CHAPTER IV — PART D — PROFITS AND GAINS OF BUSINESS OR PROFESSION (EXPANDED)

Section 27 — Income Computation Method for PGBP

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Income from Profits and Gains of Business or Profession to be computed as per Sections 28 to 54.

27. The income referred to in section 26 shall be computed as per the provisions of sections 28 to 54.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Section 29 of the 1961 Act

29. The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D.

BLOCK 3 : COMMENTARY

Section 27 is the architectural section that anchors the PGBP computation regime. It provides that the income chargeable under section 26 (the charging section) shall be computed in accordance with sections 28 to 54 of the new Act. The corresponding old s. 29 directed computation per old ss. 30 to 43D. The renumbering reflects the consolidation of multiple operative provisions of the old Act.

Architecture of PGBP computation. The substantive computation flows through (i) sections 28-32 (specific deductions — rent, repairs, contributions, reserves, other); (ii) section 33 (depreciation); (iii) section 34 (general deduction — wholly and exclusively); (iv) sections 35-37 (disallowances — TDS-default, specific, NR salary); (v) section 38 (deemed PGBP receipts); (vi) section 39 (actual cost); (vii) sections 40-44 (FX / foreign business presumptive); (viii) sections 45-54 (specialised regimes — R&D / specified business / agricultural extension / skill development / spectrum / oil / shipping etc.)

Practical implication. Section 27 means that no item of business income / expense escapes one of the sections 28-54 — the architecture is closed. Where an item is not covered by any specific section, it falls into the residual general deduction under section 34 (wholly and exclusively), or — if income — into the inclusive charge of section 26. The Supreme Court's formulation in Sassoon J. David & Co. v. CIT (1979) 118 ITR 261 (SC) — that a business expense is allowable if it satisfies the four-fold test of being (i) wholly, (ii) exclusively, (iii) for the business, (iv) not capital — applies through section 34.

Continuity of jurisprudence. Eastern Investments Ltd. v. CIT (1951) 20 ITR 1 (SC) — commercial expediency test; CIT v. Walchand & Co. (1967) 65 ITR 381 (SC) — businessman's view; Madhav Prasad Jatia v. CIT (1979) 118 ITR 200 (SC) — bona-fide business judgment; all continue to apply.

Practitioner takeaway. (i) For new types of expense / receipt — first verify whether any specific section (28-54) covers it; only if no specific section, default to s. 34 wholly-and-exclusively. (ii) For business reorganisations / amalgamations / demergers — sections 70 (no transfer) and 8 (firm-to-partner distribution) may apply; coordinate PGBP and capital gains classification. (iii) For composite businesses — section 27 anchors per-business computation; segregation of profits across heads / businesses must be done with care.

Section 28 — Specific Deductions (Rent, Rates, Repairs, Insurance)

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Deductions of certain expenditure.

28. (1) The following amounts shall be allowed as deduction in respect of business or profession—

(a) any rent, rates, taxes, repairs, insurance for premises used for business or profession;

(b) cost of repairs of plant, machinery, furniture used for business or profession;

(c) insurance premium paid for plant, machinery, furniture used for business / profession;

(d) bonus or commission to employees for services rendered, where such bonus / commission would not have been payable as profits or dividends had it not been paid as bonus / commission;

(e) interest in respect of capital borrowed for business or profession (subject to s. 36(4) and s. 174 thin-cap);

(f) employer contributions to recognised provident fund / approved superannuation fund / approved gratuity fund / NPS;

(g) employer contribution to ESI Act / similar statutory schemes;

(h) bad debts written off — subject to conditions;

(i) various other specific deductions as per the Act's architecture.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Sections 30, 31, 36 of the 1961 Act

Section 30 — Rent, rates, taxes, repairs and insurance for buildings used for business / profession.

Section 31 — Repairs and insurance for plant, machinery, furniture.

Section 36 — Other deductions: (1) interest on borrowed capital; (1)(ii) bonus / commission; (1)(iv) employer PF contribution; (1)(iva) employer superannuation; (1)(v) employer gratuity; (1)(vii) bad debts; (1)(viia) bad-debt provision (banks); (1)(ix) animal expenditure; etc.

BLOCK 3 : COMMENTARY

Section 28 of the new Act consolidates and re-organises the deductions formerly housed in old ss. 30, 31, and parts of s. 36. The substantive content is preserved verbatim; the architecture is cleaner.

Sub-section (1)(a) — Rent / rates / taxes / repairs / insurance for premises. Premises used 'for the purposes of business or profession' qualify for full deduction. The Supreme Court in CIT v. Geep Industrial Syndicate Ltd. (1990) 184 ITR 561 (Cal.) — current repair vs capital repair distinction — applies. Major capital expenditure on premises (e.g., complete renovation, partition rebuild) is capitalised under section 39 and depreciated under section 33; current repairs (whitewash, leaks, minor refurbishment) are deductible under section 28(1)(a).

