Profits From Business & Profession
It is the most important head of income. Here, tax is paid by the assessee who carries on the business
or profession. It is paid on total income earned from all types of business. It can be undertaken at any time
during the previous year. It may include:
a) Income derived by a trade, professional or similar association from specific service rendered
to its members.
b) Export Incentives like sale of REP licences, cash assistance, duty drawback etc.
c) The value of any benefit or perquisite whether convertible into money or not arising from
business or exercise of a profession.
d) Any interest, salary, bonus, commission or remuneration, by whatever name called, due to,
or received by, a partner of a firm from such firm.
PROFESSION:
“Profession” implies professed attainment in special knowledge as distinguished from mere skill.
Every businessman prepares a Profit and Loss Account for his every business activity. However, book profit
showed by this account cannot be accepted as true income because it is affected by many non-business, noneligible and irregular items.
I) Computation of taxable income when P/L Account is given:
Net Profit as per P/L Account
Add: Disallowed/ to be considered separately:
1) ...........
2) ...........
Less: Allowed/ to be considered separately:
1) ............
2) ............
Taxable income from business
x
x
x
x
x
x
x
x
xx
The following items are specifically allowed as deduction while computing taxable income from business:
1) Rent, Rates, taxes, insurance and repairs of Building [sec. 30].
2) Repairs and insurance of machinery and furniture [sec. 31].
3) Depreciation of assets [sec. 32].
4) Amortisation of Preliminary Expenses: [sec. 35 D]
5) Insurance Premium on stocks: [sec. 36 (1) (i)]
Amount of premium paid is allowed as deduction.
6) Insurance Premium on health of employees : [sec. 36 (1) (ib)]
Amount of premium paid for insurance on the health of his employees is allowed as deduction.
7) Bonus or Commission to employees: [sec. 36 (1) (ii)]
Bonus or commission paid to the employees is allowed as deduction.
8) Interest on loan: [sec. 36 (1) (iii)]
Interest paid on money borrowed for the purpose of business or profession is allowed as deduction.
9) Contribution to RPF or Approved Super annuation Fund: [sec. 36 (1) (iv)]
Such payment of contribution is allowed as deduction.
10) Contribution to Approved Gratuity Fund: [sec. 36 (1) (v)]
Such payment of contribution is allowed as deduction.
11) Write-off Allowance for Animals: [sec. 36 (1) (vi)]
The animals which are used for the purpose of business or profession, have died during the year, the
difference between the actual cost of the animals and the amount realised on their sale of carcasses, is
allowed as deduction.
12) Bad debts written off: [sec. 36 (1) (vii)]
Bad debts which have been actually written off during the year, are allowed as deduction.
13) Family Planning Expenses: [sec. 36 (1) (ix)]
A company can claim deduction for the expenses incurred for promoting family planning amongst its
employees. Amount of deduction is 1/5 of expenditure every year for 5 years if it is a capital expenditure.
General Deductions [sec. 37 (1)]:
It is a residuary provision. It applies to expenditure not covered by any of the above deductions. The
expenditure must satisfy the following conditions in order to claim deduction under this provision:
a) The expenditure should not be of the nature described in sections 30 to 36.
b) It should not be in the nature of capital expenditure.
c) It should not be in the nature of personal expenses of the assessee.
d) It should have been expanded wholly or exclusively for the purpose of such business.
e) Itshouldnotbeforapurposewhichisanoffenceorwhichisprohibitedbylaw.[e.g.bribespaid].
Examples of Expenses Allowed u/s. 37:
1) Litigation expenses for protecting assets or for purpose of business.
2) Expenses in connection with obtaining loan e.g.
- legal charges for drafting agreement of loan.
- brokerage paid for raising loan amount.
- stamp and registration charges in respect of bank loan.
- stamp duty etc. for loans by way of debentures.
- commitment charges on loans sanctioned but not yet availed.
3) Damages paid- to a worker to dismiss him in the interest of business.
