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Unit I

Income from Business &
Profession
Income Tax II

Mohammed Umair,
Department of Commerce, St. Joseph’s Evening College
Income from Business & Profession

Unit I

According to Section 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.
Essential features of a business

trade
1 It means purchase and
sale of goods carried
on with profit
motive
Commerce
2 It means trade carried
on a large scale.
Manufacture
3

Making of new and
different article out
of input material by
physical or
mechanical labour.

Any
adventure or concern in
the nature of trade,
commerce or
4
manufacture
A single isolated
transaction outside the
assessee’s line of
business may constitute
adventure in
nature of trade and
commerce.

1

Regularity of transactions
or continuity of activities

2

Objective of earning
profits

3

Application of
labour and skill

Whether an activity is an adventure or concern in
the nature of trade, commerce or manufacture is to
be decided on the basis of cumulative effect of the
facts and circumstances of each case.
Income from Business & Profession

INCOMES CHARGEABLE TO TAX UNDER THE HEAD “PROFITS AND GAINS
OF BUSINESS OR PROFESSION”
[Section 28]
1

Profits and gains of any business or profession, on by assessee at any time during
previous year.

2

Income derived by trade, professional or other similar association from specific
services rendered to its members.

3

Profit on sale of import entitlement licences, incentives by way of cash
compensatory support and drawback of duty.

4

Value of any benefit or perquisite, whether convertible into money or not arising
from exercise of business or profession.

5

Any interest, salary, bonus, commission, or remuneration received by a partner of
a firm, from such a firm

6

Any sum received or receivable, in cash or in kind, under an agreement, for Noncompetition and Exclusivity.

7

Any sum (including bonus) received under Keyman Insurance Policy

8

Income from Speculative Business- settled other than actual delivery

Unit I
Income from Business & Profession

Case Laws : BASIS OF CHARGE
Under section 28

When there was a temporary suspension of business with
the object of tiding over the crisis condition and during
such period the machinery, there to used in the business,
is leased out then the rental income there from is to be
identified as ?
Answer: Business income'.
CIT vs. Vikram Cotton Mills Ltd 169 ITR 597 (SC) and CEPT vs. Shri Lakshmi Silk Mills Ltd., 20 ITR 451 (SC).

Lease of factory after assessee stopped business with no
intention of reviving the business will amount to earning
lease rental ?
Answer: It is not in the nature of business income. In such a
case the income is assessable head ' income from other
sources '
Universal Plast Ltd. vs. CIT, 237 ITR 454 (SC).

Unit I
Income from Business & Profession

Unit I

Case Laws : BASIS OF CHARGE
Under section 28

I have purchased 500 shares of
reliance on 16.08.2010 in the
stock exchange and sold the
same on 17.08.2010. Whether
the transaction would come
under speculative business?

As per Section 43(5) of the Income Tax Act, 1961, intra-day trading shall be
considered as speculation business transactions and the income there from
would be either speculation gains or speculation losses.
Income from Business & Profession

Unit I

Case Laws : BASIS OF CHARGE
Under section 28

An assessee purchases a plot of
land and builds a complex on it
and divides it into office spaces
and sells each of these, thereby
making a profit from the entire
activity.
Any adventure or concern in the nature
of trade, commerce or manufacture.

Section 2(13), A single isolated transaction outside the
assessee’s line of business may constitute adventure in
nature of trade and commerce.
Income from Business & Profession

Unit I

METHOD OF ACCOUNTING
There are two main methods of accounting
Cash Basis Accounting
1

Under cash basis accounting
revenues are recognized and
earned only when cash is
received irrespective of when
and how the services were
performed or goods delivered.

Accrual or Mercantile Basis Accounting
2

Accrual or Mercantile Basis
Accounting Under accrual or
mercantile basis accounting,
revenues are recognized and
earned when they are realized or
realizable irrespective of when
the cash is received.

Is it compulsory to maintain books of accounts?
1. If the income of the person from the business is more than 1.20 lacs
or his total sales receipts are more than 10 lacs. in any of the last
three years.
2. In case of newly started business if the expected income or receipts
are expected to exceed the above limits.
3. Information Technology i.e. people carrying on the business of
software and hardware service.
Income from Business & Profession

Unit I

What books of account have been
prescribed to be maintained by a person
carrying on business under the Income tax
Act?
The Act does not prescribe any specific books of account for business. However you
are expected to maintain your accounts in such a fashion that the net profit of the
business can reasonably and easily be arrived at by the department.

