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 business
Net profit as per profit and loss account XXX
ADD: 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 XXX
of closing stock
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 XXX
of closing stock
INCOME FROM BUSINESS XXX
 ADMISSIBLE DEDUCTIONS
Admissible Deductions
Specifically 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