PROFITS AND GAINS

FROM BUSINESS AND

PROFESSION

DR. N. K. GUPTA

DEFINITIONS

BUSINESS:
BUSINESS SEC.2 (13) ANY TRADE, COMMERCE
OR MANUFACTURE OR ADVENTURE OR
CONCERN IN THE NATURE OF TRADE,
COMMERCE OR MANUFACTURE.
PROFESSION : ALL SUCH HUMAN ACTIVITIES,
WHICH REQUIRE INTELLECTUAL SKILL AND
TECHNICAL EXPERTISE.
VOCATION:
VOCATION IT INCLUDES BOTH BUSINESS AND
PROFESSION AND ANY SUCH ACTIVITY UPON
WHICH A PERSON SPENDS MAJOR PART OF HIS
TIME IN ORDER TO EARN FOR HIS LIVING.

CHARGEABILITY (SEC 28)

INCOME
FROM
BUSINESS
AND
PROFESSION
COMPENSATION DUE OR RECEIVED
INCOME OF TRADE OR PROFESSIONAL
ASSOCIATIONS
PROFIT ON SALE OF LICENCE
CASH ASSISTANCE
REFUND OF DUTY
VALUE OF ANY BENEFIT IN LIEU OF
SERVICES BY A PROFESSIONAL LIKE GIFTS
FOR A DOCTOR BY HIS PATIENTS

INCOME FROM SPECULATION

INTEREST, SALARY ETC. RECEIVED BY A
PARTNER FROM THE FIRM
ANY SUM RECEIVED UNDER A KEYMAN
INSURANCE POLICY
ANY OTHER INCOME INCIDENTAL TO
BUSINESS OR PROFESSION BY WHATEVER
NAME CALLED

COMPUTATION OF INCOME FROM BUSINESS

NET PROFIT AS PER PROFIT AND LOSS
ACCOUNT
ADD:
INADMISSIBLE
EXPENSES
(MEANS
EXPENSES AND LOSSES DEBITED TO PROFIT
AND LOSS ACCOUNT BUT NOT ALLOWED AS
DEDUCTION)
ADD: INCOMES CHARGEABLE UNDER THIS HEAD
BUT NOT CREDITED TO PROFIT AND LOSS
ACCOOUNT
LESS:EXPENSES ALLOWED BUT NOT DEBITED TO
PROFIT AND LOSS ACCOUNT
LESS: INCOMES FROM OTHER SOURCES BUT
CREDITED TO PROFIT AND LOSS ACCOUNT

INCOME FROM PROFESSION

ALL TAXABLE INCOMES
LESS : ALL DEDUCTIBLE EXPENSES AND LOSSES

GENERAL PRINCIPLES TO COMPUTE INCOME FROM

BUSINESS AND PROFESSION

EXPENSES ARE RELATED TO THE PREVIOUS

YEAR
EXPENSES ARE RELATED TO BUSINESS OR
PROFESSION
PRINCIPLE OF COMMERCIAL EXPEDIENCY
BUSINESS OR PROFESSION MUST BE CARRIED
DURING THE PREVIOUS YEAR
NO ANTICIPATED LOSSES
INCLUDES ILLEGAL BUSINESS ALSO
NO DEDUCTION FOR PENALTIES FOR BREACH OF
LAW
DEDUCTION RELATED TO TAXABLE PROFITS
ONLY

DEDUCTIONS ALLOWED

RENT, RATES, REPAIRS AND INSURANCE FOR

BUILDINGS (SEC. 30)
RENT,
REPAIRS
AND
INSURANCE
OF
MACHINERY, PLANT AND FURNITURE (SEC. 31)
DEPRECIATION (SEC. 32)
DEPRECIATION IS ALLOWED ON TANGIBLE
AND INTANGIBLE ASSETS BOTH.
ASSETS ARE DIVIDED ON THE BASIS OF
BLOCK OF ASSETS (BUILDINGS, FURNITURE,
PLANT AND MACHINERY AND INTANGIBLE
ASSETS)

STEPS FOR COMPUTING DEPRECIATION

FIND THE OPENING WRITTEN DOWN VALUE OF

EACH BLOCK AT THE BEGINNING OF THE YEAR
ADD COST OF ACQUISITION OF ASSETS
ACQUIRED DURING THE YEAR IN THE
RESPECTIVE BLOCKS TO WHICH THE NEW
ASSETS BELONG
DEDUCT THE MONEY RECEIVED/RECEIVABLE
ALONG WITH ITS SCRAP VALUE, IF ANY, IN
RESPECT OF THE ASSETS OF THE SAME
BLOCK, WHICH ARE SOLD, DISCARDED OR
DESTROYED DURING THE YEAR
THE BALANCING FIGURE IS THE VALUE ON
WHICH DEPRECIATION IS TO BE CHARGED.

CONTD

FULL DEPRECIATION WILL BE CHARGED IF

THE ASSET IS PUT TO USE FOR ATLEAST 180
DAYS OTHERWISE 50% OF THE NORMAL
DEPRECIATION WILL BE CHARGED.
IT IS MANDATORY TO CLAIM DEPRECIATION
IF AN ASSET IS OWNED BY AN UNDERTAKING
ENGAGED IN GENERATION OR DISTRIBUTION
OF POWER ON OR AFTER 1.4.1997, THEN
DEPRECIATION WILL BE CHARGED ON THE
ACTUAL COST OF THE ASSET.

CONTD

ADDITIONAL
DEPRECIATION
SHALL
BE
ALLOWED @ 20% OF THE ACTUAL COST OF
ELIGIBLE
ASSET
TO
AN
INDUSTRIAL
UNDERTAKING ENGAGED IN THE BUSINESS OF
MANUFACTURE OR PRODUCTION OF ANY
ARTICLE OTHER THAN SHIPS OR AIRCRAFTS,
MACHINERY, PLANT INSTALLED IN OFFICE OR
RESIDENTIAL
ACCOMODATION,
ROAD
TRANSPORT VEHICLES ETC. IF ASSETS ARE
INSTALLED AFTER 31.3.2005.

