INCOME UNDER THE HEAD PROFITS & GAIN OF BUSINESS OR PROFESSION

Presented by: Anurag Khandelwal Himanshu Shekhaliya Rikita Agrawal Harsh R Patel Nimesh Tulsiyani Arnish Patel Kusum Lata Parth Patel Umang Panchal Chetan Borad Hitesh Madhani Harsh N Patel Nandish Patel Tapan Shah Hardik Patel

Income under head Profit & gain of business & Profession

Covers provisions Computation of taxable income Sect. 28 Defines Scope of Income Sect. 29-44 D Method of Computation of Income Sect. 29-37 Lists Expenses/ Allowances by the Act Sect. 40, 40A,43B Disallowed Expenses

Basis of charge
Profits & gains from business or profession Any compulsion or other payments due to received by any person specified in section 28(ii) Income derived by trade; profession or similar association from specific service performed for its members. The value of any benefit/perquisite, whether convertible into money or not, arising from business or profession. Any profit on the transfer of duty entitlement pass book scheme. Any profit on transfer of the duty free replenishment certificate. Export incentive available to exporters.

Basis of charge cont.

Any interest, salary, bonus, commission or remuneration received by the 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 keyman insurance policy including bonus. Any sum received in cash on account of any capital asset being demolished, destroyed, discarded or transferred if the whole of the such expenditure on such capital has been allowed as a deduction under section 35AD. Profits and gains of managing agency. Income from speculative transaction.

Meaning of business
Though the definition is not exhaustive. It basically covers all the following activities : Business includes trade Business includes commerce Business includes manufacturing Business includes any adventure in the nature of trade, commerce or manufacture.

AGRICULTURAL INCOME
Rent received from Agricultural Land. Income from agricultural operation. Income from farm house. Income from nursery operation.

CONDITIONS
There must be Land. Land should be situated in India. Land should be used as agricultural purpose. Land cultivation is necessary. If the income derived from farm house, the building of the farm house should be situated on that land only.

INCOMES HELD TO BE NON AGRICULTURAL INCOME

Business income not taxable under the head profits & gains of business or profession

LOSSES CAN BE ALLOWED AS DEDUCTION ONLY IF THE FOLLOWING CONDITION ARE SATISFIED

SCHEME OF BUSINESS DEDUCTIONS

Particulars Onus of proof Allowances are cumulative Examples Loss of revenue incidental to business or profession Rent, repair, Insurance for business Not capital nature, personal exp. of assessee Mercantile account method Cash account method If business close/discontinue before commencement of PY Parent company sub company

Expenditure should relate to the previous year Business should carried on previous year Expenditure should have been incurred in connection with assesses business Benefit of expenditure may extend to somebody else Benefit of the expenditure may extend beyond the relevant previous year

Lessor

lessee

Revenue exp. incurred during PY is deductible if benefit of extend beyond year of exp.

Particulars

Examples

No allowance in respect of exhaustion of wasting assets

no allowance in respect of expenditure incurred before the setting up of a business Exception incorporation

Wasting asset
New business if business is commenced by promoters of a company before its incorporation tax incidence on profit Agriculture income Ordinary business exp. In caring illegal business, not infringement Exception stock-in trade Share and security not allowed Exp. fall under certain sections exclude capital exp. are allowed

No allowance in respect of non assessable business Expenditure relating to illegal business

No allowance in respect of anticipated losses No deduction in respect of depreciation of investment Relevance of distinction between capital or revenue expenditure

Depreciation Allowance
Conditions for Claiming Depreciation
1. 2. 3. 4. Asset must be owned by the Assesse Used for the purpose of business or profession Should be used during the relevant P.Y. Depreciation is available on tangible or intangible assets

Basic Concepts for computation of depreciation allowance

1. Block of Assets(Total 13 Blocks)
Tangible assets(12 blocks) Plant & machinery(8 blocks) , building(3 blocks), furniture(1 block)

Intangible assets(1 block) patents, copyrights, trade marks,

etc.

2.

Written Down Value

3.

