Profit and Gains of Business or

Profession (PGBP)

Dr. Sonam Topgay Bhutia

 U/S 14- Five Heads of Income Sources
According to Income-Tax Act 1961

I. Salaries
II. Income from house property
III. Profit and gains of business or profession (PGBP)
IV. Capital gains
V. Income from other sources
The Basic conditions for the charge of such income
under PGBP are as follows :
• Condition -1
There be a business profession.
• Condition-2
The business or profession should be carried on by the assessee.
• Condition -3
The business or profession should be carried on at least for the some time
during the previous year.
• Condition- 4
Profit and gains of the previous year of the business of profession are
chargeable to tax.
• Condition -5
The charge extends to any types of business or profession.
Problem
The following is the Profit and Loss of Dinesh Ltd. for the year ended 31st March 2015:

PARTICULARS Rs PARTICULARS Rs
To opening stock 72,000 By Sales 6,67,900
To Purchase 4,20,000 By Closing stock 1,08,000
To Wages 50,000 By Discount 9,300
To Repair 18,000 By Bank interest 7,800
To Salaries 48,000 By dividend from Indian Co. 8,700
To Insurance 18,000
To Bad debt 15,000
To Discount 7,200
To Reserve for bad debt 12,000
To Charities and donation 18,000
To Gift and presents 10,000
To provision for income-tax 8,000
To provision for depression 12,500
To Interest on loan 5,700
To Interest on Capital 7,300
To Life Insurance Premium 5,400
To Net profit 74,600
8,01,700 8,01,700
 Compute income from business of Dinesh Ltd. for the
assessment year 2015-2016 after taking into account the
following information:
a) Stock is consistently valued at 10% below cost.
b) Repair includes Rs 7000 being the cost of addition to
office - building.
c) Wages include Rs 12000 paid to a labour for installation
of a new machinery acquired in May, 2014
d) Interest on loan represents interest on money borrowed
for the construction of factory -shed, the construction of
which has not yet started.
Solution
Computation of Income from business of Dinesh Ltd. a resident individual, for the assessment year 2015-2016
relating to the previous year 2014-2015

Rs Rs
Net profit as per P/L A/C 74600
Add: Inadmissible expenses:
•Wages for installation of new machinery, being capital expenditure 12000
•Cost of addition to office –building, being capital expenditure 7000
•Reserve for bad debt 12000
•Charities and Donation (assuming donation is not made to trade association) 18000
•Provision for income tax ( disallowed U/S 40(a)(ii) 8000
•Provision for depression (treated separately) 12500
•Interest on Loan (refer to note 4) 5700
•Interest on capital 7300
•LIC premium, 5400 87900
1,62,500
Less: Admissible expenses:
•Depreciation (assumed calculated as per income –tax Rules) 12500
1,50,000
Less: Income not taxable as business income:
•Bank Interest 7800
•Dividend from Indian company 8700 16,500
1,33,500
Add: Adjustment for undervaluation of stock
•10/90*Rs (108000-72000) 4000
Income from business 137,500
Notes :
1. Bad debt is allowed as deduction under section 36(1)(vii) on the assumption
that all conditions of section 36(2)(i) are fulfilled.
2. Gifts and presents are allowed as deduction on the assumption that such gift
and presents have been made exclusively for the purpose of the business.
3. It is assumed that depreciation is properly calculated and includes depreciation
on addition to office- building and new machinery purchased during the year.
4. Interest on loan is deductible under section 36(1)(iii) if the loan is taken for
the purpose of the business or profession. However, interest for the period
beginning from the date on which the capital was borrowed for acquisition of
the asset till the date on which such asset was first put to use is not allowable
as deduction.
5. Undervaluation of opening stock by Rs 8000 (Rs 72,000*10/90 ) has
increased the net profit by the same amount and undervaluation of closing
stock by Rs12,000(Rs 1,08,000*10/90) has reduced the net profit by the
amount.
6. Thus, undervaluation of stock has wrongly reduced the net profit by Rs 4000
(Rs 12,000- Rs 8,000). In the solution , net reduction of the net profit for the
undervaluation of stock has been calculated and adjusted accordingly.
• Thank You