Profits and Gains of Business or Profession

This is the largest head of income

It

includes every body from a small shopkeeper having a shop at the roadside to as high as the biggest businessman.

This head of income covers the largest number of persons who could be taxed under the act. This includes profits and gains that are earned in practically every business activity.

Basis of Charge (Section 28)

Following Incomes shall be charged to tax under this head Profit and Gains of any business or Profession carried on by the assessee Any Compensation or other payments due or received by assessee, for loss of agency, due to termination or modification in terms and conditions of such agency Income derived by a trade, professional or similar association, for specific services performed; for its members. Export Incentives received by Exporter such as Sale of licenses, Cash Assistance, Duty Drawback

Basis of Charge (contd.)

Value

of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession Interest, Salary, Bonus, Commission or remuneration due to or received by, a partner of a firm from such firm. Sum Received or receivable in cash or kind for a) not carrying out any activity b) not sharing any knowhow's, patent etc. Sum Received under Keyman Insurance Policy Income from Speculative Business.

Business & Profession

Business

includes any Trade, Commerce or Manufacture or any adventure in the nature of Trade, Commerce or Manufacture.
Adventure

in the nature of trade and commerce: It means even a single activity can be also called as a business. So for business definition it is not necessary that the activity should be carried out regularly and continuously. Even if there is an isolated transaction then also it is liable to be called for business.

Profession:

means an occupation requiring specialised Knowledge and Skill. Vocation: is an activity in which an assessee has specialised skill for earning Income. Business cannot be carried out with own self. It means that there has to be some bilateral relations between two or more persons and business done with self does not make sense and it therefore not entertained under law.

Method of Accounting
Two methods of accounting: Cash system : Income and expenses recorded on receipt/payment basis and mercantile system: Income and expenses are recorded on accrual basis Income under this head should be calculated on the basis of method regularly employed by the assesses. Hence the method of accounting followed is important.

Deduction Allowable

Rent, Rates, Taxes and Insurance of Building ( u/s 30)

Deduction

is allowed in respect of these expenditures if incurred for the purpose of business or profession Rent of building is not deductible if the building is owned by the assessee Capital expenditure on repair is not deducitble.
Repairs
Allowable

and Insurance of Machinery, Plant and Furniture (u/s 31):

expenditure includes expenditure on current repairs and not capital expenditure and Insurance on P&M and Furniture used for business purpose.

Depreciation (u/s 32)

Following conditions are to be fulfilled. a) Assessee must be owner of the Asset. b) Asset must be used for the purpose of business or Profession. c) Such use must be in the relevant previous year. d) It is available on Tangible as well as Intangible assets

Depreciation
Deprecation is allowed in respect of a) Building b) Plant & Machinery c) Furniture d) Motor Vehicles e) Computers f) Intangibles

Depreciation
Depreciation is allowed on the Written Down Value of Block of Assets Opening WDV XX Add : Purchases during the year XX Less : Sales during the year XX Closing WDV XX Note : If the Asset is put to use for less than 180 Days in the year, depreciation will be allowed at 50 % of the eligible rate.

DEPRECIATION RATES
Particulars Rate of Depreciation

Residential Building
Office, Factory, Godowns or Buildings not used for residential purpose Purely temporary construction e.g. Water supply project building, wooden structures Furniture (including Electrical fittings)

5%
10% 100% 10%

Plant and Machinery not covered under following blocks and motor cars other than used for running them on hire 15% P&M : Ocean going ships, vessels operating on inland water including speed boats 20% P&M : Buses, Lorry and Taxis used in the business of running them on hire P&M : Aeroplanes, commercial vehicles and life saving medical equipments 30% 40%

P&M: Containers made up of glass or plastic used as refills, new commercial vehicle

50%

Depreciation Rates
P&M : Computers including softwares 60% P&M : Energy saving devices., Rollers in flour mill, sugar work and steel 80% industry Intangible assets Knowhow, patents, copyrights, trademark, license 25%

P&M : Air pollution control equipment, water pollution control equipment, solid waste control equipment

100%

Depreciation(Contd..)
Exceptions: No Depreciation is admissible when WDV has been reduced to Nil though Block of Assets does not cease to exist on the last day of the Previous year. If Block of Assets cease to exist or all Assets of the Block have been transferred and block is empty, No Depreciation is admissible. If the Asset is put to use for less than 180 Days in the year, depreciation will be allowed at 50 % of the eligible rate. In case of transfer of Assets due to succession, amalgamation, business reorganization or demerger, Depreciation is first calculated as if there is no transfer and the amount of Depreciation shall be apportioned between predecessor and successor in the ratio of no. of days of holding the asset.

