses paid/reimbursed for journeys undertaken for business purposes. • Payment of annual premium on personal accident policy, if such policy is taken to safeguard the employer’s interest. See CIT vs. Lala Shri Dhar (1922) 84 ITR 192 (Delhi). • Rent-free official residence to a High Court or Supreme Court Judge. • Rent-free furnished residence to official of Parliament. • Conveyance facility to High Court/Supreme Court Judges. • Reimbursement of expenditure on medical treatment of the employee himself or his family member in respect of any illness relating to COVID-19 subject to conditions as may be notified. E. Valuation of perquisites i. Rent-free unfurnished accommodation (Rule 3) • Central and State Government employees Equal to licence fee determined as payable by concerned employee in accordance with rules framed by Government for allotment of houses to its officers as reduced by rent actually paid. • Semi-Government and private sector employees. — For accommodation owned by employer Situated in cities having population exceeding 25 lakhs as per 2001 census –15% of salary in respect of the period of occupying the accommodation by the employee as reduced by the rent actually paid by the employee. Situated in cities having population exceeding 10 lakhs but not exceeding 25 lakhs, 10% of salary – in respect of the period of occupying the accommodation by the employee as reduced by the rent actually paid by the employee. Situated in other places – 7.5% of salary. — For accommodation taken on lease or rent – actual rent or 15% of salary, whichever is lower as reduced by rent actually paid by the employee — Accommodation in a hotel (other than provided for a period not exceeding 15 days on the transfer) – least of 24% of salary or actual hotel charges as reduced by rent actually paid by employee For meaning of “salary” see Explanation 3 to section 17(2). ii. Rent-free furnished accommodation Value of the accommodation as if unfurnished and add: • 10% per annum of the original cost of furniture, if furniture is owned by the employer.

Income from Salaries 1.53 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication • Actual hire charges (whether paid or payable), if furniture is hired by the employer and reduce the rent actually paid by the employee. Furniture includes radio sets, television sets, refrigerators, air-conditioners and other household appliances. iii. Gas, electricity or water supply provided • Where employer has supplied gas, electricity or water for household purposes from his own sources without purchasing from any outside agency, the value of such benefits is manufacturing cost incurred per unit by the employer. • Where the employer has supplied gas, electricity or water for household purpose, by purchasing from outside agency, value is amount actually paid by employer. • Where any amount is paid by employee the amount so paid shall be deducted from value so arrived. iv. Free Domestic Servants Actual cost to employer in respect of free services of a sweeper, a gardener, a watchman or a personal attendant as reduced by the amount paid by an employee. v. Free or concessional educational facility Where educational institution is maintained and owned by the employer or education is allowed in other educational institution due to his employment, the value shall be the cost of such education in a similar institution in or near the locality to the extent such cost does not exceed ` 1,000/- per month per child where facility is provided to children of employee and reduced by the amount paid by the employee and in other cases the value shall be the expenditure incurred by the employer. 6. “Salary” for the purposes of computing exemptions of Gratuity, House Rent Allowance and Leave Encashment Salary includes : a) Basic; b) Dearness Allowance (if the terms of employment provide); and c) Commission at a certain percentage of sales achieved by the employee, if paid in the course of employment. [Refer Gestetner Duplicators Pvt. Ltd. vs. CIT 117 ITR 1 (SC)]. 7. Value of following perquisites provided to an employee or to any member of his family, by an employer is taxable in the hands of the employee. (For valuation of such perquisites – See Rule 3). • Use of Motor car. • Where employer is engaged in the carriage of passengers or goods and provides any facility for private journey free of cost or at concessional fare. • Any travelling, touring, accommodation and any other expenses paid by employer for any holiday availed by the employee or his family members. • Free food and non-alcoholic beverages provided by employer. • Any gift/voucher/token in lieu of which gift may be received by the employee or his family member, provided by employer. • Credit card provided by employer. • Club membership provided by employer. Any other benefit, amenity, service, right or privilege provided by the employer.

1.54 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication V. Income from House Property In case of all assessees, “Income from house property” shall be computed as under: A. In the case of Let Out Property [whether for residential purpose or for business purpose] The annual value of any property shall be deemed to be: • The sum for which property might reasonably be expected to let from year to year; or • When property or any part of property is let, the annual rent received/receivable less unrealised rent or the sum as above, whichever is higher. • Where property or part of it is let and was vacant for whole or part of year, and rent received/ receivable less unrealised rent is less than the sum as per (i) above due to the vacancy, then the rent actually received/receivable. • The annual value of the property (being building or land appurtenant thereto) to be considered as nil [for up to two years (up to A.Y. 2019-20 – one year) from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority] provided such property is held as stock-in-trade and not let during the whole or any part of the previous year. Deduction shall be allowed as under: Sl. No. Nature of Deduction Section Limit/Condition 1 Municipal Tax, etc. 23(1) First proviso Only if borne and actually paid by the owner irrespective of the financial year in which the liability to pay such taxes was actually incurred as per the method accounting employed by the owner. 2 Standard deduction 24 Clause (a) 30% of Annual Value. 3 Interest on borrowed capital 24 Clause (b) Interest payable on capital borrowed for the purpose of acquisition, construction, repair, renewals or reconstruction only. If the Assessee opts to pay tax under new tax regime under section 115BAC, then he will not be eligible to claim deduction under section 24(b). 4. Preconstruction Interest Interest for the period prior to acquisition or construction would be deductible in five equal instalments from the year of completion. B. In the case of two self-occupied house properties (up to A.Y. 2019-20 one self occupied house property) The annual value of two self-occupied houses or part of such houses shall be nil. Further the aggregate amount of deductions shall be allowable as under:

