Section 29 — Income from PGBP How Computed

Case Laws & Commentary

SECTION 29 — Income from profits and gains of business or profession — How computed

Important Case Laws — 1961 Treatise (FA 2026)

Provision in brief: Section 29 is the machinery provision: income chargeable under s. 28 is to be computed in accordance with the provisions contained in sections 30 to 43D. Thus s. 29 makes the deductions / disallowances / definitions in ss. 30-43D part of the computational scheme; no PGBP income can be computed except by reference to these sections.

Section Commentary

Machinery clause for computing PGBP

Section 29 is the bridge between the charging section (s. 28) and the computational scheme (ss. 30 to 43D). It simply states that income chargeable under s. 28 shall be computed in accordance with ss. 30 to 43D. Every deduction, disallowance or definition placed within ss. 30 to 43D is funneled through this gateway. Consequently, when FA 2018 inserted s. 43AA and s. 43CB, these new computational provisions applied without any further amendment to s. 29. Provisions outside that range, such as s. 44BBC (inserted by Act No. 15 of 2024), do not flow through s. 29; they apply notwithstanding anything contained in ss. 28 to 43A.

Interplay with commercial accounting

Where the Act is silent on a particular issue of computation, the courts have consistently allowed recourse to accepted commercial accounting principles. Calcutta Co. permitted accrued-liability deduction matching accrued revenue; Madras Industrial Investment Corpn. permitted spread of debenture discount over the loan life; Challapalli Sugars permitted capitalisation of pre-production interest. These rulings give s. 29 a flexible, principle-driven character — but only where the Act has no specific override (e.g., s. 43A overrides accrual for capital FX; s. 43B overrides accrual for statutory dues). Post-FA 2018, ICDS notifications u/s 145(2) have further narrowed the play of pure accountancy.

Method of accounting — interface with s. 145 and ICDS

PGBP computation operates within the s. 145 framework — assessee may follow cash or mercantile method, but consistently. Ten ICDS standards (notified 31.3.2015, revised 29.9.2016) prescribe the manner of income recognition (revenue, construction contracts, inventories, fixed assets, foreign currency, government grants, securities, borrowing costs, accounting policies, contingent liabilities). Conflict between ICDS and judicial precedent was addressed by FA 2018 inserting ss. 36(1)(xviii), 40A(13), 43AA and 43CB. The practitioner must therefore reconcile (i) the book treatment under AS / Ind-AS, (ii) the tax treatment under ICDS, and (iii) the position under the Act itself.

Pre-commencement vs commenced business

Tuticorin Alkali Chemicals holds that interest earned on borrowed funds before commencement of business cannot be netted against pre-operative interest expense; it is 'Other Sources' income. Bokaro Steel softens this where the receipt is 'inextricably linked' with the capital construction (e.g., rent recovered from contractor occupying site quarters). The line is whether the receipt arises out of the construction process or is independent of it. Mis-classification often becomes the trigger for re-assessment notices.

Practical compliance for CA

(i) Identify the assessee's method of accounting and ensure consistency. (ii) Maintain an ICDS disclosure note (Annexure to tax audit report — Form 3CD Cl. 13(f)). (iii) Reconcile book profits under Schedule III with tax-PGBP via a deferred-tax-style schedule capturing s. 30-43D adjustments. (iv) Identify pre-commencement receipts/expenses carefully — these are often the highest-risk addition zone.

FA 2026 impact: No FA 2026 amendment. The reference to ss. 30 to 43D continues to govern; computational provisions within that range (e.g., s. 43AA, s. 43CB) flow through s. 29. s. 44BBC and s. 44BBD lie outside it and apply notwithstanding anything contained in ss. 28 to 43A.

Leading Decisions

1. Challapalli Sugars Ltd. v. CIT

Citation: (1975) 98 ITR 167 (SC)

Forum: Supreme Court of India

Facts & Issue: Assessee, a sugar manufacturer, paid interest on borrowings used to construct a factory prior to commencement of production and capitalised it as cost of the asset for depreciation purposes. The question was whether such interest could form part of 'actual cost' u/s 43(1) for computing depreciation u/s 32, even though Income-tax Act did not specifically provide for capitalisation.

Held / Ratio: The Supreme Court held that 'actual cost' must be construed in commercial / accounting parlance. Pre-production interest on borrowings utilised to acquire/install fixed assets is part of the cost of the asset and depreciation is allowable thereon. The Court relied on prevailing accountancy practice. This principle was later partly codified by Explanation 8 to s. 43(1) inserted by FA 1986.