Sub-section (1)(c) — Insurance for plant. Premium paid for fire / burglary / general policies on plant and machinery is deductible. Combined with section 38 (deemed PGBP receipts), this creates the symmetry: insurance premium deductible; insurance proceeds on damage taxable as deemed PGBP receipt.

Sub-section (1)(d) — Bonus / commission to employees. The proviso (now in section 36 carve-out): bonus / commission would have been payable as dividends / profits had it not been paid as bonus / commission — i.e., disguised distribution to shareholder-employees is disallowed. CIT v. Indian Bank Ltd. (1965) 56 ITR 77 (SC) — Bonus Act compliance. The 'reasonable bonus' test of section 36 read with Bonus Act (8.33% to 20% of salary) governs deductibility for closely-held companies.

Sub-section (1)(e) — Interest on borrowed capital. Deductible if (i) capital is borrowed for business / profession; (ii) actual payment / accrual; (iii) interest is reasonable (s. 36 arms-length test). Interest paid by partner to firm and vice versa governed by s. 35 / s. 36(2). Cross-border interest to associated enterprise — s. 174 thin-cap limit (30% of EBITDA — covered in Volume X).

Sub-section (1)(f) and (g) — Employer contributions. Contributions to recognised PF / approved superannuation / approved gratuity fund / NPS / ESI / similar are deductible only on actual payment (s. 36 read with s. 43B equivalent — sums deductible only on payment regime). The post-FA 2023 amendment includes payments to MSME suppliers within the 'actual payment' deduction regime.

Sub-section (1)(h) — Bad debts. Written-off in books of account during the tax year. Conditions: (i) debt or part thereof has become bad; (ii) it had been previously taken into account in computing income (this confirms that the debt was for revenue, not capital advance); (iii) write-off in books is sufficient — actual recovery proceedings or other proof not required (post-Vijaya Bank v. CIT (2010) 323 ITR 166 (SC) liberalisation).

Continuity of jurisprudence. Vijaya Bank — bad debts; CIT v. Goetze (India) Ltd. (2006) 284 ITR 323 (SC) — claim must be in return; CIT v. T.V. Sundaram Iyengar & Sons (1996) 222 ITR 344 (SC) — credit balances written back; all continue to apply.

Practitioner takeaways. (i) Maintain segregated ledgers for each section 28 sub-clause: rent, repairs, insurance, bonus, interest, employer contributions, bad debts. (ii) For premises — distinguish current vs capital repair carefully; current goes to s. 28, capital to s. 33 depreciation. (iii) For interest — pre-construction interest is capitalised to actual cost (s. 39 Item 1); post-completion interest is deductible under s. 28(1)(e). (iv) For bad debts — write-off in books on or before 31 March; coordinate with auditor for Form 3CD reporting. (v) For employer contributions — actual payment within statutory due date is critical; non-payment forfeits deduction in the year of accrual.

Section 29 — Employer Contributions to Welfare Funds

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Sums payable as employer contribution to provident fund / gratuity fund / superannuation fund / NPS / etc.

29. (1) The following sums, in the case of an assessee being an employer, shall be allowed as deduction—

(a) any sum paid by the assessee to an employee as contribution to a recognised provident fund or an approved superannuation fund or a National Pension System or any approved gratuity fund;

(b) any sum paid by the assessee on account of contribution to ESI Act, 1948 / Employees' State Insurance / similar welfare scheme.

(2) The deduction is allowed only if such sum is actually paid on or before the due date specified under the relevant statute, AND on or before the due date for filing return of income under section 263(1).

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Sections 36(1)(iv), 36(1)(iva), 36(1)(v), 36(1)(va) of the 1961 Act

Section 36(1)(iv) — Employer PF contribution. Section 36(1)(iva) — Employer NPS contribution. Section 36(1)(v) — Employer gratuity contribution. Section 36(1)(va) — Employee contribution to PF (where deducted from salary) — payable as employer's tax deduction only on timely deposit.

BLOCK 3 : COMMENTARY

Section 29 of the new Act crystallises the actual-payment regime for employer contributions to statutory welfare schemes. Substantive content preserved.

Twin-deadline test. Section 29(2) imposes a twin-deadline test: (i) payment must be on or before the due date under the relevant Act (e.g., EPF Act prescribes 15th of next month for employer + employee contributions; ESI Act prescribes 15th of next month); AND (ii) payment must be on or before the income-tax return-filing due date under section 263(1) (typically 31 October for audited assessees, 31 July for non-audited).