Income from House Property 1.55 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Nature of Deduction Section Limit/Condition Interest on borrowed capital 24 Clause (b) ` 2,00,000/- from A.Y. 2015-16 onwards, provided : i. Property is acquired or constructed on or after 1 April 1999 and such acquisition or construction is completed within 5 years from the end of the financial year in which capital was borrowed. ii. A certificate from the lender certifying interest payable to him is furnished by the assessee. In other cases, ` 30,000. No other deduction allowed in respect of two self-occupied properties whose value is taken at NIL. C. In the case of more than two selfoccupied house properties Notional income as stated in A(i) above will have to be computed. In such cases, all deductions mentioned in ‘A’ would be available. D. Property owned by co-owners – Section 26 Where property is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not be assessed as an AOP (Association of Persons) but the share of each person in the income from the property as computed under Sections 22 to 25 (i.e., Income from house property) shall be included in his total income. E. Arrears of Rent and Unrealised Rent received subsequently – Section 25A (with effect from A.Y. 2017-18) In respect of let out property, if not charged to tax in earlier PY, is taxable in the year of receipt after deducting 30% of such amount, irrespective if the assessee is the owner of the property or not in the year of receipt of such arrears of rent or unrealised rent. 2

1.56 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication VI. Income from Business & Profession (1) Charging provisions ARRANGEMENT OF SECTIONS INCOMES Section 28, Section 41, Section 43AA, Section 43CA, Section 43D EXPENSES ALLOWED AS DEDUCTION Section 30 to Section 37(1), Section 43(1), Section 43AA, Section 43B DISALLOWED Section 37(2B), Section 38, Section 40(a), Section 40(b), Section 40(ba), Section 40A ACCOUNTS & AUDIT Section 44AA, Section 44AB COMPUTATION-RELATED SECTIONS Section 29, Section 43CB, Section 145, Section 145A, Section 145B PRESUMPTIVE TAXATION Section 44AD, Section 44ADA, Section 44AE, Section 44B, Section 44BB, Section 44BBA, Section 44BBB Profits and Gains of Business or Profession (Charging Section) [S. 28] The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”,— i. the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year; ii. any compensation or other payment at or in connection with the termination or the modification of the terms and conditions, of any contract relating to his business; iii. income derived by a trade, professional or similar association from specific services performed for its members; iv. Export Incentives like – profits on sale of a licence granted under the Imports and Exports (Control) Act, 1947; Such export incentives are not eligible for any “income-based” deductions under Chapter VI-A, Part C or u/s. 10AA cash assistance received or receivable by any person against exports under any scheme of the Government of India; any Duty Drawback against exports; any profit on the transfer of the Duty Entitlement Pass Book Scheme or Duty-Free Replenishment Certificate;

Income from Business & Profession 1.57 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication v. the value of any benefit or perquisite arising from business or the exercise of a profession, whether (a) convertible into money or not, or (b) in cash or in kind or partly in cash and partly in kind; (Amendment as per Finance Act, 2023) (c) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm [Section 28(v)]: (d) any sum, whether received or receivable, in cash or kind, under an agreement as non compete fees. the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the manner prescribed [Rule 11UAB] (e) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy; (f) any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD. (2) Specific provisions related to computation SECTION PROVISIONS 145A – Valuation of Inventory 1. Valuation of purchases, sales and inventory shall include any tax, duty, cess or fee, by whatever name called actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation 2. Valuation of inventory: Listed Securities Cost or NRV whichever is lower [Comparison to be made categorywise] Unlisted Securities Actual Cost initially recognised Other items held as inventory Cost or NRV whichever is lower 145B – Taxability of Certain Incomes Nature of income PY in which it is chargeable to tax Interest on any compensation or enhanced compensation The PY in which it is received, overriding section 145 Claim for escalation of price in a contract The PY in which reasonable certainty of its realization is achieved Export incentives The PY in which reasonable certainty of its realization is achieved Subsidy under section 2(24)(xviii) The PY in which it is received, if not taxed in any earlier PY

Direct Taxes 1.58 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication SECTION PROVISIONS 1. Subsidy received towards cost of fixed assets shall be covered by section 43(1) and shall not be charged to tax as income u/s. 2(24)(xviii). 2. Subsidy or Grant by the Central Government to a trust or institution established by the Central Government or a State Government shall not be treated as income u/s. 2(24)(xviii), if it is meant to be part of the corpus of the trust or institution. 43CB: Profits and Gains from Construction Contracts, Service Contracts 1. The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of PERCENTAGE OF COMPLETION METHOD in accordance with the ICDS. 2. In case of a contract for providing services with a duration of 90 days or less, profits and gains shall be computed using the project completion method. 3. In case of a contract for providing services where the number of acts to be performed are indeterminate but the duration of the contract is determinate or fixed, the profits and gains shall be computed using Straight Line Method. 4. Whether the method followed is % completion method, project completion method or SLM, (a) contract revenue shall include retention money and (b) contract costs shall not be reduced by any incidental income like interest, dividends, capital gains. (3) Expenses allowed as a deduction SECTION DESCRIPTION 30 Rent, Rates and Taxes, Repairs and Insurance Premium of Building,used for the purpose of business or profession 31 Repairs and Insurance Premium paid for furniture, plant and machinery used for the purpose of business 35CCA Amount paid to – (1) an association or institution, which is carrying on programmes for rural development, (2) an association or institution, which undertakes training of persons for implementing programmes of rural development; (3) a rural development fund set up and notified by the Central Government in this behalf; the National Urban Poverty Eradication Fund set up and notified by the Central Government in this behalf, 35CCC Expenditure incurred on “agricultural extension project” as notified by the Board. 35CCD Any expenditure (other than cost of land and building) incurred by the company on any skill development project

Income from Business & Profession 1.59 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication SECTION DESCRIPTION 35D Amortization of Preliminary Expenses incurred- (1) before commencement of business; or (2) in connection with extension of his undertaking; or in connection with setting up of a new unit Deduction allowable = 1/5th of “Eligible Amount” ASSESSEE WHAT IS THE “ELIGIBLE AMOUNT?” Resident Person (other than a company) Actual Preliminary Expenses or 5% of “Cost of Project” whichever is less Indian Company Actual Preliminary Expenses or 5% of [Higher of “Capital Employed” or “Cost of Project”] whichever is less Cost of Project = “Actual Cost” [as defined in section 43(1)] (including expenditure on development of land and buildings) Capital Employed = Issued Share Capital (excluding securities premium) + Debentures + Long-term borrowings “Cost of Project” and “Capital Employed” shall be computed as on 31st March of the PY in which – (1) the business of the assessee commences or (2) the new unit commences production or (3) the extension of the undertaking is completed. 35DD Amortization of expenditure in case of amalgamation or demerger Deduction allowable = 1/5th of Expenditure incurred 35DDA Amortization of expenditure incurred on Voluntary Retirement Scheme Deduction allowable = 1/5th of Expenditure incurred