Actual Cost

Normal depreciation & Additional Depreciation

Normal Depreciation a) WDV b) Rate of Depreciation as per the blocks of assets The multiplication of both will give us normal depreciation 250000 10% 25000

Additional Depreciation 20% if asset is used for 180 days or more 10% if asset is used for less than 180 days Conditions: a) Assesse must be engaged in manufacture/production of any article or thing b) New plant & machinery should be acquired & installed after 31/3/2005 c) It should be an eligible plant & machinery
Example

Unabsorbed Depreciation
Depreciation allowance of the P.Y. is first deductible from the income chargeable under the head PGBP. If it is not fully deductible under the head PGBP because of absence or inadequacy of profits, it is deductible from income chargeable under other heads of income (except under the head of salaries) for the same A.Y. If still it is unabsorbed, it can be carried forward to the subsequent A.Y.(s) by the same assesse for indefinite years Continuity of business is not relevant for the purpose of above set off & carry forward Depreciation can be carried forward by the same assesse

Other specific deduction under the act

Rent, rates, taxes, repairs and insurance for building [sec 30]
The rent of premises and the amount of repair the amount of current repair Sum on account of land revenue, local rates or municipal taxes[ sec 43B] Any premium of insurance against damage

Judicial rulings
Assesses take premises on lease for business or profession and agree to pay rent of previous tenant, such rent not deducted. Fluctuating item like a share in profit cant be treated as rent. Painting outside of a house is repair.

 Repairs and insurance of machinery, plant and furniture [sec31] Investment Allowance[ sec.32A] Investment deposit account scheme [ sec 32AB]

Tea/coffee/rubber development account[sec 32AB]

Conditions
1. Engaged in tea/rubber/coffee plantation 2. Deposit 3. Audit

Amount of deduction
1. a sum equal to amt deposited in the special account 2. 40% of profit
Whichever is less

Other points
No Deduction shall be allowed in any other previous year Amt. released from the special account in a year not utilized in the same previous year will be treated as taxable profit. Amt. withdrawn when closure or dissolution of business, amt. will be treated as taxable profit. In other death of tax payer, partition of HUF and liquidation of company, the amt. withdrawn will not include as taxable income.

Site restoration fund [Sec. 33ABA]

An assessee can claim deduction under section 33ABA as follows:

The assessee must satisfy the following conditions1. Production of petroleum/ natural gas 2. Agreement 3. Deposit 4. Audit Amount of deduction isa. A sum equal to amounts deposited as given below b. 20% of the profit of such business, Whichever is less

Reserves for shipping business [Sec 33AC] No deduction under section 33AC is available from A.Y 2005-06

Expenditure on scientific research

Any activity for the extension of knowledge in the fields of natural or applied sciences including agriculture, animal husbandry or fisheries.
1. Revenue expenditure incurred by the assessee himself [Sec 35(1)(i)] Pre-commencement Period expenses 2. Contribution made to outsiders [sec 35(1)(ii)/(iii)] To whom contribution is made An approved research association which undertakes scientific research [sec 35(1)(ii)] An approved university, college or other institution for the use of scientific research[sec. 35(1)(ii)] An approved association which undertakes research in social science or statistical or an approved university, college or other institution for the use of research in social science or statistical research[sec.35 (1)(iii)] Weighted deduction 175% of actual expenditure 175% of actual expenditure

125% of actual expenditure

 3. Capital expenditure incuured by an asseessee himself [Sec 35(2)] 4. Contribution to national laboratory [Sec. 35 (2AA)] Amt of deduction: Weighted deduction of 200%, if the aforesaid conditions are satisfied 5. Expenditure on in-house Research and development expenses [Sec. 35(2AB)] Amt of deduction: If all the conditions are satisfied, then a sum equal to 200% of the expenditure so incurred shall be allowed as deduction

6. Contribution to a company to be used by such company for scientific research [Sec.35(1)(iia)] If all the conditions are satisfied, a weighted deduction of 125% of the amount paid by taxpayer to the payee-company

Production: Dec 1, 2011 Expenditure upto year ending on March 31, 2012
Sr. No 1. 2. 3. 4. 5. Particulars 80000*1.75 [ Sec 35(1)(ii)] 70000*1.25 [Sec 35 (1)(iii)] 40250*2 Cost of construction only Revenue Expenditure Amt in Rs. 1,40,000 87,500 80500 4,70,000

Perquisite(Not Deductible) Salary to research personnel

Perquisite(Not Deductible) Purchasing Research material Cost of Land (Not deductible) Cost of equipment Cost of Growing herbals Amount deductable under section 35 for the assessment year 2012-13

Nil 32,000
Nil 44,800 Nil 1,40,000 44,600 10,39,400

 Expenditure on acquisition of patent rights and copyrights : Expenditure on know-how Amortisation of telecom licence fees Conditions If all conditions are satisfied, then one can claim deduction under section 35ABB.