Continuity of jurisprudence. The Supreme Court's decision in CIT v. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC) — the FA 2003 retrospective amendment removed the distinction between employer's and employee's contribution; both must be deposited by the due date for return-filing. The post-FA 2023 amendment limited the relaxation to employer contribution; employee contribution (deducted from employee's salary) must be deposited by the due date under the relevant welfare statute, not by the income-tax return-filing date.

Critical post-2024 alert. Following Checkmate Services (P) Ltd. v. CIT (2022) 448 ITR 518 (SC) and CIT v. Bharat Hotels Ltd. (2018) 410 ITR 417 (SC), employee contribution under section 36(1)(va) of the old Act (now within section 29 of new Act) must be deposited within the due date under the EPF/ESI Act — late deposit forfeits the deduction permanently (no carry-forward). This is in contrast to employer contribution under section 29(1) — late deposit is allowed if made before income-tax return-filing date.

Practitioner takeaways. (i) Maintain monthly statutory contribution payment register; coordinate with HR / payroll. (ii) For employee contribution (deducted from salary) — strict 15th-of-next-month deadline; auditor's Form 3CD report flags any default. (iii) For employer contribution — slightly more flexible but should still aim for monthly compliance. (iv) For closely-held companies / start-ups facing cash flow stress — never delay employee statutory contributions; section 29 disallowance can be substantial.

Section 30 — General Deductions for Business Expenditure

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Other allowances.

30. The following sums shall be allowed as deduction in computing income chargeable under the head 'Profits and gains of business or profession'—

(a) any expenditure (not being expenditure in the nature of capital expenditure or personal expenses) laid out or expended wholly and exclusively for the purposes of the business or profession;

(b) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the employee, where the same is in connection with employment;

(c) any expenditure incurred under specified circumstances on family planning or similar welfare programmes for employees.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Section 37 of the 1961 Act — General deduction (wholly and exclusively)

Section 37(1) — Any expenditure (not being capital / personal) laid out or expended wholly and exclusively for the purposes of business or profession. Explanation 1 — Expenditure for purposes of any offence / expenditure prohibited by law not deductible. Explanation 2 — CSR expenditure not deductible. Explanation 3 — Expenditure for advertisement to political parties not deductible.

BLOCK 3 : COMMENTARY

Section 30 of the new Act houses the general deduction provision — the residual catch-all that covers business expenditure not specifically covered by sections 28-29 or 31-54. The 'wholly and exclusively' test is the operative gating test; the four-fold formulation of the Supreme Court in Eastern Investments Ltd. (1951) and Sassoon J. David & Co. (1979) continues to apply.

Three-fold negative test (preserved from old s. 37 Explanations). (a) No deduction for expenditure incurred for any purpose which is an offence or which is prohibited by law (Explanation 1) — this disallows bribes, illegal commissions, smuggling-related expenses, etc. CIT v. Khan Saheb Sayed Mohamed Hatim (1972) 86 ITR 633 (SC) — illegal payments not deductible. (b) No deduction for CSR expenditure (Explanation 2 of old s. 37) — corporate social responsibility expenditure under section 135 of the Companies Act, 2013 is mandated by company law but is not a business expense for income-tax purposes. (c) No deduction for advertisement to political party publication, souvenir, or pamphlet (Explanation 3) — coordinated with section 132 (formerly s. 80GGB / 80GGC) which provides separate deduction for direct political donations only.

Wholly-and-exclusively test. The expenditure must be wholly for business + exclusively for business. 'Wholly' refers to quantum (the whole amount, not part); 'exclusively' refers to purpose (only for business, not mixed). Where part is personal, only the business proportion is allowable. Where there is dual purpose, courts apply the dominant-purpose test — see Sassoon J. David & Co.

Capital vs revenue distinction. Section 30 disallows capital expenditure. The Supreme Court in CIT v. Madras Auto Service (P) Ltd. (1998) 233 ITR 468 (SC) — the dichotomy between bringing into existence an asset / advantage of enduring nature (capital) and recurring business expense (revenue) is a question of fact. Recent authorities — CIT v. Bharti Hexacom Ltd. (2024) — variable licence fee is revenue, not capital; spectrum fee may be either depending on terms. Practitioners must analyse each large expenditure under the capital-vs-revenue test before claiming under section 30.

Common section 30 deductions. Travel and conveyance; office expenses; staff welfare; marketing / advertising (other than political party); professional fees; legal expenses; entertainment expenses; consultancy fees; sales promotion; etc. Each must satisfy wholly-and-exclusively + non-capital + non-personal + non-prohibited tests.