Section relevance: Foundational interpretation of 'actual cost' u/s 43(1); links commercial accountancy to statutory computation under s. 29.

2. Madras Industrial Investment Corpn. Ltd. v. CIT

Citation: (1997) 225 ITR 802 (SC)

Forum: Supreme Court of India

Facts & Issue: Assessee issued debentures at a discount. Discount was the difference between face value (payable at maturity) and issue price (received upfront). Revenue contended that discount was either a capital expense or, if revenue, allowable only in year of redemption. Assessee claimed it as a deferred revenue expenditure to be spread over life of debentures.

Held / Ratio: The Supreme Court permitted the assessee to spread the discount over the life of the debentures and claim proportionate deduction each year. Although ordinarily revenue expenditure is deductible in the year incurred, where the benefit extends over several years and accounting demands spreading, the law permits a matching deduction. The Court noted that 'profit/gain' u/s 28-29 must be computed on commercial principles where the Act is silent.

Section relevance: Foundational on 'matching principle' as part of PGBP computation; allows deferred-revenue spread.

3. Calcutta Co. Ltd. v. CIT

Citation: (1959) 37 ITR 1 (SC)

Forum: Supreme Court of India

Facts & Issue: Assessee, a real-estate developer, sold plots receiving substantial advance from buyers, with an obligation to develop the land (roads, drainage, lighting) at its own cost. It claimed deduction in the year of sale for the estimated future development expenditure though the actual expenditure was incurred in subsequent years.

Held / Ratio: The Supreme Court allowed the deduction. Where a known and ascertained liability exists corresponding to the income recognised, the matching liability must be allowed even if the actual outflow is deferred. The Court endorsed mercantile-method principles in computing profits of the business and held that profits cannot be ascertained without setting off accrued obligations against accrued revenues.

Section relevance: Locus classicus on accrual / matching under PGBP computation; cited routinely in revenue-recognition disputes.

4. Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT

Citation: (1997) 227 ITR 172 (SC)

Forum: Supreme Court of India

Facts & Issue: Assessee had not commenced business; deposited borrowed funds (intended for setting up plant) in bank for the interim and earned interest income. The interest was sought to be set off against pre-operative interest expense (capitalised), not offered as 'other sources'.

Held / Ratio: The Supreme Court held that interest earned on temporary deposit of borrowed funds, prior to commencement of business, is income from other sources u/s 56 — not business income u/s 28 — because no business has commenced. It cannot be netted against capitalised interest expense. The Court distinguished between fund-application and source-of-income tests.

Section relevance: Authoritative on commencement of business; clarifies what does NOT enter PGBP computation u/s 29.

5. CIT v. Bokaro Steel Ltd.

Citation: (1999) 236 ITR 315 (SC)

Forum: Supreme Court of India

Facts & Issue: Assessee, during the construction phase prior to commencement of business, earned receipts from contractors (rent for quarters, hire of plant, interest on advances) that were directly linked to the construction activity. Revenue, citing Tuticorin Alkali, sought to tax such receipts under 'Other Sources'.

Held / Ratio: The Supreme Court distinguished Tuticorin Alkali. Where receipts during construction are 'inextricably linked' with the setting up of the capital structure (e.g., rent recovered from contractor for site facilities), they go to reduce cost of construction and are NOT taxable as income. Only receipts independent of capital construction (e.g., interest on idle funds) are taxable separately.

Section relevance: Key counterpoint to Tuticorin Alkali — defines what receipts get netted against capital cost under PGBP framework.

6. Tata Iron & Steel Co. Ltd. v. State of Bihar

Citation: (1958) 9 STC 267 (SC) — principle adopted in IT context

Forum: Supreme Court of India

Facts & Issue: Question of fundamental principle: how is 'profit' to be ascertained for taxation. Although the case arose under sales tax, the principles were extensively borrowed in computing PGBP.

Held / Ratio: Profit is the surplus left after meeting all costs properly attributable to the income earned. Computation must follow accepted commercial principles. This case was relied upon in subsequent PGBP rulings (e.g., Madras Industrial Investment) to support matching / accrual / deferred-revenue treatment.

Section relevance: Established the commercial-profit principle that animates s. 29 computation where statutory provisions are silent.

— End of Section 29 Case-Law Note —