Additional Depreciation
Additional Deprecation @ 20 % of Actual Cost of Machinery acquired and installed after 31.03.2005 for a) New Industrial Undertaking b) Existing Industrial Undertaking Conditions to be fulfilled for Additional Depreciation: The assessee must be engaged in manufacturing, production of any article. New P&M should be acquired and installed after 31st March, 2005 It should be an eligible P&M.

Additional Depreciation (Contd..)

Additional depreciation is not available in the case of ships, aircrafts, second hand assets, assets installed in office, residence, guesthouse, office appliances, road transport vehicles, and those assets which are qualified by 100% deduction in the first year Note:If the asset is put to use for less than 180 days in the year in which it is acquired, the rate of additional depreciation will be 10%

Unabsorbed Depreciation

Depreciation allowance is first deductible from the income. If it is not fully deductible, under the head Profits and Gains from Business and Profession because of absence or inadequacy of the profits; it is deductible from Income chargeable under other Heads (except Income under the head Salaries) for the same assessment year If depreciation allowance is still unabsorbed, it can be carried forward to the subsequent assessment years by the same assessee. No time limit is fixed for the purpose of carrying forward of unabsorbed depreciation

Expenditure of Scientific Research U/s 35

Revenue expenditure on scientific research is deductible in the year in which it is incurred, if it relates to the business. Any capital expenditure (other than Cost of Land) expended on scientific research related to the business is deductible. Depreciation in such a case is not deductible Contribution to i) Approved research association, approved university, college, other institutions is deductible at the rate of 175% of actual expenditure ii) Approved research association, university, college for the purpose of research in social sciences or statistical research eligible for 125 % Deduction

iv) Contribution to an approved national lab, university, IIT is deductible @ 200% of the contribution. v) In House Research in specified industries eligible for 200 % Deduction

Expenditure for Obtaining License to operate Telecommunication Services U/s 35ABB

Deduction under this section is available if following conditions are satisfied: 1. Expenditure is capital in nature 2. It is incurred for acquiring any right to operate telecommunication services. 3. Expenditure is incurred either before commencement of business or thereafter. 4. Payment for the work has been actually made to obtain license. Amount of deduction: Allowed as Deduction equally over the number of years of Validity of Licenses starting from the year of payment and upto the year in which license comes to an end(Irrespective of the year in which the liability is incurred)

Profit/Loss on sale of telecom license:

Any profit/Loss is taken as business income and taxed accordingly. Rules are as under:
Different Situations Entire telecom licencse is transferred
When sale consideration is less than WDV When sale consideration is more than WDV WDV minus sale consideration is allowed as deduction in the year of sale Excess of sale consideration over WDV is taxable as business income in the year of sale

Tax Treatment

When a part of telecom license is transferred When sale consideration is less than WDV WDV minus sale consideraion will be allowed as deduction over the unexpired period

When sale consideration is more than WDV

Excess of sale consideration over WDV is taxable as business income in the year of sale

WDV means the expenditure incurred remaining unallowed. In situations when sale consideration is more than WDV, amount taxable as business income cannot exceed the deduction allowed u/s. 35ABB in earlier years. In case of amalgamation/demerger when a license is transferred, deduction will not be available to the amalgamating co. or demerged company but will be available to the amalgamated or resulting company If deduction is allowed under this section , no deduction for depreciation u/s.32 will be allowed for the same expenditure in the said previous year or subsequent years

Other Expenditures
35AC : Expenditure on Eligible Projects: Where an assessee incurs any expenditure by way of payment to a public sector company or a local authority or to an institution approved by national committee for carrying out any eligible project or scheme, the assessee shall be allowed a deduction of such expenditure

35AD : Investment linked tax incentive:

The

tax payer should be in the business specified as per the section The business specified includes setting up and operating a cold chain facility , warehousing faciltiy for storage of agricultural products, laying and operating a cross country natural gas or crude or pertoleum oil pipeline network , building and operating a new hotel of 2 star or above category, hospital with at least 100 beds, developing and maintaining housing project, production of fertilizer in India , beekeeping, warehouisng for sugar.

