Taxation of income from Business and Profession in India


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Taxation of income from Business and Profession in India

  1. 1. Income from business and profession
  2. 2. What is Business? <ul><li>S2(13) TRADE,COMMERCE,MANUFACTURE ADVENTURE/CONCERN </li></ul><ul><li>PROFIT MOTIVE </li></ul><ul><li>CONTROL </li></ul>
  3. 3. What is Profession? <ul><li>S 2(36) PROFESSION INCLUDES VOCATION </li></ul><ul><li>SPECIAL KNOWLEDGE AND SKILL </li></ul>
  4. 4. SOME BUSINESSES <ul><li>Dealing in land </li></ul><ul><li>Converting land into plots </li></ul><ul><li>Dealing in shares </li></ul><ul><li>Money lending </li></ul>
  5. 5. Is this a business receipt? <ul><li>Amt credited in books </li></ul><ul><li>Land purchased but sold for want of finance </li></ul><ul><li>Compensation for loss of earning? </li></ul><ul><li>Exchange fluctuation </li></ul><ul><li>Security/trade deposit recd? </li></ul><ul><li>Value of excess stock declared to bank </li></ul>
  6. 6. Factors in assessment of business income <ul><li>Right to carry on the business </li></ul><ul><li>Must be carried on during previous year </li></ul><ul><li>Income of previous year taxable in AY </li></ul><ul><li>Incidence on aggregate income </li></ul><ul><li>Ownership </li></ul><ul><li>Real vs notional profit </li></ul><ul><li>Recovery of sums allowed as a deduction </li></ul>
  7. 7. Business losses <ul><li>Revenue losses </li></ul><ul><li>Incurred during previous year </li></ul><ul><li>incidental to business </li></ul>
  8. 8. S 30 <ul><li>Rent </li></ul><ul><li>Rates </li></ul><ul><li>Taxes </li></ul><ul><li>Insurance </li></ul><ul><li>Repairs current/capital </li></ul>
  9. 9. S31 <ul><li>Repairs </li></ul><ul><li>Insurance </li></ul>
  10. 10. S 32 <ul><li>Depreciation </li></ul><ul><li>BUSINESS ASSET </li></ul><ul><li>Ownership </li></ul><ul><li>Used for purpose of business </li></ul><ul><li>Used during year </li></ul>
  11. 11. asset <ul><li>Tangible </li></ul><ul><li>Intangible </li></ul>
  12. 12. Building,Machinery and Plant <ul><li>Only superstructure (owned land &leased) </li></ul><ul><li>mechanical contrivance </li></ul><ul><li>Plant something which allows to carry on business </li></ul><ul><li>Furniture </li></ul>
  13. 13. WDV <ul><li>Value of block of assets at start of year </li></ul><ul><li>+actual cost of acquired assets </li></ul><ul><li>-moneys recd/receivable in respect of assets sold / discarded / demolished / destroyed during year </li></ul><ul><li>AO not bound to accept the wdv for previous year[ karnani ind bank v Cit[1980]124 itr 482{mp}] </li></ul>
  14. 14. Actual cost <ul><li>Actual cost to assessee </li></ul><ul><li>+all expenses related to acquisition of asset, install and make fit to use,training,pre-production expenses </li></ul><ul><li>-cost met directly/indirectly by any other person or authority </li></ul>
  15. 15. S 36 <ul><li>(1)(i] insurance premium </li></ul><ul><li>(1)[ii] bonus/commission to employees </li></ul><ul><li>(1)[iii]interest on borrowed capital </li></ul>
  16. 16. interest <ul><li>Must have borrowed capital </li></ul><ul><li>Must be used for purpose of business </li></ul><ul><li>No test of reasonableness </li></ul>
  17. 17. S 36[1][vii] <ul><li>Bad debts </li></ul><ul><li>There must be a debt </li></ul><ul><li>Incidental to the business of assessee </li></ul><ul><li>Taken into a/c </li></ul><ul><li>Actually written off </li></ul><ul><li>Adjustment on recovery </li></ul><ul><li>Live business </li></ul>
