PGBP Master Solution
Computation of Total Income of SS Ltd. for the A.Y. 2024-25
Particulars Amount (₹)
Income from house property
Rental income [Rs. 60,000*12m] 7,20,000
Less: Municipal Taxes paid (8,000)
Net Annual Value 7,12,000
Less: Deduction u/s 24 (30%) (2,13,600)
Income from House Property 4,98,400
Profits and gains of business and profession
- Net profit from business [See working note 1] 234,61,500
- Profits and gains from Speculation business -
- Profits and gains from the business of setting up a
warehouse for storage of edible oil
Profit from setting up of warehouse (before providing for 5,00,000
depreciation under section 32)
Less: Depreciation as per Income-tax Rules, 1962 on 1,20,000 3,80,000
construction of warehouse [₹12,00,000 x 10%] [Since it is
not a specified business under section 35AD]
- Profit and gains from the business of setting up a
warehouse for storage of agricultural produce
Profit from setting up of warehouse (before providing 15,00,000
deduction u/s 35AD)
Less: Deduction under section 35AD [100% of capital 23,00,000
expenditure is allowable as deduction, since setting up and
operating a warehousing facility for storage agricultural
produce is a specified business, where operations are
commenced on or after 01.04.2009]
Loss from the specified business under section 35AD to be (8,00,000) -
carried forward indefinitely for set-off against profits of
the specified business, assuming that the firm has filed
the return of income on or before the due date u/s 139(1)
Total Profit from business or profession 238,41,500
Capital Gain
- Additional compensation received from State Government - -
[Since the additional compensation has been received
pursuant to an interim order of the Court, the same would
be deemed as income chargeable to tax under the head
“Capital Gains” in the year of final order as per section
45(5). Consequently, such compensation would not be
taxable during P.Y. 2023-24].
- Profit on sale of building to 100% Indian subsidiary -
[Short-term capital gains arise on sale of building held for
less than 24 months. However, in this case, since the
transfer is to a 100% subsidiary company and the
subsidiary company is an Indian company, the same would
not constitute a transfer for levy of capital gains tax as
per section 47(iv)]
- Sale of shares of Yara Ltd
- Original shares [250 * (2050 – 1980)] 17,500
- Bonus shares [250 * (2050 – 1980)] 17,500 35,000 35,000
Income from other sources
- Dividend income from specified foreign company 15,00,000
[Since M/s Kaveri Ltd. holds 26% or more equity shares in
foreign company, such foreign company is a specified
foreign company u/s 115BBD. Expenditure on earning
dividend income from specified foreign company is not
allowable as deduction.]
- Interest on income tax refund 45,000 15,45,000
Gross Total Income
Deduction
- Deduction u/s 80G in respect of donation to Swachh 2,00,000
Bharat Kosh, assuming that the donation is otherwise than
by way of cash
- Deduction under section 80GGB (donation to political 50,000
party) [No deduction for donation to electoral trust in
cash]
- Deduction u/s 80M in respect of inter-corporate dividends 12,00,000
[being lower of ₹ 15 lakh, being dividend received from
specified foreign company, and ₹ 20 lakh, being dividend
distributed by M/s Kaveri Ltd. on or before the due date
specified u/s 139(1) of filing return of income]
- Deduction u/s 80JJAA [30% of (30*10*15000 + 14,49,000 (28,99,000)
3*5*22000)]
Total Income 230,20,900
Working Note:
1. Computation of Profit or gain from business or profession of SS Ltd for the AY 2024-25
Particulars Amount (in ₹)
Net profit as per Statement of profit and loss 200,00,000
Add: Difference in valuation of stock:
Overvaluation of opening stock [₹ 55,00,000 x 10/110] 5,00,000
Undervaluation of closing stock [₹ 54,00,000 x 10/90] 6,00,000 11,00,000
Add: Items debited but to be considered separately or to be disallowed
- Depreciation as per Companies Act 45,00,000
- Interest & borrowing cost included in Opening & Closing inventory 2,50,000
[Since the same have been included in the opening and closing
inventory, the difference between ₹ 9,50,000, being interest
included in opening inventory – ₹ 7,00,000, being interest included in
