PROFITS AND GAINS FROM

BUSINESS/PROFESSION
FOLLOWING INCOMES ARE CHARGED UNDER
PROFITS AND GAINS FROM BUSINESS/PROFESSION
 Profits and gains from business/profession
 Income derived by trade/professional association from
specific services provided to its members
 Export incentives to exporters
 Interest, salary,bonus etc received by a partner from
partnership firm
 Sum received for not carrying our any activity related
to any business/professionor non sharing of patent,copy
right etc.
 Sum received under a keyman insurance policy
 Salvage value received from any capital assets if the
whole of such expenditure was allowed as a deduction.
General principles governing business income

1. Business / profession must be carried on by the assessee

2. Business / profession must be carried on by the
assessee during the previous year
3. Taxable profit is the profit which accrues / arises during the
year.
4. Any amount recovered during the year which was claimed
as a deduction during the year is chargeable as income.
5. Income tax is not concerned with legality or illegality of
business
6. Method of accounting may be mercantile or cash
Deductions allowed in computing business income (sec 29-45D)

Basic principles governing admissibility of expenses

1. Expenses should be revenue in nature

2. Expense should relate to the business
3. Business should be carried on during the previous years
4. Expenses should relate to the taxable income
5. It should have been incurred during the previous year
6. It should not have been incurred for any purpose which is an offence or
prohibited by law.
7. No allowance in respect of anticipated losses
8. No allowance in respect of depreciation of investment in shares etc,
wasting assets like mines quarries, timber bearing land et

In a nutshell, any revenue expenditure actually incurred for earning

business income is allowed as a deduction.
Deductions expressly allowed
1. Rent, rates, taxes, repairs and insurance of building
2. Repairs and insurance of machinery, plant & furniture
3. Depreciation (both tangible and intangible) as per Income Tax
method
4. Expenditure on scientific research
5. Expenditure on acquisition of patents
6. Expenditure on knowhow
7. Amortization of telecom license fees
8. Payment to the association and institution carrying out rural
development
9. Amortisation of preliminary expenses
10. Amortisation of expenditure under voluntary retirement scheme
11. Insurance premium on health of employees
12. Bonus / commission to employees
13. Interest on borrowed capital
14. Employers contribution to Recognised PF/ Superannuation fund /
Gratuity fund
15. Bad debts
16. Advertisement ( except in a political party’s newspaper/pamphlet etc.)
Deductibility of certain expenses

1. Expenditure on scientific research (sec 35)

a) In house research related to business– 100% of capital and
revenue expenditure ( except cost of land)
b) Specified business ( bio-technology) – 100% of capital and
revenue expenditure ( except cost of land and building).
Assessee has to be a company.
c) Contribution to approved bodies undertaking scientific
research (National Lab/IIT/University) – 100% of such
contribution.
d) Contribution to approved bodies undertaking social research –
100%

2. Expenditure on obtaining right to use spectrum for operating

telecom services ( sec35 ABA)– over the period of license
3. Expenditure on specified business ( sec 35 AD)- 100% of
capital expenditure incurred for the purpose of specified
business . ( Such business include:
• cold chain facility,
• warehousing facility,
• laying and operating natural gas/oil/petroleum pipeline
network,
• Building and operating hospitals ( at least 100 beds)
• Housing project under Slum Redevelopment scheme /
affordable housing scheme of Govt
• Production of fertilizer
• Setting up semi conductor fabrication unit
• Developing/operating/maintaining new infrastructure
facility in an agreement with Govt
(NA in alternate tax regime)
4. Preliminary expenses ( maximum amount 5% of cost of
project/capital employed) ( Sec 35 D)- over a period of 5 yrs
5Expenses on VRS - over a period of 5 yrs

6.Expenses on prospecting minerals ( Indian companies and

resident assessee)- over a period of 10 yrs

7. Capital expenditure on promoting family planning - over a

period of 5 yrs

8. Discount on zero coupon bonds on a prorata basis

9. Banking cash transaction tax, STT and Commodities

transaction tax allowed. STT and CTT allowed only if the
assessee is a dealer.
Expenses expressly disallowed

