CA Final · Direct Tax Laws & International Taxation

Profits and Gains of Business or Profession: formula sheet

Full chapter guide

Key formulas

Business income from books: Business income = Net profit as per books + Inadmissible expenses debited − Admissible deductions not debited − Income credited but taxable under other heads or exempt; Use this as the standard reconciliation layout. Show every adjustment with a reason.
General test for a deductible expense: Revenue in nature + Wholly and exclusively for business + Not disallowed by any provision = Deductible; All three conditions must be met. Failing any one means no deduction under the general rule.
Capital vs revenue (broad guide): Enduring benefit or asset or structure of the business = Capital; Day-to-day running or profit-earning process = Revenue; This is a guide, not a rule of law. Courts decide on the facts, so state the facts you rely on.
Method of accounting: Income computed per cash or mercantile system regularly followed by the assessee; A method that is not regularly followed, or leads to distorted profit, can be rejected by the Assessing Officer under the Act.
Deemed business receipts: Recovery of earlier allowed loss, bad debt or expense, or remission of a trading liability = Business income in the year of recovery or remission; Applies only if the earlier amount was allowed as a deduction. Check this condition first.
WDV of block before depreciation: Opening WDV + Additions in the year − Sale proceeds (money/value received) of assets sold; Sale proceeds reduce the whole block. They are not tied to the asset sold.
Normal depreciation: Block WDV × Rate; additions used for less than 180 days × 50% of Rate; The law reduces the whole block by the sale proceeds. For working, set the proceeds against opening WDV and full-rate additions first. This is a working convention, not a rule of the Act. Use the rate given in the question.
180-day rule: Put to use for less than 180 days in the tax year → 50% of the normal rate on that addition; It applies to additions only. Opening WDV always gets the full rate.
Additional depreciation: 20% of actual cost of new plant or machinery; if used for less than 180 days, 10% in the year of acquisition and the balance 10% in the next year; For a manufacturing or production business, or power generation, transmission or distribution. It is not allowed on ships, aircraft, second-hand plant or machinery (including plant used outside India before import), office appliances (including computers), vehicles, or assets whose whole cost is deducted in one year. Look up the full list in the Act.
Negative block value: Sale proceeds > Opening WDV + All additions (block still has assets) → excess is deemed short-term capital gain; depreciation is nil and the block WDV becomes nil; The test uses the whole block: opening WDV plus all additions in the year, whatever their days of use, less the proceeds. If proceeds exceed that total, the excess is deemed short-term capital gain, even if assets remain in the block. The block WDV then becomes nil and no depreciation is allowed on it.
Block ceases to exist: All assets sold → positive WDV after proceeds = short-term capital loss; negative = short-term capital gain; The balance is a capital loss or gain, not business income. A negative balance is the same excess of proceeds over the whole block described in the Negative block value row.
Closing WDV: WDV before depreciation − Normal depreciation − Additional depreciation; Closing WDV becomes next year's opening WDV. Additional depreciation reduces it too.
Specified capital expenditure: Scientific research capital expenditure (not land) is deducted in full in the year incurred. Capital expenditure on specified businesses is generally deducted at 100% in the year incurred. Some items are spread in equal instalments over the years the Act fixes. All are subject to the Act's conditions.; If you claim a full deduction on an asset, you cannot claim depreciation on it. Use the percentage and the number of instalments given in the question.
Cash payment disallowance: Expenditure (including a purchase of goods) for which payment to one person in one day > ₹10,000 is made otherwise than by account payee cheque/draft, bank electronic mode or other prescribed mode → whole expenditure disallowed; The rule applies to the expenditure incurred for which the payment is made, so it covers purchases and expenses alike, as long as the cost was debited to profit. Check how the purchase was debited. If it was routed through the trading account or stock, the disallowance still applies to that expenditure, so make the adjustment in the profit or stock figure. The limit is ₹35,000 per day for payment to a transporter for hiring goods carriage. The test is per person per day, not per year. Prescribed exceptions exist, such as payments to banks and the Government.
TDS default on payment to a resident: Disallowance = 30% × specified resident payment (such as interest, commission or brokerage, fees for professional or technical services, rent, contract payments), where tax was deductible but not deducted, or deducted but not deposited by the due date for filing the return; The 30% rule applies only to the specified payments to residents, not to every expense. The 30% disallowed is allowed in the year of deposit of the tax. This holds in both cases: the tax is deducted in a later year, or it was deducted in the year of expense and deposited after the return due date. No disallowance applies if the payee has paid the tax and furnished the required certificate.
TDS default on payment to a non-resident: Disallowance = 100% × expense, where the sum is paid to a non-resident (or outside India), is chargeable to tax in India, and tax was deductible but not deducted, or deducted but not deposited by the due date for filing the return; Applies to interest, royalty, fees for technical services and other sums chargeable to tax in India. The trigger is that the sum is chargeable in India and tax was deductible on it. The expense is allowed in the year of deposit of the tax, both where the tax is deducted in a later year and where it was deducted in the year of expense and deposited after the return due date.
Payment-basis items with return-due-date relief: Allowed in the year of provision only if actually paid on or before the due date for filing the return; otherwise allowed in the year of actual payment; Covers statutory dues like tax, duty, cess and fee (the liability itself must actually be paid by the return due date; a mere provision is not enough); employer's own contribution to PF/ESI and similar funds; bonus or commission to employees; and interest on loans from specified banks and institutions. For this interest, actual payment by the return due date is needed. Converting unpaid interest into a loan or borrowing is not treated as payment, so it stays disallowed until actually paid. The conditions differ for each item, so check each one. Employee's contribution is not in this group; see the next rows.
Payment-basis items with no return-due-date relief: Leave encashment: allowed only in the year of actual payment. Sums owed to micro and small enterprises beyond the permitted period (15 or 45 days, as applicable): disallowed in the year of expense and allowed only in the year of actual payment; Paying these after the year-end but before the return due date does not bring the deduction back into the year of provision. Do not group them with bonus or statutory dues.
Employee's contribution: Allowed only if deposited within the due date under the relevant Act, which is stricter than the return due date; Employer's own contribution is different: it is allowed if deposited by the due date for filing the return. Do not apply one date to both.
Related person payments: Disallowed = Amount paid − Amount that would be reasonable as per fair market value or the business need; Only the excess or unreasonable part is disallowed. Apply it to an expense paid to a related person, as defined, for goods, services or facilities.
Other amounts not deductible: Income-tax and its surcharge or cess, and fines or penalties for breach of law: not deductible; Do not confuse these with allowable business levies such as GST on inputs, which follow their own treatment.

