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General Principles - for Deductions Allowed from Gross Income of Business and Professions

Sections 30 to 37 of Income-tax Act provide for the deductions to be allowed while computing profit under the head ‘Business or Profession’. There are numerous types of expenses varying from business to business and according to the nature of the unit. Under these sections, an effort was made to enlist every type of expense. But this list is not the final list; any other expenditure if at all incurred for earning a particular income, the same shall be allowed as deduction to calculate the real profit. The admissibility of an item of expenditure is governed by the following general principles. These are

1.   Any expenditure incurred in consideration of commercial expediency and on the basis of the principles of ordinary commercial trading is allowed as deduction.

2.   Commercial expediency simply means the expenditure made by prudent man for the purpose of his business, in the best interest of his business or any other expenditure incurred totally, and exclusively for the purpose of the business.

3.   Any other expenditure which was incurred in the carrying on of the business or profession and is incidential to such business or profession.

4.  Only those expenses are allowed which are not prohibited, expressed or implied.

5.   In the case of a new business, accounting year commences on the date when the business is set up. Expenditure incurred prior to setting up cannot be allowed as it falls outside the accounting year. So deductions are made regarding those expenses only which are incurred in the relevant accounting year. Each accounting year is separate and distinct one.

6.   Deduction is to be made from the business for which the expenses were made. In case of more than one business, the expenses of one cannot be charged from the other in any case.

7.  The expenditure of a business which was discontinued before the commencement of the accounting year cannot be charged from the existing business. A general nile in such cases is that the expenses of a dead business become capital loss.

8.  In case of a single transaction all expenses are allowed whether incurred in that accounting year or earlier to that.

9.   A partner is allowed a deduction from his share of income from the firm’s profit such expenses which he might have incurred in earning this partnership profit.

10.  Only expenses are allowed to be deducted while the loss of any type is not allowed without considering its nature.

11.   Capital expenditure is not allowed.

12.  Expenditure which is deductible for income-tax purposes is one which is towards a liability actually existing at the time but putting aside a money which may become expenditure on the happening of an event is not expenditure.

13.  Deduction will be allowed in case of only those expenses which have been incurred for the purposes of the assessee’s own business.

14.  Any amount previously allowed as deduction, if the same is recovered, will be taxable in the year in which it is so recovered.

15.  The onus of proof that a particular expenditure is permissible as a deduction falls upon the assessee.


More Topics .... " Business or Profession"
Definition of the Head ' Business or Profession'-[Sec.-28]
Compensation Received as Business Income(Section-28(ii))]
Income of a Trade or Professional Association [Section 28(iii)]
Income from Export Incentives is chargeable to Income Tax
Any Amount Received Under certain Agreement for not to Carry on Business [Section 28(va)]
Speculation Business [Explanation to Section 28]
Profit Earned from an Illegal Business
Transfer of certain Assets Specified u/s 35AD in certain circumstances [Section 28(vii)]
Certain Incomes relating to business but not taxable under the head ‘Profits Gains of Business or Profession .
Computation of Income of Business or Profession - General Important Points
General Principles - for Deductions Allowed from Gross Income of Business and Professions
Deductions from Gross Income of Business or Profession [ Section 30 to 44DB]
Expressly Admissible Deductions from Gross Income from Business or Profession [Section 30-36]
Expenditure Incurred in the Field of Scientific Research [Section 35]
Expenses on Research Activities carried on by the assessee himself
Contribution to Approved Institutions to carry on Research is Allowed as Weighted Deductions for Calculating Profits and Gains of Business or Professions.
Expenditure incurred on the acquisition of Patents Rights or Copy Rights [Section 35A] [Applicable for expenditure incurred before 1-4-1998]
Expenditure on know-how [Section 35 AB] [Applicable for expenditure incurred before 1-4-1998]
Expenditure for obtaining License to operate Telecommunication Services [Section 35 ABB]
Expenditure on eligible projects or schemes [Section 35 AC]
Deduction in respect of expenditure incurred on setting up of a Specified Business [Sec. 35AD]
Any amount given to an institution or association [Section-35CCA]
Expenditure on Notified Agricultural Extension Project [Section-35 CCC] [w.e.f. A.Y. 2013-14]
Expenditure on Notified Skill development project [Section-35 CCD] [w.e.f. A.Y. 2013-14]
Amortisation of Certain Preliminary Expenses [Section 35D]
Expenditure on demerger or amalgamation [Section 35DD]
Amortisation of Expenditure Incurred Under Voluntary Retirement Scheme [Section 35DDA]
Expenditure on Prospecting etc., for certain Minerals [Section 35E]
Other Deductions Allowed to Compute Income from Business or Profession   [Section-36]
Interest on Borrowed Capital [Sec. 36(1)(iii)].
Deduction of discount on Zero Coupon Bond [Section 36(iiia)]
Contribution to Provident and Superannuation Fund [Sec. 36(1)(iv)].
Employee’s contribution towards staff welfare schemes [Sec. 36(1)(va)]
Bad debts [Sec. 36(1)(vii)]
Bad debts of Banks, financial institution and industrial investment corporation etc. [Section 36(1)(viia)]
Special Reserve Created and Maintained by Financial Corporation [Section 36(1)(viii)].
Expenditure on Family Planning [Section-36(1)(ix)].
General Or Allowable Deductions [Section 37]
Commission earned by the agents of Life Insurance Corporation, Unit Trust of India, Post Office or Mutual Funds
Legal Expenses in the Interest of Business are Allowable Expenses
Losses incidental to Business Allowed to be Debited.
Expenses Expressly Disallowed In the Case of any ‘Assessee’ [ Section-40a]
Expenses Expressly Disallowed In the Case of any Firm [Section 40(b)]
Expenses Expressly Disallowed In General Cases [Section 40(b)]
Disallowing of certain Expenses under certain circumstances like ‘Payments to Relatives’
Payments exceeding ` 20,000 by cash/bearer cheque [Section 40A (3)].
Provision for the Payment of Gratuity – [Section-40A(7)]
DEEMED PROFITS Under Profits and Gains of Business or Professions [Section 41]
VALUATION OF STOCK for Profit and Gains of Business or Professions
Deduction Of Certain Payments Only If Actually Paid [Section 43B]
Maintenance Of Accounts By Certain Persons Carrying On Profession Or Business. [Sec. 44AA]
Compulsory Audit For The Non-Corporate Assessees [Section-44 AB]
Computation of Income on Estimated Basis [Section 44AD]
Profit from the business of carriage of goods for truck owners [Section 44 AE]
Special provision for computation of income from royalties in case of nonresidents [Section 44DA]
Partly Agricultural and Partly Business Income
Adjustment In The Profit And Loss A/C Prepared By The Assessee
Computation of Profits and Gains of a Non-Resident from Shipping Business— [Section 44B]
Computation of Profits and Gains of business of Oil Exploration [Section 44BB]
Computation of Profits and Gains of the Business of operation of Aircrafts by Non-Resident [Section 44 BBA]
Computation of Profits of Foreign Enterprises [Section 44BBB]
Ceiling Limits in respect of Head Office Expenses [Section 440]
Special Provisions in case of Income of Public Financial Institutions etc. [Section 43D]
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