Profit & Gains from Business or Profession.

TAXATION( M.Com- Part I)

INCOME FROM BUSINESS & PROFESSION

-: Complied By :-

Prof. Rajesh Jain

[email protected]

Income from Business & Profession

Meaning of Business : [ Sec 2(13) ]

Business Includes,

a)Trade,

b) Commerce

c) Manufacture

d) Any adventure or concern in the nature of trade, commerce or manufacture.

Meaning of Profession : [ Sec 2(36) ]

Profession includes vocation.

Profession requires purely intellectual skill or manual skill on the basis of some special learning.

Income from Business & Profession -:- Key Points -:-

Must be carried on by Assessee.

Must be carried on during the previous year.

Only profit of the previous year are to be taxed.

Income includes negative income i.e. Loss.

Relevance of method of accounting ( Cash or Mercantile )

A Person Cannot do business with one self. Hence, notional profit is not taxable. If a proprietor withdraws goods casting Rs.50000 for personal use at an agreed value of Rs.60000 then profit of Rs.10000 shall not be taxable.

There is no difference between legal & illegal business for taxation purpose. Even income from illegal business shall be taxable.


Basis of Charge : [ Sec 28 ]

The following income shall be chargeable to income tax under the head “ Profit & Gains of

Business or Profession.

The profit or gains of any business or profession. [ Sec 28 (i) ]

Income derived by a trade, professional or similar association from specified services performed for its members. [ Sec 28 (ii) ]

Export Incentive. [ Sec 28 (iiia), Sec 28 (iiib), Sec 28 (iiic), Sec 28 (iiid) ]

- Profit on sale of import license or duty entitlement pass book.

- Cash Assistant received or receivable by an exporter under any scheme of the Govt.

- Export Duty draw back.

The Value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of profession. [ Sec 28 (iv) ]

Any interest, Salary, bonus, commission or remuneration due to or received by a partner from a firm. [ Sec 28 (v) ]

Any Sum received for not carrying out any activity in relation to any business or not to share any know-how, patent, copyright, trademark etc. [ Sec 28(va) ]

Income from speculative transaction

Any sum received under Keyman Insurance Policy including Bonus on such policy.


COMPUTATION OF INCOME FROM BUSINESS [ Sec 29 ]

The profit and gains of business or profession shall be computed in accordance with the provisions contained in Sec 30 to 44 DB.

It must however be noted that the allowances and deductions are not exhaustivelylisted.

Admissibility of deduction will depend upon the method of accounting followed by assessee, subject to deeming provisions of the Act.


SPECIFIC DEDUCTIONS [ Sec.30 to Sec 37 ]

1. Rent, Rates ,Taxes & Insurance for Building [ Sec 30 ]2. Repairs & Insurance of Plant & Machinery , Furniture [ Sec 31 ]3. Depreciation [ Sec 32 ]4. Investment Allowance [ Sec 32 AC ]5. Tea/Coffee/Rubber Development A/c [ Sec 33 AB ]6. Site Restoration Fund [ Sec 33 ABA ]7. Reserve for Shipping Business [ Sec 33 AC ]8. Scientific Research Exp [ Sec 35 ]9. Amortisation of telecom licence fees [ Sec 35 ABB ]10. Expenditure on eligible projects or scheme [ Sec 35 AC ]11. Deduction in respect of exp on specific business [ Sec 35 AD ]12. Payment to Association and institution for carrying out rural development program [ Sec 35

CCA ]13. Weighted deduction for expenditure incurred on Agricultural Extension Project [ Sec 35 CCC ]14. Weighted deduction for expenditure for skill development [ Sec 35CCD ]15. Amortisation of Preliminary Expenses [ Sec 35 D]16. Amortisation of Expenditure on development of certain minerals [ Sec 35 E ]

Income from Business & Profession -: Deduction U/s 36 :-

1. Insurance Premium [ Sec 36 (1) (i) ]2. Insurance premium paid by a Federal Milk Co-op Socierty [ Sec 36 (1)(ia ]3. Insurance premium on health of employees [ Sec 36(1) (ib) ]4. Bonus or Commission to employees [ Sec 36 (1) (ii )5. Interest on Borrowed Capital [ Sec 36 (1) (iii ) ]6. Discount on Zero Coupon Bond [ Sec 36(1) (iiia) ]7. Employer’s Contribution to Recognised PF & Superannuation Fund [ Sec 36(1)(iv)]8. Employer’s Contribution to Notified Pension Scheme (NPS) [ Sec 36(1)(iva)]9. Provision for bad & doubtful debts relating to rural branches of scheduled

commercial Bank. [ Sec 36(1)(viia) ]10. Transfer to Special Reserve [ Sec 36 (1) (viii) ]11. Family Planning Expenditure [ Sec 36(1) (ix) ]12. Revenue Expenditure incurred by entities establised under any Central, State or

Provincial Act. [ Sec 36 (1) (xii ) ]13. Banking Cash Transaction Tax & Securities Transaction Tax.14. Contribution to Credit Guarantee Trust Fund [ Sec 36(1) (xiv) ]15. Commodities transaction tax [ Sec 36(1) (xvi) ]16. Advertisement Expenses [ Sec 37 (2B) ]


-: General Deduction U/s 37 (1)Sec 37(1) is a residuary section. In order to claim deduction under this section, the

following condition should be satisfied :-

• The expenditure should be other than covered u/s 30 to 36.

