Profits and Gains of Business or Profession (PGBP)

Section 40(a)(ia) deals with the disallowance of certain expenses if TDS (Tax Deducted at Source) is not deducted or not paid to the government within the prescribed time. If TDS is not deducted, or after deduction, not paid to the government on or before the due date of filing the return of income, then 30% of such expenditure (e.g., interest, commission, brokerage, rent, royalty, fees for professional/technical services, contract payments) payable to a resident is disallowed. If TDS is deducted but paid after the due date of return filing, it is allowed in the previous year of payment. For payments to non-residents, 100% of the expenditure is disallowed if TDS is not deducted or not paid.

A 'block of assets' refers to 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, licenses, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed. Depreciation is calculated on the WDV (Written Down Value) of the entire block of assets, not on individual assets. When an asset is sold, its sale proceeds reduce the WDV of the block. If the WDV of a block becomes nil or negative, or the block ceases to exist, then terminal depreciation or short-term capital gain/loss arises.

Expressly disallowed expenses under Section 40(a) include: Any interest, royalty, or fees paid to a non-resident without TDS; 30% of payments to residents without TDS; any income tax paid; any wealth tax paid; any payment to relatives which is unreasonable (40A(2)); and cash payments exceeding ₹10,000 in a day (40A(3)).

To claim bad debts as a deduction, the following conditions must be met: (1) The debt must have been taken into account in computing the income of the assessee of the previous year or an earlier previous year (i.e., it must be a 'trading debt'). (2) The debt must be written off as irrecoverable in the books of accounts of the assessee for the relevant previous year. It is not necessary to prove that the debt has actually become bad; merely writing it off in the books is sufficient. However, if a provision for bad and doubtful debts was created, only the actual write-off against that provision is allowed, not the provision itself (except for banks and financial institutions under Section 36(1)(viia)).

Section 35 provides for deductions for scientific research expenditure. Revenue expenditure on scientific research related to the business is fully deductible in the year it is incurred. Capital expenditure (excluding land) on scientific research related to the business is also 100% deductible in the year it is incurred. If the research is carried out by an approved research association, university, or college, or an approved company, then a weighted deduction (e.g., 100% or 150% depending on the specific clause and assessment year) may be available. For in-house R&D, only revenue and capital expenditure (excluding land and building) are deductible at 100%.

For an income to be taxable under PGBP, it must arise from a 'business' or 'profession' carried on by the assessee at any time during the previous year. The definition of 'business' and 'profession' is broad, including any trade, commerce, manufacture, or any adventure or concern in the nature of trade, commerce, or manufacture, and any vocation. The income must be derived from the regular activities of such business or profession, and not merely from isolated transactions unless they constitute an adventure in the nature of trade. The existence of profit motive is generally essential, though not always conclusive, especially for professional activities.

Section 44AD is applicable to resident individuals, HUFs, and partnership firms (excluding LLP) engaged in any business (except specified professions, agency business, or commission/brokerage business) whose total turnover or gross receipts in the previous year does not exceed Rs. 2 crore (or Rs. 3 crore if cash receipts are within 5% of total receipts). Under this scheme, income is presumed to be 8% of the total turnover or gross receipts (6% for amounts received through digital modes). The assessee is not required to maintain books of accounts under Section 44AA or get accounts audited under Section 44AB. However, if the assessee declares lower profits than the presumptive rate and total income exceeds the basic exemption limit, they must maintain books and get them audited.

Capital expenditure results in the acquisition of an asset or an improvement that provides a lasting benefit (e.g., purchase of machinery, construction of a building). Generally, capital expenditure is not allowed as a direct deduction in PGBP but is eligible for depreciation over its useful life under Section 32. Revenue expenditure, on the other hand, is incurred for the day-to-day running of the business, does not create an enduring asset, and its benefit is usually consumed within the accounting period (e.g., salaries, rent, repairs). Revenue expenditure is generally fully deductible in the year it is incurred under Section 30 to 37, provided it is incurred wholly and exclusively for the purpose of business or profession and is not of a personal nature or expressly disallowed.

Section 40A(3) disallows any expenditure exceeding Rs. 10,000 (or Rs. 35,000 for transport operators for payment made to a single person in a day) if paid in cash or by any mode other than account payee cheque/draft, or electronic clearing system through a bank account. This disallowance is 100% of the payment. Section 40A(3A) deals with payments made in a subsequent year for an expense allowed in an earlier year. If such payment exceeds the specified limit and is made in cash, the amount so paid is deemed to be the income of the previous year in which the payment is made. There are specific exceptions to these rules, such as payments made to government, banking companies, or in circumstances specified in Rule 6DD.

Section 35AD provides for 100% deduction of capital expenditure (other than land, goodwill, and financial instruments) incurred for certain 'specified businesses'. This deduction is available in the year in which the expenditure is incurred, irrespective of the date of commencement of operations. The specified businesses include setting up and operating a cold chain facility, setting up and operating a warehousing facility for agricultural produce, building and operating a hospital with at least 100 beds, developing and building a housing project under a scheme for affordable housing, production of fertilizer, development of a new infrastructure facility, etc. The asset must be used exclusively for the specified business for at least 8 years.

A tax audit under Section 44AB is mandatory for a person carrying on business if their total sales, turnover, or gross receipts exceed Rs. 1 crore in the previous year (Rs. 10 crore if cash receipts/payments are 5% or less of total). For a person carrying on a profession, a tax audit is mandatory if their gross receipts exceed Rs. 50 lakh in the previous year. Additionally, if an assessee opts for presumptive taxation (e.g., 44AD, 44ADA) but declares profits lower than the prescribed rate and their total income exceeds the basic exemption limit, they are also required to get their accounts audited.

Preliminary expenses are certain expenses incurred before the commencement of business or in connection with the extension of an existing undertaking or setting up a new unit. These include expenses like feasibility reports, project reports, market surveys, engineering services, legal charges for drafting MOA/AOA, and expenses for issuing shares/debentures. Under Section 35D, an Indian company or a resident non-corporate assessee can amortize these expenses over five equal annual installments, starting from the previous year in which the business commences or the extension/new unit begins production. The maximum amount deductible is limited to 5% of the cost of the project or 5% of the capital employed, whichever is higher.

Under the Income Tax Act (Section 32), computers, computer software, laptops, and printers are part of a specific block of assets eligible for depreciation at a rate of 40%.

Section 44AD allows eligible assessees (Resident Individual, HUF, Partnership Firm - excluding LLP) engaged in eligible business with a turnover up to ₹2 crores (₹3 crores if cash receipts <= 5%) to declare income at 8% of non-digital turnover and 6% of digital turnover. They are exempt from maintaining books of accounts and audit.

Section 44AA mandates certain assessees to maintain books of accounts. For individuals and HUFs carrying on a profession, if gross receipts exceed Rs. 1,50,000 in any of the three preceding previous years, or in the first year of profession, they must maintain prescribed books. For individuals and HUFs carrying on a business, if total sales/turnover/gross receipts exceed Rs. 25 lakh or income exceeds Rs. 2.5 lakh in any of the three preceding previous years, or in the first year of business, they must maintain books. If they opt for presumptive taxation (e.g., 44AD) and declare profits lower than the presumptive rate, and their total income exceeds the basic exemption limit, they must also maintain books.