1. Any payment by way of interest, royalty, fees for technical

services payable outside India subject to TDS will be
disallowed if TDS is not deposited before the due date of
filing the return.
2. Any salary payable outside India will be disallowed if TDS
has not been paid.
3. Any amount paid to residents (salary, interest, commission
etc) on which no TDS has been deducted or paid before the
due date of filing the return will be disallowed to the extent
of 30% of such amount.
4. Income tax, interest on delayed payments of income
tax

5. Payments exceeding Rs.10000 paid otherwise than

by a/c payee cheques / bank drafts/ electronic means
of transfer* subject to rule 6D.

• *NEFT/RTGS/UPI/BHIM/AADHARPAY/IMPS/CREDIT
CARD/DEBIT CARD

• Exceptions:
• Payment to bank/govt
• Payment to farmer/producer of agricultural goods
• Payment to person residing in a place not covered by
banking services
• Payment made on a bank holiday
• Payment to agent
• Payment by authorised money changer in the course of
his business
6.Excessive or unreasonable payments made to
related persons.
1.Payments made by
➢ Individual to relatives
➢ Company to a Director or relative of Director
➢ Firm/AOP/HUF to a partner/member or
relative of such partner/member
2. Payment made to a company/firm/HUF/AOP which
has substantial interest in the payee’s business
3.Paymnet to a person in whose business the
payer/relative of the payer has substantial interest.

Relative – spouse/brother/sister/ lineal

descendant or ascendant
Substantial interest – beneficial owner of 20% of
equity/profits
7. The following expenses are allowed only they are
actually paid at least before the due date of filing
the return.

1. Tax, duty, cess or fee etc.

2. Contribution to RPF/ SA fund/ Gratuity fund etc
3. Bonus / commission to employees
4. Interest on loans taken from financial institutions /
scheduled banks/NBFC
5. Leave salary to employees.
6. Payment to Indian railways for use of railway assets
7. Any sum payable to micro or small enterprises
The following expenditure will not be allowed :

1. Expenditure incurred for any purpose which is offence /

prohibited by law.
2. Expenditure on CSR
Computation of Income from business

Net profit as per Profit & Loss A/c xxx

Add: Expenses disallowed xxx

Less : Incomes considered under other heads of income xxx
Less : Exempt incomes
Less : Expenses allowed not claimed as deduction xxx

Income from business xxx

1.The following is the Profit & Loss A/c of Dhanraj Ltd. for
the y.e 31.3.24

Particulars Rs. Particulars Rs.

Opening stock 150000 Sales 800000

Purchases 400000 Closing stock 200000
Wages 200000 Sale of jewellery 170000
Rent 60000 Income Tax refund 30000
Repairs 30000
Advertisement 20000
Travel & Conveyance 30000
General expenses 100000
Depreciation 40000
Income tax paid 10000
Net profit 160000

1200000 1200000
 0 0
Salaries 800000 Rent received from comm. 121500
2.From the Profit & Loss A/c of Mehta Ind. determine income from business .
complex 0
Rent, rates & taxes 120000 Rent received from workers 200000
quarters
Legal charges 40000 Dividends from Indian Co. 150000
Miscellaneous expenses 20000
Provision for doubtful 30000
debts
Provision for Income Tax 40000
Patents acquired 120000
Depreciation 40000
Contribution to appr. 25000
SRA
Interest on loans 42000
Net profit for the year 568000
604500 604500
0 0

(i)Depreciation as per Income Tax 45000 (ii) COGS includes Rs.50000 paid for
purchases by bearer cheque
3. X Ltd is engaged in the business of manufacture of goods for domestic
market. The foll. is the company’s P&L A/c for the y.e 31/3/2024:

Particulars Rs Particulars Rs.