RATES OF DEPRECIATION
BUILDINGS
BLOCK 1: USED FOR RESIDENTIAL PURPOSE
BLOCK 2: FOR OTHER PURPOSES
BLOCK 3: TEMPORARY ERECTIONS

- 5%
- 10%
- 100%

FURNITURE & FITTINGS INCLUDING ELECTRICAL

FITTINGS
- 10%
INTANGIBLE ASSETS INCLUDE KNOW HOW,
PATENTS, COPYRIGHTS, TRADE MARKS,
LICENCES, FRANCHISES ETC.
- 25%

PLANT & MACHINERY

BLOCK 1: MOTOR CARS
- 15%
BLOCK 2: SHIPS, VESSELS, TUGS, BARGES ETC - 20%
BLOCK 3: TAXIS, MOTOR BUSES, MOULDS ETC - 30%
BLOCK 4: AEROPLANES & SPECIFIED LIFE
SAVING MEDICAL EQUIPMENTS
- 40%
BLOCK 5: CONTAINERS MADE OF GLASS,
PLASTIC ETC
- 50%
BLOCK 6: COMPUTERS INCLUDING SOFTWARE,
BOOKS OTHER THAN ANNUAL
PUBLICATIONS OR USED BY
LIBRARIES
- 60%

BLOCK 7: ROLLERS, ENERGY SAVING DEVICES,

GAS CYLINDERS ETC
- 80%
BLOCK 8: WATER TREATMENT SYSTEM,
CINEMATOGRAPH FILMS, MATCH
FACTORIES, SALT WORKS, BOOKS
BEING ANNUAL PUBLICATIONS OR
USED IN THE LIBRARY, POLLUTION
CONTROL EQUIPMENTS
100%

QUESTION: X IS ENGAGED IN THE BUSINESS OF

TRANSPORTATION OF GOODS. ON 1-4-09, THE WDV
OF HIS VARIOUS ASSETS WAS AS GIVEN BELOW:
OFFICE BUILDING (RATE OF
DEPRECIATION 10%)
9,20,000
COMERCIAL VEHICLES (DEPRECIATION
@ 30%)
30,90,000
CAR (DEPRECIATION @ 15%)
2,10,000
DURING THE YEAR, HE SOLD ONE OF THE
COMMERCIAL VEHICLES WHICH WAS OVER THE
AGE OF 15 YEARS FOR RS. 60,000. IT WAS
REPLACED BY ANOTHER VEHICLE AT THE COST OF
Rs 9,00,000 ON 1-11-09. A NEW VEHICLE WAS
PURCHASED ON 1-1-10 FOR RS. 15,00,000.
CALCULATE DEPRECIATION ADMISSIBLE FOR THE
PREVIOUS YEAR 2009- 10.

SOLUTION :
CALCULATION OF DEPRECIATION FOR THE PREVIOUS
YEAR 2009-10
ASSET
WDV DEPRECIATION
A. BUILDING 10% BLOCK
W.D.V. ON 1-4-09
9,20,000
DEPRECIATION @ 10%
92,000
W.D.V. AS ON 1-4-10
8,28,000
B. CAR 15% BLOCK
W.D.V. ON 1-4-09
DEPRECIATION @ 15%
W.D.V. ON 1-4-10

2,10,000
31,500
1,78,500

92,000

31,500

SOLUTION CONTD.
C. COMMERCIAL VEHICLE-30% BLOCK
W.D.V. ON 1-4-09
30,90,000
ADD: ACTUAL COST OF NEW ASSETS 15,00,000
9,00,000 24,00,000
54,90,000
LESS: MONEY REALISED
60,000
54,30,000
DEP. @ 30% ON Rs. 30,30,000
9,09,000
& @ 15% ON Rs 24,00,000
3,60,000 12,69,000
W.D.V. ON 1-4-10

41,61,000

TOTAL DEPRECIATION = 92,000+ 31,500+ 12,69,000

= 13,92,500

QUESTION: FROM THE PARTICULARS GIVEN BELOW

CALCULATE THE AMOUNT OF DEPRECIATION
ADMISSIBLE DURING THE YEAR ENDING 31-3-10.
FIXED ASSETS
W.D.V ON ADDITIONS
RATE
1-4-09
DURING THE OF
ACCOUNTING DEP
YEAR
(RS.)
(RS.)
BUILDING (NONRESIDENTIAL)
15,60,000
NIL
10%
BUILDING
(RESIDENTIAL)
3,75,000
NIL
5%
PLANT &
MACHINERY
31,50,000
5,60,000
15%
MOTOR CARS
74,000
15%
FURNITURE
17,600
NIL
10%

PART OF THE RESIDENTIAL BUILDINGS WHOSE

WRITTEN DOWN VALUE ON 1-4-2009 WAS RS.
2,20,000 WAS COMPLETELY DESTROYED BY FIRE
ON 5-6-2009 AND RS. 1,80,000 WAS RECEIVED
FROM INSURANCE COMPANY IN RESPECT
THEREOF.

THE NEW PLANT AND MACHINERY WERE

INSTALLED ON 1-10-2009.

SOLUTION
CALCULATION OF DEPRECIATION
ASSETS
W.D.V. RATE

RS.

A. BUILDING BLOCK 10%

(i) BUILDING (NONRESIDENTIAL)
(ii) BUILDING
(RESIDENTIAL)
LESS: MONEY
REALISED

15,60,000

10%

1,56,000

5%

9,750

3,75,000
1,80,000
1,95,000

B. PLANT & MACHINERY: BLOCK 15%

PLANT & MACHINERY
(OLD)
ADD: NEW ADDITION

31,50,000
5,60,000
37,10,000

15%

5,56,500

C. MOTOR CARS
D. FURNITURE BLOCK

74,000

15%

11,100

FURNITURE
TOTAL DEPRECIATION

17,600

10%

1,760
7,35,110

TEA, COFFEE & RUBBER DEVELOPMENT ACCOUNT

(SEC 33AB)
QUANTUM OF DEDUCTION WILL BE THE AMOUNT
DEPOSITED WITH NABARD IN A SCHEME
APPROVED BY TEA, COFFEE RUBBER BOARD OR
40% OF THE PROFIT OF SUCH BUSINESS
WHICHEVER IS LESS.

