Income Tax: Profit and Gains of Business or Profession (PGBP)

Comprehensive review flashcards covering charging provisions, depreciation, scientific research, specified businesses, general deductions, disallowances, payment-basis deductions, maintenance of accounts, tax audit, presumptive taxation, and partnership provisions under PGBP.

Which section of the Income-tax Act serves as the charging section for Profit and Gains of Business or Profession (PGBP)?

Section $28$.

Under Section $28$, how is profit arising from the sale of an import entitlement licence taxed?

It is taxable as business income under the head PGBP.

Under Section $28$, under which head of income are cash compensatory support and duty drawback received by an exporter taxable?

They are taxable under the head PGBP.

Under Section $28$, how is any amount received under a Key-Man insurance policy treated for tax purposes?

It is taxable under the head PGBP.

Are gifts, benefits, or perquisites arising due to business or profession taxable under PGBP if they are in kind or non-convertible into money?

Yes, they are taxable under PGBP whether convertible into money or not, whether in cash or in kind, or partly in cash and partly in kind.

To what extent are interest, salary, bonus, or commission received by a partner from a partnership firm taxable under PGBP?

To the extent they are allowed as a deduction to the firm under Section $40(b)$.

How are non-compete fees received for not carrying out any business activity or not sharing patents, copyrights, or know-how taxed?

They are taxable under PGBP u/s $28$.

Under Section $28$, how is income derived by a trade, professional, or similar association from specific services performed for its members taxed?

It is taxable under the head PGBP.

What is the taxable value when inventory is converted into a capital asset, and under which head is it charged?

The Fair Market Value ($\text{FMV}$) of the inventory as on the date of conversion is taxable under PGBP.

How is compensation received in connection with the termination or modification of a business contract treated u/s $28$?

Any such compensation, whether revenue or capital in nature, is taxable under PGBP.

What is the tax treatment of income from letting out a residential house (or part thereof) by the owner, as per the Finance Act 2024?

It shall not be taxable under PGBP and shall be taxable under "Income from house property" ($\text{FA } 24$ w.e.f. $\text{AY } 25\text{-}26$).

How does the Income-tax Act define a "Speculation Business"?

A transaction in which a contract for the purchase or sale of any commodity (including stocks and shares) is periodically or ultimately settled otherwise than by actual delivery or transfer.

Are hedging contracts in respect of raw materials, merchandise, or stocks and shares treated as speculative transactions?

No, they are deemed not to be speculative transactions.

Is trading in commodity derivatives through a recognised stock exchange on which CTT is paid treated as speculative?

No, it is not deemed to be a speculative transaction (and CTT applicability is not required for agricultural commodity derivatives from $\text{AY } 19\text{-}20$).

Which sections govern the computation of income under the head PGBP as per Section $29$?

Provisions contained in Sections $30$ to $43\text{D}$.

Under Section $30$, can an owner claim a deduction for rent paid on a building used for business?

No, rent is not allowed to an owner; it is only allowed to a tenant.

Under Section $30$, are rates and taxes of a building used for business allowed to an owner and a tenant?

Yes, rates and taxes are allowed as a deduction to both owner and tenant.

How are capital repairs to a building treated for an owner versus a tenant under Section $30$ and Section $32$?

Capital repairs are not allowed as an immediate deduction for either; for a tenant, capital expenditure is treated as a Deemed Building and depreciation is allowed u/s $32$.

Under which section is rent of Plant & Machinery and Furniture paid by a tenant deductible?

Under Section $37$ (as Section $31$ covers only insurance and repairs).

Are capital repairs on Plant & Machinery and Furniture deductible under Section $31$?

No, capital repairs are not allowed as a deduction u/s $31$; they are capitalised to the cost of the asset.

What are the two basic conditions required to claim depreciation under Section $32$?

$(1)$ The assessee should be the owner (wholly or partly) of the asset, and $(2)$ The asset should be used for business/profession purposes (active or passive).

Can a beneficial owner claim depreciation under Section $32$?

Yes, depreciation is allowed if the assessee is the beneficial owner.

In case of a lease, who is entitled to claim depreciation according to the CBDT circular?

Depreciation is always claimed by the lessor, whether it is a financial lease or an operating lease.

When can an assessee purchasing an asset on Hire Purchase start claiming depreciation?

