Library / Income-tax Act, 2025: The Professional's Master Guide
9. Profits and Gains of Business or Profession (Sections 26 to 66)
This is the largest head and the one professionals work with most. The approach is unchanged: start from the profit in the books, add back what the Act does not allow, deduct what the Act allows but the books do not show, and arrive at taxable business income.
9.1 Map of the PGBP sections
Topic | New section | Old section |
|---|---|---|
Charging section: what is business income | 26 | 28 |
Manner of computing (subject to other provisions) | 27 | 29 |
Rent, rates, taxes, repairs and insurance | 28 | 30, 31 |
Employee welfare: PF, gratuity, superannuation, bonus | 29 | 36(1)(ib), (ii), (iv), (iva), (v), (va), 40A(9) |
Insurance premia (cattle, health of employees) | 30 | 36(1)(i), (ib) |
Bad debts and provision for bad debts | 31 | 36(1)(vii), (viia) |
Other deductions: interest on borrowed capital, discount on ZCB, etc. | 32 | 36 |
Depreciation | 33 | 32 |
General deduction (residual) | 34 | 37 |
Amounts not deductible (TDS default, income tax, partner payments) | 35 | 40 |
Payments not deductible (related party excess, cash, provisions) | 36 | 40A |
Deduction only on actual payment (incl. MSME dues) | 37 | 43B |
Deemed profits (remission of liability, recovery) | 38 | 41 |
Actual cost and written down value | 39, 41 | 43(1), 43(6) |
Preliminary expenses | 44 | 35D |
Scientific research | 45 | 35 |
Capital expenditure of specified business | 46 | 35AD |
Amortisation: amalgamation, demerger, VRS expenses | 52 | 35DD, 35DDA |
Stock-in-trade land or building sold below stamp value | 53 | 43CA |
Construction and service contracts | 57 | 43CB |
Presumptive taxation for residents | 58 | 44AD, 44ADA, 44AE |
Royalty and FTS of non-residents; head office expenses | 59, 60 | 44DA, 44C |
Presumptive taxation for non-residents | 61 | 44B, 44BB, 44BBA, 44BBB etc. |
Books of account / Tax audit | 62 / 63 | 44AA / 44AB |
9.2 What is taxable as business income (section 26)
- Profits of any business or profession carried on during the tax year.
- Compensation on termination or modification of a business contract or agency.
- Income of a trade or professional association from specific services to members.
- Export incentives such as duty drawback and similar benefits.
- Value of any benefit or perquisite arising from business, whether convertible into money or not (for example, a car gifted by a supplier to a dealer).
- Interest, salary, bonus, commission or remuneration received by a partner from the firm (to the extent allowed to the firm).
- Sums received under a keyman insurance policy, and sums for not carrying out an activity or not sharing know-how (non-compete fees).
- Profit on transfer of a Duty Entitlement Pass Book and similar licences, and income from conversion of stock-in-trade into a capital asset (at FMV on conversion date).
Illustration 30: Benefit from business A distributor meets its annual sales target and the company gives the proprietor a car worth Rs. 8,00,000. Even though no cash is received, Rs. 8,00,000 is business income of the distributor for that tax year. TDS on such benefits applies under section 393 (old 194R) if the giver is required to deduct. |
9.3 Computation from the books: a full worked example
Illustration 31: Sharma Traders Pvt. Ltd., Tax Year 2026-27 Net profit as per profit and loss account: Rs. 25,00,000. The following items are in the accounts. Compute business income. |
Item in books | Treatment | Section | Amount (Rs.) |
|---|---|---|---|
Profit as per P&L | 25,00,000 | ||
Book depreciation debited | Add back | 33 | 3,00,000 |
Income tax paid debited | Add back | 35 | 2,00,000 |
Provision for gratuity (not to an approved fund) | Add back | 36 | 50,000 |
Employees' own PF contribution deposited after due date under PF law | Add back (lost permanently) | 29 | 40,000 |
Cash payment of Rs. 15,000 to one person in a day | Add back | 36 | 15,000 |
Bonus provided, paid after the return due date | Add back (allowed when paid) | 37 | 1,20,000 |
CSR expenditure | Add back | 34 | 1,00,000 |
Total after additions | 33,25,000 | ||
Tax depreciation as per section 33 | Deduct | 33 | (3,60,000) |
Dividend credited (taxed under other sources) | Deduct | 92 | (80,000) |
LTCG on shares credited (taxed under capital gains) | Deduct | 67 | (1,50,000) |
Interest on income tax refund credited | Deduct | 92 | (10,000) |
Income from business | 27,25,000 |
Key point Employer's contribution to PF is allowed if paid by the return due date (section 37). The employees' own contribution deducted from salary must be deposited by the due date under the PF or ESI law; if late, it is disallowed for ever. CSR spending required under the Companies Act is not a business expense, though qualifying CSR donations may still get a deduction under section 133 in some cases. |
9.4 General deduction (section 34, old 37)
Any expenditure not covered by specific sections is allowed if it is (a) not capital, (b) not personal, and (c) laid out wholly and exclusively for the business. Expenses for any purpose that is an offence or prohibited by law are not allowed, which includes payments to settle proceedings for violation of law and gifts or freebies to medical practitioners that are prohibited under their regulations.
