Profits and Gains from Business or Profession

Learning Outcome

To understand and explain the scope of the income that can be taxed as business income , it computation methodology and in that direction to demonstrate the understanding the various expenses that are admissible in computing the income under this head

Basis of Charge The following income are specifically chargeable to tax

under this head

• Profits and Gains from business and profession

• Any compensation received [section 28(ii)]

• Income derived by a trade, professional or other association from services rendered for its members

• The value of any benefit or perquisite whether convertible into money or not arising from a business or in the exercise of a profession

• Export incentive available to exporters

• Any interest, salary, bonus, commission or remuneration received by any partner from the firm

• Any sum received under a Keyman Insurance Policy including bonus

• Profits and Gains of Managing Agency

• Income from speculative transaction

Section 2[13] states that business includes any of the following

a] trade

b] commerce

c] manufacture

d] any adventure or concern in the nature of a trade, commerce or manufacture

Basic Principles for arriving at Business Income

• Business or Profession should be carried on by the assessee• Business or Profession should be carried out during the previous year• Income of the previous year is taxable the during the following

assessment year• Tax incidence arises in respect of all business or profession taken as

group• Both legal and beneficial ownership of business are taxable• Only profits earned or losses incurred during the previous year will be

subject to charge of tax. Anticipated profits and losses are outside the taxable purview

• Any recovery of sum already admitted as deduction in earlier year is taxed in the year of recovery

Income from businessNet profit as per profit and loss account XXXADD: 1. Inadmissible expenses shown in Income statement XXX

2. Business Incomes not shown in the income statement XXX

3. Over valuation of opening stock and under valuation of closing stock

XXX

LESS: 1. Admissible expenses not shown in Income statement XXX

2. Non business income shown in Income statement XXX

3. Under valuation of opening stock and over valuation of closing stock

XXX

INCOME FROM BUSINESS XXX

ADMISSIBLE DEDUCTIONS

Admissible DeductionsSpecifically stated in sections 30 to 43 D

• Rents , Rates, Taxes Repairs and Insurance for premises used for the purpose of business or profession [section 30]

• Repairs and Insurance of machinery, plant and furniture used in business or profession [section 31]

• Depreciation Allowance [section 32]

• Sum deposited in a special account by an assessee engaged in the business of growing and manufacturing tea, coffee or rubber in India [section 33AB]

• Sum deposited in a special account by an assesse engaged in the production of petroleum/natural gas in India [section 33ABA]

• Expenditure on Scientific Research-revenue, capital and contribution to others – are deductible – weighted 1.25 times the expenditure [section 35]

• Expenditure on acquisition of patents rights and copy rights to be amortised over a 14 year period commencing from the year of acquisition or rights [section 35 A]

• Amortisation of telecom licence fees equally over the period of the licence [section 35ABB]

• Expenditure by way of payment to public sector companies or local authority etc for carrying out any eligible project or scheme for promoting social and economic welfare or uplift of public [section 35AC]

• Payments made to association and institutions for carrying out rural development programmes [section 35 CCA]

• Amortisation of preliminary expenses available to domestic companies, subject to 5% of the project cost and deductible in 5 equal instalments

• Amortisation of expenditure under a Voluntary Retirement Scheme, where 20% is permitted in the year of incurring the expenditure and the balance in 4 equal instalments [section 35DDA]

• Amortisation of expenditure on prospecting for development of certain minerals,- available only for Indian companies and resident assesses , = is allowed as deduction in 10 equal instalments after commercial production. [ section 35E]

• Insurance premium paid against risk of damage to stock or stores used for the purpose of business or profession, on health of employees [section 36(1)]

• Bonus or Commission paid to employees [section 36(1)(ii)]

• Interest on borrowed capital used in the business. [section 36(1)(iii)]

• Discount on notified Zero Coupon Bonds [section 36(1)(iiia)]

• Employers’ contribution to recognised provident and superannuation fund [section 36(1)(iv)]

• Employers’ contribution to recognised gratuity fund [section 36(1)(v)]

• Bad Debts written off [section 36(1)(vii)]

• Provision for bad and doubtful debts relating to branches of scheduled commercial banks [section 36(1)(viia)]

• Banking cash transaction tax [section 36(1)(xiii)]

• Any expenditure incurred wholly and exclusively for the purpose of business , not being a capital or personal expenditure [section 37]

Disallowances under the Act• Expenses specifically disallowed under section 40a

- interest , royalty and fees for technical services payable to non-residents

- securities transaction tax

-fringe benefit tax

-income tax

-wealth tax

- salary paid outside India without tax deduction

• Amounts paid in excess of Rs.20,000 otherwise than by way of Account Payee Cheque or Account Payee Demand Draft [section 40A(3)]

• Provision for unapproved gratuity fund [section 40A(7)]

• Contributions made by employers to non-statutory funds [section 40A(9)]

• Specified unpaid liabilities shown in the books of account under the mercantile system [section 43B]

Depreciation

There are 2 types of depreciation charts: Income tax act depreciation chart is given in Sec. 32 of Income Tax act 1961, and is required for the computation of 'income from business and profession' as per income tax act. Whereas companies act, 1956 Schedule XIII gives the depreciation rates as per companies act. This chart is applicable only to companies. Both the charts are required to calculate depreciation on fixed assets in case of companies.

While computing total income of a company for the purpose of payment of tax: Profit/loss as per Profit and Loss account (prepared according to Companies act) is taken and depreciation as per companies act is added back to it. Then depreciation as per Income tax act is reduced from the above amount. The amount so arrived is the amount on which tax will be paid subject to any other adjustments.

Block of assets

It means a group of assets falling within a class of assets comprising of tangible and intangible assets.

A tax payer may have 13 different block of assets out of which 12 blocks are for tangible assets and 1 block is for intangible assets. Rates of depreciation is different for different blocks. E.g. Block 1-5%, block 2-10%, block 3-100%, block 4-10%, block 5-15% etc.

When an asset is put to use for less than 180 days in the year of acquisition

The deduction in respect of such assets shall be restricted to 50% of the amount calculated at the % prescribed in the case of block of asset comprising such asset. Two conditions to be fulfilled:

• The asset is acquired in the previous year• It is put to use for less than 180 days period

PROBLEMS

Problem 1

Introduction to capital gains