• It should not be in the nature of Capital Expenditure.

• It should not be Personal Expenditure of the Assessee.

• It should have been incurred in the previous year.

• It should be in respect of business carried on by the assessee.

• It should have been spent wholly & exclusively for the purpose of business.

• It should not have been incurred for any purpose which is an offence or is prohibited by any law.

Depreciation Chart (Important Block of Assets )

Block of Asset Asset Rate of Depre(%)

1) Building Residential Building 5

Factory Building, Office Building, Godown, Stock yard, borewell, well, Wall compound, Temple, road etc

10

Temporary Erections 100

2) Furniture Office Furniture & Appliances 10

3) Plant & Machinery

Machinery, Car, Two Wheeler, Mobile 15

Computer, laptop and software, books ( other than covered under 100% )

60

Books used by Professionals, Air Pollution Control Equipment

100

4) IntangibleAssets

Patents, Copyrights, Trademarks, know-how 25

Depreciation : Key Points

Depreciation is available whether or not the assessee has claimed deduction in books of account.

If a part of the assets is used for business purpose and part is used for personal purpose ( e.g. Resi-cum-office ) ,depreciation should be allowed only for the portion for which the asset is used for business purpose.

Usage during the previous year is important :

a) if asset was acquired during any Preceding Previous Years (PPY) and put to use in current P.Y. ( even for 1 day ), it is eligible for full depreciation.

b) Further, asset acquired during the PY ( Current year) and usage :

i) No usage - No Depreciation.

ii) Used for more than 180 days – full normal depreciation.

iii) Used for less than 180 days – 50% of normal depreciation.

Depreciation : Key Points....

Block is formed for Common Asset with common rate of depreciation.

And accordingly, depreciation is calculated based on Block Concept and not on individual asset.

Any expenditure incurred till date , asset is put to use is to be capitalised i.e. Added to the Cost of Assets.

Depreciation is calculated only as per WDV method.

SLM method is not allowed. ( except in case of Power Units ,where prescribed rate on actual cost of asset, and NOT block value of assets )

In case of Company Assessee, depreciation is recorded as per Company Law, in such case, depreciation as per Books is added back while depreciation as per Income Tax Act is allowed, while computing the income of such company.

Whether asset is eligible for depreciation or not, it depends on nature of asset and purpose of holding asset.

Land is never to be depreciated.

Amount Not Deductible [ Sec 40 ]

Sec 40 (a) (i) { TDS Compliance related }

No deduction is allowed in respect of interest, royalty, fees for technical service or other sum payable to :

a) Any person outside India OR

b) In India to a Non-resident (not being Company or Foreign Company) on which TDS under chapter XVII B has not been deducted or paid.

Sec 40 (a) (ia)

No deduction is allowed in respect of payment to resident towards interest, commission, brokrage, fees for professional service or technical service, amount payable to Contractor or sub contractor, rent or royalty in which provisions of TDS under chapter XVII-B has not been complied with.

Amount Not Deductible [ Sec 40 ]...

Sec 40 (b ) { Related to Partnership Firm }

According to Scheme of assessee of Firms, Salary, Bonus, commission or remuneration to partners of firms is allowable as deduction in the hands of the firm, as under :-

* Remuneration to Partners :

Maximum Permissible limit

* Interest on Capital to Partners :

Conditions to be satisfied :

i) Rate of interest should not exceed 12% p.a. Simple interset.

ii) Payment of interest on capital should be authorised by partnership deed.

iii) Payment of int should be pertained to the period after partnership Deed.

Book Profit Limit

On the First Rs.300000 of Book profit or in case of LOSS

Rs.150000 or 90% of Book profit whichever is more

On the balance of Book Profit 60% of Book Profit.

Amount Not Deductible [ Sec 40 ]...

Sec 40 A (2 ) : Excessive or Unreasonable Payments to Relatives/Associates

Any Expenditure in respect of which payments have been or is made to a relative or associate concern, so much of the expenditure as is concerned to be excessive or unreasonable shall be disallowed by the Income Tax Officer.

Sec 40 A (3) : Payment in excess of Rs.20000/- in cash.

As per Income Tax Act,1961, any expenditure incurred in respect of which payment is made in a sum exceeding Rs.20000/- in CASH, shall not be allowed as deduction.

Explanation : In case payment is made to same party on one day and the total of payment in a day crosses Rs.20000 , then this section is attracted.

( Note : In case of payment is made to plying , hiring or leasing goods carrier the limit of payment is increased to Rs.35000 )

Profit & Gains from Business or Profession.

Law

Transcript of Profit & Gains from Business or Profession.