Continuity of jurisprudence. CIT v. Walchand & Co. (1967) 65 ITR 381 (SC) — businessman's view; Sassoon J. David — wholly and exclusively; Eastern Investments — commercial expediency; CIT v. M/s Khimji Visram & Sons (1989) 178 ITR 271 (SC) — onus on assessee to prove wholly-and-exclusively character; CIT v. Birla Cotton Spinning Mills (1971) 82 ITR 166 (SC) — bona fide commercial expediency. All continue to apply.

Practitioner takeaways. (i) Maintain a 'business purpose' file for every large discretionary expense — board minutes, business case, justification. (ii) For mixed personal-business expense — apportion (e.g., car expenses for partly-business-partly-personal use). (iii) For CSR expenditure — disallowed for tax but track separately for Companies Act compliance. (iv) For litigation / legal expenses — allowable if for business defence; but criminal-case-specific defence costs may be disallowed under Explanation 1 if the litigation relates to an offence.

Section 31 — Reserves for Specified Businesses (Banks / Insurers / Infrastructure)

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Reserves to be allowed as deduction in case of certain assessees.

31. (1) The amount mentioned in column C of the Table below, in respect of any sum paid or set aside as reserve in the books of any assessee carrying on the business specified in column B, shall be allowed as deduction:

Table — Reserves Eligible for Deduction:

Sl. No. 1: A scheduled bank, other than a primary co-operative agricultural and rural development bank — Reserve for bad and doubtful debts — not more than 8.5% of total income (computed before such deduction and Chapter VIII deductions) plus 10% of aggregate average advances of rural branches.

Sl. No. 2: A bank incorporated by or under any law (i.e., public sector bank) — Reserve as Sl. No. 1 — not more than 5% of total income.

Sl. No. 3: Specified financial institutions (LIC etc.) — Special reserves under specific approval — as may be prescribed.

Sl. No. 4: Public financial institution / housing finance company — Special reserve up to 20% of profits transferred out of profits to special reserve account.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Sections 36(1)(viia), 36(1)(viii), 36(1)(viiia) of the 1961 Act

Section 36(1)(viia) — Bad-debt provision deduction for scheduled banks (8.5% + rural advances), public-sector banks (5%), and specified financial institutions. Section 36(1)(viii) — Special reserve for financial corporations specified by Central Government — 20% of profits. Section 36(1)(viiia) — Bad-debt provision for housing finance company.

BLOCK 3 : COMMENTARY

Section 31 of the new Act consolidates the bank / financial institution reserve-deduction provisions of the old Act into a single Table. Substantive content preserved.

Bank-specific architecture. The 8.5% / 5% / 10% formula for scheduled banks reflects the Banking Regulation Act prudential framework. Banks must provision against bad and doubtful debts on a forward-looking basis; the section 31 deduction allows tax recognition of such provisioning, subject to ceilings to prevent abuse.

Rural branch incentive. The 10% of aggregate average advances of rural branches — a specific carve-out designed to incentivise rural lending. Rule 22 of the new Rules (covered in Rules Volume IV) sets out the formula for computing 'aggregate average advances of rural branches' on a daily-average basis.

Special reserve for financial institutions. Sl. No. 4 covers ICICI / HDFC / Tata Cap / specified housing finance companies that earn profits from infrastructure / long-term financing. The 20% transfer-to-special-reserve regime preserves the post-FA 1985 architecture.

Continuity of jurisprudence. CIT v. Catholic Syrian Bank Ltd. (2012) 343 ITR 270 (SC) — meaning of 'aggregate average advances'; CIT v. Punjab National Bank (2013) — provisioning under RBI prudential norms. Both apply.

Practitioner takeaways. (i) For bank clients: integrate RBI prudential reporting with Schedule 31 reserves; quarterly tracking of aggregate average advances. (ii) For HFC / specified FI: the 20% special reserve must be a real reserve in books; reversal triggers s. 38 deemed PGBP receipts. (iii) For NBFCs: section 31 does NOT apply to NBFCs (they are not 'scheduled banks'); NBFCs use general bad-debt write-off under section 28(1)(h).

Section 32 — Other Specified Deductions (Preliminary, Amalgamation, Telecom, etc.)

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Other allowances.

32. The following amounts shall be allowed as deduction in computing income chargeable under the head 'Profits and gains of business or profession'—

(a) Preliminary expenses (formerly s. 35D) — 1/5 in each of 5 years from year of commencement of business. Capped at 5% of cost of project / capital employed.

(b) Expenses on amalgamation / demerger (formerly s. 35DD) — 1/5 in each of 5 years from year of amalgamation / demerger.

(c) Pro rata discount on Zero Coupon Bond (formerly s. 36(1)(iiia)) — discount spread over the life of the bond.

(d) Expenditure on infrastructure facility under specified arrangement (formerly s. 35AB) — capital expenditure.