closing inventory, has to be added back]
- Employees’ contribution to EPF 2,60,000
[Since employees’ contribution to EPF has not been deposited on or
before the due date under the PF Act, the same is not allowable as
deduction as per Explanation 2 below to section 36(1)(va). Since the
same has been debited to Statement of profit and loss, it has to be
added back for computing business income]
- Employer’s contribution to EPF -
[As per section 43B, employers’ contribution to EPF is allowable as
deduction since the same has been deposited on or before the due
date of filing of return of income u/s 139(1). Since the same has
been debited to statement of profit and loss, no further
adjustment is necessary]
- Contribution towards NPS in excess of 10% of salary disallowed 21,000
[Contribution to the extent of 10% of salary (basic salary +
dearness allowance, if it forms part of pay for retirement benefits)
is allowable as deduction under section 36(1)(iva). In this case, ₹
90,000 (15% of ₹ 6,00,000) – ₹ 69,000 [10% of (₹ 6,00,000 + 50%
of 30% x ₹ 6,00,000)], would be disallowed]
- Municipal taxes in respect of let-out part of office premises 8,000
[Municipal taxes paid in respect of office premises, debited to
Statement of Profit and Loss has to be added back to compute
business income, since same is to be considered separately under
the head “Income from house property”]
- Loss from trading in shares [without delivery] 3,00,000
[Loss incurred on purchase and sale of shares of other companies
without delivery is a speculative transaction. Since the same is
debited to profit and loss account, the same is required to be
added back while computing business income]
- Payment of labour charges to A & Co., a sub- contractor, 3,00,000
without deduction of tax [30% of ₹ 10 lakh]
[Under section 40(a)(ia), 30% of any sum paid to any resident on
which tax is deductible is disallowed if tax is not deducted at
source. In this case, TDS provisions under section 194C are
attracted on labour charges which are shown separately in the
bills. Since tax has not been deducted on labour charges, 30% of
the expenditure shall be disallowed]
- Payment to share brokers for transaction in relation to equity 3,45,000
shares and commodity brokers for transaction in commodities
[Since the company is engaged in the manufacture business, it is
assumed that investment in equity shares and commodities is not
related to the business and such payment is not wholly and
exclusively for the purpose of assessee’s business. Since the said
payment has been debited to statement of profit and loss, the same
has to be added back]
- Fees paid to directors without TDS [30% of ₹1 lakh] 30,000
[Disallowance @ 30% would be attracted under section 40(a)(ia) for
non-deduction of tax at source from director’s remuneration on
which tax is deductible under section 194J]
- Payment to transport contractor -
[As per section 194C, no tax is required to be deducted at source
since the payment is to a transport contractor who opts for sec
44AE and he has given a declaration to that effect along with his
PAN. Hence, disallowance u/s 40(a)(ia) for non-deduction of tax at
source is not attracted. Also, since payment is made by account
payee cheque, no disallowance under section 40A(3) is attracted]
- Contribution to National Fund for Rural Development -
[Allowed as deduction u/s 35CCA while computing business income]
- Cash payment in excess of ₹ 10,000 [Disallowance u/s 40A(3) is 19,000
attracted in respect of expenditure, for which payment exceeding
₹ 10,000 in a day has been made in cash. Since expenditure of ₹
19,000 towards printing and stationery items is debited to the
statement of profit and loss, the same has to be added back.
However, payment of ₹ 22,000 to producer for dairy farming
products is not disallowed since it is covered under the exceptions
specified in Rule 6DD]
- Payment in cash to a goods transport operator -
[Rs. 32,000 paid to B & Co., a goods transport operator, in cash is
deductible while computing business income, as the disallowance
under section 40A(3) would be attracted in case of payment to a
transport contractor only when such cash payment exceeds Rs.