Do a small time trader need to maintain any accounts?
Any business or profession that has an annual turnover/gross receipts exceeding
rupees 10 lakh and net profit of rupees one lakh twenty thousand, must maintain such
books of account and documents from which its income can be reasonably ascertained
by the department.

Is it compulsory to get the books audited?
(i) Every person carrying on business shall get his accounts audited if the total sales, turnover or
gross receipts in business exceed Rs 60 lakhs in the previous year. (Now Rs. 1 Crore)
(ii) Every person carrying on profession shall get his accounts audited if his gross receipts exceed
Rs 15 lakhs in the previous year. (Now Rs. 15 Lakhs)
Profit and Loss account
Particulars

Amt

Particulars

To Salaries

By bad debts recovered

Advertising

By dividend

Carriage outwards

By commission

Rent

By rent from house property

Depreciation

By commission

Taxes paid

By export incentives

Interest on capital

By share of income from HUF

Auditing fee

By bad debts recovered

Loss on sale of assets
Reserve for doubtful debts
Commission outstanding
Provision for staff bonus
Renovation of building
Donation
Drawings

To Net profit

Amt
Trading account
Particulars

Amt

Particulars

To Opening stock

By sales

To Purchases

Return Inwards

To Return outwards

Closing Stock

To Carriage inwards
TO Direct expenses

By Gross Profit

1. Over Valuation of opening Stock
2. Under valuation of closing Stock

Decreases Gross profit

1. Under Valuation of opening Stock
2. Over valuation of closing Stock

Increases Gross profit

Valuation of Stock: Cost or market price, whichever is less

Amt
Income from Business & Profession

Unit I

SCHEME OF BUSINESS DEDUCTIONS
Section 28 defines various income which are chargeable to tax under the head “Profits and gains of business or profession”.
Section 29 permits deductions and allowances laid down by sections 30 to 43D while computing profits or gains of a business
or profession.

1
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

Inadmissible Expenses: Not allowed but debited to Profit and Loss account
Provision and Reserves (Provision can be claimed to the extent used)
Direct taxes (Income tax, wealth tax, gift tax etc.)
Rent, Salary paid to self and other personal drawings
Interest on proprietor's capital and interest paid on loan borrowed from family members
All capital expenditure (e.g. Purchase and renovation of assets)
Loss on sale of assets
Fine and penalty paid
Personal insurance premiums
Contribution in NSS, NSC, PPF, URPF, unapproved gratuity and Staff welfare fund
Rent paid of residence
Loss by theft at home
Expenses on illegal business
Difference in trail balance
Legal expenses incurred of personal cases
Preliminary expenses
Expenses incurred in acquisition of assets
Income from Business & Profession

Unit I

SCHEME OF BUSINESS DEDUCTIONS
Section 28 defines various income which are chargeable to tax under the head “Profits and gains of business or profession”.
Section 29 permits deductions and allowances laid down by sections 30 to 43D while computing profits or gains of a business
or profession.

Contd….

1
17.
18.
19.
20.
21.
22.
23.
24.
25.

Inadmissible Expenses: Not allowed but debited to Profit and Loss account
Excess depreciation
Payments made by way of cash (Exceeding Rs. 20,000)
Any amount not paid with in stipulated date
Outstanding expenses
Expenses prior to incorporation
Municipal tax, Revenue and other local taxes
Ads given in political souvenirs
Overvaluation of Opening stock
Under valuation of closing Stock
Income from Business & Profession

Unit I

SCHEME OF BUSINESS DEDUCTIONS
Section 28 defines various income which are chargeable to tax under the head “Profits and gains of business or profession”.
Section 29 permits deductions and allowances laid down by sections 30 to 43D while computing profits or gains of a business
or profession.

2
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Inadmissible Incomes: Not allowed but credited to Profit and Loss account
Part time salary
Bank interest
Interest from various investments (e.g. securities, saving schemes and deposits)
Dividend on shares
Sale of assets and profit on sale of assets
Income from house property
Bad debts recovered (Disallowed earlier)
Winning from lottery, horse race, gambling and betting
Under valuation of opening stock
Over valuation of closing stock.
Important provision related to business and professional income
Expenditure on scientific research
1

Any expenditure incurred on scientific research or any contribution made to
approved scientific research is admissible to the extent of 150% of
contribution made. In house research (200%)

Preliminary expenses
2

To charged in 5 equal annual installment. (i.e. one fifth of preliminary expense
is allowed as deduction). Example of preliminary expenses are market survey,
Expenses for raising initial share capital etc.

