EDITORIAL NOTE — VOL IV-C

This Volume covers the PGBP head — the operative provisions are 1961 Act ss. 28 (charge), 29 (computation framework), 30-32 (deductions for rent/repairs/insurance/depreciation), 33AB-35E (specialised deductions / scientific research / investment allowance), 36 (specific allowances), 37 (general deduction), 40 (amounts not deductible), 40A (cash payment / related-party / etc.), 41 (deemed receipts), 43 (definitions), 43A (foreign exchange), 43B (actual payment basis), 44AA-44AB (books / audit), 44AD-44AE (presumptive), 44B-44DB (NR special). The 2025 Act counterpart spans ss. 26-66 (Chapter IV-C and Chapter IV-D).

Section 28 — CHARGE OF PGBP INCOME

BLOCK 1 — TEXT OF SECTION 28, 1961 ACT (key extracts)

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 due to or received by [various enumerated office holders] in connection with termination / modification of agreements;

(iii) income derived by a trade, professional or similar association from specific services performed for its members;

(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955;

(iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;

(iiic) any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971;

(iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme [DEPB];

(iiie) any profit on the transfer of the Duty Free Replenishment Certificate;

(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;

(v) any sum 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;

(va) any sum, whether received or receivable, in cash or kind, under an agreement for— (a) not carrying out any activity in relation to any business or profession; or (b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services;

(vi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.

BLOCK 2 — 2025 ACT COUNTERPART (Section 26)

BLOCK 3 — COMMENTARY

STATUTORY ARCHITECTURE

Section 28 is the gateway. The 'business or profession' carried on at ANY time during the PY suffices — even one transaction can constitute business if intended as such. Adventure-in-the-nature-of-trade is a recurring s. 28 issue.

JUDICIAL EVOLUTION — Pharma Freebies (Apex Laboratories)

The Supreme Court in Apex Laboratories (P.) Ltd. v. DCIT, (2022) 442 ITR 1 (SC), held that pharma freebies to medical professionals are not 'wholly and exclusively' for business and offend public policy. Disallowance under s. 37(1) Explanation (1961) is valid.

HELD: Pharmaceutical companies' gifting freebies to doctors is clearly 'prohibited by law'; the freebies are tainted by a violation of the medical practitioners' Code of Conduct under the Indian Medical Council Regulations, 2002. The expenditure is not allowable under section 37(1). (per Apex Laboratories ¶ 22).

JUDICIAL EVOLUTION — Export Incentives (DEPB)

Topman Exports v. CIT, (2012) 342 ITR 49 (SC) — DEPB credit on export = profits of export; entire DEPB amount represents profit for s. 80HHC type provisions.

JUDICIAL EVOLUTION — Dividend Stripping

CIT v. Walfort Share & Stock Brokers (P.) Ltd., (2010) 326 ITR 1 (SC) — loss arising from dividend-stripping transactions is allowable unless statutorily disallowed; FA 2002 inserted s. 94(7) prospectively.

PLANNING NOTES

(i) For pharma sector, document non-physician promotional spend separately from physician-related expenditure; the latter is disallowable per Apex Laboratories. (ii) For export businesses, classification of incentive (DEPB, MEIS, RoDTEP, drawback) determines deductibility under s. 80HHC-equivalent provisions — verify category. (iii) For non-compete consideration, classify under s. 28(va) (PGBP) — formerly capital receipt route is foreclosed.

Section 32 — DEPRECIATION

BLOCK 1 — TEXT OF SECTION 32, 1961 ACT (key extract)

(1) In respect of depreciation of—

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

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—

(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:

Provided that no deduction shall be allowed under this clause in respect of any motor car manufactured outside India where such motor car is acquired by the assessee after the 28th day of February, 1975 but before the 1st day of April, 2001 unless it is used—(i) in a business of running it on hire for tourists; or (ii) outside India in his business or profession in another country.

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

BLOCK 2 — 2025 ACT COUNTERPART (Section 33)

Section 33 of the 2025 Act preserves the depreciation framework. The block-of-assets concept (FA 1986) continues. Additional depreciation for manufacturing (s. 32(1)(iia)) is preserved.

BLOCK 3 — COMMENTARY

JUDICIAL EVOLUTION — Functional Test for 'Plant'

The leading authority is CIT v. Taj Mahal Hotel, (1971) 82 ITR 44 (SC), where the Supreme Court ruled that 'plant' has a wide meaning and includes any apparatus used by a businessman for carrying on his business — including sanitary fittings in a hotel.

HELD: The word 'plant' in its ordinary sense includes whatever apparatus is used by a businessman for carrying on his business. Sanitary and pipeline fittings in a hotel are 'plant' as they constitute the apparatus through which the hotel-keeper renders services. (per Taj Mahal Hotel ¶ 6).