35,000. Since it is already debited to statement of profit and loss,
no further adjustment is required]
- Expenditure for transfer of carbon credits 35,000
[Income by way of transfer of Carbon Credits is chargeable to tax
u/s 115BBG at a flat rate. No deduction is allowed under any
provision of the Act in respect of any expenditure or allowance in
relation thereto. Since such expenditure is debited to the
statement of profit and loss, the same has to be added back]
- Bonus transferred to the trust 4,41,000
[The bonus would be allowable as deduction u/s 36(1)(ii), even
though the amount of bonus payable was initially remitted to the
trust created for the purpose of avoiding late payment of bonus,
provided actual payment of bonus is made to the employees on or
before the due date. However, since in the present case, actual
payment of bonus to employees is made on 30th December 2024,
after due date of filing return of income i.e., after 31st October
2024, deduction u/s 36(1)(ii) would not be allowable merely because
the amount was remitted to the trust before the stipulated due
date. Since the same has been debited to the profit and loss
account, it has to be added back]
- Loss due to hedging contract in respect of raw material -
[Loss due to hedging contract against future price fluctuations in
respect of import of raw material for manufacturing is not deemed
to be speculative transaction. Hence, the same is allowable as
deduction while computing income from manufacturing. Since the
same is already debited in statement of profit and loss, no further
adjustment is required]
- Marked to market losses 6,00,000
[Marked to market loss or other expected loss as computed in
accordance with the ICDS would be allowed as deduction u/s
36(1)(xviii). As per ICDS I, marked to market losses cannot be
recognized unless the recognition of such loss is in accordance with
the provisions of any other ICDS. Marked to market loss in respect
of an unsettled derivative contract is not allowable as deduction.
Since such losses have been debited to the profit and loss A/c,
they have to be added back for computing business income.]
- Regularization fee paid to Municipal Authorities 98,000
[Regularization fee paid to Municipal authorities to regularize the
deviation from the earlier approved construction plan in its on-going
projects is in the nature of penalty as it is paid to compound an
offence. Hence, it does not qualify for deduction u/s 37. As the
same has been debited to the profit and loss account, it has to be
added back]
- Secret commission paid during the year 50,000
[Explanation 1 below section 37(1) of Income-tax Act, 1961
provides that any expenditure incurred by an assessee for any
purpose which is an offence or which is prohibited by law, shall
not be deemed to have been incurred for the purpose of business
and no deduction shall be made]
- Expenditure on CSR Activities 1,45,000
As per Explanation 2 to section 37(1), expenditure incurred on CSR
activities is not deductible. Assuming that such expenditure is not
deductible under sections 30 to 36, the entire amount is liable for
disallowance. Since
- Donation to Swachh Bharat Kosh 2,00,000
[Not an allowable expenditure under section 37 since it is not laid
out wholly or exclusively for the purposes of business or profession.
Hence, the same has to be added back while computing business
income
- Expenditure on expansion of new business of retail petrol outlet 1,75,000
[Where expenditure is incurred on project not related to the
existing business and the project was abandoned without creating a
new asset, the expenses are capital in nature. Retail petrol outlet is
not related to the existing business of construction and real estate,
the expenditure incurred on setting up such business would not be
allowed as deduction. As the same has been debited to the
statement of profit and loss, it has to be added back]
- Advertisement in the souvenir of political party not allowable as per 50,000
section 37(2B)
- Donations to electoral trust (irrespective of mode of payment) 75,000
- Provision for doubtful debts [10% of ₹ 200 lakhs] 20,00,000
[Provision for doubtful debts is allowable as deduction under
section 36(1)(viia) only in case of banks, public financial institutions,
state financial corporations, state industrial investment
corporations and non-banking financial corporations. Such provision
is not allowable as deduction in the case of a manufacturing
company. Since the same has been debited to Statement of profit
and loss, it has to be added back for computing business income]
- Commission paid to recovery agent for realization of a debt: -
[Commission of ₹ 1 lakh paid to a recovery agent for realisation of a
debt is an allowable expense under section 37 as per DCIT v. Super
Tannery (India) Ltd. (2005). Since the same has been debited to
Statement of profit and loss, and tax has been deducted at source,
no further adjustment is required]
- Penalty for non-fulfilment of contract -
[Penalty for non-fulfilment of delivery conditions of a contract
for reasons beyond control is not for the breach of law but was
paid for breach of contractual obligations and therefore, is an
allowable expense]
- Penalty levied by the GST department for delayed filing of returns 50,000
not allowable as being paid for infraction of law
- Interest for delay in deposit of GST -
[Interest paid on delayed deposit of GST is not penal in nature but
is compensatory in character and is an allowable deduction u/s 37]
- Interest under section 234B for short payment of advance tax 60,000
[Any interest payable for default committed by assessee for
discharging his statutory obligations under Income-tax Act, 1961
which is calculated with reference to the tax on income is not
allowable as deduction under section 40(a)(ii). Since the same has
been debited to statement of profit and loss, it has to be added
back]
- Payment of advertisement expenditure 60,000
(i) ₹ 8,000, being the excess payment to a relative disallowed u/s
40A(2)
(ii) As the payment is made in cash and since the remaining amount
of ₹ 52,000 exceeds ₹ 10,000, 100% shall be disallowed under
section 40A(3)
- Sale of leather bag at a price lower than the fair market value -
[₹300x5,000]
[Section 40A(2) is attracted where assessee makes payment to
related person for expenditure and payment is excessive and
unreasonable. However, it is not attracted in case of sales. Hence,
there is no adjustment required.]