SITE RESTORATION FUND (SEC 33ABA)

QUANTUM OF DEDUCTION WILL BE THE AMOUNT
DEPOSITED WITH SBI IN A SPECIAL ACCOUNT OR
SITE RESTORATION ACCOUNT OF THE MINISTRY
OR 20% OF PROFIT OF SUCH BUSINESS
WHICHEVER IS LESS.

1.

2.

3.

EXPENDITURE ON SCIENTIFIC RESEARCH (SEC

35)
QUANTUM OF DEDUCTION IS 100% OF THE
EXPENDITURE IN GENERAL INCLUDING
CAPITAL EXPENDITURE
DONATION
TO
SCIENTIFIC
RESEARCH
ASSOCIATIONS,
NATIONAL
LABORATORY,
UNIVERSITY OR AN IIT ETC
- 125%
IN HOUSE RESEARCH IN THE AREA OF BIO
TECHNOLOGY, DRUGS, PHARMACEUTICALS,
COMPUTERS ETC
- 150%

QUESTION
BUSINESS INCOME OF X LTD. BEFORE ALLOWING
EXPENDITURE ON SCIENTIFIC RESEARCH FOR THE
PREVIOUS YEAR 2009-10 IS RS. 2,50,000. THE
COMPANY HAS INCURRED THE FOLLOWING
EXPENDITURE ON SCIENTIFIC RESEARCH DURING
THE PREVIOUS YEAR 2009-10.
REVENUE EXPENDITURE ON
SCIENTIFIC RESEARCH
2,60,000
CAPITAL EXPENDITURE ON
SCIENTIFIC RESEARCH
5,00,000
COMPUTE THE DEDUCTION AVAILABLE ON
ACCOUNT OF SCIENTIFIC RESEARCH ASSUMING
THE COMPANY DOES NOT HAVE ANY OTHER
INCOME.

SOLUTION
BUSINESS INCOME BEFORE
CLAIMING EXPENDITURE ON
SCIENTIFIC RESEARCH
2,50,000
LESS: (i) REVENUE EXPENDITURE
ON SCIENTIFIC RESEARCH
2,60,000
(ii) CAPITAL EXPENDITURE ON
SCIENTIFIC RESEARCH RS. 5,00,000
(NOT ALLOWED IN THIS YEAR AS
THERE ARE NO PROFITS)
NIL
BUSINESS LOSS
10,000

SOLUTION CONTD
THE ENTIRE CAPITAL EXPENDITURE OF RS.
5,00,000 ON SCIENTIFIC RESEARCH SHALL BE
CARRIED FORWARD AS UNABSORBED CAPITAL
EXPENDITURE ON SCIENTIFIC RESEARCH IN THE
SAME MANNER AS UNABSORBED DEPRECIATION
IS CARRIED FORWARD.

EXPENDITURE FOR OBTAINING LICENCE TO

OPERATE TELECOMMUNICATION SERVICES (SEC
35ABB)
QUANTUM OF DEDUCTION WILL BE ALLOWED IN
EQUAL INSTALMENTS OVER THE PERIOD FOR
WHICH THE LICENCE REMAIN IN FORCE SUBJECT
TO THE MAXIMUM OF AMOUNT ACTUALLY PAID.
EXPENDITURE ON ELIGIBLE PROJECTS OR
SCHEMES (SEC 35AC)
QUANTUM OF DEDUCTION WILL BE THE AMOUNT
SPENT ON APPROVED PROJECTS OR PAID TO AN
APPROVED ASSOCIATION DURING THE PREVIOUS
YEAR

EXPENDITURE BY WAY OF PAYMENTS TO

ASSOCIATIONS & INSTITUTIONS CARRYING OUT
RURAL DEVELOPMENT PROGRAMME OR POVERTY
ERADICATION PROGRAMME SET UP BY CENTRAL
GOVERNMENT (SEC 35CCA)

AMORTIZATION
OF
CERTAIN
PRELIMINARY
EXPENSES (SEC 35D & RULE 6AB)
QUANTUM OF DEDUCTION WILL BE 1/5TH OF
EXPENDITURE EVERY YEAR FOR 5 YEARS TO THE
MAXIMUM OF 5% OF THE COST OF THE PROJECT.

AMORTIZATION OF EXPENDITURE IN CASE OF

AMALGAMATION OR DEMERGER (SEC 35DD)
IF ANY INDIAN COMPANY INCURS ANY
EXPENDITURE ON OR AFTER 1.4.1999 WHOLLY
OR EXCLUSIVELY FOR THE ABOVE MENTIONED
PURPOSE QUANTUM OF DEDUCTION WILL BE
1/5TH OF SUCH EXPENDITURE FOR 5 YEARS
BEGINNING WITH THE PREVIOUS YEAR IN WHICH
THE AMALGAMATION OR DEMERGER TAKES
PLACE.

AMORTIZATION OF EXPENDITURE INCURRED

UNDER VOLUNTARY RETIREMENT SCHEME (SEC
35DDA)
QUANTUM OF DEDUCTION WILL BE 1/5TH OF SUCH
EXPENDITURE FOR 5 YEARS
AMORTIZATION
OF
EXPENDITURE
ON
PROSPECTING ETC. FOR DEVELOPMENT OF
CERTAIN MINERALS (SEC 35E)
QUANTUM OF DEDUCTION WILL BE 1/10TH OF SUCH
EXPENDITURE FOR FIRST 10 YEARS

OTHER DEDUCTIONS (SEC 36)

INSURANCE PREMIUM OF STOCKS

INSURANCE PREMIUM OF CATTLE
INSURANCE ON HEALTH OF EMPLOYEES
BONUS OR COMMISSION TO EMPLOYEES
INTEREST ON BORROWED CAPITAL
DISCOUNT ON ISSUE OF ZERO COUPON BONDS
TO BE ALLOWED AS DEDUCTION ON PRO RATA
BASIS
EMPLOYERS CONTRIBUTION TO RECOGNIZED/
APPROVED PROVIDENT FUND.