Illustration 32: Capital or revenue? A company spends Rs. 12,00,000 on repainting and repairing its factory (revenue, allowed), Rs. 30,00,000 on a new floor added to the factory (capital, depreciation only), and Rs. 2,00,000 on a penalty for violating pollution norms (not allowed, being a penalty for breach of law). |
9.5 Disallowance for TDS default (section 35, old 40(a))
If tax is deductible on a payment to a resident but is not deducted, or deducted but not paid by the return due date, 30% of the expense is disallowed. For payments to non-residents, 100% is disallowed. The amount is allowed in the year the TDS is later paid.
Illustration 33: Professional fees without TDS ABC Pvt. Ltd. pays Rs. 2,00,000 to a legal consultant but does not deduct TDS. Disallowance = 30% of 2,00,000 = Rs. 60,000. If TDS is deducted and deposited in Tax Year 2027-28, the Rs. 60,000 is allowed in that year. Interest for late deduction is also payable. |
Judicial view: Paid or payable Palam Gas Service v. CIT (Supreme Court, 2017): the disallowance for failure to deduct TDS applies not only to amounts outstanding at the year-end but also to amounts already paid during the year. |
9.6 Partner remuneration and interest (section 35, old 40(b))
A firm can deduct salary, bonus, commission or remuneration to working partners only if authorised by the partnership deed and within limits. Interest to partners is allowed up to 12% simple per year.
Book profit | Maximum remuneration allowed |
|---|---|
First Rs. 6,00,000 of book profit (or loss) | Rs. 3,00,000 or 90% of book profit, whichever is higher |
Balance book profit | 60% |
Illustration 34: Partner remuneration Book profit of Mehta & Associates (profit under this head before deducting partner remuneration) is Rs. 12,00,000. Remuneration paid to working partners is Rs. 10,00,000. Interest on capital paid at 15% on capital of Rs. 20,00,000 = Rs. 3,00,000. |
On first 6,00,000: higher of 3,00,000 or 90% (5,40,000) | 5,40,000 |
On balance 6,00,000 at 60% | 3,60,000 |
Maximum remuneration allowed | 9,00,000 |
Remuneration disallowed (10,00,000 less 9,00,000) | 1,00,000 |
Interest allowed at 12% on 20,00,000 | 2,40,000 |
Interest disallowed (3,00,000 less 2,40,000) | 60,000 |
The partner is taxed on remuneration and interest only to the extent allowed to the firm. TDS at 10% under section 393 (old 194T) applies on such payments above Rs. 20,000 in a year.
9.7 Related party payments and cash (section 36, old 40A)
- Excessive payments to related persons (relatives, directors, partners, substantial interest holders): the excess over fair market value is disallowed.
- Cash payments above Rs. 10,000 per person per day (Rs. 35,000 for transporters) are fully disallowed, unless covered by an exception in the Rules. A later cash payment for an expense allowed on accrual in an earlier year is taxed as deemed income.
- Provision for gratuity is allowed only for contribution to an approved gratuity fund, or when actually paid.
- Contributions to funds not approved or not required by law are not allowed.