Quick revision

Business income is computed for the tax year, starting from book profit and adjusted under the Act.
Check the method of accounting first; it decides when income and expenses count.
An expense must be incurred for the business, be revenue in nature, and not be specifically disallowed.
Capital expenditure is not deductible as an expense; only the specific capital deductions and depreciation are allowed.
Depreciation is calculated on the block of assets, not on each asset, for the assets covered by the block rules.
Depreciation is allowed on assets owned wholly or partly by the assessee (with the Act's specified exceptions) and used for the purposes of business or profession during the tax year.
Disallowances override allowable expenses, so always run the disallowance filter at the end.
Many payment disallowances depend on TDS compliance or the mode of payment; check the facts before deciding.
Presumptive taxation replaces normal computation for eligible assessees; check the eligibility conditions first.
Audit and accounts rules depend on turnover or receipts limits and on whether the assessee opted for presumptive taxation.
Safe harbour fixes a prescribed way of attributing income; apply it only if all its conditions are met.
Always write the provision, apply the facts, and state the conclusion, even in a short answer.

Common mistakes

Treating book depreciation as an allowed deduction. Fix: Always add back book depreciation and deduct depreciation as computed under the Act.
Leaving bank interest, dividend or rent in business income. Fix: Remove the item from business profit and tax it under its proper head. Mention this in your working.
Applying half rate to the whole block or to opening WDV. Fix: The 180-day test applies only to additions. Opening WDV always takes the full rate.
Deducting sale proceeds only from the asset sold, or charging a profit or loss on sale as business income. Fix: Reduce the block by the sale proceeds. If proceeds exceed the opening WDV plus all additions, the excess is deemed short-term capital gain even if assets remain, and the WDV becomes nil. If all assets are sold, a positive balance is a short-term capital loss and a negative balance is a short-term capital gain.
Applying 30% to a payment to a non-resident where TDS was not deducted. Fix: Look at the residential status of the payee first. The 30% rate is for residents. For non-residents the whole amount is disallowed.
Testing the cash limit on the annual total or on each bill instead of per person per day. Fix: Group payments by person and by date. Add up the same-day payments to that one person and compare with the limit. Payments to different persons or on different days are not added.

Exam tips

In theory answers, quote the three-part test for deductibility and then apply it to the facts given. Do not just state the rule.
For capital vs revenue questions, name the facts that point either way, such as enduring benefit, asset created, or running expense. Courts decide on facts, so a one-word answer loses marks.
In numerical questions, show a reconciliation from net profit. Even if one item is wrong, step marks protect the rest.
Read the question for the method of accounting and for any earlier-year deduction. These two facts decide many deemed-income items.
Case-scenario MCQs reward quick classification. Practise placing items as business income, another head, or capital, within seconds.
Write the eligibility conditions first. Many case MCQs hinge on one disqualifier, such as second-hand plant, a vehicle, or a trading business.
Show the date of use for each addition and the day count. Examiners award marks for the 180-day test.
Show the sale proceeds deduction and the block figure in the working. If proceeds exceed the opening WDV plus additions, the excess is deemed short-term capital gain even if assets remain, and the WDV becomes nil. If all assets are sold, a positive balance is a short-term capital loss and a negative balance a short-term capital gain. None of these is business income.