Specified business should be new business:

It should not be formed by splitting up or reconstruction of a business already in existence It should not be set up by transfer of old plant and machinery However, 20% old machinery is permitted Second hand imported machinery is treated as new subject to the following conditions; i. Such a machinery was not at any time previous to the date of the installation by the assessee used in India ii. Such machinery or plant is imported into India from any country outside India iii. No deduction on account of depreciation on such assets has been allowed previously

Books of accounts of the assessee should be audited Amount of Deduction: The expenditure(other than land and building, goodwill or financial instrument) is deductible 100% in the year in which it is incurred Preliminary expenditure will be allowed in the year of commencement of business Consequences of claiming deduction : No deduction u/s. 80 for the same year No deduction of the same expenditure for any other sections

Any sum received/receivable on account of any capital asset in respect of which deduction has been allowed under this section , being demolished, destroyed, discarded or transferred shall be treated as income and chargeable to tax under PGBP Any loss shall not be set off except against profits and gains if any of any other specified business . If the loss remains unabsorbed it will be carried

Amortisation of
Preliminary Expenses ( Section 35D): Deduction available to Indian company or a resident non corporate assessee One fifth of the qualifying amount is available as deduction in 5 Years beginning with the year in which business commences Amortisation of Amalgamation or Demerger expenses (Section 35DD): The expenditure allowable in 5 Years in 5 equal installments starting from the year in which amalgamation or demerger takes place No deduction is available under any other provisions of the Act

Amortisation

of VRS Expenses (section 35DDA): The expenditure allowable in 5 Years in 5 equal installments

Other Deduction u/s 36

i.

ii. iii. iv.

v. vi. vii. viii. ix.

x.

Insurance premium paid to cover the risk of damage or destruction of Stock. Insurance Premium of health of employees Bonus or Commission paid to Employees Interest on Capital borrowed for the purpose of business Employers Contribution to Recognised Provident Fund and Approved Superannuation Fund Contribution to Approved Gratuity Fund Employees contribution to staff welfare scheme. Bad Debts Expenditure on promotion of Family Planning among employees (Revenue exp Fully; Capital exp 1/5) Discount on Zero coupon Bonds.

General Expenses u/s 37

Conditions to be fulfilled 1. Expenditure should not be in the nature prescribed u/s 30 to 36 2. Not a Capital Expenditure 3. Not Personal Expenditure 4. Should have been incurred in the previous year 5. For the purpose of Business 6. Should not have been incurred for any purpose which is an offence or is prohibited by any law

Advertisement Expenses ( Section 37(2B)

Deduction is not allowed in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or like published by a political party.

Tea, Coffee, Rubber Development Account u/s.33AB

The assessee must satisfy the following conditions: 1. The assessee must be engaged in the business of tea, coffee or rubber plantation which includes growing and manufacturing tea or coffee or rubber in India 2. It must make a deposit in special account [with NABARD or in accordance with the scheme approved by Tea Board or Coffee Board] Or to be deposited in an account opened by the assessee in accordance with the scheme framed by Board with the approval of Central Government

Sec 33AB Contd..

3 The deposit should be made within specified time limit [six months from the end of the previous year or before the due date of furnishing of the return of income, whichever is earlier] 4 The accounts of the assessee should be audited

Amount of Deduction:

Amount deposited in special account OR 40% of the profit of such business before making any deduction u/s. 33AB and before adjusting any brought forward business loss u/s. 72

Sec 33AB Contd..

If deduction is claimed as per this section, no further deductions shall be allowed in in any other previous year If deduction allowed to AOP,BOI, no deduction to any of their members Any excess amount in special account is not treated as deposit made in the next year/s After allowing the deduction under this section, as per rule 8, 40% of the balance taxable amount will be treated as non agricultural income and liable to tax and balance 60% is treated as agricultural income and hence exempt.

Sec 33AB Contd..

Amount can be withdrawn for the purpose of scheme The amount at the credit of the special account may be withdrawn only for the purpose specified in the scheme. If the amount is not utilised for the purpose the amount will be treated as taxable profit The amount cannot be utilised for the purpose of purchase of any plant or machinery to be installed in office premises/residential accomodation including guest houses, The amount cannot be utilized for purchasing any office appliances other than computers

Consequences if the new asset is transferred within 8 years

The deduciton allowed will be withdrawn if the asset acquired out of the money withdrawn is sold or otherwise transferred.
Transferred within 8 yrs
Deduction will not be withdrawn

To whom it is transferred
To Central /State Government, local authority, statutory corp. or a Govt co.