Scientific Engineering House (P.) Ltd. v. CIT, (1986) 157 ITR 86 (SC) — drawings, designs, charts, plans (know-how) are 'plant' for depreciation.

JUDICIAL EVOLUTION — Building Exclusion (Anand Theatres)

CIT v. Anand Theatres, (2000) 244 ITR 192 (SC) — cinema / hotel building IS NOT plant, however specially designed. The premises is the SITUS, not the apparatus. FA 2003 codified the building exclusion in Explanation 1 to s. 43(3) with retrospective effect from 1-4-1961.

HELD: We are of the view that the building cannot be held to be a plant. The premises in which the business is carried on, even if specifically constructed for the purpose, would not normally be regarded as plant. The plant is the apparatus with which the business is carried on, not the place where it is carried on. (per Anand Theatres ¶ 37).

CIT v. Karnataka Power Corporation Ltd., (2001) 247 ITR 268 (SC) — READ DOWN of Anand Theatres — generating-station building functionally integrated with apparatus may still qualify as plant. Functional test is determinative for sector-specific structures.

RULES 1962 CROSS-REFERENCE

Rule 5 + Appendix I — depreciation rates by asset class. Buildings: 5% (residential) / 10% (non-residential / commercial), 40% (purely temporary erections); Plant & Machinery: 15% (general); 30% (specified machinery, motor vehicles for hire), 40% (computer hardware/software, energy-saving devices), 60-100% (R&D / pollution-control). Rule 5(1A) — power generation undertakings option for SLM (straight-line method) at percentages in Appendix IA.

PLANNING NOTES

(i) For specialised industrial structures (cold storage, gas-storage tank, telecom tower, wind-turbine foundation), evaluate Karnataka Power-type plant claim with engineering certificate. (ii) For hotel / cinema / hospital buildings, accept building-rate depreciation — Anand Theatres forecloses plant classification. (iii) For lift, escalator, electrical fittings, plumbing — these are 'plant' attached to a building, depreciable at plant rate (10%-15%) if separately invoiced and identified. (iv) Maintain detailed asset master with engineering certification of plant character — critical for s. 143(3) scrutiny defence.

SECTIONS 36 & 37 — SPECIFIC + GENERAL DEDUCTIONS

Section 36 — Specific Allowances

Major sub-clauses: s. 36(1)(i) — insurance premium for stocks; s. 36(1)(ib) — Keyman insurance premium; s. 36(1)(ii) — bonus / commission to employees; s. 36(1)(iii) — interest on borrowings (subject to capital-asset proviso); s. 36(1)(iv) — employer contribution to recognised PF / approved superannuation fund / NPS; s. 36(1)(va) — employee's contribution to PF/ESI deposited within due date; s. 36(1)(vii) — bad debts written off (subject to s. 36(2) condition); s. 36(1)(viia) — provision for bad debts of banks / FIs (subject to caps).

JUDICIAL EVOLUTION — Borrowed Capital (s. 36(1)(iii))

S.A. Builders Ltd. v. CIT, (2007) 288 ITR 1 (SC) — interest on borrowings advanced to subsidiary / sister concern, if for commercial expediency, is allowable u/s 36(1)(iii). Note that a proviso post FA 2003 excludes interest on borrowings used for acquisition of capital asset (extension of business) until put to use.

HELD: If the assessee borrows the capital and lends some of it to its sister concern as a measure of commercial expediency, then the interest on the borrowed capital is allowable as a deduction. (per S.A. Builders).

JUDICIAL EVOLUTION — Bad Debts (s. 36(1)(vii))

TRF Ltd. v. CIT, (2010) 323 ITR 397 (SC) — post FA 1989 amendment to s. 36(1)(vii), the assessee need NOT prove that the debt has actually become bad; mere write-off in the books suffices. The pre-1989 'establish bad' standard is no longer applicable.

HELD: After 1-4-1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. (per TRF ¶ 8).

Section 37 — General Deduction

s. 37(1) — any expenditure (not being capital or personal) laid out wholly and exclusively for the purposes of business is deductible. Explanation 1 [FA 1998] — expenditure incurred for any purpose which is an offence or which is prohibited by law shall NOT be deemed to be expenditure incurred for the purposes of business. Explanation 2 [FA 2014] — CSR expenditure under s. 135 of Companies Act 2013 is NOT deemed to be incurred for business and is not allowable u/s 37(1).

JUDICIAL EVOLUTION — Illegal Expenditure

CIT v. Piara Singh, (1980) 124 ITR 40 (SC) — loss incurred in illegal activity (smuggling) is incidental to the business and therefore allowable u/s 37(1) — provided the activity itself is the business. Pre-Explanation-1 (1998) period.