Direct Taxes 1.60 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication SECTION DESCRIPTION 35ABB Expenditure for obtaining license to obtain telecommunication services If the license fee is paid before commencement of the business Deduction allowed every year = License fee actually paid before commencement of the business ÷ [the PY in which the business commences to the PY in which the license expires] If the license fee is paid after commencement of the business Deduction allowed every year = License fee actually paid after the commencement of the business ÷ [the PY in which the license fee is actually paid to the PY in which the license expires] Section 35ABA Expenditure for obtaining right to use spectrum for telecommunication services The provisions are exactly identical to section 35ABB. Section 33AB All assessees engaged in the business of growing and selling tea, coffee or rubber in India are eligible for this deduction. Deduction allowed: 1. Amount deposited in NABARD Account or Deposit Account; or 2. 40% of PGBP of such business before deduction under section 33AB Whichever is less. Section 33ABA All assessees engaged in the business of prospecting for, or extraction or production of, petroleum or natural gas or both in India are eligible for this deduction. Deduction allowed: 1. Amount deposited in SBI Account or Deposit Account; or 2. 20% of PGBP of such business before deduction under section 33ABA Whichever is less Section 35AD Capital Expenditure on specified businesses as per section An assessee shall be, if he opts, allowed a deduction in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively, for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred by him. However, expenditure on land, goodwill and financial instruments shall not be allowed as a deduction u/s. 35AD.

Income from Business & Profession 1.61 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication SECTION DESCRIPTION Sr. No. Specified Business 1 Laying and operating a Cross Country pipeline of crude oil/ natural gas/ petroleum oil for distribution 2 Setting up and operating a warehouse facility for storage of agricultural goods 3 Setting up and operating a cold chain facility 4 Building and operating a new Hotel ≥ 2 star category anywhere in India. 5 Building and operating a new Hospital anywhere in India ≥ 100 beds 6 Developing and building a housing project for Slum redevelopment or rehabilitation. 7 Developing and building a Housing project under a scheme for Affordable housing framed by the Central Government or State Government 8 Production of fertilizers by way of a new plant or by way of newly installed capacity in an existing plant. 9 Bee-keeping and production of honey and bee-wax 10 Setting up and operating an Inland Container Depot (ICD) or Container Freight Station (CFS) 11 Setting up and operating a warehouse for storage of sugar 12 Laying and operating a slurry pipeline for transportation of iron ore 13 Setting up and operating a Semi-conductor wafer fabrication unit 14 Infrastructure facility (a) Developing any infrastructure facility; or (b) Operating and maintaining any infrastructure facility; or (c) Developing, operating and maintaining any infrastructure facility. Infrastructure Facility: 1 A road, including toll road, a bridge or a rail system; 2 A highway project including housing or other activities being an integral part of the highway project; 3 A water supply project, a water treatment system, irrigation project, sanitation and sewerage system or solid waste management system; 4 A port, an airport, inland waterway, inland port or a navigational channel in the sea. • An assessee shall be, if he opts, allowed a deduction in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively, for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred by him. However, expenditure on land, goodwill and financial instruments shall not be allowed as a deduction u/s. 35AD.

Direct Taxes 1.62 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication SECTION DESCRIPTION Section 35 Expenditure on Research (deductions and related conditions are specified in Note 1 Section 36(1)(i) Any insurance premium paid against risk of damage or destruction of stocks or stores, used for the purposes of the business or profession. Section 36(1)(ia) When a primary co-operative society supplies milk (raised by the members who own the cattle) to a federal milk co-operative society, any insurance premium on the cattle paid by the federal milk co-operative society Section 36(1)(ib) The premium paid for group insurance policy and the premium paid on mediclaim insurance policy (paid by any mode of payment other than cash) Section 36(1)(ii) Any sum payable to an employee as bonus or commission for services rendered shall be allowed as a deduction to the employer subject to section 43B. Section 36(1)(iii) Interest paid in respect of capital borrowed for the purposes of the business or profession. Interest on loan taken for acquisition of the asset for the period – • Upto the date the asset is put to use: shall be included in the “Actual Cost.” After the date the asset is put to use: shall be allowed as a deduction under section 36(1)(iii). Points to be noted: • If the capital is borrowed from (i) scheduled banks, (ii) co-operative banks, (iii) public financial institutions, (iv) State Financial Corporations, (v) State Industrial Investment Corporations, (vi) such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf; then the interest will be allowed as a deduction as per the provisions of section 43B. In any other case, interest on borrowed capital shall be allowed as a deduction according to the method of accounting regularly followed by the assessee. Section 36(1)(iiia) The pro-rata amount of discount on a zero-coupon bond having regard to the period of life of such bond Section 36(1)(iv) and 36(1)(v) Clause (iv): Employer’s contribution to recognised provident fund or approved superannuation fund Clause (v): Employer’s contribution to approved gratuity fund These amounts are allowed as a deduction to the employer on payment basis u/s. 43B.