EMPLOYERS CONTRIBUTION TO AN APPROVED

GRATUITY FUND
SUMS RECEIVED FROM EMPLOYEES TOWARDS
CERTAIN WELFARE SCHEMES IF CREDITED TO
THEIR ACCOUNTS BEFORE THE DUE DATE
LOSS ON ACCOUNT OF DEAD OR USELESS
ANIMALS
ACTUAL BAD DEBTS
REVENUE EXPENDITURE ON PROMOTING FAMILY
PLANNING AMONGST THE EMPLOYEES BY A
COMPANY

CAPITAL EXPENDITURE ON PROMOTING FAMILY

PLANNING
AMONGST
THE
EMPLOYEES
(QUANTUM OF DEDUCTION WILL BE 1/5TH OF
SUCH EXPENDITURE FOR 5 YEARS)
BANKING CASH TRANSACTION TAX PAID

GENERAL DEDUCTIONS (SEC 37)

REMUNERATION TO EMPLOYEES
PENALTY, DAMAGES ETC. DURING THE COURSE
OF BUSINESS
LEGAL EXPENSES
EXPENDITURE ON RAISING LOANS
EXPENDITURE ON ADVERTISEMENTS
DIWALI AND MAHURAT EXPENDITURE
PAYMENT FOR TELEPHONE CONNECTION
PREMIUM PAID ON LOSS OR PROFIT POLICIES
CONTRIBUTION TO TRADE ASSOCIATIONS
PAYMENT TO REGISTRAR OF COMPANIES
EXPENSES ON TRAINING OF STAFF
CIVIL DEFENCE EXPENSES
INDIRECT TAXES

EXPENSES NOT ALLOWED AS DEDUCTIONS

(SEC 37)

EXPENSES IN CONNECTION WITH ISSUE OF

DEBENTURES OR SHARES
ANY CAPITAL EXPENDITURE
BANK GUARANTEE COMMISSION
PUGREE OR PREMIUM PAID TO OBTAIN TENANCY
RIGHT
EXPENDITURE ON SHIFTING OF OFFICE
AMOUNT PAID TO WARD OFF COMPETITION IN
BUSINESS TO A RIVAL
ADVERTISEMENT TO POLITICAL PARTIES

DEDUCTION FROM COMMISSION EARNED BY

LIC, UTI, POST OFFICE & MUTUAL FUNDS
AGENTS

WHERE COMMISSION EARNED IS LESS THAN RS

60,000
LIC AGENTS - FIRST YEAR COMMISSION 50% OF
THE COMMISSION, SUBSEQUENT YEAR- 15% OF
THE COMMISSION, IF DIFFICULT TO SEPARATE THE
TWO COMMISSIONS THEN 33.33% OF THE
COMMISSION (TO THE MAXMIMUM OF RS 20,000)
OTHER AGENTS - 50% OF THE COMMISSION
WHERE COMMISSION EARNED IS MORE THAN RS
60,000 THEN ASSESSEE SHOULD MAINTAIN THE
NECESSARY
RECORDS
AND
CAN
CLAIM
DEDUCTION FROM SEC 30-37

EXPENSES NON DEDUCTIBLE (SEC 40)

ANY INTEREST, ROYALTY, FEES ETC PAID OUTSIDE

INDIA WITHOUT DEDUCTION OF TAX AT SOURCE
INTEREST ON CAPITAL / LOAN TO PARTNERS IN
EXCESS OF 12% P.A
UNREASONABLE EXPENSES TO RELATIVES IF THE
ASSESSEE IS HAVING SUBSTANTIAL INTEREST
ANY EXPENDITURE EXCEEDING RS. 20,000
OTHERWISE THAN BY AN ACCOUNT PAYEE
CHEQUE

SECURITY TRANSACTION TAX

FRINGE BENEFIT TAX
DIRECT TAXES
TAX ON PERQUISITES PAID BY THE EMPLOYER
CONTRIBUTION TOWARDS NON RECOGNIZED
PROVIDENT FUNDS

DEDUCTION ONLY ON ACTUAL PAYMENT

EVEN AFTER 31ST MARCH BUT BEFORE THE
DUE DATE OF FILING THE RETURN (SEC 43B)

TAXES, DUTY, CESS OR FEE

CONTRIBUTION TO PROVIDENT FUND, GRATUITY
FUND, ETC.
PAYMENT OF BONUS, COMMISSION ETC. TO
EMPLOYEES

QUESTION
THE FOLLOWING EXPENSES ARE DUE BUT
OUTSTANDING ON 31ST MARCH, 2010:
A) SALES TAX RS. 60,000; RS. 25,000 PAID ON 1ST JULY
2008 AND RS. 35,000 ON 12TH DECEMBER 2010.
B) BONUS TO EMPLOYEE RS. 1,00,000; RS. 30,000 PAID
ON 10TH JUNE 2010 AND RS. 70,000 ON 1ST
DECEMBER 2010.
C) INTEREST TO INDUSTRIAL FINANCE CORPORATION
OF INDIA RS. 80,000; RS. 30,000 PAID ON 30 JUNE
2010 AND THE BALANCE ON 28TH DECEMBER 2010.
D) INTEREST TO P&S BANK ON LOAN RS. 90,000; RS.
40,000 PAID ON 10TH SEPTEMBER 2010 AND RS.
50,000 ON 15TH JANUARY 2011.

DUE DATE OF FILING RETURN IS 30TH

SEPTEMBER 2010. FIND OUT THE PREVIOUS
YEARS IN WHICH THE AFORESAID PAYMENTS
ARE DEDUCTIBLE. THE COMPANY MAINTAINS
THE BOOKS OF ACCOUNTS ON THE BASIS OF
MERCANTILE SYSTEM OF ACCOUNTING.