JUDICIAL EVOLUTION — Wholly and Exclusively

Sassoon J. David & Co. v. CIT, (1979) 118 ITR 261 (SC) — 'wholly and exclusively' does NOT mean 'necessarily'; expenditure may benefit a third party incidentally without losing the s. 37 character.

PLANNING NOTES

(i) For inter-corporate loan / interest deduction, document commercial expediency contemporaneously — board resolution + business rationale + sister-concern's deployment of funds. Cite S.A. Builders. (ii) For bad debts, write-off in books is sufficient (post-1989 TRF) — no separate 'establish bad' analysis needed. (iii) For CSR expenditure under Companies Act, claim u/s 80G (qualified) where eligible; specifically excluded from s. 37 by Explanation 2.

SECTIONS 40 & 40A — AMOUNTS NOT DEDUCTIBLE

Section 40 — Amounts Not Deductible

Major sub-clauses: s. 40(a)(i) — sum payable to NR / foreign company on which TDS u/s 195 has not been deducted / paid; s. 40(a)(ia) — sum payable to resident on which TDS has not been deducted / paid (30% disallowance, restored on payment in subsequent year); s. 40(a)(ic) — fringe benefit tax (FBT, abolished 2009); s. 40(a)(ii) — income-tax / wealth-tax paid by the assessee; s. 40(a)(v) — tax on perquisite paid by employer where 'tax on tax' grossing-up was not done; s. 40(b) — partner's salary / interest exceeding limits prescribed in partnership deed and s. 40(b).

Section 40A — Specific Disallowances

s. 40A(2) — payment to specified persons (relatives, controlling interest holders) — to extent excessive or unreasonable. s. 40A(3) — cash payment exceeding ₹10,000 (₹35,000 for transport-related) — disallowed. s. 40A(7) — provision for gratuity (only contribution to approved fund or actually paid) deductible. s. 40A(9) — contribution to non-statutory funds beyond statutory permissible — disallowed.

JUDICIAL EVOLUTION — Foreign-payee TDS (s. 40(a)(i))

GE India Technology Centre (P.) Ltd. v. CIT, (2010) 327 ITR 456 (SC) — TDS u/s 195 arises ONLY where the sum is 'chargeable to tax in India'; the payer can self-determine chargeability subject to s. 195(2) safeguard. This determines whether s. 40(a)(i) disallowance is triggered.

JUDICIAL EVOLUTION — Resident-payee TDS (s. 40(a)(ia))

Hindustan Coca-Cola Beverages (P.) Ltd. v. CIT, (2007) 293 ITR 226 (SC) — where the payee has paid the tax due, Department cannot recover the same tax again from the deductor under s. 201(1). Interest u/s 201(1A) survives till payee-payment date. The s. 40(a)(ia) disallowance interaction with this principle is litigated regularly.

RULES 1962 CROSS-REFERENCE

Rule 6DD — exceptions to s. 40A(3) cash-payment disallowance — specified situations (banking holiday, agricultural payment to producer, transport contractor with no banking facility at site, etc.). Form 3CD Item 21(d) — auditor's reporting on s. 40A disallowances.

PLANNING NOTES

(i) For business expenditure of ≥ ₹10,000, ALWAYS pay through banking channels — disallowance u/s 40A(3) is automatic without Rule 6DD exception. (ii) For foreign payments, conduct DTAA / chargeability analysis BEFORE TDS. Form 15CA/15CB for every cross-border remittance. Cite GE India Technology Centre to defeat blanket s. 40(a)(i) attempts. (iii) For resident-payee TDS defaults, file revised return + interest u/s 201(1A); if payee has paid, invoke Hindustan Coca-Cola to bar double-recovery and obtain set-aside of s. 40(a)(ia) disallowance. (iv) For partner's salary u/s 40(b), strictly follow the deed limits + statutory caps.

Section 43B — CERTAIN DEDUCTIONS ON ACTUAL PAYMENT BASIS ONLY

BLOCK 1 — TEXT OF SECTION 43B, 1961 ACT

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

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

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

(c) any sum payable by the assessee as bonus or commission to employees for service rendered, 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

(da) any sum payable by the assessee as interest on any loan or borrowing from a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

(e) any sum payable by the assessee as interest on any loan or advance from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, in accordance with the terms and conditions of the agreement governing such loan or advance, or

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

(g) any sum payable by the assessee to the Indian Railways for the use of railway assets,

(h) [FA 2023] 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,

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

BLOCK 2 — 2025 ACT COUNTERPART (Section 41(2))

Section 41(2) of the 2025 Act consolidates 1961 s. 43B(a) to (h). Substance: actual-payment requirement notwithstanding accrual.