From the beginning, assuming the assessee is the owner from the beginning, even though legal ownership passes after the last instalment.

Can depreciation be claimed on standby machinery and emergency spares that are not yet put to use?

Yes, depreciation is allowed on standby machinery and emergency spares even if they are only ready for use and not put to use.

What are the four classes of depreciable assets under Section $32$?

Tangible Assets: Class I (Building), Class II (Furniture), Class III (Plant & Machinery); Intangible Assets: Class IV.

Are animals and tea bushes included in depreciable assets under Section $32$?

No, animals and tea bushes are not included.

Is claiming depreciation optional or mandatory under the Income-tax Act?

It is mandatory to claim depreciation for all assessees.

What is the depreciation rate for buildings used for residential purposes (except hotels)?

$5\%$.

What is the depreciation rate for buildings used for general commercial/other purposes?

$10\%$.

What is the depreciation rate for temporary or wooden structures?

$40\%$.

What is the depreciation rate for Furniture and Fittings (including electrical fittings)?

$10\%$.

What is the general depreciation rate for motor vehicles under Plant & Machinery?

$15\%$.

What is the depreciation rate for motor vehicles acquired and put to use between $23.08.2019$ and $31.03.2020$?

$30\%$.

What is the normal depreciation rate for motor vehicles (lorries, buses, taxis) used in a car hire business?

$30\%$.

What is the depreciation rate for motor hire vehicles (lorries, buses, taxis) acquired and put to use between $23.08.2019$ and $31.03.2020$?

$45\%$.

What is the depreciation rate for ships, vessels, and speed boats?

$20\%$.

What is the depreciation rate for aeroplanes and aeroengines?

$40\%$.

What is the depreciation rate for computers and computer software?

$40\%$.

Are mobile phones eligible for depreciation at the rate of $40\%$ as computers?

No, mobile phones are not computers, hence depreciation @ $40\%$ is not eligible.

What is the depreciation rate for computer accessories such as UPS, printers, and scanners?

$40\%$.

What is the depreciation rate for books (including annual publications or library books)?

$40\%$.

What is the depreciation rate for pollution control equipment?

$40\%$.

What is the depreciation rate for windmills and related equipment installed on or after $01/04/2014$?

$40\%$ (compared to $15\%$ if installed before $01/04/2014$).

What is the depreciation rate for renewable energy devices (including electric vehicles) and oil wells?

Renewable energy devices: $40\%$; Oil wells: $15\%$.

What is the depreciation rate for intangible assets under Section $32$?

$25\%$.

Is goodwill of a business or profession eligible for depreciation as an intangible asset?

No, goodwill of a business or profession is excluded from intangible depreciable assets.

What does "Plant" include under Section $43(3)$ of the Income-tax Act?

Ships, vehicles, books, scientific apparatus, and surgical equipment used for the business or profession.

What assets are specifically excluded from the definition of "Plant" under Section $43(3)$?

Tea bushes, live-stock, buildings, and furniture.

Which method of depreciation can assessees engaged in the generation or generation and distribution of power follow?

They have the option to follow either the Straight Line Method ($\text{SLM}$) or the Written Down Value ($\text{WDV}$) method.

Which method of depreciation must all assessees other than power generation units follow?

They must always follow the Written Down Value ($\text{WDV}$) method under the block of assets system.

What is the statutory definition of a "Block of Assets"?

A group of assets falling within the same class of assets that have the same rate of depreciation.

In computing depreciation under the Block of Assets method, what three categories of acquired assets are added to Opening WDV?

$(1)$ Put to use for $180\,\text{days}$ or more, $(2)$ Put to use for less than $180\,\text{days}$, and $(3)$ Acquired but not put to use.

What amount is deducted under "Money Receivable" when an asset in a block is sold or destroyed?

The actual sale price or insurance compensation/scrap value received (not the Fair Market Value).

When an assessee transfers a building from a block, is the actual sale price or the Stamp Duty Value (SDV) reduced from the block?

The actual sale price is reduced from the block (SDV is considered only when computing capital gains u/s $50$).

What is the depreciation rate allowed on an asset acquired during the current PY and put to use for less than $180\,\text{days}$?

Half the normal rate of depreciation ($50\%$ of normal depreciation).