SOLUTION
A. DEDUCTION AS TO SALES TAX PAYMENT OF RS.
25,000 WILL BE ALLOWED IN PREVIOUS YEAR
2009-10 AS THE SAME HAS BEEN PAID BEFORE
THE DUE DATE OF FURNISHING RETURN.
HOWEVER, RS. 35,000 SHALL BE DEDUCTIBLE
DURING THE PREVIOUS YEAR 2010-11 AS IT HAS
BEEN PAID AFTER THE DUE DATE OF
FURNISHING RETURN.
B. DEDUCTION AS TO BONUS PAYMENT OF RS.
30,000 ON 10TH JUNE 2010 WILL BE ALLOWED IN
P.Y. 2009-10, AND RS. 70,000 PAID AFTER THE DUE
DATE OF FURNISHING RETURN, SHALL BE
DEDUCTIBLE DURING P.Y. 2010-11.

C.

D.

INTEREST TO I.F.C.I. RS. 30,000 PAID ON 30TH

JUNE 2010, DEDUCTIBLE DURING THE P.Y. 200910 WHEREAS RS. 50,000 PAID ON 28TH DECEMBER
2010 SHALL BE DEDUCTIBLE DURING THE P.Y.
2010-11.
INTEREST PAYMENT ON LOAN TO A SCHEDULED
BANK PAID ON 10.9.2010 IS DEDUCTIBLE FOR
THE PREVIOUS YEAR 2009-10 WHEREAS RS.
50,000 PAID ON 15.1.2011 SHALL BE DEDUCTIBLE
DURING P.Y. 2010-11.

DEEMED PROFIT (SEC 41)

RECOVERY AGAINST ANY ALLOWANCE OR

DEDUCTION ALLOWED EARLIER
SALE OF CAPITAL ASSETS USED FOR SCIENTIFIC
RESEARCH
RECOVERY OF BAD DEBT

MAINTAINENCE OF ACCOUNTS (SEC 44AA)

A
PERSON
CARRYING
ON
SPECIFIED
PROFESSION SHALL BE REQUIRED TO MAINTAIN
ACCOUNTS IF HIS GROSS RECEIPTS IN THREE
PRECEDING YEARS EXCEEDS RS 1,50,000 OR IN
CASE OF NEW BUSINESS IT IS LIKELY TO EXCEED
RS. 1,50,000 IN THAT PREVIOUS YEAR
FOR OTHER PERSONS WHERE THE TOTAL
INCOME EXCEEDS RS 1,20,000 OR SALE EXCEEDS
RS 10,00,000 IN ANY OF THE PRECEDING 3 YEARS
OR IN CASE OF NEW BUSINESS LIKELY TO
EXCEED THE SAME DURING THE CURRENT
PREVIOUS YEAR

COMPULSORY AUDIT OF ACCOUNTS (SEC

44AB)

IN CASE OF BUSINESS TOTAL SALES OR GROSS

RECEIPTS EXCEEDS RS 40 LAKHS IN ANY
PREVIOUS YEAR OR IN CASE OF PROFESSION
EXCEEDS RS 10 LAKHS IN ANY PREVIOUS YEAR

PRESUMTIVE SYSTEM OF TAX (NO

ACCOUNTS ARE PREPARED)

PROFITS AND GAINS OF BUSINESS OF CIVIL

CONSTRUCTION (SEC 44AD) DEEMED PROFIT=
8% OF GROSS RECEIPTS IF THE RECEIPTS DO NOT
EXCEED RS 40 LAKHS DURING ANY PREVIOUS
YEAR

QUESTION
XY & CO., A PARTNERSHIP FIRM ENGAGED IN THE
BUSINESS OF CIVIL CONSTRUCTION HAS A GROSS
RECEIPT OF RS. 32,00,000 FROM SUCH BUSINESS.
THE PARTNERSHIP DEED PROVIDES FOR PAYMENT
OF SALARY OF RS. 3,000 P.M. TO EACH OF THE
PARTNERS I.E. X AND Y. THE FIRM USES
MACHINERY FOR THE PURPOSE OF ITS BUSINESS
AND THE WDV OF THE MACHINERY AS ON 1-4-2007
IS RS. 2,00,000. THE MACHINERY IS ELIGIBLE FOR
DEPRECIATION @ 15%. COMPUTE THE PROFITS
FROM THE BUSINESS, IF THE FIRM OPTS FOR THE
SCHEME UNDER SECTION 44AD.
(b) WHAT WILL BE THE PROFIT FROM BUSINESS, IF
EACH PARTNER IS PAID RS. 7,000 P.M. AS SALARY
INSTEAD OF RS. 3,000 P.M.

SOLUTION
AS PER SECTION 44AD, THE PROFITS WILL BE
COMPUTED AS UNDER:
8% OF GROSS RECEIPTS i.e. RS. 32,00,000 = RS.
2,56,000 RS. 72,000 [AS THE SALARY TO
WORKING PARTNERS IS WITHIN THE LIMITS OF
SECTION 40(b)] = 1,84,000
NO DEDUCTION WILL BE ALLOWED ON ACCOUNT
OF DEPRECIATION.
THE WDV OF THE MACHINERY FOR THE NEXT
YEAR SHALL BE TAKEN AS RS. 1,70,000 (2,00,000
15% OF RS. 2,00,000) ASSUMING AS IF
DEPRECIATION HAS BEEN ALLOWED.

(b) SALARY AS PER PARTNERSHIP DEED 7,000 X 12 =

84,000 X 2 = 1,68,000
SALARY ALLOWABLE AS PER SEC. 40(b)
ON FIRST 75,000 OF PROFITS, 90% i.e.
67,500
ON NEXT 75,000 OF PROFITS, 60% i.e.
45,000
ON BALANCE PROFITS OF
RS. 1,06,000 - 40%
42,400
TOTAL SALARY ALLOWED
1,54,900
THEREFORE, PROFITS FROM BUSINESS:
RS. 2,56,000 1,54,900 = RS. 1,01,100.