Illustration 35: Cash purchase A trader pays Rs. 18,000 in cash to one supplier on a single day. The entire Rs. 18,000 is disallowed, not just the excess. Splitting into two bills of Rs. 9,000 on the same day to the same person does not help, because the limit is per person per day. |
9.8 Payment basis items including MSME dues (section 37, old 43B)
Certain expenses are allowed only when actually paid, generally by the return due date: taxes and duties, employer contributions to PF and other funds, bonus and commission to employees, interest to banks, NBFCs and financial institutions (converted interest is not payment), leave encashment, railway usage charges, and dues to micro and small enterprises beyond the MSMED Act time limit (15 days, or up to 45 days if agreed in writing). For MSME dues, payment by the return due date does not help; it must be made within the MSMED time limit, otherwise it is allowed only in the year of payment.
Illustration 36: MSME supplier XYZ Ltd. buys goods worth Rs. 5,00,000 from a registered micro enterprise on 10 February 2027 with a written credit period of 45 days, so payment is due by 27 March 2027. XYZ pays on 20 April 2027. The Rs. 5,00,000 is not allowed in Tax Year 2026-27. It is allowed in Tax Year 2027-28, the year of payment. |
Practice note Tag micro and small vendors (not medium) in the vendor master and run an ageing report before 31 March. Medium enterprises and traders registered only for priority lending are outside this rule. |
9.9 Deemed profits (section 38, old 41)
If a deduction was allowed in an earlier year for a loss, expense or trading liability, and the business later gets back the amount or the liability is waived, the benefit is taxed in the year it is received or written back. This applies even if the business has closed.
Illustration 37: Liability written back A company had claimed purchases of Rs. 3,00,000 from a supplier in 2024. In Tax Year 2026-27, the supplier agrees to waive Rs. 3,00,000 in a settlement and the company writes it back. Rs. 3,00,000 is taxable as business income in Tax Year 2026-27. |
9.10 Bad debts (section 31)
A debt is deductible when written off as irrecoverable in the books, provided it was earlier taken into income (or is money lent in the ordinary course of banking or money lending). There is no need to prove that the debt has actually become bad. If a bad debt is later recovered, the recovery is taxable. Banks and NBFCs get a separate deduction for provisions within limits.
Judicial view: Bad debts T.R.F. Ltd. v. CIT (Supreme Court, 2010): after the 1989 amendment, it is enough if the bad debt is written off as irrecoverable in the accounts; the taxpayer need not prove that the debt has actually become irrecoverable. |
9.11 Depreciation (section 33)
The block of assets and WDV method continue. Assets used for less than 180 days in the year of acquisition get half the normal rate. Goodwill is not a depreciable asset. Power generating companies may choose straight line.
Judicial view: Goodwill CIT v. Smifs Securities Ltd. (Supreme Court, 2012): goodwill was held to be an intangible asset eligible for depreciation under the old law. The Finance Act, 2021 removed goodwill from depreciable assets, and the 2025 Act follows that position; the ruling remains relevant only for earlier years. |
Block | Rate |
|---|---|
Residential buildings | 5% |
Other buildings (offices, factories) | 10% |
Furniture and fittings | 10% |
Plant and machinery (general) | 15% |
Motor cars (not used in hire business) | 15% |
Computers and software | 40% |
Intangibles (know-how, patents, copyrights, licences, franchises) | 25% |
Illustration 38: Half rate Opening WDV of plant and machinery: Rs. 10,00,000. Addition of Rs. 4,00,000 on 1 June 2026 and Rs. 2,00,000 on 15 January 2027 (used less than 180 days). |
15% on (10,00,000 plus 4,00,000) | 2,10,000 |
7.5% on 2,00,000 (used less than 180 days) | 15,000 |
Total depreciation | 2,25,000 |
Closing WDV (16,00,000 less 2,25,000) | 13,75,000 |
Additional depreciation of 20% (10% if used less than 180 days) is available to manufacturers on new plant and machinery, but not under the concessional company regimes or the new regime for individuals. Sale of an asset reduces the block; if the block becomes nil or negative, or all assets in the block are sold, a short-term capital gain or loss arises (section 74).