If an asset is acquired in PY $2025\text{-}26$ but put to use in PY $2026\text{-}27$ for less than $180\,\text{days}$, what rate of depreciation applies in PY $2026\text{-}27$?

Full rate of depreciation, because the $50\%$ restriction applies only in the year of acquisition.

Is depreciation allowed on an asset acquired during the current PY but not put to use in that PY?

No depreciation is allowed, but the asset must still be added to the Block of Assets.

What cut-off date determines whether an asset acquired during the previous year is put to use for $180\,\text{days}$ or more in a non-leap year?

Put to use on or before 3rd October ($180\,\text{days}$ or more); put to use on or after 4th October (less than $180\,\text{days}$).

How is the WDV of assets transferred in a slump sale treated in the depreciation schedule?

The WDV of the assets transferred in the slump sale (computed assuming they were the only assets in the block) is deducted from the block.

What nature of capital gain or loss always arises on the transfer of depreciable assets under Section $50$?

It is always Short-Term Capital Gain ($\text{STCG}$) or Short-Term Capital Loss ($\text{STCL}$).

What is the tax consequence under Section $50$ when all assets of a block are transferred for a sale value less than (Opening WDV + Actual Cost of additions)?

Short-Term Capital Loss ($\text{STCL}$) arises, the block ceases to exist, and no depreciation is allowed.

What is the tax consequence under Section $50$ when all assets of a block are transferred for a sale value greater than (Opening WDV + Actual Cost of additions)?

Short-Term Capital Gain ($\text{STCG}$) arises, and no depreciation is allowed.

What happens if some assets in a block are transferred, but the sale price exceeds the total of Opening WDV plus additions?

The excess is taxable as $\text{STCG}$, the WDV of the block becomes Nil, and no depreciation is allowed.

Can the Written Down Value ($\text{WDV}$) of a Block of Assets ever be negative?

No, a block can be Nil, but never negative.

When some assets in a block are sold and the sale price is less than (Opening WDV + additions), what are the depreciation and capital gain consequences?

Normal depreciation is allowed on the remaining positive WDV, and no capital gain arises.

If Opening WDV is $₹ 6,00,000$, additions are $₹ 2,00,000$, and all $7$ assets are sold for $₹ 5,20,000$, what is the result?

Short-Term Capital Loss ($\text{STCL}$) of $₹ 2,80,000$ and no depreciation is allowed.

If Opening WDV is $₹ 6,00,000$, additions are $₹ 2,00,000$, and $4$ out of $7$ assets are sold for $₹ 9,10,000$, what is the result?

Short-Term Capital Gain ($\text{STCG}$) of $₹ 1,10,000$, WDV becomes Nil, and no depreciation is allowed.

Who is eligible to claim Additional Depreciation under Section $32(1)(\text{iia})$?

Assessees engaged in the business of manufacture of any article or generation, transmission, or distribution of power.

What is the normal rate of Additional Depreciation on eligible Plant & Machinery?

$20\%$.

Can an assessee who opts for Section $115\text{BAC}$ claim Additional Depreciation under Section $32(1)(\text{iia})$?

No, Additional Depreciation is not available if the assessee opts for Section $115\text{BAC}$.

Are second-hand Plant & Machinery eligible for Additional Depreciation?

No, second-hand Plant & Machinery are specifically excluded.

Are Plant & Machinery installed in an office premises or residential accommodation eligible for Additional Depreciation?

No, they are excluded from Additional Depreciation.

Are ships, aircraft, and transport vehicles eligible for Additional Depreciation?

No, ships, aircraft, and transport vehicles are excluded.

How is Additional Depreciation treated if an eligible asset is put to use for less than $180\,\text{days}$ in the year of acquisition?

$10\%$ is allowed in the current year, and the remaining $10\%$ is allowed in the immediately succeeding previous year.

Is the business of printing or printing and publishing eligible for Additional Depreciation?

Yes, CBDT clarified that printing or printing and publishing is treated as a manufacturing business eligible for Additional Depreciation.

Can a power unit opting for the Straight Line Method (SLM) claim Additional Depreciation?

No, Additional Depreciation is allowed only if the assessee opts for the WDV method.

Is a forklift truck used inside a factory eligible for Additional Depreciation?

Yes, a forklift truck used in a factory is not treated as a road transport vehicle, making it eligible for Additional Depreciation.