PROFITS AND GAINS OF PLYING, HIRING OR

LEASING GOODS CARRIAGES (SEC 44AE) IF
ASSESSEE OWNS NOT MORE THAN 10 GOODS
CARRIAGES DURING THE PREVIOUS YEAR THEN
DEEMED PROFIT WILL BE RS 3,500 EACH VEHICLE
FOR EVERY MONTH OR PART OF A MONTH IN
CASE OF HEAVY VEHICLES AND RS 3,150 EACH
VEHICLE FOR EVERY MONTH OR PART OF A
MONTH IN CASE OF LIGHT VEHICLES

QUESTION
A OWNS THE FOLLOWING COMMERCIAL VEHICLES:
(i) 2 LIGHT COMMERCIAL VEHICLES ONE FOR 9
MONTHS AND TWO DAYS AND THE OTHER FOR 12
MONTHS
(ii) 1 HEAVY GOODS VEHICLE FOR 6 MONTHS AND
25 DAYS.
(iii) 2 MEDIUM GOODS VEHICLES ONE FOR 6
MONTHS AND THE OTHER FOR 8 MONTHS AND 15
DAYS.
(a) COMPUTE THE INCOME FROM BUSINESS IF A
OPTS FOR THE SCHEME U/S 44AE. ALSO,
COMPUTE
HIS
TAX
LIABILTY
FOR
THE
ASSESSMENT YEAR 2008-09, IF HE DEPOSITS RS.
20,000 IN PPF ACCOUNT DURING THE PREVIOUS
YEAR.

(b) WHAT WILL BE THE INCOME IF THE TRUCKS

WERE NOT USED BUSINESS FOR TWO MONTHS
DURING THE YEAR DUE TO STRIKE?
SOLUTION
(a) THE INCOME U/S 44AE SHALL BE COMPUTED AS
UNDER:
(i) 10 X 3150 + 12 X 3150
69,300
(ii) 7 X 3500
24,500
(iii) 6 X 3150 + 9 X 3150
47,250
INCOME FROM BUSINESS
1,41,050
LESS: DEDUCTION U/S 80C
20,000
TOTAL INCOME
1,21,050

TAX ON RS. 1,21,050

ADD: EDUCATION CESS @ 2%
TAX ROUNDED OFF

1,105
22
1,127
1,130

(b) INCOME FROM VEHICLES IS TO BE COMPUTED

FOR EVERY MONTH OR PART OF THE MONTH
DURING WHICH THESE WERE OWNED BY THE
ASSESSEE EVEN THOUGH THESE ARE NOT
ACTUALLY USED FOR BUSINESS. THEREFORE,
THERE WILL BE NO CHANGE IN THE ANSWER.

PROFITS AND GAINS OF RETAIL BUSINESS (SEC

44AF)- DEEMED INCOME WILL BE 5% OF THE TOTAL
TURNOVER IF TURNOVER DOES NOT EXCEED RS 40
LAKH DURING THE FINANCIAL YEAR

PROFITS AND GAINS OF SHIPPING BUSINESS IN

CASE OF NON RESIDENTS (SEC 44B) - DEEMED
INCOME WILL BE 7.5% OF THE FREIGHT

PROFITS AND GAINS OF BUSINESS OF OPERATION

OF AIRCRAFT IN CASE OF NON RESIDENT (SEC
44BBA) - DEEMED INCOME WILL BE 5% OF THE
AMOUNT RECEIVED/ RECEIVABLE

QUESTION
A IS THE OWNER OF TWO BUILDINGS WHICH ARE
USED BY HIM FOR HIS OWN BUSINESS. THE WDV
OF THESE BUILDINGS IS RS 5,00,000 ON 1.4.2009
& THE RATE OF DEPRECIATION ALLOWABLE ON
THIS BLOCK IS 10%. HE PURCHASED ANOTHER
BUILDING ON 1.12.2009 FOR RS 2,50,000 & SOLD
ONE OF THE TWO OLD BUILDINGS ON 1.3.2010
FOR
RS
8,50,000.
TRANSFER
EXPENSES
AMOUNTED TO RS 20,000
COMPUTE THE ALLOWABLE DEPRECIATION/
TAXABLE CAPITAL GAIN FOR THE ASSESSMENT
YEAR 2010-11.
WHAT WOULD HAVE BEEN THE DIFFERENCE HAD
THE BUILDING BEEN SOLD FOR RS 3,50,000?

(i)

SALES CONSIDERATION

LESS:

OPENING WDV OF BLOCK

5,00,000

COST OF ASSET ACQUIRED DURING

THE YEAR

2,50,000

EXPENSES ON TRANSFER

8,50,000

20,000

SHORT TERM CAPITAL GAIN

(ii)

ADD:

7,70,000
80,000

IF THE BUILDING HAD BEEN SOLD FOR RS 3,50,000

OPENING W.D.V OF THE BUILDING
BLOCK

5,00,000

COST OF ASSET ACQUIRED

2,50,000

SALES CONSIDERATION

3,50,000

CLOSING W.D.V OF BUILDING

4,00,000

ALLOWABLE DEPRECIATION (ACQUIRED FOR LESS THAN 180 DAYS)

5% ON RS. 2,50,000

12,500

10% ON RS. 1,50,000

15,000
27,500

QUESTION:
CALCULATE THE TAXABLE PROFIT OF THE
ASSESSEE FOR THE ASSESSMENT YEAR 2010-11
FROM THE PARTICULARS GIVEN BELOW:
PROFIT FOR THE PREVIOUS YEAR 2009-10
13,70,000
(BEFORE ALLOWING THE FOLLOWING AMOUNTS)
(i) AMOUNT GIVEN TO APPROVED & NOTIFIED SCIENTIFIC
RESEARCH INSTITUTE ( RESEARCH NOT RELATED TO
THE BUSINESS OF THE ASSESSEE)
80,000
(ii) COST OF LAND ACQUIRED FOR CONSTRUCTING
RESEARCH LABORATORY
2,00,000
(iii) COST OF BUILDING AND PLANT & MACHINERY
REQUIRED FOR RESEARCH
12,00,000

CONTD..

