Computation of Profits & Gains of Business or Profession

COMPUTATION OF PROFITS & GAINS OF
BUSINESS OR PROFESSION:
for
B Com ( taxation) Students of Goa University
Presented
By
Dr. Sanjay P S Dessai
Associate Professor
VVMS Shree Damodar College of Com and Eco
Margao Goa
20-09-2014 sanjaydessai@gmail.com 1

Sections / Contents
 Sections: 28- Chargeability :-Under head Profits
and gains of business or profession
 Section: 29 -Computation of profits and gains
from business or profession ( Permits deductions/
allowances )
 Sections 30 to section 37 : deductions expressly
allowed in respect of expenses and allowances

• Section: 30- Deduction of Rent, rates, taxes,
repairs and insurance for buildings
• Section 31 - Deductions of Repairs and
insurance of machinery, plant and furniture
• Section: 32 Depreciation (excluding
Depreciation Rates)

Section 36: Deductions (Restricted to
following clauses).
Sec. 36 (1) (i) – Insurance Premium
 Sec. 36 (1) (ii) – Bonus/Commission to employees.
 Sec. 36 (1) (iii) – Interest on Borrowed Capital
 Sec. 36 (1) (iv) – Employer’s Contribution to
recognized Provident Fund & Approved
Superannuation Fund.
 Sec. 36 (1) (v) – Contribution towards Approved
Gratuity Fund
 Sec. 36 (1) (vii) – Bad Debts

General deductions
• Sec. 37 (1) – General Deduction.
• Sec. 37 (2B) – Advertisement Expenses in
Souvenir etc. of a Political Party.

Amount not deductible Sec 40
• Sec. 40 (a) Interest , Royalty, fees for technical
services payable outside India or payable to non-resident
in India is disallowed where TDS is not
deducted
• 40A(2) Payments to relatives 40 A(2)
• 40A(3) payment exceeding Rs 20,000 paid otherwise
than by account payee cheques or Bank drafts
• 43B – Disallowance of unpaid liabilities (
applicable in case of mercantile system ).

Special provisions
• Sec. 44AA Provisions in relation to maintenance
of books of accounts
• 44AB Audit of accounts of certain persons
• 44AD Computation of income on estimated basis
in case of taxpayer engaged in certain business
• 44AE computation of income on estimated basis
in case of taxpayer engaged in the business of
plying, leasing or hiring trucks

Section 28 Chargeability :- Profits and gains of
business or profession
• Profits and gains of any business or profession
• Any compensation or other payments due to or
received by any person specified in section
• Income derived by a trade, professional or similar
association from specific services performed for
its members
• The value of any benefit or perquisite, whether
convertible into money or not, arising from
business or the exercise of a profession
• Export incentive available to exporters

Income chargeable
• Any interest, salary, bonus, commission or
remuneration received by a partner from firm
• Any sum received for not carrying out any activity
in relation to any business or not to share any
know-how, patent, copyright, trademark, etc.
• Any sum received under a Key man insurance
policy including bonus
• Profits and gains of managing agency
• Income from speculative transaction.

Methods of Accounting
• Mercantile system of accounting- accrual basis
• Cash system of accounting

Section 29:- Computation of profits and gains
from business or profession
• Determine profit from business or profession
• Adjustment in respect of expenses allowable or not
allowable
• Expenses debited to profit and loss account but are not
allowed as per income tax Act, are to be added to profits
• Partly disallowed expenses to be added to profits
• Expenses which are admissible but not debited to profit
and loss account should be deducted from profits
• Income chargeable but not credited to profit and loss
account should be added to profits
• Income which are credited to profit and loss account but
not taxable under the head profits and gain of business or
profession , should be deducted

Deductions allowable
Section 30 :- Rent, rates, taxes, repairs and
insurance for buildings
• Rent, Rates, taxes, Repairs and insurance of
Buildings (sec 30) (only revenue expenditure )

Section 31:-Repairs and insurance of machinery,
plant and furniture
• Repairs and insurance of machinery, plant and
furniture
• (only revenue expenditure )

Section 32 - Depreciation
In order to avail depreciation, following conditions
are to be satisfied
1. Asset must be owned by the assessee.
2. It must be used for the purpose of business or
profession.
3. It should be used during the relevant previous
year.
4. Depreciation is available on tangible as well as
intangible assets

Depreciation
• Normal depreciation ( full year’s depreciation) is
available if an asset is put to use at least for
sometime during the previous year.
• However, depreciation allowance is limited to 50
per cent of normal depreciation, if the following
two conditions are satisfied—
1. where an asset is acquired during the previous
year; and
2. it is put to use for the purpose of business or
profession for less than 180 days during that
year.

