Profits & Gains of Business or Profession (ss.28–44) — Law of Taxation Notes

Profits & Gains of Business or Profession (ss.28–44)

A trader claimed a cash payment of ₹50,000 to a supplier as a business expense. The taxman disallowed it — not because it was fake, but because it was paid in cash over the limit. Section 40A(3) shows the theme of this head: business profit is “income minus expenses”, but the Act disallows many expenses to enforce discipline, and allows depreciation as a special deduction.

The scheme of the head “Business or Profession”

Section 28 — the charge. Taxes the profits and gains of any business or profession carried on by the assessee during the previous year, plus specified items (compensation, income of trade associations, export incentives, certain non-compete receipts, value of benefits from business).

“Business” (s.2(13)) includes any trade, commerce or manufacture; “profession” (s.2(36)) includes vocation (law, medicine, accountancy). The profit is computed on commercial principles — actual profit — but adjusted by the Act’s specific allowances and disallowances.

Deductions expressly allowed (ss.30–37):

• s.30 — rent, rates, repairs, insurance of business premises;
• s.31 — repairs and insurance of machinery, plant and furniture;
• s.32 — depreciation (see below);
• s.36 — specific deductions: interest on borrowed capital, bad debts written off, employer’s PF contribution, insurance premia;
• s.37 — the residuary allowance — any other expenditure (not capital, not personal) laid out wholly and exclusively for the business.

Depreciation (s.32) — the block-of-assets method. Depreciation is allowed on the written-down value (WDV) of a block of assets (assets of the same class and rate grouped together), at prescribed percentages. Key features:

1. Depreciation is on blocks, not individual assets — you add the cost of new assets to the block and subtract sale proceeds of assets sold.
2. It is allowed even if the asset is used only part of the year (half-rate if used less than 180 days).
3. Additional depreciation may be claimed on new plant and machinery in manufacturing.
4. Unabsorbed depreciation can be carried forward indefinitely.

Expenses and payments disallowed (ss.37, 40, 40A, 43B):

• s.37(2B) — expenditure on advertisement in a political party’s publication;
• s.40(a) — amounts on which TDS was not deducted/paid; certain taxes;
• s.40A(2) — excessive/unreasonable payments to relatives/related parties;
• s.40A(3) — cash payments exceeding the prescribed limit (to curb black money);
• s.43B — statutory dues (tax, duty, PF, bonus, interest to banks) allowed only on actual payment, not mere accrual;
• personal expenses, capital expenditure, and income-tax itself are not deductible.

The Format (pro-forma)

Learn this skeleton first, then see it applied below. XXXX stands for a figure; amounts in brackets (XXXX) are subtracted. Computation starts from the book profit and adjusts it.

Format — Computation of Profits & Gains of Business or Profession (ss.28–44)

🧩 WORKED EXAMPLE — Business profit after disallowances and depreciation

Facts. Net profit per accounts ₹5,00,000, which is after debiting: a ₹60,000 cash payment to a supplier (single payment), ₹40,000 income tax, and ₹1,00,000 depreciation charged in the books. Depreciation allowable under s.32 is ₹1,20,000.

Rule. Start from book profit; add back disallowed items (cash payment over limit — s.40A(3); income tax — not deductible; book depreciation) and deduct the s.32 depreciation.

Apply.

• Net profit 5,00,000
• Add back: cash payment 60,000 + income tax 40,000 + book depreciation 1,00,000 = +2,00,000 → 7,00,000
• Less s.32 depreciation 1,20,000

Conclusion. Business income = ₹5,80,000. The cash payment and income tax are disallowed; book depreciation is replaced by the Act’s own s.32 figure.

Section 37(1): “Any expenditure … not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed …”

In Simple Terms: Business income = profit computed commercially, then adjusted. Genuine business expenses “wholly and exclusively” for the business are allowed (s.37); depreciation is allowed on blocks of assets (s.32); but the Act disallows cash payments over the limit, unreasonable payments to relatives, unpaid statutory dues, and personal/capital expenses.

flowchart TD
    ROOT["Profits & Gains of Business/Profession s.28"]:::root
    ROOT --> A["Allowed<br/>rent/repairs 30-31, deprec 32, specifics 36, residuary 37"]:::good
    ROOT --> B["Depreciation s.32<br/>block of assets, on WDV"]:::leaf
    ROOT --> C["Disallowed<br/>40A(3) cash, 40A(2) relatives, 43B unpaid dues, personal/capital"]:::bad
    classDef root fill:#FFF8DC,stroke:#000,stroke-width:1px,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    classDef good fill:#E3F6E3,stroke:#1b7a1b,color:#000;
    classDef bad fill:#FDE2E2,stroke:#B00020,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

Case Laws

• CIT v Walchand & Co. (1967) — reasonableness of a business expense is judged from the businessman’s point of view, not the department’s.
• Empire Jute Co. Ltd. v CIT (1980) — the capital/revenue test for expenditure: an outgoing bringing an enduring advantage in the revenue field is still revenue.

Back to Top

📄 Full notes + Question Bank (₹199) — every topic in depth, model answers to all past KSLU questions, in one printable PDF. Get the bundle · 10 Solved Problems · All Law of Taxation topics