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Profit & Gain from business and profession


Business includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture Business people use mercantile system. Professional people use cash system. When Net profit or P&L a/c is given Net profit as per P& L a/c Add: Expenses disallowed & debited to P & L a/c: Personal Exp Life insurance premium Salary withdrawn by owner Donations, Gifts, Presents & charity Speculation loss Subscription or advertisement to political party Municipal Tax, repairs, insurance etc relating to let out property Any types of cash & its provision(except sales tax, excess duty, Professional tax, custom duty, local tax, entry tax) Income tax, Wealth tax, and other direct taxes Transfer to any Reserve/Provision e.g Reserve for depreciation, Bad debts reserve Transfer to any fund (Except RPF and approved gratuity fund) Preliminary Exp (as per rule) Copyrights and patents (as per rule) Technical know how Exp (as per rule) Excess provision for depreciation on tangible & intangible assets. Loss on sales of assets Expenses on maintenance of guesthouse Bad debts Difference in trail balance Excess capital expenditure on family planning Any capital expenditure 100 % of any cash payment of more than Rs 20,000 / 35000(Transporter) Any other expenses to be deducted from other incomes. Less: 1) Income from other heads credited to P & L a/c Rent from House property - Profit on sale of capital assets - Dividend, Interest received on securities - Casual Income. 2) Expenses allowed but not deducted so far - Expenses on scientific research - Entertainment expenses - Traveling Expenses - Any other expenses falling under this category xxx Income from business xx

When receipts and payments accounts is given Step-1 Take all the revenue receipts relating to the business only Write all professional earnings a) In the case of a doctor - Sale of medicine - Consultation fees - Visiting fees - Operation fees - Nursing home charges - Gifts from patients a) In the case of a lawyer or CA - Fees - Audit fee - Examining fees - Advising fees - Gifts from clients Step 2 Deduct allowed expenses relating to profession Office expenses Cost of medicine & stationary Rent of clinic or office Salary to employees Interest on loan taken for profession General expenses Expenses of [property which is used for his profession Car & traveling expenses Depreciation on surgical equipments or furnitures Depreciation on Books for profession A) Annual publication 100 % B) Other books 60 % Subscription to association magazine Other expenses Income from profession Expenditure on scientific research sec(35) 1) Scientific research carried on by the Assesses himself The research must be related to the business of the assesses for claiming the deduction. The Expenses incurred can be classified into two

xxx xx

1. Revenue expenditure 2. Capital expenditure Revenue Expenditure All the revenue expenses during the previous year are fully allowed as deduction The following revenue expenses incurred during 3 years immediately preceding the date of Commencement of the business will be allowed as deduction for the previous year in which Business is commenced. a) Payment of salary to employees engaged in scientific research b) Purchase of materials used in scientific research Capital expenditure i) All capital expenditure except cost of land is allowed as deduction ii) All the capital expenses incurred during the three years immediately preceeding to the date of Commencement of the business are allowed as deduction for the previous year in which the business is commenced.

3 35(1) (i) Revenue Expenditure related to the business incurred for own business Current year Prior Period 100% 100% upto 3 years prior to commencement 175% of amount paid 125% of amount paid

35(1) (ii) Any sum paid to approved scientific Research Association or University or College or Institutions 35(1) (iia) Any sum paid for scientific research, to a company, registered in India, Scientific research having an object to carry out scientific research and development activities 35(1) (iii) Any sum paid to an approved University, College or other Science or statistical Institution research 35 (2) Capital expenditure incurred for own business (excluding cost of land)

For undertaking Scientific research For undertaking Scientific research For research in socia Science or statistical research related to the business Current year Prior Period

125% of amount paid

100% reduction 100% upto 3 years prior to commencement 175% of amount paid

35(2AA) Any sum paid to National Laboratory or University or programme approved IIT or a specified person

35(2AB) In house research and development or Bio-technology in the busines of manufactuer expense or production of any article or thing, not being incurred an article or thing specified in list of Eleventh Schedule

For undertaking a programme approved by the prescribed autority Bio-technology or in-house research.

200% of the expenses incurred

Expenditure on acquisition of patent or copy rights 1. Total amt was allowed in equal installments spread over 14 years. If incurred before 01-04-98 14 equal installments. 2. If this has been incurred on or after 01-04-98 , depreciation @ 25% shall be admissible under written down value method. Expenditure on know-how sec 35(AB) (technical) 1. If expenditure is made before 01-04-98 1/6th of the amount so paid shall be deducted in computing the profits & gains of business for that previous year and balance amt shall be deducted in equal installments for each 5 immediately succeeding previous year. 2. If the expenditure is made on or after 01-04-98 this expenditure will be treated as intangible asset of the business. Depreciation allowance at 25% on the cost of acquiring in the previous year and there after 25% on written down value in subsequent years.

4 Amortization of preliminary expenses sec 35 D 1. If the expenditure is incurred on before 01-04-98 it is allowed as deduction in 10 equal installments and the maximum amt restricted to 2.5% of the project cost. 2. If the expenditure is incurred after 01-04-98 it is allowed as deduction is 5 equal installment and maximum amt is restricted to 5% of project cost. Ex:- Q 1. Cost of Industry 8,00,000 The production started on 01-09-03 Incurred preliminary exp = 35000 8,00,000 X 5% = 40,000 / 35000 Installment = 35000/5 = 7000 When cost = 2,00,000 2,00,000 X 5% = 10,000 or 35,000} less = 10,000 Installment = 10000/5 =2000 Amortization of expenditure in case of Amalgamation or Demerger sec 35 DD Available to Indian Co from Year 2000-2001 i.e after 31.03.99 Deduction 20% or 1/5th of such expenditure for each of 5 successive previous years beginning with year in which amalgamation or demerger takes place. Expenses incurred regarding voluntary retirement of Employees Sec 35 DDA 1/5th of such expenses will be allowed for each of 5 successive previous years Amortization of expenses on prospecting etc for development of certain minerals sec 35 E :The assessee shall be allowed a deduction of an amt equal to 1/10th of such expenditure for each of 10 successive previous years beginning with the year of commercial production. Expenditure for promoting family planning sec 36(1) (IX) If it is of capital nature then it is allowed in 5 installments in case of company only. Advertisement expenditure Sec 37 (2B) 1. No deduction for advertisement in any political sovereign, brochure, pamphlet. 2. Other cases full amt.