Transfer after 8yrs

Deduction will not be withdrawn

Transfer in scheme of succession of a firm by company

Transfer in any other case

Deduction will not be withdrawn

Deduction will not be withdrawn

Deduction will not be withdrawn

Deduction will be withdrawn

Taxability if amount is withdrawn

Amount withdrawn on account of following will be treated as taxable profit: Closure of business Dissolution of firm Amount withdrawn on account of following not treated as income: Death of a taxpayer Partition of HUF Liquidation of company

Disallowance us/s 40 a
Payment to Non-Resident without deducting TDSu/s.40(a)(i): If following conditions are satisfied, the assessee is required to deduct TDS : The amount paid is : Interest Royalty Fees for technical services or any other sum The amount is chargeable to tax in the hands of recipient It is paid/payable outside India to any person or in India to a non resident If these conditions are satisfied , the assessee is supposed to deduct TDS

Disallowance u/s 40 a
If tax is deductible but it is not deducted, the expenditure is not allowable as deduction. If tax is deducted and it is deposited with Government in same Financial year, it is deductible. However, if the same is deposited in next year, it will be disallowed for current year and deduction will be allowed in the year in which tax is deposited.

Payment to Resident without deducting TDS u/s.40(a)(ia): Tax is deductible under different section in respect of payment of interest, commission/brokerage, rent, fees for technical/professional services, royalty to a resident contractors/ sub-contractors. Case 1 - If tax is deductible but not actually deducted, the payment will be disallowed in the current Previous year. Case 2 - If tax is deducted but not deposited before the submission of return of income it will be disallowed.

The amount which is disallowed in Case 1 or Case 2 during the current year, will be allowed as deduction in the year in which tax is deposited. From A.Y. 2013-14 : A relief is given in Case 1, if the payer is not deemed to be an assessee-indefault u/s 201(1). The payer is not deemed to be an assessee-indefault if a. the resident recipient has furnished return u/s 139. b. the resident recipient has taken into account the above income in such return of income (contd)

c. the resident recipient has paid tax due on the income, and d. the payer furnishes a certificate to this effect from a C.A. in prescribed form. If the above conditions are satisfied, then it shall be deemed that the payer has deducted and paid the tax on such amount on the date of furnishing the return of income.

Fringe Benefit Tax, Income-tax and Wealth-Tax : are not deductible (including any fine, penalty, interest etc. thereof) Salary payable to Non-resident or payable outside India : Not deductible if TDS is not deducted and is not paid to Government. Tax on perquisites paid by emloyer : Not deductible for the employer.

Salary and Interest to Partners : Deductible, subject to following. a) Payment should be permitted by Partnership Deed. b) Rate of interest should not be more than 12% (excess interest will be disallowed). c) Salary and Remuneration cannot exceed specified percentage of book profit, if the aggregate payment exceeds Rs. 1,50,000/(excess payments shall be disallowed.)

Maximum remuneration to partners which is deductible is as under On first Rs. 3 lakhs of book profit (or loss) : Rs. 1,50,000 or 90% of book profit, whichever is more. On the balance of book profit : 60% of book profit. Salary and Interest by an AOP/BOI to its members : Not deductible

Disallowance u/s 40A

Payment to a relative/interconnected concern: Any expenditure by an assessee in respect of which payment has been made to relatives, inter-connected concerns is liable to be disallowed , to the extent such expenditure is excessive or unreasonable (having regard to fair market value of goods/services). From A.Y. 2013-14, this disallowance shall not be made if the aggregate value of such transactions is more than Rs. 5 crore and these transactions are at arms length price, as defined u/s 92F(ii)

Disallowance u/s 40A(3)

Expenditure exceeding Rs. 20,000 paid by a mode other than Account Payee cheque/Draft: If the following conditions are satisfied, expenditure is not deductible 1. The amount of expenditure exceeds Rs. 20,000. 2. A payment (or aggregate payments made to a person in a day) in respect to above expenditure exceeds Rs. 20,000. 3. The payment is made otherwise than by Account Payee cheque or Demand Draft. If the above conditions are satisfied, 100% of such payment will be disallowed. The limit has been increased to Rs. 35,000/- in the case of payment made for plying, hiring or leasing goods carriage

Contribution to unapproved gratuity fund : Not deductible Employers contribution to non-statutory funds/Unrecognized Provident Fund : Not deductible