Which expenditures are added to the purchase cost of an asset to determine Actual Cost u/s $43(1)$?

Installation charges, transportation expenses, trial/test run expenses, non-creditable taxes and duties, and interest on borrowing up to the date the asset is put to use.

How is the amount received from the sale of trial run products treated in computing Actual Cost u/s $43(1)$?

It is deducted from the Actual Cost of the asset.

How are government subsidies or grants received for the acquisition of an asset treated under Section $43(1)$?

They are deducted from the Actual Cost of the asset.

What is the payment threshold under Section $43(1)$ beyond which non-electronic/cash payments are excluded from Actual Cost?

Any expenditure paid to a single person in a single day otherwise than by account payee cheque/DD/ECS exceeding $₹ 10,000$ is excluded from Actual Cost.

What is the Actual Cost of an asset previously used for scientific research when brought into regular business u/s $43(1)$?

Actual Cost = Nil (because $100\%$ deduction was already claimed u/s $35$).

What is the Actual Cost when stock-in-trade is converted into a capital asset and used for business or profession?

The Fair Market Value ($\text{FMV}$) on the date of conversion.

What is the Actual Cost of an asset acquired by way of gift, will, or inheritance under Explanation 3 to Section $43(1)$?

The actual cost to the previous owner less depreciation already allowed to the previous owner.

How is the Actual Cost determined when an asset is acquired with the main intention of claiming higher depreciation?

An amount determined by the Assessing Officer with the prior approval of the Joint Commissioner (normally the FMV).

What is the Actual Cost on re-acquisition of an asset that was previously sold by the assessee?

The lower of: $(1)$ WDV at the time of sale, or $(2)$ Reacquisition cost.

What is the Actual Cost when an asset is purchased and leased back to the same person?

The Written Down Value ($\text{WDV}$) of the previous owner (lessee) at the time of transfer.

How is the Actual Cost computed when a building originally used for personal purposes is brought into business?

Original cost less notional depreciation from the date of acquisition to the date of bringing it into business at current rates.

What is the Actual Cost of an asset brought into India by a Non-Resident for use in his business or profession?

Actual cost minus depreciation calculated at rates in force as if the asset had been used in India since its acquisition.

What is the Actual Cost to the transferee if an asset deducted u/s $35\text{AD}$ is transferred to a non-specified business after $8\,\text{years}$?

Actual cost shall be Nil as per the Explanation to Section $43(1)$.

What rule does Explanation 7 to Section $43(6)$ provide for computing WDV in composite business and agricultural income cases (e.g., Tea)?

Depreciation must be computed as if the entire income were taxable under PGBP, and the total depreciation is deemed to have been actually allowed.

If a tea business earns $₹ 15\,\text{lakh}$ income before depreciation, with depreciation of $₹ 1\,\text{lakh}$, how much depreciation reduces the block WDV?

The entire $₹ 1,00,000$ is deducted from the block to arrive at WDV, even though only $40\%$ of income is taxed under PGBP.

What depreciation system is applied to power units following the Straight Line Method (SLM)?

The Individual Asset System (profit and loss is calculated on every individual sale).

Under Section $32(1)(\text{iii})$, what is "Terminal Depreciation" for a power unit on SLM?

The deficiency when an asset is sold for less than its WDV, allowable as a deduction debited to the Profit & Loss Account.

What is a "Balancing Charge" under Section $41(2)$ for a power unit on SLM?

The excess of sale proceeds over the WDV, up to the original cost, taxable as business income under PGBP.

For an SLM power unit asset costing $₹ 100$ with WDV $₹ 80$ sold for $₹ 117$, what are the PGBP and Capital Gain implications?

Balancing charge of $₹ 20$ ($100 - 80$) is taxable under PGBP u/s $41(2)$, and $₹ 17$ ($117 - 100$) is taxable as STCG u/s $50\text{A}$.

How is depreciation computed when an asset is used partly for business ($60\%$) and partly for personal purposes ($40\%$)?

Deduction is restricted to the proportionate part ($60\%$) determined by the Assessing Officer, and only that allowed amount is deducted from the block.

For how many years can Unabsorbed Depreciation under Section $32(2)$ be carried forward?

For an indefinite number of years until it is fully set off.

Against which head of income can Unabsorbed Depreciation NOT be set off?

It can be set off against any head of income except "Salaries".