Depreciation
3

Depreciation should charged as per the rates prescribed by income tax act on the
basis of WDV method. If an asset has been purchased during the previous year
and put to use for less than 180days the only half amount should be charged.

Pooja expenses
4

Diwali pooja and lakshmi pooja and muhurat expenses are allowed

5

Expense on income tax appeal is allowed

Preliminary expenses
6

Payment made to relatives is admissible provided it should not be in excess of
market rates.
Depreciation U/S 32
1.
2.
3.

Asset should be wholly or partly owned by assesse
Used for the purpose of business or profession
Block of assets: Means a group of assets falling in same class

Building
Furniture and Fittings
Machinery & Plant

Building
10%

Computer &
Software
60%

Intangible assets
Furniture and
fittings
10%

Motar car
15%

Books and
publications
100%

Palnt &
Machinery
15%

Intangible
assets
25%
Computation of Income from Business
Particulars

Amt

Net profit as per P&L account

Amt
XXX

ADD:
1. Inadmissible Expenses: (Not allowed but Debited to Profit and Loss account)
2. Admissible Incomes: (Allowed but not Credited to Profit and Loss account)
3. Admissible Incomes: (Allowed but not Credited to Profit and Loss account)
4. Over Valuation of opening Stock
5. Under valuation of closing Stock
Total
LESS:

1. Admissible Expenses: (Allowed but not Debited to Profit and Loss account)
2. Inadmissible Incomes: (Not allowed but Credited to Profit and Loss account)
3. Admissible Incomes: (Allowed but not Credited to Profit and Loss account)
4. Under Valuation of opening Stock

5. Over valuation of closing Stock

Total
Income from Business

XXX
BASIC PRINCIPLES GOVERNING ALLOWANCE OF
DEDUCTION UNDER SECTIONS 30 TO 44DA:

Expenditure
should have
been incurred
in connection
with
assessee’s
own
Business.

1

Expenditure
should relate
to the
previous year
in which
business has
been
carried on.

Onus to prove
the
admissibility
of
expenditure
lies on the
assessee.

No allowance
in respect of
expenditure
incurred
before date of
setting-up of
business:

4
2

3

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Income from business and profession