9.12 Amortised expenses
Expense | Section | Treatment |
|---|---|---|
Preliminary expenses (project reports, legal, registration) | 44 (old 35D) | 1/5 each year for 5 years, capped at 5% of cost of project or capital employed |
Amalgamation or demerger expenses | 52 (old 35DD) | 1/5 each year for 5 years |
Voluntary retirement scheme payments | 52 (old 35DDA) | 1/5 each year for 5 years |
Scientific research (in-house, revenue and capital except land) | 45 (old 35) | 100% deduction |
Specified business (cold chain, warehousing, hospitals, etc.) | 46 (old 35AD) | 100% of capital expenditure other than land, goodwill and financial instruments |
Illustration 39: Preliminary expenses A new company spends Rs. 10,00,000 on preliminary expenses. Cost of project is Rs. 1.5 crore, so the cap is 5% = Rs. 7,50,000. Deduction = Rs. 7,50,000 over 5 years = Rs. 1,50,000 each year. The balance Rs. 2,50,000 is never allowed. |
9.13 Stamp value for stock-in-trade (section 53, old 43CA)
When land or building held as stock-in-trade is sold, and the stamp duty value is more than 110% of the consideration, the stamp duty value is taken as the sale value. This is the business counterpart of section 78 for capital assets.
Illustration 40: Builder sale A builder sells a flat for Rs. 90 lakh. Stamp duty value is Rs. 1 crore, which is 111% of the price and above the 110% tolerance. Sale value for tax = Rs. 1 crore. If the agreement was signed earlier with part payment by banking channel, the stamp value on the agreement date can be used. |
9.14 Speculation, F&O and trading income
Activity | Nature | Key rules |
|---|---|---|
Intraday equity trading (no delivery) | Speculative business | Loss set off only against speculative income, carried forward 4 years |
Futures and options on recognised exchanges | Non-speculative business | Normal business loss rules, 8 years carry forward; STT on futures 0.05% and options 0.15% from 1 April 2026 |
Delivery based share trading | Business or capital gains based on intention, frequency and volume | CBDT guidance allows the taxpayer to choose capital gains for listed shares held over 12 months, applied consistently |
Virtual digital assets | Special rate of 30% | No deduction except cost; losses cannot be set off; TDS 1% on transfer |
Illustration 41: F&O turnover Kiran trades in options. During the year, the total of profits on profitable trades is Rs. 12,00,000 and the total of losses on loss-making trades is Rs. 8,00,000. Premium received on sale of options is already reflected in these figures. Turnover (absolute sum of profits and losses) = Rs. 20,00,000. Net business income = Rs. 4,00,000. Since turnover is well below Rs. 10 crore and transactions are through banking channels, tax audit is not required, unless he opts for presumptive taxation and declares lower profit with income above the exemption limit. |
9.15 Presumptive taxation (section 58)
Scheme | Who | Limit | Deemed profit |
|---|---|---|---|
Business (old 44AD) | Resident individual, HUF, firm (not LLP) | Turnover up to Rs. 2 crore (Rs. 3 crore if cash receipts are 5% or less) | 8% of turnover; 6% for digital or banking receipts |
Profession (old 44ADA) | Resident individual, firm (not LLP) in notified professions | Gross receipts up to Rs. 50 lakh (Rs. 75 lakh if cash receipts are 5% or less) | 50% of gross receipts |
Goods carriages (old 44AE) | Owner of up to 10 goods vehicles | Up to 10 vehicles | Heavy vehicle: Rs. 1,000 per ton per month. Others: Rs. 7,500 per vehicle per month |
Illustration 42: Kirana trader Ramesh has turnover of Rs. 1.8 crore: Rs. 1.6 crore through UPI and bank, Rs. 20 lakh in cash. |
6% of digital receipts (1,60,00,000) | 9,60,000 |
8% of cash receipts (20,00,000) | 1,60,000 |
Presumptive business income | 11,20,000 |
With no other income, total income is Rs. 11,20,000. The new regime tax of Rs. 52,000 is covered by the rebate under section 156. Tax payable: nil. He must still file the return.