- for failure to fulfil a contract in time.
4) Commission paid- to broker for giving personal guarantee for loans.
- to manager by way of percentage of profits.
- to selling agents.
5) Contribution to- a syndicate formed to prevent undesirable competition.
- a union formed to oppose nationalisation of business.
6) Expenses on diwali, muhurat etc. for the purpose of business.
7) Premium paid on ‘loss of profits’ insurance policies.
8) Professional tax paid in respect of business or profession.
9) Deposit paid under Own Your Telephone (OYT) scheme, in the year of payment, even though telephone is
not installed in that year.
10) Expenses on registration of trade mark.
11) Expenses on opening ceremony of a new branch office.
12) Expenses on special advertisement campaign to launch a new product or at the time of opening a new
branch.
13) Cash shortage found at the end of day.
14) Periodical payment for the use of goodwill, trademark, quota rights.
15) Periodical payment of royalty on goods sold.
16) Lawful expenses related to illegal business.
17) Premium on redemption of debentures.
18) Discount on issue of debentures (to be spread pro-rata over term of debentures).
19) Contribution to municipality for repairs or re-routing of pipelines in assessee’s area; for setting up health
centre near assessee’s factory; to Electricity Board for laying new lines in assessee’s area (as the assets created
- pipelines, health centre, new lines were not owned by the assessee).
20) Advertisement Expenses. However advertisement in any sovenior, brochures etc. of a political party will
not be allowed.
21) Guest House Expenses will be fully allowed.
22) Amount of sales tax paid and expenses incurred in connection with sales-tax proceedings including
appeals.
23) Compensation paid to an undesirable employee for the retrenchment of his services or to a director to get
rid of his services.
24) Contribution made to unrecognised provident fund maintained for the benefit of employees.
25) Commission, etc. paid for securing orders for the business.
26) Compensation paid to employees in connection with injury sustained by them or accident met by them
while on duty.
Examples of Expenses Not Allowed u/s. 37:
1) Penalty, fines and damages for breach of law.
2) Contribution to a political party not related to business.
3) Expenses on issue of share capital or shifting of registered office.
4) Litigation expenses to cure defect in title of an asset; for registration of shares; for amalgamation of
company.
5) Expenses on boring of a new tube-well, which turned out to be dry; on preparation of project report for a
project subsequently given up; on demolishing a factory building to construct a cinema theatre in its place
(object of such expenses was to create a new asset).
6) Compensation paid to tenant to get vacant possession.
Expenses Not Allowed :
1. Sec. 40(a): Amount payable outside India on which tax is not paid in India.
2. Sec. 40(a) : Income Tax, Wealth Tax paid in India.
3. Sec. 40(a) (ia): Payment to residence without TDS.
4. Sec. 40(a) (ib): Securities transaction tax.
5. Sec. 40(a) (ic): Fringe benefit tax
6. Sec. 40A (2): Excessive payments:
Where the assessee incurs any expenditure in respect of payment made to relative or to an associate
concern, which is excessive as per the opinion of Assessing Officer such expenditure is disallowed.
7. Sec. 40A(3): Expenses exceeding Rs. 20,000/- paid in cash:
If an assessee incurs any expenditure in respect of which payment in excess of Rs. 20,000 is made otherwise
than by a crossed cheque or draft, 20% of such expenditure will not be allowed as deduction.
Rule 6DD, however, prescribes the circumstances when even such cash payments would be allowed in full.
85. Sec. 40A(9): Contribution to Non-Statutory funds is not allowed as deduction.
In addition to the above expenses. which are expressly disallowed under section 40 and 40A, following are
some of the expenses not allowable as deduction while computing Taxable Income from Business.
