Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Direct Tax Laws & International Taxation

Profits and Gains of Business or Profession for CA Final

Q: How do I remember the cash payment and 43B rules for the exam?

For cash payments, remember: one person, one day, above ₹10,000, and the whole amount is disallowed. For 43B, remember that the expense is deductible in the accrual year if paid by the due date of the return, and otherwise in the year of actual payment. Practise with three or four cases in a row until the test becomes automatic.

Q: How is depreciation computed under the Income-tax Act?

Depreciation is allowed on the block of assets, not on single assets, at the prescribed WDV rate. Include opening WDV and additions, subtract sale proceeds, and give half the rate on additions used for fewer than 180 days. Book depreciation is ignored.

Q: When should a company choose 115BAA over normal provisions?

Compare the tax under both. 115BAA gives a lower rate and no MAT, but it removes many deductions, incentives and additional depreciation. It usually suits companies with few deductions and no large carried-forward benefits. In an exam, compute both and recommend the lower figure.

Q: Does presumptive taxation remove the need to compute disallowances?

For eligible assessees who opt in, income is computed at the stated percentage and normal business deductions, including depreciation, are deemed to be allowed. This means you do not work through individual disallowances, and unabsorbed depreciation cannot be separately claimed. Always check turnover limits and eligibility first.

Updated 5 October 2026 · Fact-checked

Business income is the net profit in the books, adjusted for the Income-tax law. Add back disallowed expenses, deduct items taxed elsewhere or exempt, then replace book depreciation with tax depreciation. Add deemed income, apply specific deductions, and check whether presumptive or 115BAA rules change the answer.

Understand Profits and Gains of Business or Profession

Business income is not the accounting profit. It is the profit the Income-tax law lets you tax. The law starts from the books but corrects them. Some expenses are allowed only if conditions are met. Some are never allowed. Some income is taxed under another head.

Think of it as a reconciliation. Start with net profit as per the P&L account. Add back what the law disallows: personal expenses, income tax, book depreciation, and expenses that fail a condition such as TDS, cash payment limits or payment timing. Deduct what is taxed under another head or is exempt, such as rent, interest and capital gains credited to P&L. Then give the allowed depreciation and other deductions.

Three groups of rules matter most. First, disallowances: amounts not deductible (such as payments without TDS compliance), the cash payment limit, related party payments above market value, and items allowed only on actual payment (43B items such as tax, duty, employer contributions, bonus, leave encashment, interest to banks and notified institutions). Second, depreciation, which is computed on a block of assets at the prescribed rate on written down value, not asset by asset. Third, special deductions such as scientific research and other incentive deductions, which are allowed only when their conditions are met.

There are also two regimes of simplification. Presumptive taxation lets eligible small businesses and professionals declare income at a fixed percentage of turnover or receipts without maintaining full books. Section 115BAA lets a domestic company opt for a lower tax rate but give up most deductions and incentives. In the IBS paper, a case study may mix these with audit, GST and Ind AS facts. You must spot which facts matter for tax.

Note: the Income-tax law is being re-enacted, and section numbers can differ between the old and new Acts. Use the section numbers in the law notified for your attempt. The rules below are stated in words so they stay useful either way.

Key rules to remember

Business income computation: Net profit as per P&L + disallowed expenses + book depreciation − income taxable under other heads or exempt, credited in P&L − tax depreciation − other allowable deductions; Always show a clear list of additions and deductions with reasons. Marks are given for each item.
Cash payment disallowance: Expense paid in cash to one person in one day above ₹10,000 → 100% disallowed; Limit is ₹35,000 for payments to transport operators for plying, hiring or leasing goods carriages. The test is per person per day, not per bill.
Payment-basis items (43B group): Tax, duty, cess, fee, bonus or commission to employees, employer contributions to welfare funds, and interest on loans from banks and notified institutions: deductible in the year of accrual if paid on or before the due date of filing the return for that year; otherwise deductible in the year of actual payment. Leave encashment: deductible only in the year of actual payment.; The due-date-of-return relief applies to tax, duty, cess, fee, bonus or commission to employees (where not otherwise payable as profits or dividends), employer contributions, and interest on loans from banks and notified institutions. It does not apply to leave encashment, which is allowed only when actually paid. Interest converted into a loan is not treated as paid.
Employee contribution to PF or ESI: Allowed only if deposited on or before the due date under the relevant Act; This is governed by section 36(1)(va), not 43B. The longer 'due date of return' relief applies to the employer's own contribution, not the employee's share.
Depreciation on a block: Depreciation = Rate × (Opening WDV + additions used ≥ 180 days − sale proceeds of the block) + ½ × Rate × additions used < 180 days; Closing WDV = Opening WDV + all additions − sale proceeds − depreciation. Sale proceeds are deducted from the block as a whole. If the proceeds are more than Opening WDV plus additions used ≥ 180 days, the excess reduces the additions used < 180 days, and the half-rate applies only to what is left. If the proceeds exceed the opening WDV plus all additions of the block, or all assets of the block are sold, the result is a short-term capital gain (or loss, where the block ceases with a shortfall) and no depreciation is allowed on that block. While the block still exists and proceeds are lower than opening WDV plus additions, there is no capital gain or loss.
Common depreciation rates (WDV): Plant and machinery (general) 15%; furniture 10%; buildings (residential) 5%; other buildings 10%; computers and software 40%; intangibles 25%; Rates change by block and notification. Check the rate table given in the question or your supplied text.
Presumptive income for eligible business: Deemed profit = 8% of turnover (6% on amounts received by account payee cheque or draft or through electronic modes, not in cash); Available only if turnover is within the limit and the assessee is eligible. Resident individuals, HUFs and partnership firms (not LLPs) are the usual eligible group. Income is computed at the stated percentage. Normal business deductions, including depreciation, are deemed allowed, and the WDV of assets is reduced as if depreciation had been claimed. No deduction for unabsorbed depreciation or business loss can be claimed during the presumptive years, but unabsorbed depreciation and losses of earlier years remain eligible for carry forward. Check the current turnover limits.
Presumptive income for specified professionals: Deemed profit = 50% of gross receipts; Applies to specified professions within the prescribed receipts limit. The assessee may claim lower profit only by meeting books and audit conditions.
Section 115BAA company: Tax at 22% plus surcharge of 10% and cess of 4% (effective rate 25.168%); no MAT; certain deductions and additional depreciation not allowed; The option is irrevocable once exercised. Unabsorbed additional depreciation and losses attributable to the deductions that are disallowed under this regime cannot be carried forward or set off.