- Provision for gratuity 14,00,000
[Provision of ₹ 32 lakhs for gratuity based on actuarial valuation is
not allowable as deduction. However, actual gratuity of ₹ 18 lakhs
paid is allowable as deduction. Hence, difference has to be added
back to income [32 - 18]
- Expenditure on earning dividend income 50,000
[Allowability or otherwise of expenditure on earning dividend
income has to be considered under the head “IFOS". Since the said
expenditure has been debited to statement of profit and loss, the
same has to be added back]
- Free air ticket provided by a supplier 10,00,000
[Value of free air ticket provided by a supplier is taxable as
business income u/s 28, as the value of any benefit, whether
convertible into money or not, arising from business is taxable as
business income. Since the same is not credited to profit and loss
account, the same is required to be added while computing business
income]
- GST not refunded to customers out of GST refund received 2,00,000
from Government
[The amount of GST refunded to the company by the Government is
a revenue receipt chargeable to tax. Out of the refunded amount
of ₹ 5 lakhs, the amount of ₹ 3 lakh stands refunded to customers
and hence, would not be chargeable to tax. The balance amount of ₹
2,00,000 lying with the company would be chargeable to tax]
- Salary paid to employees through bearer cheques [Salary paid 13,50,000
through bearer cheques (9 employees x ₹ 15,000 x 10 months) will
attract disallowance u/s 40A(3) and hence, the same has to be
added back] [See Note at the end of the solution]
- Claim for Escalation price in respect of ongoing construction 6,50,000
contracts
[As per section 145B, claim for escalation of a price of ₹
8,50,000 would be deemed to be income of P.Y. 2023-24 i.e., the
previous year in which reasonable certainty of its realization is
received, being the year in which the judgment in the favour of
the company was given. Since only the sum of ₹ 2,00,000
received by the company till 31.3.2024 is included in the profit
and loss account, balance ₹ 6,50,000 has to be included in
business income]
147,22,000
Less: Items credited but not taxable or taxable under another head or
expenses allowed but not debited
- Waiver of sundry creditor’s outstanding amount -
[Waiver of ₹ 6,00,000 from the sundry creditors is a benefit in
respect of a trading-liability by way of remission u/s 41(1).
Since the amount is already credited to statement of profit &
loss, no adjustment is necessary]
- Rental income from letting out of office premises (Rental income 7,20,000
from letting out a part of the office premises is taxable under
“Income from house property”. Therefore, it has to be deducted
while calculating business income, since the income has been
credited to statement of profit and loss)
- Interest on bank fixed deposit -
[Since the fixed deposit has been made with a bank as margin
money for obtaining a guarantee required by a State Government
for a particular contract, interest income of such deposit is
inextricably linked to the business of the assessee and hence, has
to be treated as business income and not as income from other
sources. Since the same has been credited to the statement of
profit and loss, no adjustment is required]
- Amount received from Adidas Ltd as non-compete fees -
Amount received for agreeing not to carry on any business
relating to computer software in India for the next five years is
chargeable to income-tax under the head “PGBP”. And hence no
adjustment required.