Illustration 43: Doctor Dr. Anjali has gross receipts of Rs. 60 lakh, of which Rs. 2 lakh (3.3%) is in cash, so her limit is Rs. 75 lakh. Deemed income = 50% = Rs. 30,00,000. New regime tax Rs. 4,80,000 plus cess Rs. 19,200 = Rs. 4,99,200, payable as advance tax in one instalment by 15 March 2027. |
Key point A person who opts out of the business scheme and declares lower profit cannot return to it for the next five years, and books and audit may apply. Presumptive income is final: no separate deduction for depreciation, partner salary or interest. |
9.16 Books of account and tax audit (sections 62 and 63)
Requirement | Threshold (broad) |
|---|---|
Tax audit for business | Turnover above Rs. 1 crore. Rs. 10 crore if cash receipts and cash payments are each 5% or less |
Tax audit for profession | Gross receipts above Rs. 50 lakh; a professional who uses the presumptive scheme (receipts up to Rs. 75 lakh with cash of 5% or less) and declares at least 50% does not need an audit |
Presumptive cases | Audit if income declared is lower than the presumptive rate and total income exceeds the basic exemption limit |
Audit report | Single Form 26 replaces Forms 3CA, 3CB and 3CD; due one month before the return due date |
Books for professionals | Specified professionals must keep books if gross receipts exceed the prescribed limit |
Practice note Before signing Form 26, reconcile every disallowance reported in the audit with the return. CPC can adjust the return during processing for any disallowance shown in the audit report but not offered in the return (section 270). |
9.17 Capital or revenue: the principles
The single most important question in business taxation is whether an item is capital or revenue. Revenue expenditure is deducted in the year incurred; capital expenditure is recovered only through depreciation (if the asset is depreciable) or through cost when the asset is sold. Receipts follow the same logic: revenue receipts are income, capital receipts are generally not, unless specifically taxed.
Test | Points to revenue | Points to capital |
|---|---|---|
Enduring benefit | Benefit consumed within the year or a short period | Benefit of a lasting nature in the capital field |
Fixed or circulating capital | Spent on stock, raw material, working expenses | Spent on acquiring or improving the profit making structure |
Nature of the advantage | Facilitates running the business more efficiently | Brings a new asset or right into existence |
Recurring or one-time | Recurs in the ordinary course | One-time outlay (though not conclusive) |
Treatment in books | Relevant but not conclusive | Relevant but not conclusive |
Judicial view: Capital or revenue Empire Jute Co. Ltd. v. CIT (Supreme Court, 1980): the enduring benefit test is not conclusive. Expenditure that gives an advantage for the more efficient running of the business, without touching the fixed capital, is revenue even if the benefit lasts for some time. Payment for purchasing loom hours was held revenue. CIT v. Mahindra and Mahindra Ltd. (Supreme Court, 2018): waiver of a loan taken for purchase of capital assets is not taxable as a business benefit or as remission of a trading liability, since the loan was not a trading liability and the waiver was of cash, not a benefit in kind. |
Illustration 44: Software and website costs A company pays Rs. 6 lakh for annual cloud software subscriptions, Rs. 20 lakh for a perpetual ERP licence with customisation, and Rs. 2 lakh for routine website maintenance. The subscriptions and maintenance are revenue. The perpetual ERP licence is capital, eligible for depreciation as an intangible or as computer software at 40%. |
9.18 Interest on borrowed capital (section 32)
Interest on money borrowed for the purpose of business is deductible. Two conditions matter: the money must be borrowed, and it must be used for the business. It does not matter whether the loan is used for a revenue or a capital purpose, except that interest for acquiring an asset for extension of an existing business, relating to the period up to the date the asset is first put to use, must be capitalised as part of the cost of the asset.
Illustration 45: Capitalisation of interest A manufacturer borrows Rs. 5 crore on 1 April 2026 at 10% to set up a new production line (an extension of its business). The line is first put to use on 1 October 2026. Interest for April to September, Rs. 25 lakh, is added to the cost of the line and depreciated. Interest from October to March, Rs. 25 lakh, is deductible as revenue expenditure in Tax Year 2026-27. |
Judicial view: Timing of interest deduction Taparia Tools Ltd. v. JCIT (Supreme Court, 2015): where a company paid interest upfront on debentures and claimed it fully in the year of payment, the claim was allowed, even though the books spread it over five years. The deduction follows the Act, not the accounting treatment, unless the Act says otherwise. |
Judicial view: Interest-free advances to sister concerns S.A. Builders Ltd. v. CIT (Supreme Court, 2006): where borrowed funds are advanced interest-free to a subsidiary or sister concern for reasons of commercial expediency, interest on the borrowing is still deductible. The test is whether the advance serves the business interest of the assessee, judged from the viewpoint of a prudent businessman. |
9.19 More on disallowances under section 35
Item disallowed | Explanation |
|---|---|
Interest, royalty, FTS or other sums payable to a non-resident without TDS | 100% disallowed until TDS is deducted and paid |
Sums payable to a resident without TDS | 30% disallowed until TDS is paid |
Income tax, including surcharge and cess, and taxes on profits | Not deductible, whether paid in India or outside (foreign tax is handled through tax credit) |
Salary payable outside India to a non-resident without TDS | Disallowed |
Partner remuneration and interest beyond limits | Excess disallowed (explained earlier) |
Payments to provident or other funds for employees, unless effective arrangements for TDS on payments from the fund | Disallowed |
Securities transaction tax paid on transactions whose income is taxed as business income is deductible, while wealth tax and similar taxes are not.