BLOCK OF ASSETS
• The term “block of assets” means a group of
assets falling within a class of assets
comprising
• Tangible- Buildings, Machinery, plant,
furniture, etc.
• Intangible - know-how, patents, copyrights,
trade marks, licenses, franchises, etc.

Computation of written down value
• Step 1 -Find out the depreciated value of the
block on the April 1
• Step 2 -To this value, add “actual cost” of the
asset (falling in the block) acquired during the
previous year
• Step 3 From the resultant figure, deduct money
received/receivable (together with scrap value) in
respect of that asset (falling within the block of
assets) which is sold, discarded, demolished or
destroyed during the previous year .

No depreciation is provided ---
• If written down value of the block of asset is
reduced to zero, though the block is not
empty.
• If the block of asset is empty

Problem (WDV is Nil )
• On 1/4/13 depreciated value of a block of
asset is Rs. 80,000 it consist of plant A and B.
The assessee sold plant A on May 3, 2013 for
Rs. 1,80,000 and purchased plant C on
December 28, 2013 for Rs. 30,000.
• Rate of depreciation 15 percent
• Calculate depreciation on 31st march 2014

Solution
• Depreciated value of the block (A&B) 80,000
• Add – Purchases (C) 30,000
• Total 1,10,000
• Less-sale-(1,80,000) 1,10,000
• Written down value - NIL
• Depreciation Nil
• Depreciated value of the bloc consist of plant B and
C- Nil
• Difference is short term capital gain

Value of block of asset is empty
• WDV of plant A and B on 1st April 2013 Rs.
2,00,000. Purchased plant C on 1st June 2013
Rs. 1,00,000 and sold Plant A, B and C on 1st
December 2013 for Rs. 1,00,000.

Value of block of asset is empty
• WDV of asset on 1st April 2013 (A&B) 2,00,000
• On 1st June purchased plant C 1,00,000
• 3,00,000
Sold plant A, B & C on 1st December for Rs. 1,00,000
• Written down value (block is empty) 2,00,000
• Depreciation Nil

Problem
• X ltd owns 2 buildings A&B On 1/4/13
depreciated value of a block of asset is Rs.
14,15,700. On 1, December 2013 he
purchased Building C for Rs. 3,10,000 and
sold building A on 10th January 2014 for Rs.
8,70,000.
• Calculate depreciation for previous year 2013-
14.

Solution
• WDV of Block of asset on 1/4/12- 14,15,700
• Add – Purchases on 1/12/2012- 3,10,000
• 17,25,700
• Less sales A 8,70,000
• WDV on 31st March 2013 (B&C) 8,55,700
• Less -Depreciation
• Plant B (855700-310000)=545700 X10%= 54,570
• Plant C 3,10,00 X 10% X1/2= 15,500 70,070
• Written down value on 31/3/2013 785630

Problem
• X ltd owns 2 buildings A&B On 1/4/12
depreciated value of a block of asset is Rs.
14,15,700. On 1, December 2012 he
purchased Building C for Rs. 3,10,000 and
sold building A on 10th January 2013 for Rs.
15,87,000.
• Calculate depreciation for previous year 2012-
13.

• WDV of Block of asset on 1/4/12- 14,15,700
• Add – Purchases on 1/12/2012- 3,10,000
• 17,25,700
• Less sales 15 87,000
• Value on 31st March 2013 1,38,700
• Less -Depreciation 1,38,700 X 10x ½ 6935
• Written down value on 31/3/2013 - 1,31,765

Section 36: Deductions (Restricted to following
clauses)
– Sec. 36 (1) (i) – Insurance Premium (stock / stores )
– Sec. 36 (1) (ii) – Bonus/Commission to employees.
– Sec. 36 (1) (iii) – Interest on Borrowed Capital (for
purpose of business / profession
– Sec. 36 (1) (iv) – Employer’s Contribution to Recognized
Provident Fund & Approved Superannuation Fund.
– Sec. 36 (1) (v) – Contribution towards Approved
Gratuity Fund (not to exceed 8.33 percent of salary )
– Sec. 36 (1) (vii) Bad Debts (written off as irrecoverable )

• Sec. 37 (1) – General Deductions (Revenue
expenditure related to business )
• Sec. 37 (2B) – Advertisement Expenses in
Souvenir etc. published by Political Party is not
allowed as deduction.