BLOCK 3 — COMMENTARY

STATUTORY ARCHITECTURE

Section 43B overrides the mercantile method by requiring ACTUAL PAYMENT for the enumerated categories. The proviso allows deduction in the year of payment if paid before the return-filing due date u/s 139(1). FA 2023 added sub-clause (h) — MSME 45-day payment rule — effective FY 2023-24, the proviso (i.e., grace period to return-filing date) does NOT apply to (h).

JUDICIAL EVOLUTION — Constitutional Validity

The constitutional validity of FA 2023's MSME 45-day rule (s. 43B(h)) was challenged in Bombay Chamber of Commerce v. UOI, (2024) Bom HC writ — admission stage dismissal. The constitutional validity is therefore undisturbed.

DEPARTMENTAL PRACTICE & PLANNING

CBDT FAQ dated 06-04-2024 clarified: (i) sub-clause (h) applies only where supplier is registered as 'Micro' or 'Small' enterprise (Medium NOT covered); (ii) the 45-day window starts from acceptance of goods/services; (iii) where no written contract, 15-day default applies. Practitioners should obtain Udyam Registration certificate from each vendor — un-registered vendors fall outside the 45-day rule.

PLANNING NOTES

(i) Maintain a 43B compliance register — track tax/duty/cess/PF/bonus/interest payable as on 31 March, and ensure payment by return-filing date. (ii) For MSME payments, trigger payment within 45/15 days of acceptance — even one day's delay forfeits deduction in year of accrual; deduction shifts to year of actual payment. (iii) Form 3CD Item 26 — auditor's reporting on s. 43B disallowance / set-off.

SECTIONS 44AA, 44AB, 44AD-44AE — BOOKS, AUDIT, PRESUMPTIVE

Section 44AA — Maintenance of Books

Every person carrying on a business / profession is required to maintain books to enable computation of total income. Specified professions (legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, authorised representative, film artist, IT professional u/s 44AA(1) Notified Categories) must maintain prescribed books per Rule 6F. For non-specified businesses with turnover > ₹1.5 crore (or income > ₹1.2 crore), books required.

Section 44AB — Tax Audit

Mandatory tax audit by CA where: (a) business turnover > ₹1 crore (₹10 crore where ≥95% receipts and payments are digital — FA 2020); (b) profession gross receipts > ₹50 lakh; (c) presumptive scheme defaulters (s. 44AD/44ADA/44AE) where total income exceeds basic exemption; Tax audit report in Form 3CA/3CB + Form 3CD by 30 September; failure attracts penalty of 0.5% of turnover or ₹1,50,000, whichever is less, u/s 271B.

Section 44AD — Presumptive Business

Eligible: resident individual / HUF / partnership firm (not LLP) with turnover ≤ ₹3 crore (FA 2023 enhancement, where ≥95% receipts digital) or ≤ ₹2 crore otherwise. Presumed profit: 8% (cash receipts) / 6% (digital receipts) of turnover. Lock-in: 5 consecutive years u/s 44AD(4) — once opted out, cannot re-opt for 5 years.

JUDICIAL EVOLUTION

Nandlal Sharma v. ITO, (2017) 165 ITD 305 (Jaipur ITAT) — assessee opting s. 44AD cannot be subjected to scrutiny on 'low margin' grounds; deeming creates a statutory floor.

CIT v. Surinder Pal Anand, (2010) 192 Taxman 264 (P&H HC) — books of account NOT required for s. 44AD assessees u/s 44AA; AO cannot demand books absent specific cause.

RULES 1962 CROSS-REFERENCE

Rule 6F — books for specified professionals. Rule 6G — Form 3CA / 3CB / 3CD for tax audit. Form 3CB-3CD — for non-statutory-audit assessees; Form 3CA-3CD — where statutory audit otherwise required.

PLANNING NOTES

(i) For presumptive scheme opting, calculate the 5-year lock-in at the time of first opting — cite Surinder Pal Anand to defeat any AO demand for books. (ii) For composite businesses (manufacturing + trading + service), each segment may have different turnover thresholds — verify whether s. 44AB / 44AD applies to aggregate or segment. (iii) Form 3CD reporting — robust review of all 47 items; recurring scrutiny areas are clauses 12, 14, 17, 21, 26, 31, 34.

CLOSING NOTE — VOL IV-C (PGBP)

Volume IV-C of the 1961 Treatise covers the PGBP head — ss. 28-44DB. All authorities — Apex Laboratories, Topman Exports, Walfort Share & Stock Brokers, Taj Mahal Hotel, Scientific Engineering House, Anand Theatres, Karnataka Power, S.A. Builders, TRF Ltd., Sassoon J. David, GE India Technology Centre, Hindustan Coca-Cola, CIT v. Piara Singh, Bombay Chamber of Commerce, Nandlal Sharma, Surinder Pal Anand — are Stage-1C verified.