1. Drawings of proprietor or partners.
2. Personal expenses of the proprietor or partners.
3. Capital expenditure.
4. Any provision or transfer to reserve except transfer to reserve as provided in the Act.
5. Amounts paid as charity or presents.
6. Past losses charged to Profit and Loss Account.
7. Any expenditure not incurred wholly and exclusively for the purpose of the business or profession.
8. Income-tax, wealth-tax and other taxes on income.
9. Expenditure incurred to buy off competition.
10. Penalties paid by the assessee.
9. Sec.40(b): Remuneration paid by firm to partners
Allowable remuneration
Amount of Book Profits (BP)
Professional Firms
a) Loss
b) First Rs. 1,00,000 of BP
c) Next Rs. 1,00,000 of BP
d) Balance of BP
Other Firms
a) Loss
b) first Rs. 75,000 of BP
c) Next Rs. 75,000 of BP
d) Balance of BP
Total Allowable Remuneration
Rs. 50,000
Higher of Rs. 50,000 or 90% of BP
60% of BP
40% of BP
U/s. 43 B: Deduction on account of following payments will be allowed only on payment basis:
1. Tax duties, cess under any law.
2. Employer’s contribution to P.F. etc.
3. Bonus/ Commission.
4. Interest payable on the loan of financial institution/ Banks.
However if payments are made before the due date of filing the returns of Income then the deduction
will be allowed.
Sec. 32: Depreciation:
Depreciation can be claimed in respect of the specified assets, i.e. tangible (building, machinery or
furniture) or intangible (Knowhow, patents, copyrights or trademarks). The asset must be owned by the
assessee and it must have been used for business during the previous year.
Depreciation is computed (a) at the prescribed rate (b) on WDV (c) of a block of assets.
Block of Assets:
It means a group of assets in respect of which the same percentage of depreciation has been prescribed.
All the assets are first divided in two main types : Tangible and Intangible.
Tangible assets are divided into following 3 classes: (1) Building (2) Machinery and (3) Furniture.
Intangible assets [purchased after 1/4/98] are divided into following 7 classes:
1) Know-how 2) Patents 3) Copyrights 4) Trade marks 5) Licence 6) Franchises and 7) other similar rights.
Different rates of depreciation are prescribed for different items even falling within the same class. The
items within a class eligible for the same rate of depreciation form a separate group which is known as a
“Block of Assets”.
Written Down Value:
WDV of a block of assets for the previous year 2007-2008 is calculated as follows:
Opening WDV as on 1/4/2007
X
(+) Actual cost of any asset acquired during 2007-08
(-)
X
X
Sale price of asset of that block sold /
discarded
Closing WDV of that block of Asset as on 31/3/2008.
X
XX
Prescribed Rates:
Depreciation rates in respect of different blocks of assets are prescribed in I-Tax rules. They are applied to the
Closing WDV of the asset as explained above.
Important Notes:
1) If the asset is purchased after 30th Sept. of the previous year, depreciation will be considered only for 6 months i.e. half of its eligibility.
2) When sale price of any asset is more than the total of opening WDV of the block and purchases; then the WDV of the block is taken as nil and not negative.
3) When a block of assets becomes empty, no depreciation can be claimed on such block,
whether it has any WDV or not.
4) No depreciation is allowed on foreign car.
5) No depreciation on Scientific Research Assets.
Computation of Taxable Income from Business:
A) When P/L Account is given:
Net Profit as per P/L A/c.
Add: 1) Unrelated Items debited to P/L A/c
2) Expenses specifically disallowed
3) Taxable incomes but not shown in P/L A/c
Less:
1) Unrelated Items credited to P/L A/c
2) Deductions specifically allowed
3) Deductions not shown in P/L A/c.
Taxable Income from Business/ Profession
X
X
X
X
X
X
X
X
X
X
XX
B) When Receipts and Payment A/c is given:
Business or professional Receipts / Income:
1) Income/ Receipts from Business or Profession
2) Profit on sale of import licence
3) Duty Drawback, Export cash assistance
4) Compensation for termination of management/
Agency
(-) Business or Professional Payments/ Expenses:
1) Business expenses
2) Expenses expressly deductible
Taxable income from Business/ Profession
X
X
X
X
X
X
X
X
XX