  18. 18. S 37[1] <ul><li>Residuary section </li></ul><ul><li>Not capital nature </li></ul><ul><li>Not personal expenditure </li></ul><ul><li>Incurred in previous year </li></ul><ul><li>Arising from business </li></ul><ul><li>Wholly and exclusively for business purpose </li></ul>
  19. 19. Capital expenses <ul><li>Elimination of competition </li></ul><ul><li>Procurement of license </li></ul><ul><li>Shifting of a plant </li></ul><ul><li>Construction of road </li></ul><ul><li>Raising new shares </li></ul><ul><li>Acquiring goodwill </li></ul><ul><li>Abandoned project </li></ul>
  20. 20. Revenue expenses <ul><li>Renovation of office </li></ul><ul><li>Payment to competititor </li></ul><ul><li>Construction of school for employees </li></ul><ul><li>Annual sum pd for use of goodwill </li></ul><ul><li>Royalty pd for obtaining stock in trade </li></ul><ul><li>Expenses on issue of debentures </li></ul><ul><li>Technical fees for use of tech data without transfer of rights </li></ul>
  21. 21. Cash & mercantile system <ul><li>Choice exists with assessee to adopt a method only in case of “ profits & gains of business &profession ” and “ income from other sources ” </li></ul><ul><li>In other heads the method is not relevant in computing taxable income. </li></ul>
  22. 22. Mercantile system <ul><li>Income expenses recorded at the time of occurrence during prv year </li></ul><ul><li>Profit calculated is actually earned though not realised. </li></ul><ul><li>Gives an idea of how the business is doing </li></ul><ul><li>Does not allow for blatant manipulation </li></ul>
  23. 23. Cash system <ul><li>Receipts and expenses recorded only if recd during this year </li></ul><ul><li>Excess of receipts over disbursements </li></ul><ul><li>A cruder system </li></ul><ul><li>shows cash flow of the business </li></ul><ul><li>allows for manipulation </li></ul>
  24. 24. <ul><li>Choice of a/c method lies with assessee but once a particular method is followed he must follow it consistently. B.C.G.A(Punjab) ltd vs CIT(1937)5 ITR 279(Lahore) </li></ul><ul><li>A/c practice cannot override any provision of the Act. Tuticorin Alkali Chemicals & Fertilizers ltd vs CIT(1997)227 ITR172 </li></ul>
  25. 25. S 145 <ul><li>either cash or mercantile </li></ul><ul><li>AO can invoke S144 if not satisfied about correctness and completeness of the a/c of the assessee </li></ul><ul><li>Or where regular a/c practices </li></ul><ul><li>Or a/c standards are not followed by the assessee. </li></ul>
  26. 26. A/c std notified u/s 145(2) <ul><li>Std 1 </li></ul><ul><li>All policies to be disclosed </li></ul><ul><li>Part of financial statements </li></ul><ul><li>Disclosed at the same place </li></ul><ul><li>Change having material effext in prv yr/s shall be disclosed.impact to be shown in he period/s. </li></ul><ul><li>If change in future to be disclosed. </li></ul>
  27. 27. <ul><li>True and fair state of affairs </li></ul><ul><li>Major considerations for selection of policy are </li></ul><ul><li>Prudence –provide for all losses </li></ul><ul><li>Substance over legal form </li></ul><ul><li>Materiality </li></ul><ul><li>3 fundamental a/c assumptions are </li></ul><ul><li>going concern </li></ul><ul><li>Accrual </li></ul><ul><li>consistency </li></ul>
  28. 28. A/c std II <ul><li>prior period items separately disclosed with nature and amounts </li></ul><ul><li>extraordinary items disclosed that their relative impact can be perceived </li></ul><ul><li>Change in a/c policies to be disclosed and quantified in respect of previous and subsequent years </li></ul>