# Adjustments to Net Profit (PGBP) — Items to ADD

When the question gives Net Profit as per P&L Account and asks for PGBP income, you have to re-work the profit by adding back items that are debited but not allowable, and items that are taxable but not credited.

## Items to ADD back to Net Profit

#	Item	Logic
1	Sale of furniture to brother below FMV	Sec 40A(2) is NOT applicable on sale transactions — only on payments/expenses. So no adjustment is required even if sold cheap to a related party.
2	Interest & municipal taxes for the business portion of a House (paid for business use)	Allowable only if paid before the due date of filing ROI. If unpaid by then → add back.
3	Additional Depreciation	Allowed only if assessee is engaged in manufacturing or generation of electricity. NOT allowed under Sec 115BAC (concessional regime).
4	Expenses on Buy-Back / Debenture issue / Bonus share issue	Specific treatment — see worked-example logic below.

## Items to DEDUCT from Net Profit (if already credited / not credited)

#	Item	Logic
1	Under-valuation of opening stock	Profit shown is inflated → reduce.
2	Income from UTI / Mutual Fund Units	Not PGBP — taxed under IFOS (or as Capital Gain on transfer).
3	Dividend Income	Taxable under IFOS, not PGBP.
4	Interest on Debentures	Taxable under IFOS.
5	Winnings from Horse Race	Taxable under IFOS @ 30% special rate.
6	Interest on Bank FD	Taxable under IFOS.
7	Interest from Post Office Savings A/c	Taxable under IFOS.
8	Royalty Income	Taxable under IFOS (if not business).
9	Income Tax Refund & Interest on Refund	Refund itself = not income; Interest on refund = IFOS.
10	Share of Profit from HUF	Exempt in the hands of the member — deduct.
11	Share of Profit from Partnership Firm	Exempt in the hands of partner — deduct.
12	Profit on sale of capital asset	Move out of PGBP and treat under Capital Gains head.

## Treatment of Interest / Penalty

Compensatory in nature → Allowed as deduction.
Penal in nature (not compensatory) → Disallowed → Add back.

## Final format for computation

```

Net Profit as per P&L xxx

Add: Inadmissible expenses / Items to add xxx

Less: Items to deduct (taxable elsewhere) xxx

--------------------------------------------------

PGBP Income xxx

Add: Income from House Property xxx

Add: Capital Gains xxx

Add: IFOS xxx

--------------------------------------------------

Gross Total Income xxx

Less: Chapter VI-A Deductions (xxx)

--------------------------------------------------

Total Income xxx

Tax Payable as per applicable rates

```

Worked example

### Example 1

Example — Sale to Relative: Mr. A sells furniture (used in business) to his brother for ₹50,000 when FMV is ₹1,00,000. Treatment: Section 40A(2) covers payment to related persons, not sale transactions. Hence no adjustment is required while computing PGBP — the loss/lower profit stands.

### Example 2

Example — Share of profit from firm: Mr. B is a partner in M/s XYZ & Co. and his share of profit credited to P&L is ₹2,00,000. Treatment: Share of profit from a firm is exempt u/s 10(2A) in the hands of the partner. Since it is already credited to P&L (increasing Net Profit), it must be deducted while computing PGBP.

### Example 3

Example — Interest on FD credited to P&L: A firm credits ₹40,000 of bank FD interest to its P&L. Treatment: Although received by the business, it is taxable under IFOS, not PGBP. Hence deduct ₹40,000 from Net Profit while computing PGBP, and show ₹40,000 separately under IFOS.

⚠️ Common exam mistakes

Applying Section 40A(2) to a SALE transaction — it applies only to expense/payment to related persons.
Forgetting that Additional Depreciation is NOT allowed under Section 115BAC.
Treating Share of Profit from HUF / Firm as taxable — it is exempt in the hands of the member/partner.
Leaving dividend, debenture interest, FD interest under PGBP instead of shifting them to IFOS.
Treating ALL interest/penalty as disallowed — compensatory interest/penalty IS allowed.
Not deducting under-valuation of opening stock from profit (it inflates the reported profit).

Bare-Act text Section 40A(2) · Income-tax Act, 1961 · click to expand

Section 40A(2): Where the assessee incurs any expenditure in respect of which payment has been or is to be made to specified persons, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which payment is made… so much of the expenditure as is considered to be excessive or unreasonable shall not be allowed as a deduction.

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Adjustments to Net Profit – Items to Add Back

Worked example

⚠️ Common exam mistakes