Amount not deductible
• Section 40(a)- Interest , Royalty, fees for
technical services payable outside India or
payable to non- resident in India is disallowed
where TDS is not deducted
• (Aforesaid amount is chargeable to tax )

Payments to relatives 40 A(2)
• 40A(2) Any expenditure by way of Payment to
relatives is liable to be disallowed in computing
business profit to the extent such expenditure is
considered as excessive or unreasonable having
regard to fair market value of goods and services
or facilities.
• Relative – husband , wife , brother , sister or any
lineal ascendant or descendent of that individual
Lineal Ascendant means father, grandfather, great
grand father... Lineal Descendant means son, grand
son, great grand son....

Amount not deductible
• 40A(3) payment exceeding Rs 20,000 paid
otherwise than by account payee cheques or
Bank drafts.
• Expenditure incurred is otherwise deductible
under provisions of the act for computing
business income.

Sec. 43(B) – Disallowance of unpaid liabilities.
• Applicable when accounts are maintained under
mercantile system
• The following expenses are deductible on payment
basis
• Sum payable by way of tax, duty , cess
• Contribution to employees PF or superannuation fund
for welfare of employee
• Bonus / commission paid to employees for service
rendered
• Interest on loan payable
• Salary in lieu of leave payable

Maintenance of accounts by certain person s(Sec
44AA)
• Specified professionals:
Assessee carrying on profession of law, medicine,
accountancy, architecture, technical consultancy,
interior decoration, authorized representative, film
artist, information technology professionals
Whose gross receipts in the profession exceed
Rs.1,50,000 in all the three years immediately
preceding the previous year or( for newly setup
profession during current previous year in which
business is commenced)

Maintenance of accounts
by other Persons covered
u/s 44AA (2):
• Any other persons engaged in any other profession or carrying
on any business other than section 44AA (1)
• The requirement of compulsory maintenance of books of
accounts applies if-
• Either the income from business or profession exceeds Rs
120000 or
• The turnover or gross receipts exceed Rs 10 Lakhs in any one
of the three years immediately preceding the previous year.

Section 44AB compulsory audit
• 44AB section stipulates that every person
carrying on business or profession is required
to get his accounts audited by a CA
• In case of Business - if the total sales, turnover
or gross receipts exceed Rs.1 crore
• In the case of profession gross receipts exceed
Rs.25 lakhs
Back

44AD computation of income on estimated basis
in the case of tax payer engaged on certain
business
• Section will be applicable to any business ( whether it is Retail
trade, or Civil construction or any other business).
Applicable if the following conditions are satisfied:
• Assessee eligible for the purpose of this Section has to be an
Individual / HUF/ Partnership Firm
• The assessee has not claimed any deduction
u/s.10A,10AA,10B,10BA,80HHto 80RRB in the relevant
Assessment Year;

• Income from the eligible business is estimated
at 8 percent of the gross receipts or total
turnover .
• Exempted from payment of advance tax
• Exempted from maintenance of books of
account
• Total Turnover/ Gross Receipt of the Assessee
in the previous year should not exceed Rs. 1
crore .

Following persons are not eligible to
avail any benefit under this section
• A person carrying of profession as referred
under section 44AA(1)
• Earning income in the nature of commission
or brokerage
• Carrying of any agency business
• A person who is in the business of plying,
hiring or leasing goods carriages
•

44AE computation of income on estimated basis
in the case of taxpayers engaged in business of
plying, leasing or hiring trucks
• Income Calculation:
In case of Heavy Vehicle, Rs.5000/- per month per
truck
In case of others, Rs.4500/- per month per truck
• "Goods Carriage and Heavy Vehicles" means as
described in the Motor Vehicles Act
• "Eligible Assessee" is one who has NOT MORE
THAN TEN TRUCKS.
• Maintenance of books of account is not

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