(iv) AMOUNT GIVEN AS SALARY TO STAFF

ENGAGED IN RESEARCH (RELATING TO A
FIELD RELATED TO ASSESSEES OWN
BUSINESS DURING 2008-09 (BUSINESS
STARTED ON 1-4-2009).THE AMOUNT IS
CERTIFIED BY THE PRESCRIBED
AUTHORITY

90,000

(v) SALARY GIVEN TO STAFF ENGAGED IN

RESEARCH WITHIN THE PREMISES DURING
2009-10
1,20,000

SOLUTION: COMPUTATION OF BUSINESS INCOME

NET PROFIT AS PER P & L A/C
13,70,000
LESS: REVENUE EXPENSES
(i) AMOUNT GIVEN TO APPROVED
SCIENTIFIC RESEARCH INSTITUTE
[80,000 * 125%]
1,00,000
(ii) SALARY GIVEN TO STAFF ENGAGED
IN SCIENTIFIC RESEARCH RELATED
TO ASSESSEES FIELD (RESEARCH
BEFORE COMMENCEMENT)
90,000
(iii) SALARY GIVEN TO STAFF
ENGAGED IN RESEARCH DURING
2009-10
1,20,000 3,10,000
10,60,000

SOLUTION CONTD.
LESS: CAPITAL EXPENSES
(i) COST OF LAND
NOT ALLOWED
(ii) COST OF BUILDING AND
PLANT & MACHINERY
12,00,000 12,00,000
UNABSORBED CAPITAL EXPENDITURE
ON RESEARCH CARRIED FORWARD
1,40,000

QUESTION
X GIVES YOU THE FOLLOWING PARTICULARS FOR
THE YEAR ENDED 31-3-2010
NET PROFIT AS PER P&L A/C (WITHOUT ALLOWING
THE FOLLOWING ITEMS)
5,20,000
CAPITAL EXPENDITURE ON FAMILY PLANNING
70,000
LUMP SUM CONSIDERATION FOR PURCHASE OF
TECHNICAL KNOW HOW DEVELOPED IN
GOVERNMENT LABORATORY
1,20,000
ENTERTAINMENT EXPENDITURE
40,000
EXPENDITURE ON ACQUISITION OF PATENT RIGHTS 80,000
EXPENDITURE ON ADVERTISEMENT PAID IN CASH 25,000
PROVISION FOR EXCISE DUTY
60,000

CONTD..
HE PAID Rs 30,000 ON 27-6-2010, & Rs. 12,000 ON
1-11-2010 DUE DATE OF FILING RETURN IS
31-7-2010 AMOUNT PAID TO DELHI UNIVERSITY A
NOTIFIED INSTITUTION FOR AN APPROVED
RESEARCH PROGRAMME IN THE FIELD
OF SOCIAL SCIENCES NOT CONNECTED
WITH HIS BUSINESS
60,000
COMPUTE HIS BUSINESS INCOME FOR THE ASSESSMENT
YEAR 2010-11?

SOLUTION: COMPUTATION OF BUSINESS INCOME

(FOR THE ASSESSMENT YEAR 2010-11)
NET PROFIT AS PER P&L A/C
LESS: ALLOWED EXPENSES
CAPITAL EXPENDITURE ON FAMILY
PLANNING (ALLOWED ONLY TO
COMPANIES)
PURCHASE OF TECHNICAL KNOWHOW: DEPRECIATION @ 25%
ENTERTAINMENT EXPENDITURE
ADVERTISEMENT EXPENDITURE IN
CASH: DISALLOWED @ 100%
ACQUISITION OF PATENT RIGHT:
DEPRECIATION @ 25%
AMOUNT PAID TO DELHI UNIVERSITY
FOR SCIENTIFIC RESEARCH
60,000*125%
PAYMENT OF EXCISE DUTY BEFORE DUE
DATE OF FILING RETURN
TAXABLE BUSINESS PROFIT

5,20,000

NIL
30,000
40,000
NIL
20,000
75,000
30,000

1,95,000
3,25,000

QUESTION: THE FOLLOWING IS THE P&L A/C OF A FOR

THE YEAR ENDED 31-3-2010.COMPUTE HIS TAXABLE
INCOME FROM BUSINESS FOR THAT YEAR:
OPENING STOCK
15,000 SALES
PURCHASES
40,000 CLOSING STOCK
WAGES
20,000
GIFTS FROM FATHER
RENT
6,000
SALE OF CAR
REPAIRS OF CAR
3,000
INCOME TAX REFUND
WEALTH-TAX PAID
2,000
MEDICAL EXPENSES
3,000
GENERAL EXPENSES
11,000
DEPRECIATION OF CAR
3,000
ADVANCE INCOME TAX
1,000
PROFIT FOR THE YEAR
26,000
1,30,000

80,000
20,000
10,000
17,000
3,000

1,30,000

FOLLOWING FURTHER INFORMATION IS GIVEN:

(i) A CARRIES ON HIS BUSINESS
FROM RENTED
PREMISES HALF OF WHICH IS USED FOR HIS
RESIDENCE.
(ii) A BOUGHT A CAR DURING THE YEAR FOR RS 20,000.
HE CHARGED 15% DEPRECIATION ON THE VALUE OF
CAR. THE CAR WAS SOLD DURING THE YEAR FOR RS
17,000. THE USE OF THE CAR WAS 3/4TH FOR BUSINESS
& 1/4TH FOR PERSONAL PURPOSES.
(iii) MEDICAL EXPENSES WERE INCURRED DURING
SICKNESS OF A FOR HIS TREATMENT.
(iv) WAGES INCLUDE Rs. 2,500 ON ACCOUNT OF AS
DRIVER.

TAXABLE INCOME FROM BUSINESS

PROFIT FOR THE YEAR
ADD: AMOUNT NOT DEDUCTIBLE
WEALTH TAX PAID
ADVANCE INCOME TAX
RENT
MEDICAL EXPENSES
DRIVERS SALARY
REPAIRS OF CAR
DEPRECIATION ON CAR

26,000
2,000
1,000
3,000
3,000
625
750
3,000

LESS: AMOUNT CONSIDERED SEPARATELY

GIFT FROM FATHER
10,000
SALE OF CAR
17,000
INCOME TAX REFUND
3,000
INCOME FROM BUSINESS

13,375
39,375

30,000
9,735

NOTE:
SHORT TERM CAPITAL LOSS OF RS. 3000 ON TRANSFER
OF CAR WILL BE CARRIED FORWARD.

