COMPUTATION OF PROFITS & GAINS OF BUSINESS OR PROFESSION:

Sections / Contents
Sections: 28- Chargeability :-Under head Profits and gains of business or
profession
Section: 29 -Computation of profits and gains from business or profession
( Permits deductions/ allowances )
Sections 30 to section 37 : deductions expressly allowed in respect of
expenses and allowances

Section: 30- Deduction of Rent, rates, taxes, repairs and insurance for
buildings
Section 31 - Deductions of Repairs and insurance of machinery, plant and
furniture

Section: 32 Depreciation (excluding Depreciation Rates)

Section 36: Deductions (Restricted to following clauses).

Sec. 36 (1) (i) Insurance Premium

Sec. 36 (1) (ii) Bonus/Commission to employees.
Sec. 36 (1) (iii) Interest on Borrowed Capital
Sec. 36 (1) (iv) Employers Contribution to recognized Provident Fund &
Approved Superannuation Fund.
Sec. 36 (1) (v) Contribution towards Approved Gratuity Fund
Sec. 36 (1) (vii) Bad Debts
General deductions
Sec. 37 (1) General Deduction.
Sec. 37 (2B) Advertisement Expenses in Souvenir etc. of a Political Party.
Amount not deductible Sec 40
Sec. 40 (a) Interest , Royalty, fees for technical services payable outside India
or payable to non- resident in India is disallowed where TDS is not deducted
40A(2) Payments to relatives 40 A(2)
40A(3) payment exceeding Rs 20,000 paid otherwise than by account payee
cheques or Bank drafts
43B Disallowance of unpaid liabilities ( applicable in case of
mercantile system ).
Special provisions
Sec. 44AA Provisions in relation to maintenance of books of accounts
44AB Audit of accounts of certain persons
44AD Computation of income on estimated basis in case of taxpayer
engaged in certain business
44AE computation of income on estimated basis in case of taxpayer engaged
in the business of plying, leasing or hiring trucks

Section 28 Chargeability :- Profits and gains of business or profession

Profits and gains of any business or profession

Any compensation or other payments due to or received by any person
specified in section
Income derived by a trade, professional or similar association from specific
services performed for its members
The value of any benefit or perquisite, whether convertible into money or not,
arising from business or the exercise of a profession
Export incentive available to exporters

Income chargeable
Any interest, salary, bonus, commission or remuneration received by a
partner from firm
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.
Any sum received under a Key man insurance policy including bonus
 Profits and gains of managing agency
Income from speculative transaction.

Methods of Accounting
Mercantile system of accounting- accrual basis
Cash system of accounting

Section 29:- Computation of profits and gains from business or profession

Determine profit from business or profession

Adjustment in respect of expenses allowable or not allowable
Expenses debited to profit and loss account but are not allowed as per
income tax Act, are to be added to profits
Partly disallowed expenses to be added to profits
Expenses which are admissible but not debited to profit and loss account
should be deducted from profits
Income chargeable but not credited to profit and loss account should be
added to profits
Income which are credited to profit and loss account but not taxable under
the head profits and gain of business or profession , should be deducted

Deductions allowable
Section 30 :- Rent, rates, taxes, repairs and insurance for buildings

Rent, Rates, taxes, Repairs and insurance of Buildings (sec 30) (only revenue expenditure )

Section 31:-Repairs and insurance of machinery, plant and furniture

Repairs and insurance of machinery, plant and furniture

 (only revenue expenditure )

Section 32 - Depreciation

In order to avail depreciation, following conditions are to be satisfied

Asset must be owned by the assessee.
It must be used for the purpose of business or profession.
It should be used during the relevant previous year.
Depreciation is available on tangible as well as intangible assets

Depreciation
Normal depreciation ( full years depreciation) is available if an asset is put to
use at least for sometime during the previous year.
However, depreciation allowance is limited to 50 per cent of normal
depreciation, if the following two conditions are satisfied
where an asset is acquired during the previous year; and
it is put to use for the purpose of business or profession for less than 180
days during that year.

BLOCK OF ASSETS
The term block of assets means a group of assets falling within a class of
assets comprising
Tangible- Buildings, Machinery, plant, furniture, etc.
Intangible - know-how, patents, copyrights, trade marks, licenses, franchises,
etc.
Computation of written down value
Step 1 -Find out the depreciated value of the block on the April 1
Step 2 -To this value, add actual cost of the asset (falling in the block)
acquired during the previous year
Step 3 From the resultant figure, deduct money received/receivable (together
with scrap value) in respect of that asset (falling within the block of assets)
which is sold, discarded, demolished or destroyed during the previous year .