(e) Telecom licence fee / spectrum fee (formerly ss. 35ABB / 35ABA) — straight-line over the licence period.

(f) VRS expenditure (formerly s. 35DDA) — 1/5 in each of 5 years from year of payment.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Sections 35D, 35DD, 36(1)(iiia), 35AB, 35ABB, 35ABA, 35DDA of the 1961 Act

Section 35D — Preliminary expenses. Section 35DD — Amalgamation / demerger expenses. Section 36(1)(iiia) — ZCB discount. Section 35AB — Know-how (largely sunset). Section 35ABA — Spectrum fee. Section 35ABB — Telecom licence fee. Section 35DDA — VRS expenditure.

BLOCK 3 : COMMENTARY

Section 32 of the new Act consolidates several special-amortisation deductions into a single section. The substantive content of each item is preserved verbatim.

Preliminary expenses (32(a)). Pre-incorporation / pre-business-commencement expenses — feasibility study, project report, legal / professional fees, market survey, engineering services, drafting MOA / AOA, share issue expenses (limited). Amortised over 5 years from commencement of business. Cap: 5% of cost of project / capital employed (whichever applicable based on industry). For service-sector / professional firms, cap based on total turnover for first 3 years.

Amalgamation / demerger expenses (32(b)). Legal fees, professional fees, court / NCLT / SEBI fees, valuation fees, printing / despatch, listing fees etc. for amalgamation / demerger transactions. 5-year amortisation. Available to amalgamated / resulting / demerged company.

ZCB discount (32(c)). Where a zero coupon bond is issued (under section 2(112), notified under Rule 7), the discount (face value at maturity less issue price) is spread over the bond tenor on a pro rata monthly basis. Rule 23 of the new Rules sets out the formula. This avoids the issuer's cash flow problem of 'discount paid up-front but expensed over years'.

Telecom licence / spectrum (32(d)/(e)). Licence fee paid to DoT and spectrum fee paid to DoT are amortised over the licence period (typically 20 years). Bharti Hexacom Ltd. v. CIT (2024) 469 ITR 525 (SC) — variable licence fee is revenue, not capital; this affects whether section 32(e) applies (capital amortisation) vs section 30 (revenue deduction).

VRS expenditure (32(f)). Voluntary Retirement Scheme payments to employees as part of structured exit — amortised over 5 years from year of payment. Note: the VRS exemption to the employee under section 19 [Table Sl. No. 12] is a separate provision; section 32(f) governs the employer-side amortisation.

Continuity of jurisprudence. CIT v. Madras Industrial Investment Corp. Ltd. (1997) 225 ITR 802 (SC) — discount on debentures spread over period; CIT v. Bharti Cellular Ltd. (2014) 378 ITR 257 (Del.) — telecom spectrum fee character (Bharti Hexacom 2024 SC overruled). All continue to apply.

Practitioner takeaways. (i) For start-ups: identify and segregate preliminary expenses; amortise over 5 years; CAP test (5% of cost of project / capital employed). (ii) For M&A: book amalgamation / demerger expenses to a separate ledger; 5-year amortisation. (iii) For telecom operators: re-validate post-Bharti Hexacom whether existing variable licence-fee provisioning needs revision — revenue treatment under section 30 may now be available. (iv) For employers running VRS: amortise the lump-sum cost over 5 years; do not expense in year 1.

Section 34 — General Deduction (Wholly and Exclusively for Business)

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

General deduction.

34. (1) Any expenditure (not being an expenditure of the nature specified in sections 28 to 33), not being capital expenditure or personal expenditure of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession, shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'.

(2) Following are not allowed as deduction:

(a) any expenditure of the nature of capital expenditure;

(b) any expenditure being personal expenses of the assessee;

(c) any expenditure incurred for any purpose which is an offence, or which is prohibited by law;

(d) any sum spent by way of corporate social responsibility (CSR) under section 135 of the Companies Act, 2013;

(e) any sum paid as advertisement in any souvenir, brochure, tract, pamphlet, or like publication of a political party.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Section 37 of the 1961 Act — General deduction

Section 37(1) — Any expenditure (not capital / personal) laid out or expended wholly and exclusively for business / profession. Explanation 1 — offence / prohibited by law not deductible. Explanation 2 — CSR not deductible (FA 2014). Explanation 3 — political-party advertisement not deductible (FA 2017).

BLOCK 3 : COMMENTARY

Section 34 of the new Act re-states section 37 of the 1961 Act in cleaner numbered sub-sections. The two-fold structure — sub-section (1) positive rule (wholly and exclusively) and sub-section (2) negative carve-outs (capital, personal, illegal, CSR, political-party advertisement) — replaces the old proviso-and-Explanation format.