Income from Business & Profession 1.63 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication SECTION DESCRIPTION Section 36(1)(iva) Employer’s contribution towards pension scheme- on payment basis u/s. 43B provided it does not exceed 10% of the SALARY of the employee in the previous year [Salary means Basic + DA (in terms) only]. Section 36(1)(va) Employee’s contribution- Contributions received from employees are considered as income for the employer under section 2(24)(x) read with section 28 (under the head PGBP). When the employer deposits the contributions to the employees’ account in the relevant fund on or before the fund’s due date (as per the relevant act), it is allowed as a deduction to the employer under this section. Section 36(1)(vi) Write-off allowance in respect of animals (not held as stock-in-trade)- The actual cost to the assessee of the animals (-) the amount realized on the sale of animal or sale of dead body of the animal Section 36(1)(vii) Bad debts written off as irrecoverable in the accounts of the assessee for the previous year. Provided that in the case of an assessee to which section 36(1)(viia) applies, the bad debts written off which are in excess of the deduction already allowed u/s. 36(1)(viia) – Provision for bad and doubtful debts shall be allowed as a deduction u/s. 36(1)(vii). Section 36(1) (viia) Provision for bad and doubtful debts Assessee = Scheduled Bank, Non-scheduled Bank, Co-operative Bank- 8.5% of the total income [before making any deduction under section 36(1)(viia) and any deduction under Chapter VI-A] + 10% of the aggregate average advances made by the rural branches of such bank. Assessee = Foreign Bank, Public Financial Institution, State Financial Corporations, State Industrial Investment Corporations, NBFC - % of the total income [before making any deduction under section 36(1)(viia) and any deduction under Chapter VI-A] Any provision created in books of account which is in excess of the above amount shall be disallowed. Allowability of bad debts under section 36(1)(vii) If actual bad debts for a PY > Provision for doubtful debts allowed u/s. 36(1)(viia), then the amount of bad debts allowed under section 36(1)(vii) = Actual bad debts (-) Provision already allowed u/s. 36(1)(viia). If actual bad debts for a PY ≤ Provision for doubtful debts allowed u/s. 36(1)(viia), then bad debts will not be allowed as a deduction in the relevant PY. For taxation purposes, the amount of provision to be carried forward = Provision already allowed u/s. 36(1)(viia) (-) the amount of bad debts in the relevant PY. Such carried forward provision shall be utilized for adjustment against future bad debts.

Direct Taxes 1.64 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication SECTION DESCRIPTION Section 36(1)(viii) Special Reserve- Deduction = LOWER OF (a) Amount transferred to the special reserve account during the previous year; (b) 20% of the profits derived from the business activities, computed u/s. 28 to 44D before claiming deduction u/s. 36(1)(viii) 200% of paid-up share capital and general reserve as on 31st March of the PY (-) the balance of the special reserve account on 1st April of the PY Section 36(1)(xiv) Any contribution made by a public financial institution to Credit Guarantee Fund Trust for small industries shall be allowed as a deduction. Section 36(1)(xv) STT paid on “securities” held as stock-in-trade shall be allowed as a deduction while computing PGBP income. Section 36(1)(xvi) When commodities are held as stock-in-trade, any amount paid as commodities transaction tax shall be allowed as a deduction. Section 36(1)(xvii) The expenditure incurred by a co-operative society engaged in the business of manufacture of sugar for purchase of sugarcane at a price which is equal to or less than the price fixed or approved by the Government shall be allowed as a deduction. Section 36(1) (xviii) Marked to market loss or other expected loss as computed in accordance with the ICDS notified u/s. 145(2) is to be allowed as a deduction. Section 37(1) Any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession. Points to be noted: Expenditure incurred on Corporate Social Responsibility (CSR) shall not be allowed as a deduction u/s. 37(1). Any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be allowed as a deduction. Note 1 The following expenses shall be allowed fully i.e., a 100% deduction, to the assessee CASE 1 – if the assessee pays tax as per the Finance Act, 2023 rates CASE 2 - if the assessee pays tax as per the concessional tax rates prescribed by Section 115BAA to Section 115BAE Nature of Expenditure Section Number Is Deduction allowed? CASE 1 CASE 2 Revenue expenditure on scientific research done exclusively for the assessee Section 35(1)(i) Yes Yes Any revenue expenditure incurred within 3 years immediately preceding the commencement of business, shall also be allowed as a deduction in the PY of commencement of business

Income from Business & Profession 1.65 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Nature of Expenditure Section Number Is Deduction allowed? CASE 1 CASE 2 Capital Expenditure on scientific research done exclusively for the assessee Section 35(2) • Cost of Land No No • Other Capital Expenditure Yes Yes Any capital expenditure remaining unabsorbed due to inadequate profits shall be carried forward without any maximum time limit, similar to UAD under section 32(2) COMPANY engaged in the business of bio-technology or in any business of manufacture or production of any article or thing Section 35(2AB) • Cost of land No No • Cost of Building Allowed under section 35(2) Allowed under section 35(2) • Other Capital Expenditure and Revenue Expenditure Yes No Research done by outsiders and contribution made by the assessee - Scientific Research done by Research Association, University, College which has been approved by the prescribed authority Section 35(1)(ii) Yes No Indian company whose main object is scientific research and approved by the prescribed authority Section 35(1)(iia) Yes No National Laboratory or Indian Institute of Technology (IIT) or a University with a specific direction by the assessee that the amount contributed shall be used for scientific research under an approved programme Section 35(2AA) Yes No Research in social science/ statistical research done by a University, College or Research Association which undertakes research in social science or statistical research Section 35(1)(iii) Yes No Other Points:- 1. The deduction under section 35(1)(ii), section 35(1)(iia) and section 35(1)(iii) shall be allowed only if – (a) The research association, college, university or Indian company, as the case may be, furnishes a statement to the prescribed income-tax authority giving details of the contributions received; AND