How to solve Profits and Gains of Business or Profession questions

Use the same sequence for every business income question. It keeps your answer in the format examiners expect and stops you from missing hidden items.

1Read the facts and list each item separately with its amount. Note the assessee type (individual, firm, company), the year and the regime it follows.
2Start with net profit as per the P&L. If the question gives gross receipts instead, build the profit first.
3Check each expense against the conditions: TDS compliance, cash payment, related party pricing, payment timing, and whether it is personal or capital in nature.
4Add back disallowed items and book depreciation. Deduct items taxable under other heads or exempt, even if they sit in the P&L.
5Compute tax depreciation by block: apply the 180-day rule, subtract sale proceeds, and watch for additional depreciation if the regime allows it.
6Apply specific deductions (for example, scientific research or other incentives) only if each condition is satisfied, and check any regime restriction such as 115BAA.
7Test presumptive eligibility. If the assessee opts in, the profit is the stated percentage. Check audit implications if declared profit is lower than the deemed rate.
8Present the final business income. Where a choice exists between regimes, compute both and recommend the lower tax, with a one-line reason.

Quickest way: Four-pass scan for a business income case

When to use it: Use when the case study is long and you have about 10 to 12 minutes per sub-part. It helps you decide first what is a tax issue and what is noise.

Pass 1: Underline every payment, with date, mode, payee and amount. These decide cash limit, TDS and 43B issues.
Pass 2: Mark every credit in the P&L that is not business income, such as rent, interest, capital gain or exempt receipts.
Pass 3: Write the block opening WDV, additions with dates, and sales. Compute depreciation in a small table.
Pass 4: Check regime hints such as 'opted for lower tax rate', turnover limits and digital receipts. Then total everything in one reconciliation list.

Common mistakes in Profits and Gains of Business or Profession

Applying the cash payment limit to the total payments in a year or to each bill instead of per person per day.
Students remember the ₹10,000 figure but not the exact test.
Fix: Group payments by payee and date. Disallow the whole day's amount for that payee if it is above the limit, and check the transport operator exception.
Disallowing a 43B item that was paid after year-end but before the due date of the return.
Students think the item must be paid within the financial year.
Fix: Tax, duty, cess, fee, bonus or commission to employees, employer contributions, and interest on loans from banks and notified institutions are allowed in the accrual year if paid by the due date of filing the return. Leave encashment is different: it is allowed only in the year of actual payment. The employee's PF or ESI contribution is governed by section 36(1)(va) and must be deposited by the due date under the relevant Act.
Forgetting to deduct income taxed under another head that is credited in the P&L.
Students focus only on add-backs.
Fix: Scan the credit side of the P&L for rent, interest, dividends and capital gains. Deduct them here and tax them under their own heads.
Computing depreciation asset by asset, or giving full-year depreciation on an asset used for fewer than 180 days.
The block system is easy to mix up with the accounting method.
Fix: Work with the block. Give half the rate on additions used for less than 180 days. Subtract sale proceeds before applying the rate.
Using book depreciation as the allowed deduction.
The P&L already shows a depreciation figure.
Fix: Always add back book depreciation and replace it with tax depreciation.
Claiming additional depreciation or deductions for a company that opted for 115BAA.
Students apply normal provisions out of habit.
Fix: Check the regime first. State clearly in your answer which items are denied because of the 115BAA option.