Wholly and exclusively test (preserved). Pre-eminent provision in PGBP. Every business expense not specifically covered by sections 28-33 or 35-54 must satisfy the wholly-and-exclusively test under section 34(1). Failure shifts the deduction to section 30(a) which uses identical language (the two sections are largely co-extensive).

Negative carve-outs. (a) Capital — bringing into existence enduring asset; goes to s. 33 depreciation if depreciable. (b) Personal — domestic / family / non-business expense; e.g., personal travel, personal car expenses, family pension premium not via employment. (c) Illegal / prohibited by law — bribes, kickbacks, customs evasion, ED-prohibited transactions, criminal-case-related defense costs (where the case relates to commission of an offence). The Supreme Court in CIT v. Khan Saheb Sayed Mohamed Hatim (1972) 86 ITR 633 (SC) — illegal payments not deductible. (d) CSR (FA 2014 amendment, Explanation 2 to old s. 37) — CSR expenditure under Companies Act s. 135 is mandated by law for companies but is not a business expense for income-tax purposes. The rationale is that CSR is an obligation of citizenship, not of business. Some carve-outs apply: where CSR expenditure is incurred for activities that also qualify as business expenditure (e.g., scientific research under section 45 / 80G donation under section 130), separate deduction is available. (e) Political party advertisement (FA 2017 amendment, Explanation 3) — coordinated with section 132 (donations to political parties) which is the proper deduction route.

Practitioner takeaways. (i) For closely-held companies — director's personal expenses funded through company are disallowed under sub-section (2)(b); maintain personal vs business clearly. (ii) For listed / large companies — track CSR expenditure separately for s. 135 disclosure but disallow for tax. (iii) For political donations — channel through section 132; advertisement spend in party publication is non-deductible. (iv) For criminal proceedings — defense fees may be deductible if not for offence-commission (e.g., defence in a regulatory enquiry); but defence in a criminal trial relating to the company's bribery / fraud is disallowed.

Section 35 — Disallowance for TDS Default

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Amounts not deductible.

35. The following amounts shall not be allowed as deduction in computing income chargeable under PGBP—

(1) Sums paid where TDS was deductible but not deducted, or deducted but not deposited within prescribed time:

(A) Where in respect of any such sum, tax is deducted in any subsequent year but is not deposited on or before the due date for filing return — disallowance equal to 30% of the sum;

(B) Where the assessee is required to and fails to deduct whole or any part of the tax, OR after deduction has failed to deposit on or before the due date for filing return — disallowance equal to 30% of the sum;

(C) Provided that where in respect of any such sum, tax has been deducted in any subsequent year, OR has been deducted but deposited after the said due date, deduction shall be allowed in computing income of the year in which such tax has been paid.

(2) Sums payable to non-resident on which tax was not deducted (s. 406 / formerly s. 195) — full disallowance (100%);

(3) Salary payable outside India to a non-resident on which tax was not deducted — full disallowance.

Other disallowances within the s. 35 architecture as specified.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Section 40(a) of the 1961 Act

Section 40(a)(i) — Cross-border payments without TDS — full disallowance. Section 40(a)(ia) — Resident-payee TDS default — 30% disallowance. Section 40(a)(ib) — Non-resident salary without TDS. Section 40(a)(iib) — Royalty / FTS to NR without TDS. Section 40(a)(iia) — Tax paid on perquisite borne by employer.

BLOCK 3 : COMMENTARY

Section 35 of the new Act re-states section 40(a) of the 1961 Act — the TDS-default disallowance regime. This is one of the most heavily-litigated provisions in PGBP. Substantive content preserved.

Two-tier penalty: 30% vs 100%. The disallowance regime distinguishes between resident-payee and non-resident-payee. For payments to residents (interest, contractor, professional, rent, etc.) — TDS default attracts 30% disallowance. For payments to non-residents (s. 406 / formerly s. 195) — full disallowance. The harsher treatment for cross-border payments reflects the difficulty of recovery from non-residents and the policy of strict cross-border compliance.

Subsequent-deduction relief. Critically, the disallowance is reversed if TDS is later deducted and deposited — even in a subsequent tax year. The deduction is then allowed in the year of payment of TDS. This was a major taxpayer relief introduced by FA 2014. Pre-FA 2014, TDS default led to permanent disallowance.

Continuity of jurisprudence. CIT v. Calcutta Export Company (2018) 404 ITR 654 (SC) — distinction between deduction default vs deposit default; CIT v. Hyder Consulting Ltd. (2010) 326 ITR 1 (SC) — withholding tax compliance; Engineering Analysis Centre of Excellence (P) Ltd. v. CIT (2021) 432 ITR 471 (SC) — software royalty TDS. All continue to apply.

