Income from Business or Profession

1. Income from Business &
Profession
Dr. P. Ravichandran
M.Com., M.B.A., M.A (Astrology)., M.Phil., Ph.D.,
D.C.P., D.L.L & A.L., P.G.D.C.A., P.G.D.P.M & I.R.,
S.B.K. College, Aruppukottai – 626101.
 9443424090 & 9080030090
 e-mail id.- prcapk@gmail.com

2. A business (also known as an enterprise,
a company (or) a firm) is an
organizational entity involved in the
provision of goods and services to
consumers.
The word ‘business’ can refer to a
particular organization (or) to an entire
market sector (for example: “the
financial sector”) (or) to the sum of all
economic activity (“the business sector”).

3. Essential features of
business
Regularity of transactions (or) continuity of
activities;
Objective of earning profits (profit motive);
Application of labour and skill;
Business rendering services to others;
Business cannot be carried on with oneself.

4. U/S 2(13), ‘Business’ includes any –
 (a) trade,
 (b) commerce,
 (c) manufacture, (or)
(d) any adventure (or) concern
in the nature of trade,
commerce (or) manufacture.

5. Trade
 It means purchase and sale of goods carried on with
profit motive.
Commerce
 It means trade carried on a large scale.
 i.e., trade and all other activities that are associated
with the trade.
Manufacture
 Making of new and different article out of input
material by physical (or) mechanical labour.

6. Profession [Sec.2(36)]
Profession means an occupation requiring
specialized Knowledge and Skill.
These type of persons also have a separate
and specialized course to attain
professional knowledge.
Ex: Doctors, Engineers, Lawyers and Auditors.

7. Vocation
Vocation is an activity in which an assessee
has specialized skill for earning Income.
It implies natural ability of a person for some
particular work.
It may (or) may not be profit.
There is no need for systematic and organized
activity.
Ex: Tax experts, Journalists, Architects, Cost
and Management accountants etc.,

8. Income from Business & Profession
- Key Points -
 Must be carried on by Assessee.
 Must be carried on during the previous year.
 Only profit of the previous year are to be taxed.
 Income includes negative income i.e. Loss.
 Relevance of method of accounting [Cash (or) Mercantile]
 A Person cannot do business with one self. Hence, notional
profit is not taxable. If a proprietor withdraws goods
costing ₹ 50,000 for personal use at an agreed value of
₹ 60,000 then profit of ₹ 10,000 shall not be taxable.
 There is no difference between legal & illegal business for
taxation purpose. Even income from illegal business
shall be taxable.

9. Maintenance of accounts
Cash & Mercantile system
Choice exists with a assessee to adopt a
method only in case of “Profits and
gains of business and profession”
and “Income from other sources”.
In other heads the method is not relevant
in computing taxable income.

10. Mercantile system
Income and expenses recorded at the time
of occurrence during previous year.
Profit calculated is actually earned
though not realized.
Gives an idea of how the business is doing.
Does not allow for blatant manipulation.

11. Cash system
Receipts and expenses (payments)
recorded only if received and paid
during the year.
Excess of receipts over disbursements.
A Cruder system.
Shows cash flow of the business.
Allows for manipulation.

12. Choice of method of accounting lies
with assessee, but once a
particular method is adopted he
must follow it consistently.
Accounting practice cannot override
any provisions of the Act.

14. 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.

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

16. 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.

17. Additional Depreciation
• Additional Deprecation @ 20 % of Actual Cost of Machinery
acquired after 31.03.2002 for
• a) New Industrial Undertaking
• b) Existing Industrial Undertaking
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.

18. DEDUCTION ONLY ON ACTUAL
PAYMENT EVEN AFTER 31ST MARCH
BUT BEFORE THE DUE DATE OF FILING
THE RETURN (SEC 43B)
• TAXES, DUTY, CESS OR FEE
• CONTRIBUTION TO PROVIDENT FUND,
GRATUITY FUND, ETC.
• PAYMENT OF BONUS, COMMISSION ETC. TO
EMPLOYEES

19. Computation of Income from Business
Particulars Amt Amt
Net profit as per P&L account xxx
ADD:
1. Inadmissible Expenses: (Not allowed but Debited to P&L a/c) xx
2. Admissible Incomes: (Allowed but not Credited to P&L a/c) xx
3. Admissible Incomes: (Allowed but not Credited to P&L a/c) xx
4. Over Valuation of opening Stock xx
5. Under valuation of closing Stock xx xxx
xxxx
LESS:
1. Admissible Expenses: (Allowed but not Debited to P&L a/c) xx
2. Inadmissible Incomes: (Not allowed but Credited to P&L a/c) xx
3. Admissible Incomes: (Allowed but not Credited to P&L a/c) xx
4. Under Valuation of opening Stock xx
5. Over valuation of closing Stock xx xxx
Income from Business XXXX