Expenditure on eligible projects or scheme[sec.35AC]

Assessee A company To whom the payment should be made Deduction is available if the taxpayer incurs any expenditure by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme. A certificate in Form No. 58A should be obtained from the done organizatin Same as above Direct expenditure on eligible project A company can also directly incur expenditure in respect of eligible project and claim the same as deduction provided it is certified by a chartered accountant in Form No. 58B

A person other than a company

Direct expenditure is not permitted.

Withdrawal of approvalConsequences in the hands of payer Consequences in the hands of recipient

CONDITION 1 sec [35AD]

Specified business Who should own the business Approval (if any) Date of commenc ement of business

Setting up and operating a cold chain

Any person

Not required

On or after April 1, 2009

On or after April 1, 2009

Setting up and operating a warehousing facility for storage of agricultural produce Building and operating, anywhere in India, any hospital with atleast 100 beds for the patients (applicable from the assessment year 2011-2012) Production of the fertilizer in India (applicable from the assessment 20122013)

Any person

Not required

Any person

No approval On or after required April 1, 2010 Not required On or after April 1 2011

Any person

Condition 2- specified business should be new business

specified business should be new business old plant and machinery should not be transferred to set up a new business 20 percent old machinery is permitted- value of the transferred assets should not exceed 20 percent of the total value of the machinery or plant used in business. Second-hand imported machinery is treated as newplant and machinery which was used outside India by any person (other than assessee) shall not be treated as previously used for any purpose.

Amount of deduction Expenditure incurred on acquistion of any land or goodwill or financial instrument is eligible for any deduction. Expenditure incurred prior to the commencement of operation, shall be allowed as deduction during the previous year in which he started any specified business.

Consequences of claiming deduction under sec [35AD]

IF DEDUCTION IS CLAIMED AND ALLOWED, THE ASSESSEE shall not be allowed any deduction in respect of the specified business. No deduction in respect of the expenditure. If the assesse owns two units one of them qualifies for the deductions and the other one is not eligible for the same and the inter unit transfer of goods and services between the two units, transactions are made at the market value.

 Payments to associations and institutions for carrying out rural development programmes [sec. 35CCA] Amortisation of preliminary expenses [sec.35D] Double deductions not permissible. Amortisation of expenditure in the case of amalgamation/demerger

Section:35E
Amortisation of expenditure on prospecting etc, for development of certain minerals.
Who can claim deductions Qualifying person Qualifying expenditure Amount and period of deduction

Section:36(1)
Insurance premium

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Insurance premium paid by a federal milk cooperatives society. Bonus or commission to employees
Admissible only if not payable as profit or dividend Deductible on payment basis

Premium for insurance on health of employees.

DEDUCTIBLE EXPENSES
EMPLOYERS CONTRIBUTION TO RECOGNIZED PROVIDENT

FUND/ APPROVED SUPERANNUATION FUND [SEC. 36 (1)(IV)]

EMPLOYERS CONTRIBUTION TOWARDS AN APPROVED GRATUITY FUND [SEC. 36 (1)(V)]

EMPLOYEES CONTRIBUTION TOWARDS STAFF WELFARE SCHEMES [SEC. 36 (1)(VA)] Any sum received from the employees as contribution (provident fund, gratuity fund etc.) shall be allowable as deduction only if such sum is credited by employer to the employees account on or before due date.

 WRITE OFF ALLOWANCE FOR ANIMALS [SEC. 36 (1)(VI)] BAD DEBTS INCURRED [SEC. 36 (1)(VII)] Conditions:

The Debt has been considered while computing the Income of the assesse of that previous year/ an earlier previous year.
It has been written off as irrecoverable in the accounts of the assesse for that particular previous year. There must be a debt. Debt must be incidental to the business/ profession of the assesse. If any subsequent recovery is made against a bad debt already claimed as deduction in any earlier previous year is chargeable to tax as Business Income in the year of recovery under provisions of Section 41(4) of the Income Tax Act.