9.20 Related party payments (section 36) in detail
Where a payment is made to a related person (a relative of the individual, a director or partner or their relatives, a person with substantial interest of 20% or more, and certain connected entities), the Assessing Officer can disallow the part that is excessive or unreasonable having regard to the fair market value of the goods, services or facilities, or the legitimate needs of the business.
Illustration 46: Salary to a relative A proprietor pays his son Rs. 1,20,000 a month as "business development manager". The son is a fresh graduate with no experience; similar roles in the market pay about Rs. 60,000 a month. The Assessing Officer can disallow Rs. 60,000 a month, i.e. Rs. 7,20,000 for the year, as excessive. Keep evidence of qualifications, duties and market benchmarks to support such payments. |
9.21 Payment basis items (section 37) with timing examples
Item | Allowed in which year |
|---|---|
Tax, duty, cess or fee under any law (GST, customs, municipal tax) | Year of payment, or accrual year if paid by the return due date |
Employer contribution to PF, superannuation, gratuity fund | Same |
Bonus or commission to employees | Same |
Interest on loans from banks, co-operative banks, NBFCs, financial institutions | Same; converting interest into a new loan is not payment |
Leave encashment | Same |
Payments to micro and small enterprises beyond MSMED time limit | Only in the year of actual payment |
Illustration 47: Bonus timing A company provides bonus of Rs. 10 lakh for Tax Year 2026-27 in its books. It pays Rs. 6 lakh on 15 October 2027 and Rs. 4 lakh on 10 December 2027. The return due date is 31 October 2027. Rs. 6 lakh is allowed in Tax Year 2026-27. Rs. 4 lakh is allowed only in Tax Year 2027-28, the year of payment. |
Judicial view: Employees' PF contribution Checkmate Services (P) Ltd. v. CIT (Supreme Court, 2022): employees' contributions deducted from salary are income of the employer (held in trust) and are deductible only if deposited by the due date under the PF or ESI law. The relaxation of paying by the return due date applies only to the employer's own contribution, not to the employees' share. |
Judicial view: Employer's contribution paid before the return due date CIT v. Alom Extrusions Ltd. (Supreme Court, 2009): the amendment allowing the employer's contribution to PF and similar funds on payment by the return due date is curative and applies retrospectively. This principle continues under section 37 for the employer's own contribution. |
9.22 Depreciation: special situations
Situation | Treatment |
|---|---|
Asset used partly for personal purposes | Depreciation allowed only for the business proportion |
All assets of a block sold | No depreciation for the year; difference between sale value and WDV plus additions is short-term capital gain or loss |
Sale value exceeds WDV plus additions | Excess is short-term capital gain, even if assets were held for years (section 74) |
Asset acquired but not put to use in the year | No depreciation that year |
Asset acquired from a related person or in a scheme | Actual cost as per section 39 rules (for example, WDV of the transferor) |
Subsidy or grant for the asset | Reduces actual cost |
Cash payment above Rs. 10,000 for acquisition | That payment is excluded from actual cost |
Illustration 48: Block of computers Opening WDV of the computers block is Rs. 3,00,000. No additions. During the year all computers are sold for Rs. 4,00,000. The block ceases to exist. No depreciation. Short-term capital gain = Rs. 1,00,000 (4,00,000 less 3,00,000), taxed at normal rates. If instead only some computers were sold for Rs. 2,00,000, the block would continue with WDV Rs. 1,00,000 and depreciation at 40% = Rs. 40,000. |
Unabsorbed depreciation: if depreciation cannot be fully absorbed because profits are inadequate, the balance is added to the next year's depreciation and carried forward without time limit. Order of set off each year: current depreciation, then brought forward business loss, then unabsorbed depreciation.
