# PGBP — Items to be Added Back to Net Profit (Disallowances)

When computing Profits & Gains from Business or Profession (PGBP) starting from Net Profit as per P&L, certain items debited to P&L are not allowed under the Income-tax Act and must be added back.

## Rule for additions

Add back only if already debited to the Profit & Loss Account.

## Detailed list of disallowances

#	Item	Section / Reason
1	Depreciation as per Books of Accounts (replaced by depreciation as per IT Act)	Sec 32
2	Amount paid to relative in excess of reasonable amount	Sec 40A(2)
3	Motor car expenses to the extent used for personal purpose (proportionate disallowance)	Personal element
4	Drawings (personal in nature)	Personal exp.
5	Investment in NSC (debited as expense) — but allowed u/s 80C	Capital item
6	Under-valuation of closing stock (add the under-valued amount)	Inventory valuation
7	Cash payment (or bearer/crossed cheque) exceeding ₹10,000 to a single person in a day	Sec 40A(3)
8	Advertisement in souvenir/brochure of a political party	Sec 37(2B) — but allowed u/s 80GGB (cos)/80GGC (others)
9	Donation to political party or electoral trust	Disallowed u/s 37; allowed u/s 80GGB/80GGC
10	GST Penalty (if not compensatory in nature)	Sec 37 Explanation 1
11	30% of any sum payable to a Resident without TDS	Sec 40(a)(ia)
12	100% of any sum payable to a Non-Resident without TDS	Sec 40(a)(i)
13	Interest on loan for asset up to the date of put-to-use	Capitalised to cost of asset
14	Accrued/due expenses — disallowed if assessee follows cash system	Sec 145
15	Salary paid to relative in excess of reasonable amount	Sec 40A(2)
16	Family planning expenses on employees — only allowed to companies	Sec 36(1)(ix)
17	Medical insurance premium for parents of employees — disallowed in PGBP; employee may claim u/s 80D (₹25k/₹50k senior citizen)	Personal benefit
18	Purchase of business asset (capital expense) — depreciation allowed instead	Capital nature
19	Income Tax, Advance Tax, TDS Penalty, Interest on direct tax	Sec 40(a)(ii)
20	Employer contribution to NPS in excess of 14% of Basic + DA	Sec 36(1)(iva)
21	4/5th of VRS compensation (only 1/5th allowed each year for 5 years)	Sec 35DDA
22	Donation to Gurudwara/temple in cash (if > ₹2,000) — also not allowed u/s 80G	Sec 80G(5D)
23	Interest & Municipal taxes paid for SOP and let-out portion of house used personally — municipal tax on SOP NOT allowed under HP head either	Personal exp.
24	Notional rent of own house used for business — not allowed to owner u/s 30	Sec 30 proviso
25	Interest paid to Bank after due date of filing Return of Income	Sec 43B
26	Contribution to PM Relief Fund debited to P&L — disallowed in PGBP, allowed u/s 80G (100%)	Sec 37
27	Loss on sale of capital asset — treated under Capital Gains	Wrong head
28	Loss on sale of Scientific Research Asset	Sec 41(3) — adjustment
29	Industrial power tariff concession from Govt — always included in income	Sec 28(iiib)
30	4/5th of Preliminary Expenditure (only 1/5th allowed per year for 5 years)	Sec 35D
31	Amount payable to MSME beyond time limit in MSME Act 2006 — allowed only on actual payment	Sec 43B(h) — 45 days if written agreement, 15 days if no agreement
32	Capital expenditure/Repairs of capital nature	Capital — depreciation only
33	Fine/Penalty for breach of law	Sec 37 Explanation 1
34	Expense on issue of Right Shares, Public Issue, and increase in authorised capital	Capital nature

## Key principles

40A(2) — Excess payment to specified relatives is disallowed only to the extent of unreasonableness.
40A(3) — Cash payments > ₹10,000 per person per day are disallowed (limit is ₹35,000 for transporters).
43B — Statutory dues (tax, interest, employer PF, leave salary) allowed only on actual payment before due date of ROI.
Penalty distinction — Compensatory penalty/interest is allowed; punitive penalty for breach of law is disallowed.

Worked example

### Example 1

Example 1 — Salary to Relative (Sec 40A(2))

Firm pays ₹5,00,000 salary to partner's wife. Reasonable salary for such work = ₹3,00,000.

→ Disallowance = ₹5,00,000 − ₹3,00,000 = ₹2,00,000 added back.

### Example 2

Example 2 — Cash payment u/s 40A(3)

Company pays ₹25,000 in cash on a single day to a supplier (not a transporter).

→ Entire ₹25,000 disallowed (exceeds ₹10,000 cash limit).

### Example 3

Example 3 — MSME payment u/s 43B(h)

A buyer purchases goods from an MSME on 1-March-2026. Written agreement: payment within 30 days. Buyer pays on 30-April-2026.

→ Statutory cap = 45 days. Agreement said 30 days; payment delayed beyond agreed period → if not paid in same FY, disallowed and allowed in year of payment.

### Example 4

Example 4 — TDS default on Resident (40(a)(ia))

Company pays ₹1,00,000 rent to a resident landlord without deducting TDS u/s 194I.

→ Disallowance = 30% × ₹1,00,000 = ₹30,000 added back. (Allowed in the year TDS is paid.)

⚠️ Common exam mistakes

Disallowing 100% of TDS-defaulted payment to a Resident — only 30% is disallowed; for Non-Residents the full 100% is disallowed.
Adding back depreciation as per IT Act — students sometimes add back the IT Act depreciation; correct rule is to add back book depreciation and then deduct IT Act depreciation.
Treating donations to political parties as fully disallowed — disallowed under PGBP but allowed under Chapter VI-A (80GGB/80GGC).
Allowing entire VRS compensation in one year — only 1/5th per year for 5 years under Sec 35DDA.
Forgetting that family planning expenses are deductible only for companies under Sec 36(1)(ix).
Confusing the 40A(3) limit — ₹10,000 in general, but ₹35,000 for transporters.

Bare-Act text Sections 28-44, 40A, 43B · Income-tax Act, 1961 · click to expand

Section 40A(2): Where the assessee incurs any expenditure in respect of which payment has been made to a person referred to in clause (b)... and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value... so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed. Section 40A(3): Where the assessee incurs any expenditure in respect of which a payment exceeding ten thousand rupees is made otherwise than by an account payee cheque/bank draft/electronic mode, such expenditure shall not be allowed. Section 40(a)(ia): Thirty per cent of any sum payable to a resident, on which tax is deductible at source... and such tax has not been deducted or after deduction has not been paid before the due date specified in sub-section (1) of section 139.

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PGBP - Items to be ADDED back to Net Profit (Disallowances)

Worked example

⚠️ Common exam mistakes