Direct Tax Laws & International Taxation · Profits and Gains of Business or Profession

Specific Deductions and Allowable Expenses in Business Income (CA Final DT)

Updated 5 October 2026

Specific deductions are expenses the law expressly allows when computing business income, such as rent, repairs, insurance, bad debts and employer contributions to staff funds. To solve a question, check that the expense is business-related, revenue in nature, incurred in the tax year, meets its own condition (for example write-off or deposit date), and is not disallowed.

Understand Specific Deductions and Allowable Expenses

Business income is profit as per the books, adjusted by the Act. The Act first lists expenses it specifically allows. It then lists expenses it disallows. A good answer tests every item against both lists.

Each specific deduction has a condition. Rent and repairs must relate to premises, machinery, plant or furniture used for business. Repairs must be current (revenue) repairs. Capital expenditure on repairs is not allowed under this head. Insurance must cover business assets, stock or employees, and must be paid or incurred for the business.

A keyman insurance premium is allowed as a deduction. The specific mode-other-than-cash condition applies only to health insurance of employees. Stock, stores and keyman premiums do not carry that condition, but the general cash-payment disallowance rule can still apply if they are paid in cash. The sum received under the policy, including any bonus, is taxed as business income in the year of receipt.

Bad debts are allowed only when the debt was taken into income in that tax year or an earlier one, or was a money-lending debt, and you have written it off as irrecoverable in your books. You do not need to prove that the debt is actually irrecoverable. A mere provision for bad or doubtful debts is not a write-off and is not allowed.

Employee contributions have two parts. The employer's own contribution to a recognised provident fund, approved superannuation fund or gratuity fund is allowed if paid on or before the due date for furnishing the return of income. The employee's share, deducted from salary, is the employee's money held by the employer. It is allowed in the year of deduction only if deposited on or before the due date set by the relevant law (for example the PF or ESI law). Paying it later, even before the return due date, does not rescue it for that year. The Supreme Court held in Checkmate Services v CIT (2022) that the return due date does not apply to the employee's share. A late deposit is allowed only in the year it is actually paid.

The common thread is timing and form. The expense is allowed only when its own condition is met. Read each fact in the question for dates, accounting treatment and the nature of the item.

Key rules to remember

Rent, rates, taxes, repairs and insurance of premises: Allowed = rent + rates + taxes + current repairs + insurance (premises used for business); Tenant: rent paid, and current repairs if the tenant bears them. Owner: current repairs, insurance, taxes. Capital repairs are not allowed here.
Repairs and insurance of plant, machinery and furniture: Allowed = current repairs + insurance premium; Capital outlay on improvement is not a repair. It goes to the depreciation or capital expenditure rules.
Insurance of stock, stores and employees: Premium on stock or stores is allowed. Keyman insurance premium is allowed as a deduction. Premium on employee health insurance under a scheme framed by the General Insurance Corporation and approved by the Central Government, or under an IRDAI-approved scheme of another insurer, is allowed only if paid by a mode other than cash.; The sum received under a keyman policy, including any bonus, is taxable as business income in the year of receipt. The mode-other-than-cash condition is specific to health insurance of employees, which must also be under a scheme framed by the General Insurance Corporation and approved by the Central Government, or under a scheme of another insurer approved by IRDAI. Stock insurance and keyman premiums are allowed on payment or incurrence without that specific condition, but the general cash-payment disallowance rule can still apply if they are paid in cash.
Bad debts: Allowed = amount written off as irrecoverable in books, if the debt was earlier taken into income (or is a money-lending debt), minus the credit balance in the provision for bad and doubtful debts account for that debt; Deduction = amount written off minus the credit balance in the provision account created for that debt. A later recovery is business income in the year of recovery, to the extent the amount was earlier allowed as a deduction. A provision alone is not allowed.
Employee contribution (deducted from salary): Allowed in the year of deduction only if deposited on or before the due date under the relevant fund law; If deposited after that due date, it is disallowed for the year of deduction. It is allowed in the year it is actually deposited. The return due date does not help. See Checkmate Services v CIT (2022).
Employer's own contribution to recognised funds: Employer's own contribution to a recognised provident fund, approved superannuation fund or gratuity fund is allowed if paid on or before the due date for furnishing the return of income for the year; This rule covers only the employer's own contribution. Contribution to an unrecognised or unapproved fund is not allowed. It does not apply to the employee's share.
Bonus or commission to employees: Allowed if it would not otherwise be payable to the employee as profit or dividend; Payments in lieu of profit share to partners or shareholders are not covered.

How to solve Specific Deductions and Allowable Expenses questions

Use this order for any question that asks which expenses are allowed or what business income is.

1List every expense in the question and note whether it is revenue or capital in nature.
2Match each item with its specific deduction: premises, machinery, insurance, bad debts, interest, employee funds, bonus or other.
3Check the condition of that deduction: use for business, taxed earlier, written off, deposited on time, approved fund.
4Check the dates. For the employee's share, compare the deposit date with the due date under the fund law, not the return date. If it is late, disallow it.
5Check the disallowance list: cash payments, non-deduction of tax at source, personal expenses and others.
6Separate items already debited to the profit and loss account (add back if disallowed) from items not debited (deduct if allowed).
7Treat recoveries of earlier allowed bad debts as business income. Treat the sum received under a keyman policy, including bonus, as business income of the year of receipt.
8Write the answer as: rule, application to the facts, conclusion with the amount.

Quickest way: Three-column check: item, condition, amount

When to use it: When a case lists many small expenses and you must give the allowable total in a few minutes.

Draw three columns: item, condition met (yes or no), allowed amount.
Mark every provision, capital item, personal item and late deposit as nil.
Mark bad debts allowed only if the sale was in income and the debt is written off in books.
Mark employee-share fund deposits yes only if deposited by the fund-law due date.
Add the allowed column and adjust the book profit by the difference between what was debited and what is allowed.