Debts of a discontinued business are not deductible if such business has been discontinued before the commencement of the assessable previous year. Debts must have been written off in the books of accounts. Limitation: Limited to the amount by which such debts exceeds the credit balance in the provision for bad debts.

TRANSFER TO SPECIAL RESERVE U/S 36(1)

A financial corp., banking company, co-op. bank and a housing finance company can claim deduction, if following conditions are satisfied. The amount transferred during the previous year to the special reserve account created for the purpose of section 36(1) OR 20% of the profits derived from the business of providing longterm finance before claiming deduction under the same section OR 200% of paid-up share capital as on last day of previous year minus the balance of the special reserve account on the first day of the previous year. Whichever is lower.

EX. X Ltd. Financial Corp. for purpose of deduction U/S 36(1)

for income of the taxpayer for the previous year 2011-12.

Given data, Providing long term finance for Ind. Development Paid-up capital and general reserve on March 31,2012 Balance of special reserve account on April 01,2011 Amt. transfer to Special reserve acc. during year 2011-12 560 lakh 610 lakh 1150 lakh 220 lakh

Sol. a) Rs.220 lakh (amt. transferred to special reserve account during year 2011-12) OR b) Rs.110 lakh (being 20% of Rs.560 lakh) OR c) Rs.70 lakh (being 200% of Rs.610 lakh minus Rs.1150 lakh) So, the least amount of deduction U/S 36(1) will be 70 lakh.

Other deductions
Family Planning expenditure Revenue expenditure incurred by entities established under any Central, State or Provincial Act. Banking cash transaction tax and securities transaction tax

Other deductions (continued)

Contribution to credit guarantee trust fund Advertisement expenses Expenses deductible from commission earned by life insurance agents, UTI agents, post office / Govt securities agent and agents of notified mutual funds

Disallowances
INTEREST, ROYALTY, FEES FOR TECHNICAL SERVICES PAYABLE TO A NON-RESIDENT Disallowance attracted if the following conditions are satisfied.

Condition one

The amount paid is interest , royalty, fees for technical services .

Condition two
Condition three

The aforesaid amount is chargeable to tax under the Act in the hands of the recipient.
The aforesaid amount is paid/payable as follows Situation Place of payment To whom it is paid/payable Situation 1 =Outside India = o a resident or nonresident Situation 2 = In India = To a non-resident or foreign company In respect of the aforesaid, tax is deductible but tax has not been deducted Or tax has been deducted but after deduction it has not been paid to the Government in the previous year.

Condition four

 SECURITIES TRANSACTION TAX - Securities transaction tax is not deductible while calculating business income. FRINGE BENEFIT TAX - Fringe benefit tax is not deductible while calculating business income from the assessment year 2006-07.

INCOME-TAX
WEALTH-TAX

 SALARY PAYABLE OUTSIDE INDIA WITHOUT TAX DEDUCTION

- is applicable if the following conditions are satisfied
Condition one The payment is chargeable under the head Salaries in the hands of the recipient.

Condition two

It is payable a. outside India (to any person resident or non-resident); or Condition two b. in India to a non-resident.
Tax has not been paid to the Government nor deducted at source under the Income-tax Act.

Condition three

 PROVIDENT FUND PAYMENT WITHOUT TAX DEDUCTION

Amount not deductible in case of a partnership firm AMOUNT NOT DEDUCTIBLE IN RESPECT OF PAYMENT TO RELATIVES Relative ? Substantial interest ? (1) Payment to relatives , directors , partners (2) payment to a person who has substantial interest in the business and to the relative of such person. (3) payment to a person in whose business the assessee has a substantial interest

AMOUNT NOT DEDUCTIBLE IN RESPECT OF EXPENDITURE EXCEEDING RS. 20,000

Condition one The assesse incurs any expenditure, which is otherwise deductible under the other provisions of the Act for computing business/profession income (e.g., expenditure for purchase of raw material, trading goods, expenditure on salary, etc.). The amount of expenditure exceeds Rs. 20,000. A payment in respect of the above expenditure (or part thereof) exceeds Rs. 20,000. The payment mentioned in condition two is made in cash or by bearer cheque (i.e., not by crossed cheque or crossed demand draft).