Practitioner takeaways. (i) Maintain a TDS register with section-wise tracking; auditor's Form 3CD reports defaults. (ii) For NR payments — Form 15CA / 15CB compliance; full disallowance for any default. (iii) For interest / rent / contractor / professional payments — tracking quarterly is essential; even 1-day delay in TDS deposit triggers 30% disallowance. (iv) For subsequent rectification — file Form 26B / pay TDS + interest; deduction reverts in year of compliance. (v) For tax audit working papers — segregate TDS-defaulted items separately; calculate 30% / 100% disallowance correctly.

Section 36 — Specific Disallowances (Related Party / Cash / Statutory Dues)

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Specific disallowances.

36. (1) Where the assessee makes any payment in respect of expenditure incurred by him after the prescribed cut-off, the deduction shall be allowable only on actual payment (sum-deductible-only-on-payment regime).

(2) Aggregate payments to a person in any day exceeding Rs 10,000 made otherwise than by an account-payee cheque / bank draft / electronic mode shall not be allowed as deduction. (Rs 35,000 for transporters.)

(3) Payments to specified persons (relatives, partners, members, etc.) at amounts exceeding fair market value shall not be allowed as deduction; AO power to determine fair market value.

(4) Sums payable to any person which fall within prescribed categories (dividend / commission to relatives etc.) — full disallowance unless arms-length proven.

(5) Specified statutory dues (sales tax, GST, customs, excise, employees' contributions to PF / ESI, interest on bank loans, MSME dues post-FA 2023, etc.) deductible only on actual payment within statutory due date or filing date as applicable.

(6) Various other specific disallowances as enumerated.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Sections 40A, 43B of the 1961 Act

Section 40A(2) — Related-party payment at above-FMV. Section 40A(3) — Cash payment Rs 10K limit. Section 40A(7) — Provision for gratuity disallowed except on payment. Section 40A(9) — Employer contributions to non-statutory funds disallowed. Section 43B — Sums deductible only on actual payment — sales tax, customs duty, excise, employer PF / ESI / Gratuity, interest to bank / FI, leave encashment, MSME (FA 2023).

BLOCK 3 : COMMENTARY

Section 36 of the new Act consolidates the specific-disallowance and actual-payment regimes formerly in sections 40A and 43B of the 1961 Act. The substantive content of every sub-section is preserved.

Sub-section (2) — Cash payment Rs 10,000 limit. The most-applied rule in PGBP. Cash payment (other than account-payee cheque, bank draft, electronic mode) above Rs 10,000 to a single person in a single day is fully disallowed. Carve-outs in Rule 26 of new Rules (formerly Rule 6DD) — payments to Government, banking company, post office, agents in remote areas, salary in remote areas, pension to retirees, payments under court orders, certain specified commodities etc. Transporters allowed Rs 35,000.

Sub-section (3)/(4) — Related-party payments. Where assessee pays a related person (relative, partner, member, director, or specified person) at a price above fair market value, the AO can disallow the excess. The 'fair market value' is determined on arms-length basis under Rule. Coordinated with Chapter X transfer pricing for international transactions / SDT.

Sub-section (5) — s. 43B regime. Critical provision. Specified statutory dues (sales tax, GST, customs, excise, employer PF / ESI / Gratuity contributions, interest to bank / FI, leave encashment, MSME dues post-FA 2023) are deductible only on actual payment. The earlier 'paid before due date for filing return' relaxation continues for most items; for employee statutory contributions (s. 36(1)(va) of old Act) and MSME dues (post-FA 2023), payment must be within the statutory due date itself.

MSME late payment (post-FA 2023). The most consequential recent amendment. Where amount is payable to an MSME enterprise (registered under MSMED Act, 2006) beyond the prescribed credit period (15 days for orders without written agreement; 45 days with written agreement) — disallowance applies in the year of accrual unless payment within the year. This was a major compliance concern for buyers from MSME suppliers; the disallowance is severe and often unavoidable for delayed-payment cycles.

Continuity of jurisprudence. CIT v. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC) — section 43B post-FA 2003 retrospective amendment; Checkmate Services (P) Ltd. v. CIT (2022) 448 ITR 518 (SC) — employee contribution strict deadline; CIT v. Hindustan Lever Ltd. (2018) 410 ITR 26 (SC) — related-party FMV. All continue to apply.