No depreciation is provided ---

If written down value of the block of asset is reduced to zero, though the
block is not empty.
If the block of asset is empty
Section 36: Deductions (Restricted to following clauses)

Sec. 36 (1) (i) Insurance Premium (stock / stores )

Sec. 36 (1) (ii) Bonus/Commission to employees.
Sec. 36 (1) (iii) Interest on Borrowed Capital (for purpose of business /
profession
Sec. 36 (1) (iv) Employers Contribution to Recognized Provident Fund &
Approved Superannuation Fund.
Sec. 36 (1) (v) Contribution towards Approved Gratuity Fund (not to exceed
8.33 percent of salary )
Sec. 36 (1) (vii) Bad Debts (written off as irrecoverable )
Sec. 37 (1) General Deductions (Revenue expenditure related to business )
Sec. 37 (2B) Advertisement Expenses in Souvenir etc. published by Political
Party is not allowed as deduction.

Amount not deductible

Section 40(a)- Interest , Royalty, fees for technical services payable outside
India or payable to non- resident in India is disallowed where TDS is not
deducted
(Aforesaid amount is chargeable to tax )

Payments to relatives 40 A(2)

40A(2) Any expenditure by way of Payment to relatives is liable to be
disallowed in computing business profit to the extent such expenditure is
considered as excessive or unreasonable having regard to fair market value
of goods and services or facilities.
Relative husband , wife , brother , sister or any lineal ascendant or
descendent of that individual

Lineal Ascendant means father, grandfather, great grand father... Lineal Descendant means son,
grand son, great grand son....

Amount not deductible

40A(3) payment exceeding Rs 20,000 paid otherwise than by account payee
cheques or Bank drafts.
 Expenditure incurred is otherwise deductible under provisions of the act for
computing business income.

Sec. 43(B) Disallowance of unpaid liabilities.

Applicable when accounts are maintained under mercantile system

The following expenses are deductible on payment basis
Sum payable by way of tax, duty , cess
Contribution to employees PF or superannuation fund for welfare of employee
Bonus / commission paid to employees for service rendered
Interest on loan payable
Salary in lieu of leave payable

Maintenance of accounts by certain person s(Sec 44AA)

Specified professionals:
Assessee carrying on profession of law, medicine, accountancy, architecture,
technical consultancy, interior decoration, authorized representative, film artist,
information technology professionals
Whose gross receipts in the profession exceed Rs.1,50,000 in all the three years
immediately preceding the previous year or( for newly setup profession during
current previous year in which business is commenced)

Maintenance of accounts
by other Persons covered
u/s 44AA (2):

Any other persons engaged in any other profession or carrying on any business
other than section 44AA (1)
The requirement of compulsory maintenance of books of accounts applies if-
Either the income from business or profession exceeds Rs 120000 or
The turnover or gross receipts exceed Rs 10 Lakhs in any one of the three years
immediately preceding the previous year.
Section 44AB compulsory audit
1. 44AB section stipulates that every person carrying on business or profession
is required to get his accounts audited by a CA
2. In case of Business - if the total sales, turnover or gross receipts exceed Rs.1
crore
3. In the case of profession gross receipts exceed Rs.25 lakhs

44AD computation of income on estimated basis in the case of tax payer engaged on certain
business

1. Section will be applicable to any business ( whether it is Retail trade, or Civil

construction or any other business).
Applicable if the following conditions are satisfied:
Assessee eligible for the purpose of this Section has to be an Individual / HUF/
Partnership Firm
2. The assessee has not claimed any deduction u/s.10A,10AA,10B,10BA,80HHto
80RRB in the relevant Assessment Year;
3. Income from the eligible business is estimated at 8 percent of the gross
receipts or total turnover .
4. Exempted from payment of advance tax
5. Exempted from maintenance of books of account
6. Total Turnover/ Gross Receipt of the Assessee in the previous year should not
exceed Rs. 1 crore
7. Following persons are not eligible to avail any benefit under this section
8. A person carrying of profession as referred under section 44AA(1)
9. Earning income in the nature of commission or brokerage
10. Carrying of any agency business
11. A person who is in the business of plying, hiring or leasing goods carriages

44AE computation of income on estimated basis in the case of taxpayers engaged in business of
plying, leasing or hiring trucks

1. Income Calculation:
In case of Heavy Vehicle, Rs.5000/- per month per truck
In case of others, Rs.4500/- per month per truck
2. "Goods Carriage and Heavy Vehicles" means as described in the Motor
Vehicles Act
3. "Eligible Assessee" is one who has NOT MORE THAN TEN TRUCKS.
4. Maintenance of books of account is not