Chapter 4 : Profits and Gains from Business and Profession
CMA/CS R.K. Khurana
Intermediate (IPC) CoursePaper 4 - Taxation: Income Tax Law
© The Institute of Chartered Accountants of India
Recording Date:22.02.2018
Profits and Gains of Business and Profession
Importance from Real Life & Examination Perspectives
Profits and Gains of Business and Profession
This lesson deals with the provisions for computation of Income from Business and Profession.
The provisions for computation of Income from B and P are covered under Section 28 to 44 D
Section 28 defines the scope of income which can be taxed under this head.
The expenses expressly allowed by the Act are listed under Sections 29 to 37.
Sections 40, 40A and 43B enumerate those expenses which are expressly disallowed while computing taxable income.
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This Lesson covers:
1. Introduction
2. Meaning of Business. Profession and Vocation
3. Chargeability/scope of tax on Income under Profits and Gains of Business and Profession
4. Income from Profits and Gains of Business or Profession – how computed ?
5. Expenses admissible under different section.
6. Amounts not deductible/ Not deductible in certain circumstances
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This Lesson covers:
7. Maintenance of books of accounts by certain persons carrying on business or profession
8. Compulsory audit of accounts
9. Presumptive income in certain cases
10. Lesson sum up
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Business and Profession
1. Business: The word business is defined in Section 2(13) to include any of trade commerce or manufacture. trade, commerce, or manufacture or any adventure or concern in the nature
2. Adventure in the nature of trade: Sec 2(13) defines business to include “any adventure or concern in the nature of trade, commerce or manufacture.”
3. The word business is generally understood as systematic and organised course of activity or conduct with a purpose.
4. The isolated transaction can also be considered as business. The requirement is that it must have an element of trade.
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Profession:
Profession: Profession involves the idea of an occupation requiring purely intellectual skill or manual skill on the basis of some learning.
There should be some special qualification of a person apart from skill and ability, which is required in carrying on any activity which could be considered as a profession.
Vocation: Vocation refers to any activity on which a person spends a major part of his time in order to earn his livelihood.
Distinction not material: The distinction between business, profession and vocation is not material, because the income from all these activities is taxable under the same head i.e. PGBP.
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The Chapter on PGBP can be studied under the following broad parts1. Nature and types of profits and gains that can be taxed under this Chapter (Section 28)
2. Income from PGBP - how calculated ? (Section 29)
3. Specific deductions admissible while calculating profits or gains (Sections 30 to 36)
4. General Deductions (Section 37)
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The Chapter on PGBP can be studied under the following broad parts
5. Amounts not deductible (Section 40)
6. Expenses or payments not deductible in certain circum-stances (Section 40A)
7. Profits chargeable to tax (Sec 41)
8. Compulsory maintenance of books of accounts in certain cases
9. Compulsory Audit of accounts
8. Presumptive income in certain cases
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Chargeability/Scope of income taxable under the head PGBP (Sec28)
(i) The profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;
(ii) Compensation or other payment due to or received by certain kinds of assessees,
(iii) Income derived by a trade, professional or similar association from specific services performed for its members
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(iii a). Profits on sale of a licence granted under the Imports (Control) Order, 1955
(iii b) Income derived by a trade, professional or similar association from specific services performed for its members
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Chargeability/Scope of income taxable under the head PGBP (Sec28)
(iii b) The profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;
(iii c) Any duty of customs or excise re-paid or re-payable as drawback to any person against exports
(iii d) Any profit on the transfer of the Duty Entitlement Pass Book Scheme
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(iii e) Any profit on the transfer of the Duty Free Replenishment Certificate
(iv) The value of any benefit or perquisite, whether convertible into money
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Chargeability/Scope of income taxable under the head PGBP (Sec28)
(v) Any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm
(v a) any sum, whether received or receivable, in cash or kind, under an agreement for—
(a) not carrying out any activity in relation to any business 26[or profession]; or
(b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature
(vi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy
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Chargeability/Scope of income taxable under the head PGBP (Sec28)
(vii) any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) beingdemolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD
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Income from profits and gains of business and profession , how computed (Sec 29)
The income referred toin section 28 shall be computedin accordance with theprovisions contained in sections30 to 43D.
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Certain provisions for providing specific admissible deduction
Section 30: Rent, rates, taxes, repairs and insurance for buildings
Section 31: Repairs and insurance of machinery, plant and furniture.
Section 32: Depreciation
Plethora of incentive for investments/expenditures Sec Investment allowance, development rebates, expenditure on tea
32AD: Investment in new plant or machinery in notified backward areas in certain states
Section 35: Expenditure on Scientific Research
Section 36: Other deductions
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Sec 36 Other deductions
36 (1) (i): Insurance premium of stock
36 (1) (ia): Insurance premium of cattle
36 (1) (ia): Insurance on the health of employees
36 (1) (ii): Bonus, commission to employees
Deductions which are specified under sec 36 are the following:
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Sec 36 Other deductions
36 (1) (iii): Interest on borrowed capital
36 (1) (iii a): Discount on issue of zero coupon bonds
36 (1) (iv): Employers contribution to a recognized provident fund
36 (1) (iv a): Employer’s contribution towards pension scheme
Deductions which are specified under sec 36 are the following:
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Sec 36 Other deductions
36 (1) (v): Employer’s contribution to an approved gratuity fund
36 (1) (v a): Sums received from employees towards certain welfare schemes
36 (1) (vi): Allowance in respect of dead or permanently useless animals
36 (1) (vii): Bad debts
Deductions which are specified under sec 36 are the following:
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Sec 36 Other deductions
36 (1) (vii a): Provision for bad and doubtful debts of certain banks or financial institutions
36 (1) (ix): Expenditure on promoting family planning amongst the employees
36 (1) (xv): Securities transactions tax paid
36 (1) (xvi): Commodities Transactions Tax
Deductions which are specified under sec 36 are the following:
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Section 37: General
Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession
shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".
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Sec 37 Conditions for allowance
1. Such expenditure should not be covered under the specific sections 30 to 36
2. Expenditure should not be of capital nature
3. Expenditure should have been incurred during the previous year
4. The expenditure should have been incurred wholly or exclusively for the purpose of business or profession
5. The expenditure should not be of a personal nature
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Sec 37 General
Deduction under Sec 37 (1) subject to overriding provisions: In determining whether a particular item of expenditure is or not is not deductible under Sec 37 (1) (or under sec 30 to 36) it is necessary to examine whether the deduction is subject to any overriding provisions contained in sections 37 (2B), 40, 40A and 43B.
Further there are special provisions for computation of business income in certain special cases like insurance business, retail trade, civil construction, royalty, etc., which are covered under sections 43D, 44, 44A, 44AD, 44AE, 44B, 44BB etc.
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Section 40 Inadmissible deductions
Section 44 AB Audit of books of Accounts
44 AD Special Provisions for computing profits and gains of business on presumptive basis
44ADA Presumptive scheme of taxation for assesses engaged in eligible profession
Sec 44 AA Compulsory maintenance of books of accounts
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Lesson SummaryFriends:
Taxation of income from profits and gains of business and profession.
The Chargeability/types of incomes that are taxed under this chapter
Admissible/inadmissible deductions
Deductions inadmissible under certain cercircumtances
Books of accounts and their audit
Presumptive income in certain cases.
For more details, please refer to the ICAI Study Material and the Bare Act.
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Thank You
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