# PGBP — Items to be Deducted from Income (if credited to P&L)

Net Profit as per P&L may contain items of income that are not chargeable under PGBP — either because they belong to another head, are exempt, or are already taxed elsewhere. These must be subtracted from PGBP.

## Rule

Deduct from PGBP only if credited to the Profit & Loss Account. If not credited, no adjustment is needed (they will be taxed under their respective heads).

## List of items to be deducted

#	Item	Correct Head/Treatment
1	Over-valuation of opening stock	Inventory adjustment — deduct excess
2	Income from UTI	IFOS
3	Dividend income	IFOS (taxable at slab rates)
4	Interest on Debentures	IFOS
5	Winnings from horse race	IFOS — taxable @ 30% u/s 115BB (flat)
6	Interest on Bank FD	IFOS
7	Interest from Post Office Savings A/c	IFOS (exempt up to ₹3,500/₹7,000 joint u/s 10(15))
8	Royalty Income (not from regular business activity)	IFOS/applicable head
9	Income Tax Refund + Interest on Refund	Refund principal → not income; Interest on refund → IFOS
10	Share of Profit from HUF	Exempt in member's hands u/s 10(2)
11	Share of Profit from Partnership Firm	Exempt in partner's hands u/s 10(2A)
12	Interest/Penalty — compensatory allowed; non-compensatory disallowed	Distinguish carefully
13	Profit on sale of Capital Asset	Capital Gains head

## Key principles

The rule is to classify income under the correct head — anything credited to P&L that does NOT belong to PGBP must be removed.
Exempt incomes (HUF profit share, partner's profit share) are completely removed and not taxed anywhere.
IFOS items are deducted from PGBP and added under IFOS separately.
Capital gains items are deducted from PGBP and computed separately under Capital Gains.

Worked example

### Example 1

Example 1 — Dividend credited to P&L

ABC Ltd.'s P&L shows Net Profit ₹10,00,000 which includes Dividend Income of ₹50,000 from listed shares.

→ Deduct ₹50,000 from PGBP. Add ₹50,000 to IFOS. Net PGBP = ₹9,50,000; IFOS = ₹50,000.

### Example 2

Example 2 — Partner's share of profit

Mr. P, partner in M/s XY & Co., receives share of profit ₹2,00,000 (credited to his P&L from proprietorship business).

→ Deduct ₹2,00,000 from PGBP. Exempt u/s 10(2A) — not taxed in any head.

### Example 3

Example 3 — Profit on sale of capital asset

Firm's P&L shows ₹3,00,000 profit on sale of office building (held for 5 years).

→ Deduct ₹3,00,000 from PGBP. Compute Long-Term Capital Gain separately.

⚠️ Common exam mistakes

Leaving exempt income (share of HUF/firm profit) in PGBP — it must be deducted to avoid wrong head classification.
Treating Income Tax refund principal as taxable — only the interest on refund is taxable; the refund itself is a return of own money.
Including dividend in PGBP at concessional rate — dividend is IFOS taxed at slab rates (no concessional treatment after DDT abolition).
Forgetting to deduct capital gain item from PGBP — leads to double taxation when also computed separately under Capital Gains.

Bare-Act text Sections 10(2), 10(2A), 115BB · Income-tax Act, 1961 · click to expand

Section 10(2A): In the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm shall be exempt. Section 10(2): Subject to the provisions of sub-section (2) of section 64, in the case of an individual, being a member of a Hindu undivided family, any sum received by an individual as a member of a Hindu undivided family out of the income of the family shall not be included in his total income. Section 115BB: Where the total income of an assessee includes any income by way of winnings from any lottery or crossword puzzle or race including horse race... the income-tax payable shall be calculated at the rate of thirty per cent.

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PGBP - Items to be DEDUCTED from Income (if credited to P&L)

Worked example

⚠️ Common exam mistakes