Worked examples

Example 1

Case: Sunrise Traders Pvt Ltd (a domestic company under normal provisions) shows net profit of ₹18,00,000 in its P&L. The following were debited or credited: (a) cash payment of ₹45,000 on one day to one supplier for goods; (b) employees' share of PF ₹60,000, deposited after the due date under the PF Act; (c) income tax of ₹1,50,000 debited to P&L; (d) bonus of ₹2,00,000 to employees, provided in the year and paid before the due date of filing the return but after the end of the year; (e) bank interest of ₹40,000 credited to P&L, taxable as other sources. Ignore depreciation. Compute business income.

Show the solution

Start with net profit: ₹18,00,000.
(a) Cash payment of ₹45,000 to one person in one day is above ₹10,000 and the payee is not a transport operator. The expense is disallowed in full. Add ₹45,000.
(b) Employees' PF contribution deposited after the due date under the relevant Act is not allowed, even if paid before the return due date. Add ₹60,000.
(c) Income tax is not an allowable business expense. Add ₹1,50,000.
(d) Bonus to employees is a 43B item. It was paid after year-end but before the due date of filing the return, so it is allowed in the year it was provided. No add-back.
(e) Bank interest is taxable under other sources, so deduct ₹40,000 from business income.
Total: 18,00,000 + 45,000 + 60,000 + 1,50,000 − 40,000 = ₹20,15,000.

Answer: Business income = ₹20,15,000 (bank interest of ₹40,000 is taxed separately under other sources; the bonus is allowed in this year because it was paid by the return due date).

Example 2

Case: Meridian Engineering, a resident firm under normal provisions, has a block of plant and machinery (rate 15%) with opening WDV of ₹10,00,000. During the year it bought machine A for ₹4,00,000 on 1 September (put to use the same day) and machine B for ₹2,00,000 on 15 December (put to use the same day). It sold an old machine from the block for ₹1,00,000. Ignore additional depreciation. Compute depreciation and closing WDV.

Show the solution

Machine A was used from 1 September to 31 March, which is 212 days. This is 180 days or more, so the full rate applies.
Machine B was used from 15 December to 31 March, which is fewer than 180 days, so only half the rate (7.5%) applies.
Amount eligible for full rate = Opening WDV 10,00,000 + Machine A 4,00,000 − sale 1,00,000 = ₹13,00,000. The proceeds are smaller than this pool, so they do not reduce the half-rate pool.
Depreciation at 15% on ₹13,00,000 = ₹1,95,000.
Depreciation at 7.5% on ₹2,00,000 = ₹15,000.
Total depreciation = 1,95,000 + 15,000 = ₹2,10,000.
Closing WDV = 10,00,000 + 4,00,000 + 2,00,000 − 1,00,000 − 2,10,000 = ₹12,90,000.
The block still exists and the sale proceeds are lower than the opening WDV plus additions of the block, so there is no capital gain or loss.

Answer: Depreciation for the year = ₹2,10,000; closing WDV of the block = ₹12,90,000.

Exam tips

In case studies, tax facts are mixed with audit and Ind AS facts. Pull out the dates, modes of payment and payees first, because most disallowances depend on them.
Show a clean reconciliation list in written answers. Give a one-line reason against each add-back, since marks go to each correct adjustment.
If the question states the regime (for example, 115BAA), say at the start which deductions are denied. Examiners test this directly.
Check the 180-day rule and the sale proceeds for every depreciation problem. These two points are the most common source of lost marks.
In MCQs, test the exact condition in the option (per person, per day, due date of return). Wrong options usually change one such detail.

Practice questions from Direct Tax Laws & International Taxation

Profits and Gains of Business or Profession in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA IntermediateComputation of Income from Business or Profession

Profits and Gains of Business or Profession: frequently asked questions

How do I remember the cash payment and 43B rules for the exam?

For cash payments, remember: one person, one day, above ₹10,000, and the whole amount is disallowed. For 43B, remember that the expense is deductible in the accrual year if paid by the due date of the return, and otherwise in the year of actual payment. Practise with three or four cases in a row until the test becomes automatic.

How is depreciation computed under the Income-tax Act?

Depreciation is allowed on the block of assets, not on single assets, at the prescribed WDV rate. Include opening WDV and additions, subtract sale proceeds, and give half the rate on additions used for fewer than 180 days. Book depreciation is ignored.

When should a company choose 115BAA over normal provisions?

Compare the tax under both. 115BAA gives a lower rate and no MAT, but it removes many deductions, incentives and additional depreciation. It usually suits companies with few deductions and no large carried-forward benefits. In an exam, compute both and recommend the lower figure.

Does presumptive taxation remove the need to compute disallowances?

For eligible assessees who opt in, income is computed at the stated percentage and normal business deductions, including depreciation, are deemed to be allowed. This means you do not work through individual disallowances, and unabsorbed depreciation cannot be separately claimed. Always check turnover limits and eligibility first.