Condition two Condition three

Example : x ltd purchased goods on credit A) 15,000 in cash B) 30,000 by bearer cheque C) 41,000 by an account payee cheque

Solution : A) Nothing will disallowed (not exceeding 20000 ) B) 100 % of 30,000 disallowed C) Nothing will disallowed ( account payee cheque )

 amount not deductible in respect of provision for unapproved gratuity fund Provision for gratuity fund is deductible only if such gratuity fund is an approved gratuity fund
amount not deductible in respect of contributions to non-statutory funds . Condition 1) The contribution is made by an assessee as an employer . 2) it is paid towards setting up any trust , company , association of persons , body of individuals , society or it is paid by way of contribution to any fund . 3) the contribution is not required by any law.

Amount not deductible in respect of unpaid liabilities

Mercantile system is must General Rule:certain expenses are on payment basis Exception:when deductible on accrual basis
Condition 1 Payment in respect of aforesaid expenses is has to be made on or before due date of submission of return of income Evidence of such payment is submitted along with return of income

Condition 2

Conversion of unpaid taxes into loan by state govt. Conversion of unpaid interest on loan as fresh loan by
bank/financial institution

Deemed profits and how they are charged

Recovery against any deduction Sale of assets used for scientific research Condition 1 In any of the earlier years a deduction was allowed to Recovery of bad debts in respect of laws, expenditure (revenue the tax payer Amount withdrawn expenditure) or trading liability incurred by or capital from reserve created under Sec 36 (1) (viii) Recovery after discontinuance of business or profession the assessee Adjustment of Loss
Condition 2 Condition 1 Condition 2 During the current previous year, the tax payer A) has obtained a refund of such trading liability (it The business or profession is discontinued may be in cash or any other manner) or Loss of such business or profession pertaining to the B) has obtained such benefit in respect of such trading year in which it is discontinued could not be set off liability by way of remission or cessation thereof against any other income of that year (remission or cessation for this purpose includes unilateral act of the assessee by way of writing-off such Such business is not a speculative business liability in this books of accounts) After discontinuation of such business or profession, there is a receipt which is dominated as business income under sec 41(1), (3), (4) or (4A).

Condition 3 Condition 4

Undisclosed income/investments are taxed

Cash Credit Unexplained investments Unexplained money, etc. Amount of investment not fully disclosed in books of accounts Unexplained expenditure Amount borrowed or repaid on hundi

When maintenance of books of accounts becomes compulsory

Persons Carrying on specified professions Persons Carrying on non specified professionals or any business Persons covered by sections 44AD, 44AE, 44BB, 44BBB

Who has to get his accounts audited on compulsory Basis

Tax Payers When they cover by Provision of compulsory audit.

A person carrying on Business.

If the total sales, turnover for the previous year relevant to the assessment year exceeds or exceeds Rs.60 lakh.

A person carrying on Profession.

If the total gross receipts for the previous year relevant to the assessment year exceeds Rs.15 lakh.

Special provision computing income on estimated basis U/S 44AD

If a tax payer is engaged in a business. The following Condition must be satisfied:1. Eligible assesse 2. Has not claimed some deduction 3. Eligible business 4. Turnover not exceed 60 lakh.

Who is covered by Section 44AE

If a Tax-payer is engaged in business of leasing and hiring trucks. Following Conditions must be satisfied:
Condition 1 The taxpayer may be an individual , HUF ,firm, company, co-operative society, or any other person. Tax payer is engaged in the business of plying, hiring or leasing goods carriages. The taxpayer owns not more than 10 goods carriages at any time during the previous year.

Condition 2

Condition 3

VALUATION OF CLOSING STOCK

An assesse may value its stock either at cost price or at market price, whichever is less. Once a particular method of valuation is adopted, the same should be continued in subsequent year. On the basis of lower of cost or market price:
Individual method
In this method, one has to take cost or market price, whichever is less, in respect of each item of stock.

Global method
In this method, value of stock is taken as the total cost of all items of stocks or market price of all items of stocks, whichever is less.

Example

Global Method

Individual Method

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