Direct Taxes 1.66 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication (b) It also issues a certificate to the donor, specifying the amount of contribution/donation received from him. 2. If the capital expenditure (i.e., the fixed asset) used for scientific research and the cost whereof is allowed as a deduction u/s. 35(2) has been – (a) Subsequently used for the purpose of business of the assessee: Refer Section 43(1), Explanation 1. (b) Sold without using it for business at all: Refer section 41(3). 3. An assessee, whose gross total income does not include “Profits and Gains of Business or Profession” and who makes the payments as referred to in section 35(1)(ii) [to research association only] or section 35(1)(iii) [to research association, college or university], shall - (i) be allowed as a deduction of the said amounts u/s. 80GGA from the gross total income, if the assessee opts to pay tax as per rates prescribed by the Finance Act, 2023. However, if such payments, exceeding ` 2,000, are made by cash, then the deduction under section 80GGA is not allowable; or (ii) not be allowed a deduction of the said amounts, if the assessee opts to pay tax u/s. 115BAA to 115BAE, since deduction u/s. 80GGA is not applicable to such assessee. (4) Depreciation and rates of depreciation I. Block of Assets The expressions Assets and Blocks of Assets w.e.f. 1-4-1999 shall mean a group of assets falling within a class of assets comprising: a. Tangible Assets being buildings, machinery, plant or furniture. b. Intangible Assets being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature; in respect of which same percentage of depreciation is prescribed. II. Rates of Depreciation Sr. No. Block of assets RATE % (for AY 2006-07 to AY 2017-18) RATE % (for AY 2018- 19 onwards) (Refer Note 1) I Buildings : (See Note 4) 1 Buildings which are used mainly for residential purposes except hotels and Boarding House 5 5 2 Buildings which are not used mainly for residential purposes and other than mentioned in 1 & 3 10 10 3 Buildings acquired on or after 1-9-2002 for installing P & M forming part of water supply project or water treatment system and put to use for the purpose of providing infrastructure facilities u/s. 80-IA(4)(i) 100 40 4 Purely temporary erections such as wooden structures 100 40

Income from Business & Profession 1.67 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Sr. No. Block of assets RATE % (for AY 2006-07 to AY 2017-18) RATE % (for AY 2018- 19 onwards) (Refer Note 1) II Furniture and fittings including electrical fittings 10 10 III Machinery and plant : (See Note 5) 1 Machinery and plant other than those covered by subitems 2, 3 and 8 below 15 15 2 Motor-cars (other than those used in business of running them on hire) acquired or put to use on or after 1st April, 1990 15 15 3 i. Aeroplane — Aeroengines 40 40 ii. Motor buses, Motor lorries and Motor taxies used in a business of running them on hire 30 30 iii. Commercial vehicle acquired on or after 1-10-1998 but before 1-4-1999 and is put to use before 1-4-1999 for the purposes of business or profession 40 40 iv. New commercial vehicle acquired on or after 1-10-1998 but before 1-4-1999 and is put to use before 1-4-1999 in replacement of condemned vehicle of over 15 years of age for the purpose of business or profession 60 40 v. New commercial vehicle acquired on or after 1-4-1999 but before 1-4-2000 in replacement of condemned vehicle of over 15 years of age and is put to use before 1-4-2000 for the purpose of business or profession 60 40 vi. New commercial vehicle acquired on or after 1-4-2001 but before 1-4-2002 and is put to use before 1-4-2002 for the purpose of business or profession 50 40 vi. a) New commercial vehicle acquired on or after 1-1-2009 but before 1-10-2009 and is put to use before 1-10-2009 for the business or profession 50 40 vii. Moulds used in rubber and plastic goods factories 30 30 viii. Air pollution control equipments 100 40 ix. Water pollution control equipments 100 40 x. Solid waste control equipments 100 40

Direct Taxes 1.68 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Sr. No. Block of assets RATE % (for AY 2006-07 to AY 2017-18) RATE % (for AY 2018- 19 onwards) (Refer Note 1) xi. P & M used in semi-conductor industry 30 30 xi.a) Life saving medical equipments (For Items refer to Rule 5 App. I) 40 40 4 Containers made of glass or plastic used as refills 50 40 5 Computers (including computer software) 60 40 6 Machinery and plants used in weaving processing, and garment sector of textile industry purchased under TUFS on or after 1-4-2001 but before 1-4-2004 and is put to use before 1-4-2004 50 40 7 & 8 For other items of P & M refer to Rule 5 App. 1 100/80/60 40 9 i. Books owned by assessees carrying on a profession a. Annual publication 100 40 b. Other books 60 40 ii. Books owned by assessees carrying on business in running lending libraries 100 40 IV Ships Refer to Rule 5 App. I V Intangible Assets Knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature acquired on or after 1-4-1998 (not being Goodwill of a business or profession w.e.f. 1-4-2021) 25 25 NOTES: 1. Notification No. 103/2016 dated 7th November 2016 restricts the highest rate of depreciation to 40%. The depreciation rates are applicable from AY 2018-19 onwards for all taxpayers except for newly set up domestic manufacturing companies (under Section 115BA) where these depreciation rates are applicable from A.Y. 2017-18 onwards. The new rate is made applicable to all the assets (whether old or new) falling in the relevant block of assets. 2. Where an asset is put to use for less than 180 days in a previous year in which it is purchased, depreciation thereon shall be allowed at 50% of the depreciation allowable in respect of the block of asset comprising such asset. 3. Buildings include roads, bridges, culverts, wells and tubewells.

