Income from Business and Profession

Rules and provisions for calculating business income (applicable for sole proprietorship, partnership,
and company:

Expenses which are not allowable (Inadmissible) and should not be debited by a business:

1. Payment of salary, commission, remuneration, and interest to the owners or partners of a

business.
2. Payment of salary to the employees who does not have Tax Identification Number (TIN).
3. Payment of salary to the employees in cash (without bank transfer) whose salary exceeds Tk
15,000 per month.
4. Any other payments to any party (employees and others) without deducting tax at source
where such tax should be deducted.
5. Fine and penalty, advance tax, provision/reserve/allowance for bad debt or doubtful debt.
6. Legal expense incurred for violating law or regulations or breach of contracts, or provisions.
7. Donation not approved by national board of revenue (NBR) such as donation to local club,
religious institutions.
8. Purchase of any assets (such as land, building, copyright, patent) except inventories or goods.
9. Incentive bonus or profit bonus and head office expense exceeding 10% of net profit.
10. Entertainment expense is allowed only @4% on the first 1,000,000 profit and @2% on the
remaining balance of profit.
11. Free sample is allowed on annual sales or turnover as follows:
Amount Pharmaceuticals Cosmetics, toiletries, and foods Others
On 1st 5,00,00,000 2% 1% 0.50%
On the next 5,00,00,000 1% 0.50% 0.25%
On the rest of amounts 0.50% 0.25% 0.10%

12. Royalty is allowed @10% on profit for the first three years of operations and 8% onwards. If
nothing is mentioned, then apply 8%.
13. Recovery of bad debt, discount and commission are considered as normal business income
and ignore if given in the question.
14. Examples of non-business income: capital gain (selling price – cost of purchase and further
improvement), interest on securities, dividend received, interest received, rental income, and
any other income that are not earned from business.

Q1. The profit and loss account of ZIKO Pharmaceutical for the year on June 30, 2020 is as follows:

Particulars Taka Particulars Taka

Salary and wages 940,000 Gross profit 2,600,000
Rent expense 200,000 Gain on sale of building (note-1) 100,000
 Free sample distribution 130,000 Interest on tax free securities 155,000
Legal expense 43,000 Bad debt recovered 32,000
Allowance for bad debt 19,000 Discount and commission 28,000
Incentive bonus 160,000 Dividend from XL Ltd 50,000
Royalty 58,000
Fine and penalties 156,000
Purchase of copyright 61,000
Donation 38,000
Depreciation 160,000
Net profit 1,000,000

Other information:

i. The cost of the building was Tk. 700,000 and the written down value at the date of sale was Tk
650,000 and sold for Tk. 750,000.
ii. Salary and wages includes Tk 150,000 as payment to the owners.
iii. Donation was approved by the board for only Tk 20,000.
iv. Legal charges have been incurred for defending a suit for alleged breach of contract.
v. Tax depreciation amounts to be Tk 170,000, and sales for the period were Tk 5,000,000.

Requirement:

Compute the total income of ZIKO Pharmaceutical for the year ended on June 30, 2020.

Solution:

Assessee: ZIKO
Pharmaceuticals Income Year:
2019-2020
Assessment Year: 2020-2021
Computation of Taxable
Income
Particulars Tk Tk
Income from business and profession:
Net profit as per profit and loss A/C 1,000,000
Add: Inadmissible expenses:
Salary paid to the owner 150,000
Donation not approved (38,000-20,000) 18,000
Legal charges incurred for breach of contract 43,000
Accounting depreciation 160,000
Free sample = [130,000- {(5,000,000×2%)}] 30,000
Allowance for bad debt 19,000
Incentive bonus = [160,000- (1,000,000×10%)]= 60,000
Royalty = [58,000- (1,000,000×8%)] 00000
Fine and penalties 156,000
Purchase of copyright 61,000
Total inadmissible expenses 697,000
1,697,000
Less: Tax depreciation (other expenses that are allowed but not reported) 170,000
Unadjusted total income 1,527,000
Less: Non-business income:
Capital gain (750,000-700,000) 50,000
Interest on tax free securities 155,000
Dividend received 50,000
Total non-business income 255,000
Income from business or business income 1,272,000
Add: Non-business income:
Capital gain 50,000
Dividend received (50,000-35,000 Non-assessable) 15,000
65,000
Total income 1,337,000

Home work

P1. The profit and loss account of ZIKO Toiletries for the year ended on June 30, 2020 is as under:

Particulars Taka Particulars Taka

Salary and wages 860,000 Gross profit 2,500,000
Rent expense 80,000 Gain on sale of building (note-1) 120,000
Advertising expenses 130,000 Interest on taxable securities 35,000
Legal expense 43,000 Bad debt recovered 32,000
Allowance for bad debt 9,000 Discount and commission 18,000
Bonus 164,000 Dividend from XL Ltd 30,000
Royalty 154,000
Fine and penalties 36,000
Underwriting commission 61,000
Advance income tax 38,000
Depreciation 70,000
Net profit 1,090,000
Other information:

i. The cost of the building was Tk. 800,000 and the written down value at the date of sale was Tk
700,000 and sold for Tk. 720,000.
ii. Salary and wages includes Tk 180,000 as payment to the owners.
iii. The business distributed goods for Tk 70,000 as free sample during the year.
iv. Legal charges have been incurred for maintaining the interest of the business.
v. Tax depreciation amounts to be Tk 80,000, and sales for the period were Tk 4,000,000.

Requirement:

Compute the income from business and total income of ZIKO Toiletries for the year ended on June 30,
2020.

P2. The profit and loss account of ZIKO Textile for the year on June 30, 2020 is as follows:

Particulars Taka Particulars Taka

Salary and wages 940,000 Gross profit 4,600,000
Rent expense 200,000 Gain on sale of building (note-1) 90,000
Free sample distribution 520,000 Interest on company bond 165,000
Legal expense 43,000 Bad debt recovered 32,000
Bad debt 49,000 Interest and discount 28,000
Incentive bonus 470,000 Dividend from XZ Ltd 60,000
Royalty 278,000
Fine and penalties 136,000
Purchase of patent 61,000
Donation 38,000
Depreciation 150,000
Net profit 3,000,000

Other information:

i. The cost of the building was Tk. 800,000 and the written down value at the date of sale was Tk
750,000 and sold for Tk. 840,000.
ii. Salary and wages includes Tk 120,000 as payment to the owners.
iii. Donation not approved by the board was Tk 25,000.
iv. Legal charges have been incurred for defending a suit for violation of contract.
v. Tax depreciation amounts to be Tk 120,000, and sales for the period were Tk 50,000,000.
Requirement:

Compute the total income of ZIKO textile for the year ended on June 30, 2020.