Section 43 B : Deduction on Payment Basis (where books are maintained on Mercantile basis)
Following will be allowed as Deduction on actual paid basis. Outstanding amount has to be paid before Due Date of Filing of Return of Income. i) Any Tax, Duty paid to government ii) Employers Contribution to PF iii) Bonus or Commission iv) Interest on Loans from financial institution V) Interest on Loans from Scheduled Bank Vi) Leave Salary to Employees The above expenses are deductible in the year in which payment is actually made. There is one exception, Exception- The above payments are deductible on accrual basis if the payment is actually made on or before the due date of submission of Return of Income

Recovery against any deduction Section 41(1)

In any of the earlier years a deduction was allowed for revenue or capital expenditure or a trading liability During the current P.Y. the taxpayera) has obtained a refund of such expenditure/liability. b) Has obtained some benefit in respect of such liability by way of remission or cessation. If above two conditions are satisfied, the amount obtained shall be deemed to be profits and chargeable to tax

Compulsory Audit of Books of accounts [Section 44AB]

Different Taxpayers When they are covered by the provisions of compulsory audit under section 44AB

A person carrying on business

A person carrying on profession

If the total sales, turnover or gross receipt in business for the p.y. exceeds Rs. 60 laksh (Rs. 1 crore from A.Y. 2013-14)
If the gross receipt in profession for the p.y. exceeds Rs. 15 lakhs (Rs. 25 lakhs from A.Y. 2013-14)

A person covered u/s If such person claims that the Profits and gains 44AD, 44AE, 44AF from the business are lower than the profits and gains computed under these sections

Computing business profits on presumptive basis[44AD]

Following conditions must be satisfied: 1 Eligible assessee: The assessee must be an eligible assessee i.e. He is a resident individual,resident HUF, or a resident partnership firm and not a LLP 2 Assessee has not claimed deduction under sections 10A, 10AA,10B , 80HH to 80RRB in the relevant assessment year 3 Eligible business: The assessee should be involved in the business retail trading or wholesale trading or civil construction or any other business.

Following are not eligible A person carrying on profession as referred to in section 44AA(1) Person earning income in the nature of commission or brokerage Person carrying on any agency business or Person who i sin the business of plying, hiring, or leasing goods carriages 4 Turnover: Total turnover should not exceed Rs. 60 Lakh

Consequences if the above conditions are satisfied

If the conditions are satisfied, income is estimated at 8% of the gross receipt or turnover. Further points: Assessee can decalre a higher income No further deductions (Deductions u/s. 30 to 38 including depreciation and unabsorbed depreciation) are allowed under this section In case of firm, deduction in respect of salary and interest to partners u/s. 40(b) shall be allowed An assessee under this section is exempted for paying any advance tax and maintaining books of accounts as required u/s. 44AA

An assessee can declare lower income than the deemed profits and gains as above. Following consequences will be applicable: Taxpayer needs to maintain books of accounts irrespective of the turnover if his total income exceeds the exemption limit To get the books of accounts audited u/s. 44AB irrespective of the turnover, if his total income exceeds the exemption limit.

Transport Operators u/s. 44AE

The section is applicable if the following conditions are satisfied: The tax payer must be an individual, HUF, AOP, BOI, firm, company, co-operative society, or any other person. He/It may be a resident/non resident Taxpayer is engaged in the business of plying, hiring, or leasing goods carriages The tax payer owns not more than 10 goods carriages at any time

Consequences if section 44AE is applicable:

Types of goods carriage Heavy goods vehicle Estimated income Rs. 5000 for every month (or part of month) during which the goods carriage is owned Rs. 4500 or every month (or part of month) during which the goods carriage is owned

Other than heavy goods vehicle

A taxpayer can claim his income from the said business higher than specified in this section No further deductions (Deductions u/s. 30 to 38 including depreciation and unabsorbed depreciation) are allowed under this section In case of firm, deduction in respect of salary and interest to partners u/s. 40(b) shall be allowed An assessee under this section is exempted for paying any advance tax and maintaining books of accounts as required u/s. 44AA

An assessee can declare lower income than the deemed profits and gains as above. Following consequences will be applicable: Taxpayer needs to maintain books of accounts irrespective of the turnover if his total income exceeds the exemption limit To get the books of accounts audited u/s. 44AB irrespective of the turnover, if his total income exceeds the exemption limit.