9.23 Presumptive schemes: more practical points
Illustration 49: Opting out of the business scheme Nisha, a trader, declared 8% profit under section 58 for Tax Year 2025-26 (then 44AD). For Tax Year 2026-27, her actual profit is lower, so she declares 4% of turnover and keeps books. She cannot use the business presumptive scheme for the next five tax years (2027-28 to 2031-32). Since her income is above the basic exemption limit and she has declared lower profit, she must also get her accounts audited. |
Illustration 50: Goods carriages Pawan owns 3 heavy goods vehicles of 12 tons gross weight each and 2 light goods vehicles, all held throughout Tax Year 2026-27. Presumptive income = (3 x 12 x 1,000 x 12) + (2 x 7,500 x 12) = 4,32,000 + 1,80,000 = Rs. 6,12,000. He may declare higher income if actual is higher. |
9.24 Income Computation and Disclosure Standards
The ten ICDS apply to all assessees following the mercantile system for computing business income and income from other sources (individuals and HUFs not requiring tax audit are excluded).
ICDS | Key tax difference from accounting standards |
|---|---|
I: Accounting policies | Prudence cannot be used to recognise expected losses unless another ICDS allows it |
II: Valuation of inventories | Cost or NRV; opening stock of a year = closing stock of the previous year |
III: Construction contracts | Percentage of completion; retention money recognised; early stage threshold 25% |
IV: Revenue recognition | Services recognised by percentage of completion; interest accrues on time basis |
V: Tangible fixed assets | Cost components; tax depreciation still under the Act |
VI: Foreign exchange | Monetary items restated at year-end rates; MTM gains and losses on certain contracts allowed |
VII: Government grants | Cannot be postponed beyond the year of actual receipt |
VIII: Securities | Held as stock-in-trade: lower of cost or NRV, category-wise |
IX: Borrowing costs | Capitalisation rules, including general borrowings by formula |
X: Provisions and contingencies | Provision only when reasonably certain (higher than "probable" under accounting) |
9.25 Books of account and records (section 62)
Person | When books must be kept |
|---|---|
Specified professionals (legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, film artists, company secretaries, IT professionals, authorised representatives) | Gross receipts above Rs. 1.5 lakh in all three preceding years: prescribed books (cash book, journal, ledger, bills, receipts). New profession: if receipts likely to exceed Rs. 1.5 lakh |
Other business or profession (individual or HUF) | Income above Rs. 2.5 lakh or turnover above Rs. 25 lakh in any of the three preceding years |
Presumptive cases declaring lower profit | Books required |
Retention | Generally 6 years from the end of the relevant year, longer if proceedings are pending |
9.26 Tax audit: what the auditor reports in Form 26
- Nature of business, books maintained, method of accounting and ICDS adjustments.
- Depreciation computed as per the Act, with additions and disposals.
- Amounts inadmissible under sections 35, 36 and 37, including TDS defaults, cash payments and MSME dues.
- Payments to related persons, loans and deposits accepted or repaid in cash, and quantitative details of goods.
- TDS and TCS compliance, including delays and short deductions.
- Brought forward losses, change in shareholding for section 119, and deemed dividends.
- GST turnover reconciliation and key financial ratios.
9.27 Speculation, derivatives and virtual digital assets
A speculative transaction is a contract for purchase or sale of a commodity, including shares, settled otherwise than by actual delivery. The following are not speculative: hedging contracts by manufacturers and merchants for raw materials or goods; hedging by dealers or investors in shares against price fluctuations; forward contracts by stock exchange members in jobbing or arbitrage; and eligible transactions in derivatives and commodity derivatives on recognised exchanges.
Virtual digital assets (crypto assets, NFTs and similar notified assets) are taxed at a flat 30% on the gain, with no deduction other than cost of acquisition, no set off of losses against any income (not even other VDA gains), and no carry forward. TDS at 1% applies on transfer, and details must be reported in the return and by the exchanges.