  • 1. Unit I Income from Business & Profession Income Tax II Mohammed Umair, Department of Commerce, St. Joseph’s Evening College
  • 2. Income from Business & Profession Unit I According to Section 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. Essential features of a business trade 1 It means purchase and sale of goods carried on with profit motive Commerce 2 It means trade carried on a large scale. Manufacture 3 Making of new and different article out of input material by physical or mechanical labour. Any adventure or concern in the nature of trade, commerce or 4 manufacture A single isolated transaction outside the assessee’s line of business may constitute adventure in nature of trade and commerce. 1 Regularity of transactions or continuity of activities 2 Objective of earning profits 3 Application of labour and skill Whether an activity is an adventure or concern in the nature of trade, commerce or manufacture is to be decided on the basis of cumulative effect of the facts and circumstances of each case.
  • 3. Income from Business & Profession INCOMES CHARGEABLE TO TAX UNDER THE HEAD “PROFITS AND GAINS OF BUSINESS OR PROFESSION” [Section 28] 1 Profits and gains of any business or profession, on by assessee at any time during previous year. 2 Income derived by trade, professional or other similar association from specific services rendered to its members. 3 Profit on sale of import entitlement licences, incentives by way of cash compensatory support and drawback of duty. 4 Value of any benefit or perquisite, whether convertible into money or not arising from exercise of business or profession. 5 Any interest, salary, bonus, commission, or remuneration received by a partner of a firm, from such a firm 6 Any sum received or receivable, in cash or in kind, under an agreement, for Noncompetition and Exclusivity. 7 Any sum (including bonus) received under Keyman Insurance Policy 8 Income from Speculative Business- settled other than actual delivery Unit I
  • 4. Income from Business & Profession Case Laws : BASIS OF CHARGE Under section 28 When there was a temporary suspension of business with the object of tiding over the crisis condition and during such period the machinery, there to used in the business, is leased out then the rental income there from is to be identified as ? Answer: Business income'. CIT vs. Vikram Cotton Mills Ltd 169 ITR 597 (SC) and CEPT vs. Shri Lakshmi Silk Mills Ltd., 20 ITR 451 (SC). Lease of factory after assessee stopped business with no intention of reviving the business will amount to earning lease rental ? Answer: It is not in the nature of business income. In such a case the income is assessable head ' income from other sources ' Universal Plast Ltd. vs. CIT, 237 ITR 454 (SC). Unit I
  • 5. Income from Business & Profession Unit I Case Laws : BASIS OF CHARGE Under section 28 I have purchased 500 shares of reliance on 16.08.2010 in the stock exchange and sold the same on 17.08.2010. Whether the transaction would come under speculative business? As per Section 43(5) of the Income Tax Act, 1961, intra-day trading shall be considered as speculation business transactions and the income there from would be either speculation gains or speculation losses.
  • 6. Income from Business & Profession Unit I Case Laws : BASIS OF CHARGE Under section 28 An assessee purchases a plot of land and builds a complex on it and divides it into office spaces and sells each of these, thereby making a profit from the entire activity. Any adventure or concern in the nature of trade, commerce or manufacture. Section 2(13), A single isolated transaction outside the assessee’s line of business may constitute adventure in nature of trade and commerce.
  • 7. Income from Business & Profession Unit I METHOD OF ACCOUNTING There are two main methods of accounting Cash Basis Accounting 1 Under cash basis accounting revenues are recognized and earned only when cash is received irrespective of when and how the services were performed or goods delivered. Accrual or Mercantile Basis Accounting 2 Accrual or Mercantile Basis Accounting Under accrual or mercantile basis accounting, revenues are recognized and earned when they are realized or realizable irrespective of when the cash is received. Is it compulsory to maintain books of accounts? 1. If the income of the person from the business is more than 1.20 lacs or his total sales receipts are more than 10 lacs. in any of the last three years. 2. In case of newly started business if the expected income or receipts are expected to exceed the above limits. 3. Information Technology i.e. people carrying on the business of software and hardware service.
  • 8. Income from Business & Profession Unit I What books of account have been prescribed to be maintained by a person carrying on business under the Income tax Act? The Act does not prescribe any specific books of account for business. However you are expected to maintain your accounts in such a fashion that the net profit of the business can reasonably and easily be arrived at by the department. Do a small time trader need to maintain any accounts? Any business or profession that has an annual turnover/gross receipts exceeding rupees 10 lakh and net profit of rupees one lakh twenty thousand, must maintain such books of account and documents from which its income can be reasonably ascertained by the department. Is it compulsory to get the books audited? (i) Every person carrying on business shall get his accounts audited if the total sales, turnover or gross receipts in business exceed Rs 60 lakhs in the previous year. (Now Rs. 1 Crore) (ii) Every person carrying on profession shall get his accounts audited if his gross receipts exceed Rs 15 lakhs in the previous year. (Now Rs. 15 Lakhs)
  • 9. Profit and Loss account Particulars Amt Particulars To Salaries By bad debts recovered Advertising By dividend Carriage outwards By commission Rent By rent from house property Depreciation By commission Taxes paid By export incentives Interest on capital By share of income from HUF Auditing fee By bad debts recovered Loss on sale of assets Reserve for doubtful debts Commission outstanding Provision for staff bonus Renovation of building Donation Drawings To Net profit Amt