Common mistakes in Specific Deductions and Allowable Expenses

Allowing a provision for doubtful debts
Students treat a provision as a write-off because both reduce profit in the books.
Fix: Allow only the actual write-off of an irrecoverable debt in the books. Add back the provision.
Allowing a written-off loan to a friend or a staff advance as a bad debt
Students check the write-off but forget the debt must have been taken into income, or must be a money-lending debt.
Fix: Ask whether the amount was earlier credited to income. A plain loan outside the lending business is not allowed as a bad debt.
Using the return due date for the employee's share of PF or ESI
Students mix the employer's contribution rule with the employee's rule.
Fix: Use the due date under the fund law for the employee's share. If it is late, it is disallowed. Use the return due date only for the employer's own contribution.
Allowing capital expenditure as repairs
A large amount is labelled repairs in the books.
Fix: Allow only current repairs that keep the asset in working order. Treat improvements as capital.
Forgetting to tax a later recovery of a bad debt already allowed
Students focus on the deduction and forget the reverse effect.
Fix: Add the amount recovered to business income in the year of recovery, to the extent the amount was earlier allowed as a deduction. This applies even if the business has closed. Do not add it again if it is already credited to the profit and loss account.
Allowing contributions to an unapproved or unrecognised fund
Students look at the payment and ignore the status of the fund.
Fix: Check the fund's approval or recognition status before allowing the employer's contribution.

Worked examples

Example 1

Rajan Traders (a proprietor) debited ₹1,60,000 in the profit and loss account for tax year 2026-27 as follows: (a) ₹80,000 written off as irrecoverable, being a customer's dues for goods sold in tax year 2024-25 and taken into income then; (b) ₹30,000 loan given to a friend, written off; (c) ₹50,000 provision for doubtful debts. In the same year Rajan recovered ₹12,000 of a debt allowed in an earlier year; this recovery was not credited to the profit and loss account. Rajan is not in the money-lending business. Assume there is no credit balance in the provision account relating to item (a). Compute the effect on business income.

Show the solution

Item (a): the debt was taken into income in an earlier year and has been written off in the books. It is allowed: ₹80,000.
Item (b): the loan was never taken into income and Rajan is not a money-lender. It is not allowed. Add back ₹30,000.
Item (c): a provision is not a write-off. It is not allowed. Add back ₹50,000.
Total debited: ₹1,60,000. Allowed: ₹80,000. Add-back: ₹30,000 + ₹50,000 = ₹80,000.
Recovery of ₹12,000 of a debt allowed earlier is business income of this year, to the extent it was earlier allowed. It was not credited to profit and loss, so add ₹12,000. If it had been credited, no further addition would be needed.

Answer: Bad debt deduction is ₹80,000. Add back ₹80,000 (₹30,000 + ₹50,000) to book profit. Assuming the ₹12,000 recovery was not credited to the profit and loss account, add it as business income. Net increase in business income over the book profit is ₹92,000. If the recovery was already credited, the increase is ₹80,000.

Example 2

Meera Steels Ltd. deducted ₹60,000 from employees' March 2027 salaries as their PF contribution. It deposited this on 25 April 2027. The due date under the PF law is the 15th of the following month. Its own PF share of ₹60,000 for March 2027 was deposited on 20 July 2027. Assume the return due date for tax year 2026-27 is 31 October 2027 and the PF is a recognised fund. How much is allowed for tax year 2026-27, and in which year is the rest allowed?

Show the solution

Employee's share of ₹60,000 was deducted from March 2027 salaries, so the deduction year is tax year 2026-27. It must be deposited by the PF law due date, 15 April 2027.
It was deposited on 25 April 2027, which is after the due date. The return due date does not help here. No deduction in tax year 2026-27: ₹0.
The employee's share is not lost. It is allowed in the year it is actually paid. The deposit on 25 April 2027 falls in tax year 2027-28, so the ₹60,000 is allowed in tax year 2027-28.
Employer's own share of ₹60,000 for March 2027 goes to a recognised fund. It was paid on 20 July 2027, before the return due date of 31 October 2027. It is allowed in tax year 2026-27: ₹60,000.

Answer: Allowed in tax year 2026-27: ₹60,000 (employer's own share). The employee's share of ₹60,000 is disallowed in 2026-27 because it was deposited after the PF law due date. It is allowed in tax year 2027-28, the year of actual deposit (25 April 2027).

Exam tips

In MCQs, look at the date of deposit and the date of write-off. The trap is usually there.
State the condition of each deduction in one line before applying it. This earns the provision mark in written answers.
Always separate provision from write-off for bad debts. Almost every question tests this.
For employee contributions, say which due date applies (fund law or return date) and say why.
Close the answer with the amount allowed, the amount added back and any recovery taxed.

Practice questions from Profits and Gains of Business or Profession

Specific Deductions and Allowable Expenses: frequently asked questions

Can I claim a bad debt deduction without proving the debt is irrecoverable?

Yes. The deduction depends on the debt having been taken into income earlier (or being a money-lending debt) and being written off in your books. You do not have to prove that it is actually irrecoverable.

Is the employee's PF share allowed if I deposit it before filing the return?

Not if it was deposited after the due date under the PF or ESI law. The return due date applies only to your own contribution as employer. A late deposit of the employee's share is disallowed.

Is a provision for bad debts allowed?

No. Only an actual write-off of an irrecoverable debt in the books is allowed. A provision is an estimate and must be added back.

Are repairs to a rented shop allowed?

Current repairs are allowed to the tenant if the tenant bears them, along with the rent. Capital expenditure, such as structural improvements, is not allowed here. It is dealt with under the capital expenditure rules.