QUESTION: X IS CHARTERED ACCOUNTANT & HAS

PREPARED THE FOLLOWING INCOME & EXPENDITURE
A/C FOR THE YEAR ENDING 31-3-2010
OFFICE EXPENSES
EMPLOYEES SALARY
MAGAZINES
PERSONNEL EXPENSES
DONATION TO N.D.F
INTEREST
INCOME TAX
CAR EXPENSES
BANKING CASH
TRANSACTION TAX
NET SURPLUS

10,000
5,000
600
17,000
500
700
13,300
2,000
1,000
90,000
1,40,000

AUDIT FEES
GIFT FROM
FATHER- IN- LAW
DIVIDEND
PROFIT ON SALE OF
INVESTMENT
TAX CONSULTANCY
FEES

70,500
5,050
8,000
6,450
50,000

1,40,000

YOU ARE REQUIRED TO COMPUTE HIS PROFESSIONAL

INCOME FOR THE ASSESSMENT YEAR 2010-11
CONSIDERING THE FOLLOWING POINTS:
(a) Rs 1,000 DOMESTIC SERVANTS SALARY IS INCLUDED
IN EMPLOYEES SALARY.
(b) X IS OWNER OF A BUILDING. ITS WRITTEN DOWN
VALUE IS RS 80,000 ON 1-4-2009. THE BUILDING IS
USED FOR THE OFFICE. BESIDES THIS, FURNITURE
COSTING RS. 30,000, WHOSE W.D.V ON 1-4-2009 IS RS
25,000 IS USED FOR PROFESSION. ALLOWED
DEPRECIATION @ 10% UNDER INCOME TAX ACT.

SOLUTION: INCOME FROM PROFESSION

NET SURPLUS AS PER INCOME & EXP. A/C
ADD: EXPENSES NOT ADMISSIBLE
DOMESTIC SERVANT SALARY
1,000
PERSONAL EXPENSES
17,000
DONATION TO N.D.F
500
INCOME TAX
13,300
LESS: ITEMS CONSIDERED SEPARATELY
GIFT FROM FATHER IN LAW
DIVIDEND
PROFIT ON SALE OF INVESTMENT
LESS:DEPRECIATION ON BUILDING
DEPRECIATION ON FURNITURE
INCOME FROM PROFESSION

5,050
8,000
6,450
8,000
2,500

90,000

31,800
1,21,800

30,000
91,800

NOTE: BCTT IS ALLOWED AS DEDUCTION U/S 36(1)(xiii)

QUESTION
COMPUTE THE TAXABLE INCOME OF A LTD. FOR
THE PREVIOUS YEAR 2009-010 FROM THE
FOLLOWING P&L A/C AND ADDITIONAL
INFORMATION:
SALARIES &
GROSS
BONUS
1,00,000 PROFIT
5,00,000
OFFICE RENT 10,000 INTEREST ON
WAR RISK
GOVT. SECURITIES 10,000
INSURANCE
10,000 PROFIT ON SALE
POSTAGE AND
OF LISTED SHARES
STATIONERY
10,000 BOUGHT ON 1-6
GENERAL
-2006 AND SOLD IN
CHARGES
20,000 MAY, 2007
15,000

RESERVE FOR
DEPRECIATION
25,000
INCOME TAX
2008-09
50,000
PROVISION FOR
INCOME TAX
2009-10
2,00,000
NET PROFIT
1,00,000
5,25,000

5,25,000

ADDITIONAL INFORMATION:
INFORMATION
(i) THE GENERAL CHARGES INCLUDE RS. 5,000 FOR
ADVERTISING, RS. 1,000 FOR CHARITABLE

DONATIONS, RS. 3,000 PAID TO A MOTOR CAR

COMPANY FOR EXCHANGE OF THE OLD CAR
FOR NEW ONE, RS. 1,000 FOR CHARITY AND RS.
5,000 FOR MISCELLANEOUS REPAIRS.
(ii) THE AMOUNT OF DEPRECIATION ADMISSIBLE
UNDER THE INCOME TAX ACT IS RS. 15,000 ONLY.
(iii) THE COMPANY ALSO DEALS IN SHARES.

SOLUTION
TAXABLE INCOME OF A LTD. FOR THE P.Y. 2009-10
NET PROFIT AS PER P&L A/C
1,00,000
LESS: INTEREST ON GOVT.
SECURITIES
10,000
PROFIT ON SALE OF
SHARES
15,000
25,000
75,000
ADD: EXPENSES NOT ALLOWABLE
RESERVE FOR DEP.
25,000
INCOME TAX 08-09
50,000
PROVISION FOR
INCOME TAX 09-10
2,00,000

SOLUTION CONTD.
CHARITABLE DONATIONS
1,000
CHARITY
1,000
AMOUNT PAID TO EXCHANGE
MOTOR CAR3,000 2,80,000
3,55,000
LESS: DEPRECIATION ALLOWABLE
AS PER INCOME TAX
a) BUSINESS INCOME
3,40,000
b) INCOME FROM SPECULATION
BUSINESS (SALE OF SHARES)*
c) INCOME FROM OTHER SOURCES
INTEREST ON GOVT. SECURITIES
GROSS TOTAL INCOME 3,65,000

15,000

15,000
10,000

SOLUTION CONTD.
GROSS TOTAL INCOME
3,65,000
LESS: DEDUCTION U/S 80G CHARITABLE
DONATION (50% OF RS. 1,000)
500
TOTAL TAXABLE INCOME
3,64,500
NOTE:
NOTE THE CHARITABLE DONATION IS ASUMED TO
BE A TRUST/INSITUTION WHIH IS COVERED U/S
80G.
* AS PER EXPLANATION TO SEC. 73, WHERE ANY PART
OF THE BUSINESS OF A COMPANY OTHER THAN
INVESTMENT, BANKING COMPANY, ETC. CONSISTS
IN THE PURCHASE AND SALE OF SHARES OF OTHER
COMPANIES, SUCH COMPANY SHALL BE DEEMED
TO BE CARRYING ON A SPECULATION BUSINESS.

THANK YOU
sirnkgupta@yahoo.com