Income from Business & Profession 1.69 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication 4. Plant has been held to include: • Movable partitions [Jarrold vs. John Good & Sons Ltd., 40 TC 681 (CA)] • Sanitary & pipeline fitting [CIT vs. Taj Mahal Hotel, 82 ITR 44 (SC)] • Ceiling and pedestal fans [CIT vs. Jagadees Chandran & Co., 75 ITR 697 (Mad.); Sundaram Motors Pvt. Ltd. vs. CIT, 71 ITR 587 (Mad.); CIT vs. Tarun Commercial Ltd., 151 ITR 75 (Guj.)] • Wells [CIT vs. Warner Hindustan Ltd., 117 ITR 15 (AP)] • Hospital [CIT vs. Dr. B. Venkata Rao 111 Taxman 635 (SC)]. However, w.e.f. A.Y. 2004-05, it shall not include buildings, furniture and fittings. 5. Depreciation on assets acquired on hire purchase basis should be allowed to the hirer where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment [Circular No. 9 (R. Dis. No. 27(4) - IT/43), dated 23rd March 1943]. 6. Depreciation in respect of motor car manufactured outside India acquired on or after 28th February, 1975 or before 1st April, 2001, shall be allowed. 7. The claim of depreciation is mandatory w.e.f. A.Y. 2002-03 overriding Supreme Court’s decision in CIT vs. Mahendra Mills 109 Taxman 225 which held that the depreciation claim is optional. 8. Total depreciation allowable in the year of succession/amalgamation/demerger to predecessor/ amalgamating/demerged co. and successor/amalgamated/resulting co. is to be restricted to depreciation allowable as if succession/amalgamation/demerger had not taken place, and such depreciation is to be apportioned on the basis of number of days usage by each of them. 9. Depreciation is allowable even on jointly owned assets. 10. No amortisation benefits under Section 35A and Section 35AB can be claimed in respect of intangible assets. 11. In respect of depreciable assets employed in power projects, depreciation may be computed under the Straight Line Method on individual assets [Rule 5(1A)] — [Appendix IA]. Alternatively, the undertaking, may at its option, also claim depreciation at the normal rates (Rule 5(1) — Appendix I), subject to the option being exercised prior to the due date of filing the return of income. In the event of sale or disposal of such assets, if the sale consideration. i. Is less than WDV of such assets – Balance (i.e., WDV – sale consideration) can be claimed as depreciation, provided that such a deficiency is written off in the books. ii. Is in excess of the WDV — Excess (to the extent of the difference between actual cost and WDV will be taxable as Business profit and the balance as Capital Gains). 12. Additional depreciation @ 20% of actual cost of new machinery or plant (other than ships and aircraft) acquired and installed after 31st March, 2005 by an assessee engaged in the business of manufacture or production of an article or thing shall be allowed on satisfying certain conditions. Such additional depreciation shall also be allowed from A.Y. 2013-14 to an assessee engaged in the business of generation or generation and distribution of power. From A.Y. 2017-18, such additional depreciation is available to an

Direct Taxes 1.70 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication assessee engaged in the business of generation, transmission or distribution of power. Additional depreciation of 35% will be allowed in respect of Plant and Machinery acquired and installed during the period 1st April, 2015 to 31st March, 2020, to an assessee setting up manufacturing operations in notified backward areas of Andhra Pradesh, Telangana, Bihar and West Bengal. If Plant and Machinery, eligible for additional depreciation is put to use for the purpose of business for less than 180 days in the relevant year, 50% of the additional depreciation shall be allowed in the year in which Plant and Machinery is put to use and balance 50% shall be allowed in the immediately succeeding year. Inserted by Finance Act, 2015, w.e.f. 1st April, 2016. 13. Following persons will not be allowed to claim the benefit of additional depreciation while computing total income for the respective assessment year- • Domestic companies opting to pay tax under section 115BAA • Newly set up manufacturing domestic companies opting to pay tax under section 115BAB • Individuals and HUFs opting to pay tax under the new tax regime under section 115BAC • Resident Co-Operative societies opting to pay tax under section 115BAD. Certain deductions to be allowed only on actual payment [S. 43B] 1. If the expenditure is covered by section 43B, deduction of such expense shall be allowed in that PY in which the actual payment of such expenditure is made, irrespective of the method of accounting regularly followed by the assessee. 2. However, if the amount is paid on or before the due date of filing return of income u/s. 139(1), deduction will be allowed in the relevant PY (and not in the year of payment). 3. If the expenditure is not covered by section 43B, deduction of such expenditure shall be allowed as per the regular method of accounting followed by the assessee. 4. The following expenses are covered by this section - (a) any sum payable as 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 bonus or commission payable to employees; or (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 or • a scheduled bank or • a co-operative bank or

Income from Business & Profession 1.71 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication • such class of NBFCs as may be notified by the Central Government in the Official Gazette in this behalf; or (e) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, or (f) any sum payable by the assessee to the Indian Railways for the use of railway assets, or (g) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) 5. Conversion of outstanding interest on borrowed capital into a loan or advance or debenture or any other instrument (by which the liability to pay is deferred to a future date) shall not be regarded as “payment.” When such converted interest is actually paid, deduction shall be allowed of the amount paid. 6. For the expense covered by point (g) above, the relaxation of due-date of filing return of income does not apply. (5) Expenses not allowed as a deduction [S. 37(2B) to S. 40A(13)] Section # Description Section 37(2B) Any expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract pamphlet, magazine or the like published by a political party. This amount shall be allowed as a deduction under – 1. Section 80GGB for an Indian company; 2. Section 80GGC for other assessees, except for local authority and artificial juridical person wholly or partly funded by the Government. However, no deduction shall be allowed for any amount paid by cash. 38 Where any building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession, then the deductions under section 30, 31 & 32 shall be restricted to a fair proportionate part thereof which the Assessing Officer may determine having regard to the use of such building, machinery, plant or furniture. 40(a)(i) Following expenses (100%) not to be allowed if tax is not deducted at source or deducted but not paid to the CG if paid to a Non-resident: 1. Interest 2. Royalty 3. Fees for Technical services Any other sum chargeable to tax under this Act [except for “Salaries” which is covered by section 40(a)(iii)] In a subsequent year, if tax is deducted at source, the amount disallowed in the earlier PY shall be allowed in that PY in which the TDS is deposited with the CG.