COGS 1378100 Sales 4270000
Office expenses 130000 Profit on sale of gold 260000
Salary to employees 1280000 Interest on debentures 10000
Exp. on scientific research 84000
Entertainment expenses 57000
Advertisement expenses 227000
Travelling expenses 320000
Interest 82000
Repairs to factory 10000
Insurance 36000
Depreciation 186000
Taxes 56000
693900
4540000 4540000
Other information :
1. COGS includes purchases from X Ltd. – an associate
company for Rs.300000. ( Market price of similar goods
Rs.286000 )
2. Out of salaries ; a)bonus of Rs.28600 is paid on
December 1 2024 b) Commission Rs.36000 is paid on
Sept 13 2024.
3. Exp on scientific research includes Rs.30000 being cost
of land and Rs.15000 paid to National lab.
4. Entertaining expenses includes Rs.9000 club bills for
entertaining customers.
5. Advertisement expenses includes a) Rs.6000 capital
expenditure on advt. b) Rs. 13000 being expenditure on
advertisement in a political party’s magazine
4. XYZ Ltd. mainly engaged in the business of manufacturing shows a profit of
Rs. 786000 for the y.e 31/3/2024 after debiting the following :

. Payment of gratuity 27000

. Fees paid to a consultant for preparation of budgets Rs. 34000
. Capital expenditure on advertisement : Rs. 120000
. Interest paid on loan from IDBI Rs.45000. Actual payment was done on
29/09/19.
. Entertainment expenses incurred outside India Rs.80000 ( RBI permission
obtained for Rs.50000 )
. Royalty paid outside India Rs. 250000 of which no TDS has been deducted
on a royalty of Rs. 120000.
. Anticipated loss on investments Rs.15000
. Amortisation of patents @ 20% Rs.20000.( cost of patents Rs.100000 )
. Sales tax and excise duty Rs.160000. ( Rs.130000 was paid on 20/04/24,
Rs.15000 on 18/08/24 and balance on 01/10/24 )
The company has purchased land for Rs.90000 and equipments for Rs.
55000 for the purpose of carrying research.

Determine Income from business.

Presumptive taxation for small business

1. Sec 44AD – Any resident assessee – individual /firm ( other

than LLP ) /HUF having business whose gross receipts does not
exceed Rs.2 crores, a amount equal to 8% of the gross
receipts/turnover will be deemed to the income from business.

If the amount is received through A/c payee cheques/draft/ECS

then 6% of such receipts

No other expenditure ( except salary and interest to partners in

case of a firm) is allowed to be claimed.

The following business are not covered :

1. Person carrying on any profession
2. Person earning income in the nature of
commission/brokerage
3. Business of plying/hiring or leasing goods carriages.
2. Sec 44ADA – Any resident engaged in a profession like
legal/medical/accountancy/engineering etc can declare
income @ 50% of the gross receipts if such gross receipts do
not exceed Rs. 50 lacs.

3. Sec 44 AE – Any assessee engaged in business of

plying/hiring/leasing trucks is eligible for presumptive
taxation if the assessee does not own more than 10 goods
carriages during the previous year.
Income will be determined as:
Heavy goods vehicle ( more than 12 Tons) – Rs.1000 p.ton
p.m per vehicle.
Light goods vehicle – Rs.7500 p.m per vehicle

Number of months would the number for which the

assessee owns the vehicles in the previous year.
1. X & Co a partnership firm is into trading grains. Their
gross turnover in 2023-24 being Rs.87.20 lacs ( 65.70
lacs is received through A/c payee cheques and ECS). It
has incurred the following expenses:

Cost of materials – 65 lacs, salary and interest to partners

( as permitted under Itax) – 1.90 lacs, Salaries to
employees- Rs.4.90 lacs, depreciation – Rs.2.70 lacs, other
expenses- 3.45 lacs.

Advise as to whether the X&Co. should opt to pay tax as

per Sec 44AD
2. X Ltd is engaged in a business of plying goods carriages.
It owns 3 light vehicles , 7 heavy vehicles ( 14T). It sold 1
heavy vehicle on 30/6/2023 and one light vehicle was
purchased in Sept 2023.

Gross receipts from business :12 lacs, operational expenses

– 6.70 lacs, Depreciation – 1.90 lacs, other office expenses –
0.75 lacs.

Advise as to whether X Ltd should opt for presumptive tax

provision under sec 44AE.