- Transfer of Carbon Credits chargeable u/s 115BBG -
[Income by way of transfer of Carbon Credits chargeable under
section 115BBG can be treated as business income or income from
other sources, depending upon the facts of the case. In this case,
since the question mentions that Suraj Industries Ltd. is engaged
in production and marketing of diversified products, it is logical to
assume that the same is in the nature of business income. Since the
amount of ₹ 4 lakh has already been credited to statement of
profit and loss, no further adjustment is necessary]
- Profit from hedging contract 3,00,000
[Hedging contract is entered into for safeguarding against any loss
that may arise due to currency fluctuation. The profit from such
contract entered into for meeting loss in foreign currency
payments towards imported printing machinery has to be adjusted
against the cost of machinery. Since the said profit has been
credited to the statement of profit and loss, the same has to be
deducted while computing business income]
- Additional compensation received from State Government in 5,00,000
respect of land
[Since the additional compensation has been received pursuant to
an interim order of the Court, the same would be
deemed as income chargeable to tax under the head “Capital Gains”
in the year of final order as per section 45(5). Since the
compensation has been credited to the statement of profit and
loss, the same has to be deducted while computing business
income”]
- Bad debt recovered [The deduction of bad debt allowed u/s 36 10,00,000
was Rs. 12 lakhs out of the total debt of Rs. 22 lakhs; Since the
amount not written off as bad debt is Rs. 10 lakhs (Rs. 22 lakhs -
Rs. 12 lakhs) while the amount recovered in respect of such debt is
Rs. 11 lakhs, only the excess sum of Rs. 1 lakh would be chargeable
to tax as business income. Since the entire amount of Rs. 11 lakhs
recovered has been credited to the statement of profit and loss,
Rs. 10 lakhs has to be reduced while computing business income.]
- Interest received on income tax refund [Chargeable to tax under 45,000
the head “Income from other sources”]
- Capital gains on sale of shares in Yara Ltd. 3,77,500
[Capital gains on sale of shares in Yara Ltd. is chargeable to tax
under the head “Capital Gains”. As the same has been credited to
the profit and loss account, it has to be reduced]
- Profit on sale of building to 100% subsidiary [Taxability or 15,00,000
otherwise to be considered under the head “Capital Gains". Since
such profit has been credited to the profit and loss, the same has
to be deducted]
- Dividend received from specified foreign company 15,00,000
[Dividend income from specified foreign company is taxable under
the head “IFOS”. Since the said dividend has been credited, it has
to be deducted]
- Audit fees of P.Y. 2022-23 75,000
[30% of ₹ 2,50,000, being the audit fees disallowed in the P.Y.
2022-23 for non-deduction of TDS in the P.Y. 2022-23 would be
allowed in the year of deduction and payment of TDS i.e., P.Y. 2023-
24]
- Payment of new loan converted from arrear interest 1,60,000
[Conversion of unpaid interest into loan shall not be construed as
payment of interest for the purpose section 43B. The amount of
unpaid interest converted into a new loan will be allowable as
deduction only in the year in which such converted loan is actually
paid. Since Rs. 1,60,000 (Rs. 8,00,000/10 x 2) has been paid in the
P.Y. 2023-24, the same would be allowed as deduction]
- Provision for wages payable to workers 12,00,000
[The provision based on fair estimate of wages and reasonable
certainty of revision is allowable as deduction, since ICDS X
requires ‘reasonable certainty’ for recognition of a provision,
which is present in this case. As the provision has not been
debited to statement to profit and loss, the same has to be
reduced while computing business income]
- Loss due to destruction of machinery by fire -
[Loss of ₹ 20 lakhs due to destruction of machinery caused by fire
is not deductible since it is capital in nature. As the loss has not
been debited to statement of profit and loss, no adjustment is
required]
- Revenue from service contract for maintenance of the office 3,73,000
building of Nitup Ltd.
[Since the service contract for maintenance of office building is
for a period of 61 days i.e., from 1st March 2024 to 30th April
2024 (less than 90 days), the revenue from such contract would
be determined on the basis of project completion method.
Consequently, the income from contract and the expenditure would
also be chargeable/ allowable in the P.Y. 2024-25. Since the
revenue of ₹ 5,00,000 is credited and expenditure of ₹ 1,27,000
has been debited to statement of profit and loss, the net amount of
₹ 3,73,000 (₹ 5,00,000 – ₹ 1,27,000) has to be deducted while
computing business income of the P.Y. 2023-24] 77,50,500
Less: Depreciation as per Income tax Rules
- Depreciation under section 32 30,00,000
- Add: Depreciation @7.5% on ₹ 92 lakhs [₹ 95 lakhs, being imported 6,90,000
printing machinery - ₹ 3 lakhs, being profit from hedging contract]
since, machinery is put to use for less than 180 days].
- Add: Additional depreciation@10% on ₹ 92 lakhs, since machinery is 9,20,000
put to use for less than 180 days assuming the conditions for claim
of additional depreciation are satisfied. 46,10,000
Profits and gains from business or profession 234,61,500