Direct Taxes 1.72 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Section # Description 40 (a)(ia) Any amount payable to a resident payee, on which tax not deducted or deduted but not paid to the CG. – 30% of the expenditure disallowed. Expenses to be allowed in the year in which TDS deposited to CG. 40 (a)(iii) Salaries payable outside India or payable to a non-resident on which tax not deducted at source or not paid after deducting to the CG – 100% expenditure permanently not allowed. 40(a)(ib) Disallowance of expenditure for defaults in Equalisation Levy (EL) Please refer to the theory printed under the heading “Provisions of PGBP related to Non-Residents” at the end of this chapter 40(a)(ii) Taxes on income Any amount of TAX on profits or gains of any business or profession (whether payable in India or as per the laws of a foreign country/territory) shall not be allowed as a deduction. Explanation 3 inserted by the Finance Act, 2022.— The term “tax” shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax; 40(a)(iib) Fee or charges paid by State Government Undertaking to State Government by way of (i) royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge. 40(a)(iv) Assessee’s own contributions to the provident fund or any other fund shall be allowed as a deduction to the assessee, only if TDS arrangements have been made by the assessee to ensure that tax is deducted at source on the amount taxable for the employee under “Salaries’” when the payment is made from the fund. If TDS arrangements are not made, section 40(a)(iv) will disallow the amount of assessee’s contributions. 40(a)(v) Tax on non-monetary perquisites borne by the employer is disallowed for the employer. Such amount shall be exempt for the employee u/s. 10(10CC). 40(ba) Any interest, salary, commission, bonus or remuneration shall be fully disallowed for the AOP/BOI. 40(b) Payments made by partnership firm to its partners (as per chart after this table) 40A(2) If the expenditure is incurred by the assessee (called as the “payer”) for which a payment is to be made to a relative/related party and such expenditure is in excess of the fair market value [FMV], then such excess [Transaction Value (-) FMV] shall be disallowed for the payer. List of Related parties:

Income from Business & Profession 1.73 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Section # Description Assessee (Payer) Relative/ Related person (Receiver) Individual Relatives/ any person in whose business the assessee individual or his relative has substantial interest [i.e., 20% or more of the voting power or PSR]. Company Director/ Relative of Director/Any person in whose business, substantial interest is held by the assessee company or its director or director’s relative. Firm Partner/ Relative of partner/ Any person in whose business, substantial interest is held by the assessee firm or its partner or partner’s relative AOP/BOI Members/Relative of members/ Any person in whose business, substantial interest is held by the assessee AOP/BOI or its member or member’s relative HUF Members/Relative of members/ Any person in whose business, substantial interest is held by the assessee HUF or its member or member’s relative Company, Firm, AOP/ BOI/ HUF An individual who has substantial interest in the business of the assessee. Company, Firm, AOP/ BOI/ HUF i. Any Company, firm, AOP/BOI, HUF which has substantial interest in the business of the assessee ii. Directors/Partners/Members of the person mentioned in (i) above iii. Relatives of the persons mentioned in point (ii) above. Company, Firm, AOP/ BOI/HUF i. Any Company, firm, AOP/BOI, HUF whose director, partner, member has substantial interest in the business of the assessee or ii. Any other director/partner/member; or iii. Their relatives. 40A(3) If the amount paid on a single day > `10,000 and it is paid through account payee cheque, account payee bank draft, ECS or any electronic mode prescribed by Rule 6ABBA, the entire amount shall be allowed as a deduction and section 40A(3) shall not apply. 40A(3A) Where an expenditure has been allowed in the assessment for any year on accrual basis and subsequently during any future previous year, the assessee makes payment exceeding ` 10,000 (in respect of such expenditure) other than the modes prescribed in section 40A(3) and Rule 6ABBA, then 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.

Direct Taxes 1.74 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Section # Description 40A(7) 1. Provision made by the assessee for payment of gratuity to his employees shall be disallowed. 2. Payment made by the assessee to an approved gratuity fund shall be allowed as a deduction u/s. 36(1)(v) r.w.s. 43B. 3. Provision made for payment of gratuity actually becoming payable during the PY shall be allowed as a deduction. 40A(9) Employer’s contribution to unapproved funds shall be disallowed during the service period of the employee and shall be allowed as a deduction to the employer at the time of retirement/termination of the employee. 40A(13) Any Marked To Market Loss or Expected Loss which is not allowed by ICDS shall be disallowed as per section 40A(13). Payments made by the Partnership Firm to its Partners [S. 40(b)] NOT AUTHORISED BY THE PARTNERSHIP DEED Disallowed for the firm u/s. 40(b) AUTHORISED BY THE PARTNERSHIP DEED FOR A PERIOD PRIOR TO THE DATE OF THE PARTNERSHIP DEED Such amount authorised with retrospective effect shall be disallowed for the firm u/s. 40(b) FOR A PERIOD ON OR AFTER THE DATE OF THE PARTNERSHIP DEED Allowed as a deduction to the extent the rate of interest is < 12% p.a. Any excess interest shall be disallowed for the firm u/s. 40(b). INTEREST PAYABLE TO PARTNERS (WORKING AND SLEEPING)

Income from Business & Profession 1.75 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication SLEEPING PARTNERS Disallowed for the firm u/s. 40(b) WORKING PARTNERS NOT authorised by partnership deed Disallowed for the firm u/s. 40(b) Authorised by partnership deed WITH RETROSPECTIVE EFFECT [i.e., prior to the date of the partnership deed] Such amount authorised with retrospective effect shall be disallowed for the firm u/s. 40(b) AUTHORISED BY THE PARTNERSHIP DEED WITH PROSPECTIVE EFFECT [i.e., on or after the date of partnership deed] Allowed as a deduction upto the limits specified u/s. 40(b). Any salary above the limits shall not be allowed. REMUNERATION TO PARTNERS Book Profit/Book Loss of the Partnership Firm Net Profit/ Net Loss as per Profit and Loss account xxxx Add/Less: All adjustments under the head “PGBP” xxxx Add: Salary to all partners (including working partners) debited to the profit and loss account. xxx BOOK PROFIT /(BOOK LOSS) +ve/ -ve Limit under Section 40(b) Sr. No. Book Profit/ Book Loss Limit u/s. 40(b) (I) Book Loss ` 1,50,000 (II) Book Profit (a) Upto ` 3,00,000 90% of Book Profit or minimum ` 1,50,000 whichever is HIGHER (b) Above ` 3,00,000 [(90% of ` 3,00,000 i.e., ` 2,70,000) + (Book Profit – ` 3,00,000) X× 60%] Salary allowable as a deduction to the partnership firm Salary to Working Partners authorised by the partnership deed for a period on or after the date of the partnership deed Or Limit under section 40(b) Whichever is less