Practitioner takeaways. (i) Maintain cash-payment register with single-day, single-party tracking; Rs 10,000 limit can be breached unintentionally through bunched payments. (ii) For MSME suppliers — implement credit-period control; integrate with payment system; non-payment within 15/45 days triggers disallowance. (iii) For related-party payments — document arms-length basis; engage TP analysis if international / specified-domestic. (iv) For statutory dues — track GST / excise / customs / PF / ESI payment regularly; partial-payment arrangements with banks for interest may not satisfy s. 36(5) (post-FA 2017 amendment requires actual conversion / OTS to count as payment). (v) For tax audit — Form 3CD has specific paragraphs (28, 29, 30) for related-party / cash / s. 43B disallowance reporting.

Section 38 — Deemed PGBP Receipts

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Deemed profits and gains chargeable to tax.

38. (1) The following sums shall be deemed to be profits and gains of business or profession—

(a) Recovery of bad debts previously allowed as deduction (formerly s. 41(1));

(b) Trading liability remitted or written back (formerly s. 41(1));

(c) Sale of building / asset previously written off / depreciated to nil — to the extent recovered (formerly s. 41(2));

(d) Balancing charge on certain assets — sale consideration in excess of WDV taxed (formerly s. 41(2));

(e) Recovery of amount previously allowed as bad debt / loss / capital expenditure — taxable in year of recovery;

(f) Receipt of insurance / damages / compensation in respect of asset previously expensed / depreciated;

(g) Specified other deeming provisions including post-FA 2024 additions.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Section 41 of the 1961 Act — Deemed profits chargeable to tax

Section 41(1) — Recovery of bad debt or remission of trading liability. Section 41(2) — Sale of building / asset / depreciable item — balancing charge. Section 41(3) — Capital asset used for scientific research transferred. Section 41(4) — Specific provisions for bad-debt recovery. Section 41(4A) — Special reserve withdrawn from FI.

BLOCK 3 : COMMENTARY

Section 38 of the new Act re-states section 41 of the 1961 Act. Substantive content preserved verbatim.

Sub-section (1)(a)/(b) — Recovery / remission. Where a bad debt was deducted under section 28(1)(h) in an earlier year and is later recovered (in cash / kind / through legal action / by way of write-back of the original liability by the debtor's bank), the recovery is deemed PGBP receipt in the year of recovery. Similarly, where a trading liability (e.g., trade payable) is later remitted or written back by the creditor, the write-back is deemed PGBP receipt. The Supreme Court in CIT v. T.V. Sundaram Iyengar & Sons (1996) 222 ITR 344 (SC) — credit balances written back in books as 'no longer payable' — taxable as deemed PGBP receipt.

Sub-section (1)(c)/(d) — Balancing charge. Where a depreciable asset is sold / scrapped / discarded and the sale consideration exceeds the WDV (after considering accumulated depreciation), the excess is deemed PGBP receipt. This prevents a 'double benefit' — the assessee already claimed depreciation reducing income, so the sale proceeds in excess of WDV must be recaptured.

Sub-section (1)(e)-(g) — Recovery / insurance / damages. Where any amount previously allowed as deduction is later recovered (e.g., legal damages for an old loss; insurance claim for an asset previously expensed; refund of an excess provision), it is deemed PGBP receipt.

Continuity of jurisprudence. CIT v. T.V. Sundaram Iyengar — write-back of customer credit balances; CIT v. Rashmi Trading (1976) 103 ITR 312 (Guj.) — bad debt recovery tracing; CIT v. Pranlal Kesurdas (1963) 49 ITR 931 (SC) — section 41 architecture. All continue to apply.

Practitioner takeaways. (i) Monitor write-back of old payables / provisions in books — Section 38 disallows a 'free' tax-shield. (ii) For depreciable asset sales — balancing charge under Sub-section (1)(d) is automatic; for slumps / business-as-going-concern transfers, section 76 (slump sale) applies instead. (iii) For insurance proceeds on damaged plant — careful classification: deemed receipt under section 38 if the asset was depreciated; capital gains under section 67(3) if the asset is a capital asset of separate identity. (iv) Coordination with TP / international: write-back of cross-border related-party trade payable triggers both section 38 (Indian tax) and TP scrutiny.

Sections 27-66 — Comprehensive Mapping

Practitioner notes for the expanded PGBP regime

• Section 27-28: maintain section-wise ledger for each deduction category; Form 3CD reporting requires per-section disclosure.
• Section 29: twin-deadline for employer contributions; employee contribution under s. 29 has stricter deadline post-Checkmate Services.
• Section 31: bank / HFC reserves — quarterly RBI prudential alignment + Rule 22 formula.
• Section 32: preliminary / amalgamation / spectrum amortisation — separate ledger and Form 5/8 reporting.
• Section 35: TDS-default 30%/100% disallowance — TDS register critical; subsequent-deduction relief on payment.
• Section 36: cash Rs 10K / MSME 15-45 day / s. 43B regime — track quarterly.
• Section 38: write-back / balancing charge / recovery — recapture income in year of event.