Illustration 51: VDA Aman sells Bitcoin for a gain of Rs. 5,00,000 and incurs a loss of Rs. 2,00,000 on another token. Tax = 30% of Rs. 5,00,000 = Rs. 1,50,000 plus cess. The Rs. 2,00,000 loss is ignored. The 1% TDS deducted by the exchange on each sale is available as credit. |
9.28 Taxation of freelancers, creators and gig workers
Independent consultants, designers, developers, content creators and similar earners are taxed under business or profession. Key points:
- Those in notified professions (including IT professionals, interior decorators, film artists and technical consultants) can use the profession presumptive scheme (50%) if receipts are within Rs. 50 lakh (or Rs. 75 lakh with 5% or less cash).
- Content creators earning from platforms (ad revenue, brand deals) are generally in business, and can use the business scheme (6% or 8%) if turnover is within limits, or compute actual profits.
- Free products received from brands are taxable as benefits of business; the brand deducts TDS under section 393 (old 194R) if the value exceeds Rs. 20,000.
- Foreign income (for example, from overseas clients or platforms) is taxable in India for residents; GST and FEMA obligations also apply.
- Expenses such as equipment (depreciation), software subscriptions, internet, travel for work and a reasonable share of home office costs are deductible if books are maintained.
Illustration 52: Content creator Neha earns Rs. 38 lakh from a video platform and brand collaborations, all through banks, and receives products worth Rs. 2 lakh (a benefit of business, so part of her receipts). If she opts for the business presumptive scheme, income = 6% of Rs. 40 lakh = Rs. 2,40,000, below the Rs. 4 lakh exemption limit of the new regime, so no tax is payable. If her actual profit is higher, declaring the presumptive amount is still lawful as long as it meets the prescribed percentage. If she declares less, she must keep books and may need an audit. |
9.29 Specified businesses and capital expenditure (section 46)
Businesses such as cold chain facilities, warehousing for agricultural produce, hospitals with 100 or more beds, affordable housing projects, fertiliser plants, cross country pipelines and certain infrastructure get a deduction of 100% of capital expenditure (other than on land, goodwill and financial instruments) in the year incurred, instead of depreciation. Loss from such a business can be set off only against income from specified businesses and carried forward without limit. The benefit is not available to companies under section 200.
9.30 Construction contracts (section 57) and ICDS III
Illustration 53: Percentage of completion A contractor has a contract for Rs. 50 crore with estimated total cost of Rs. 40 crore. By 31 March 2027 costs incurred are Rs. 16 crore (40% complete). Revenue recognised for tax = 40% x 50 crore = Rs. 20 crore; profit = Rs. 4 crore, even if only Rs. 12 crore has been billed and Rs. 1 crore of that is retention money. Under ICDS III, retention money is part of revenue; expected losses are recognised only as incurred, not in advance. |
9.31 Banks and NBFCs
- Banks get a deduction for provision for bad and doubtful debts up to 8.5% of total income plus 10% of average rural advances; NBFCs up to 5% of total income. Actual write offs are allowed only to the extent they exceed the provision already allowed.
- Interest on non-performing assets of banks, NBFCs and specified institutions is taxed in the year of receipt or credit to the profit and loss account, whichever is earlier (section 56, old 43D).
- Thin capitalisation (section 177) does not apply to banks and specified NBFCs.
Illustration 54: Interest on NPA An NBFC has loans of Rs. 5 crore classified as NPA. Interest accrued but not received during Tax Year 2026-27 is Rs. 60 lakh; it recovers Rs. 20 lakh of old interest during the year. Taxable interest from these loans = Rs. 20 lakh (received), not Rs. 60 lakh (accrued). |
Chapter summary • Start from book profit, add back disallowances, deduct allowances under the Act. • Key disallowances: TDS default (30% or 100%), cash above Rs. 10,000, excessive related party payments, CSR, penalties. • Payment basis items and MSME dues under section 37 affect timing of deductions. • Depreciation on WDV blocks; half rate for assets used under 180 days; goodwill not depreciable. • Presumptive schemes under section 58 for small businesses, professionals and transporters. • Books, ICDS and tax audit (Form 26) complete the compliance picture. |
© Vipin Nair. This guide is for reading online only. Copying, downloading, printing and redistribution are not permitted. For study and general reference; not legal, tax or investment advice.