  • 10. Trading account Particulars Amt Particulars To Opening stock By sales To Purchases Return Inwards To Return outwards Closing Stock To Carriage inwards TO Direct expenses By Gross Profit 1. Over Valuation of opening Stock 2. Under valuation of closing Stock Decreases Gross profit 1. Under Valuation of opening Stock 2. Over valuation of closing Stock Increases Gross profit Valuation of Stock: Cost or market price, whichever is less Amt
  • 11. Income from Business & Profession Unit I SCHEME OF BUSINESS DEDUCTIONS Section 28 defines various income which are chargeable to tax under the head “Profits and gains of business or profession”. Section 29 permits deductions and allowances laid down by sections 30 to 43D while computing profits or gains of a business or profession. 1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Inadmissible Expenses: Not allowed but debited to Profit and Loss account Provision and Reserves (Provision can be claimed to the extent used) Direct taxes (Income tax, wealth tax, gift tax etc.) Rent, Salary paid to self and other personal drawings Interest on proprietor's capital and interest paid on loan borrowed from family members All capital expenditure (e.g. Purchase and renovation of assets) Loss on sale of assets Fine and penalty paid Personal insurance premiums Contribution in NSS, NSC, PPF, URPF, unapproved gratuity and Staff welfare fund Rent paid of residence Loss by theft at home Expenses on illegal business Difference in trail balance Legal expenses incurred of personal cases Preliminary expenses Expenses incurred in acquisition of assets
  • 12. Income from Business & Profession Unit I SCHEME OF BUSINESS DEDUCTIONS Section 28 defines various income which are chargeable to tax under the head “Profits and gains of business or profession”. Section 29 permits deductions and allowances laid down by sections 30 to 43D while computing profits or gains of a business or profession. Contd…. 1 17. 18. 19. 20. 21. 22. 23. 24. 25. Inadmissible Expenses: Not allowed but debited to Profit and Loss account Excess depreciation Payments made by way of cash (Exceeding Rs. 20,000) Any amount not paid with in stipulated date Outstanding expenses Expenses prior to incorporation Municipal tax, Revenue and other local taxes Ads given in political souvenirs Overvaluation of Opening stock Under valuation of closing Stock
  • 13. Income from Business & Profession Unit I SCHEME OF BUSINESS DEDUCTIONS Section 28 defines various income which are chargeable to tax under the head “Profits and gains of business or profession”. Section 29 permits deductions and allowances laid down by sections 30 to 43D while computing profits or gains of a business or profession. 2 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Inadmissible Incomes: Not allowed but credited to Profit and Loss account Part time salary Bank interest Interest from various investments (e.g. securities, saving schemes and deposits) Dividend on shares Sale of assets and profit on sale of assets Income from house property Bad debts recovered (Disallowed earlier) Winning from lottery, horse race, gambling and betting Under valuation of opening stock Over valuation of closing stock.
  • 14. Important provision related to business and professional income Expenditure on scientific research 1 Any expenditure incurred on scientific research or any contribution made to approved scientific research is admissible to the extent of 150% of contribution made. In house research (200%) Preliminary expenses 2 To charged in 5 equal annual installment. (i.e. one fifth of preliminary expense is allowed as deduction). Example of preliminary expenses are market survey, Expenses for raising initial share capital etc. Depreciation 3 Depreciation should charged as per the rates prescribed by income tax act on the basis of WDV method. If an asset has been purchased during the previous year and put to use for less than 180days the only half amount should be charged. Pooja expenses 4 Diwali pooja and lakshmi pooja and muhurat expenses are allowed 5 Expense on income tax appeal is allowed Preliminary expenses 6 Payment made to relatives is admissible provided it should not be in excess of market rates.
  • 15. Depreciation U/S 32 1. 2. 3. Asset should be wholly or partly owned by assesse Used for the purpose of business or profession Block of assets: Means a group of assets falling in same class Building Furniture and Fittings Machinery & Plant Building 10% Computer & Software 60% Intangible assets Furniture and fittings 10% Motar car 15% Books and publications 100% Palnt & Machinery 15% Intangible assets 25%
  • 16. Computation of Income from Business Particulars Amt Net profit as per P&L account Amt XXX ADD: 1. Inadmissible Expenses: (Not allowed but Debited to Profit and Loss account) 2. Admissible Incomes: (Allowed but not Credited to Profit and Loss account) 3. Admissible Incomes: (Allowed but not Credited to Profit and Loss account) 4. Over Valuation of opening Stock 5. Under valuation of closing Stock Total LESS: 1. Admissible Expenses: (Allowed but not Debited to Profit and Loss account) 2. Inadmissible Incomes: (Not allowed but Credited to Profit and Loss account) 3. Admissible Incomes: (Allowed but not Credited to Profit and Loss account) 4. Under Valuation of opening Stock 5. Over valuation of closing Stock Total Income from Business XXX
  • 17. BASIC PRINCIPLES GOVERNING ALLOWANCE OF DEDUCTION UNDER SECTIONS 30 TO 44DA: Expenditure should have been incurred in connection with assessee’s own Business. 1 Expenditure should relate to the previous year in which business has been carried on. Onus to prove the admissibility of expenditure lies on the assessee. No allowance in respect of expenditure incurred before date of setting-up of business: 4 2 3