Direct Taxes 1.76 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Points to be Noted: • Where an individual is a partner in a firm on behalf, or for the benefit, of any other person, any interest paid by the firm to such individual in his personal capacity, shall not be taken into account for the purposes of section 40(b); • Where an individual is a partner in a firm in his personal capacity, any interest paid by the firm to such individual shall not be disallowed u/s. 40(b), if such interest is received by him on behalf, or for the benefit, of any other person. • If a firm pays interest to a partner and the partner pays interest to the firm on his drawings, then the interest shall not be netted off. The interest received by the firm from the partners on their drawings is taxable in the hands of the firm as income under the head PGBP. Interest paid by the firm to the partners on their capital is allowable as a deduction to the firm as per the limits under section 40(b). (6) Taxation of Firms 1 Rate of tax Flat rate of 30% on the total income after deduction of interest and remuneration to partners at the specific rates. The rate to be increased by surcharge @ 12% (if total income exceeds ` 1 crore) and Health and Education Cess on Income-tax and surcharge @ 4%. 2 Interest to Partners (Simple interest) Not exceeding 12% p.a. from 1-6-2002 3 Remuneration to Partners a. Payment to a non-working partner will not be allowed as a deduction. b. A ‘working partner’ is an individual who is actively engaged in conducting the affairs of the business or profession of the firm c. Quantum of allowance is to be determined with reference to ‘book profit, which is defined to mean an amount computed in the manner laid down in Chapter IV-D as increased by the amount of remuneration to partners if deducted in determining book profit d. Maximum permissible deduction for payment of remuneration to working partners from A.Y. 2010-11, is as under : On the first ` 3 lakh of the Book profit or in case of loss - ` 1.5 lakh or at the rate of 90% of the Book Profit whichever is more. On the balance of the Book Profit – at the rate of 60%. 4 Conditions for allowance of remuneration and interest to partners a. Remuneration should be to a working partner. b. Payment of remuneration and interest should be authorised by and should be in accordance with the terms of the partnership deed and should relate to any period falling after the date of such partnership deed. c. No deduction u/s. 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration — Circular No. 739 dated 25-3-1996.

Income from Business & Profession 1.77 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication 5 Conditions for assessment as a firm a. The partnership should be evidenced by an instrument in writing specifying individual share of the partners. b. If any default is made in compliance with the above provision, the firm will be assessed as a firm without deducting interest and salary to partners from A.Y. 2004-05 onwards and as an AOP up to A.Y. 2003-04. c. If any failure is made as mentioned in s. 144 (ex parte assessment) the firm shall be assessed as a firm from A.Y. 2004-05 without deducting interest and salary to partners and as an AOP up to A.Y. 2003-04. 6 Partners’ assessments a. Once tax is paid by firm no tax will be payable by the partners on share of income from the firm. b. Amount of interest and/or remuneration, etc. received by a partner will be taxed in his hands under the head ‘Profits and gains of business or profession’, excluding the amount disallowed in the hands of the firm being in excess of limits laid down in s. 40(b) and from A.Y. 2004-05 amount disallowed in the event of any failure as mentioned in s. 144 or non compliance of s. 184. 7 Losses of the firm Unabsorbed loss including depreciation in respect of A.Y. 1993-94 onwards of the firm will not be apportioned amongst the partners and will be carried forward by the firm only (in the case of change in the constitution of the firm due to retirement or death of a partner such loss will be reduced by the share of such retired or deceased partner). 8 Allowability of remuneration and interest vis-a-vis presumptive taxation No separate or additional deduction for remuneration and interest will be allowed as from the presumptive income computed or offered at prescribed rate u/s. 44AD, 44ADA and 44AE. 9 Due dates for filing return of firm a. 30th November, where the partnership firm is required to furnish a Transfer Pricing report u/s. 92E. b. 31st October, where the partnership firm is not covered under (a) above, but accounts of the firm are required to be audited under Income-tax Act or under any other law for the time being in force. c. 31st July in any other cases. 10 Due dates for filing of returns of partners a. 31st November in case of a partner of a firm which is required to furnish a Transfer Pricing report u/s 92E. b. 31st October in case of a partner not covered under (a) above, who is partner of a firm which is required to get its accounts audited under Income Tax Act or any other law in force c. 31st July for other partners. 11 Alternate Minimum Tax From A.Y. 2013-14, Alternate Minimum Tax (AMT) is applicable to firm.

Direct Taxes 1.78 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication (7) Specific incomes chargeable to tax - Section 41, Section 43AA, Section 43CA & Section 43D SECTION DESCRIPTION 41(1) If – (i) Any loss or expenditure has been allowed as a deduction; or (ii) A deduction has been allowed in respect of a trading liability; And subsequently – (i) Any amount is received in respect of such expenditure or loss; or (ii) There is remission or cessation of such trading liability, Then such amount received or such trading liability so ceased shall be taxable as PGBP income Points to be noted – 1. Writing off the liability unilaterally will also bring about a remission or cessation of the trading liability. 2. Section 41(1) shall also apply in case of succession of business, if the recovery of expenditure or remission of trading liability is in favour of the successor of such business. 41(2) Income from sale of an asset for which depreciation has been claimed on “Actual Cost” basis: {Moneys payable + Scrap Value} (-) WDV of the block of asset A Actual Cost (-) WDV of the block [i.e., depreciation allowed under section 32(1)(i) till date] B Taxable amount u/s. 41(2) = A or B whichever is less 41(3) Income from an asset utilised for scientific research which is sold without using for regular business purposes Sale proceeds of the fixed asset A Add: Deductions allowed under section 35 B Total C Less: Actual Cost of the asset (D) Excess E Taxable Amount u/s. 41(3) = E or B, whichever is less The sale proceeds above the actual cost shall be chargeable to tax under the head “Capital Gains.” 41(4) The amount of bad debts recovered, to the extent they were allowed as a deduction u/s. 36(1)(vii), shall be chargeable to tax under the head “PGBP.” 41(4A) If a deduction has been allowed under section 36(1)(viii), then any amount withdrawn from the Special Reserve shall be taxable as PGBP income in the PY in which such amount is withdrawn.