COMPUTATION OF INCOME FROM BUSINESS OR PROFESSION

Net Proft as per P&L a/c (or Income & Expenditure a/c) XXXX

I. Add: Expenses debited to P&L a/c but not allowable

 Business income not credited to P&La/c xx
 Undervaluation of closing stock xx
 Overvaluation of opening stock xx
 Excess depreciation xx
 Provisions and reserves (Except where they are allowable) xx
 Payments exceeding 10,000 in cash/ bearer cheque xx
xx
 Any excessive or unreasonable payments
xx
 Payments without TDS, where it is mandatory
xx
 Drawings by the proprietor or partner xx
 Interest on capital (Notional) xx
 Personal expenses xx
 Capital expenditure xx
 Donations and charities xx
 Past losses xx
 Expenses not related to business xx
 Income tax, Wealth tax (Professional tax is allowable) xx
 Penalties for violation of law xx
 Payments in the nature of sharing of profit to agents, etc. xx
 Litigation expenses in criminal cases xx
 Contribution to political parties xx
 Life insurance premium paid for owner or partner xx
 Expenses for shifting of office xx
xx
 Expenditure to increase share capital, issue of shares, etc.
xx
 Payment for goodwill
xx
 Gifts and presents otherwise than for advertisements xx xxxx
A XXXX
II. Less:
Allowable expenses but not debited to P&La/c xx
 Bad debts (not charged in P&L A/c) xx
 Depreciation (not charged in P&L A/c) xx
 Other eligible deductions xx
Overvaluation of closing stock xx
Undervaluation of opening stock xx xxxx
B XXXX
III. Less: Exempted or Incomes under other head
(a) Exempted Incomes
 Agricultural receipts xx
 Gifts from relatives xx
 Income tax refund xx
 Bad debts recovered (allowed earlier) xx
 Any capital receipt xx
(b) Incomes credited to P&L a/c, not chargeable under this head
 Interest on securities xx
xx
 Rent from house property
xx
 Capital gains
xx
 Dividend, Bank interest, Winning from lotteries, etc xx xxxx
 Salary Income
Income from business or profession - C XXXX
Case 1:

The following P&L a/c is presented by A Ltd. for the financial year 2021-22.

P&L a/c of A Ltd. for the financial year 2021-22

Particulars Amount Particulars Amount

Cost of goods sold 1,00,000 Sales 4,00,000
Office expenses 30,000 Rent (staff quarters) 40,000
Salary 5,000 Rent (company guest house) 10,000
Income tax 12,000 Rent (building let out) 60,000
Charity expenses 4,000 Income tax refund 20,000
Provision for bad debt 1,000
Service charges (GST 5,000) 41,000
Group insurance premium 6,000
Advertisement 15,000
General expenses 2,00,000
Municipal taxes paid (let out building,
5% of M.V.) 4,000

Net Profit 1,12,000

5,30,000 5,30,000

On scrutiny of the records it was found that the general expenses include Rs. 25,000 being cost of furniture
purchased on 1.04.2021, 11,000 entertainment expenses paid by cash on 31.03.2022. Interest on capital
borrowed to construct the let out building due but not paid Rs. 9,000.

You are required to ascertain the total income of the company for the year 2021-22.
Case 2:

C. Ltd. earned a net profit of Rs. 8,65,000 during the financial year 2021-22. The company has spent
3,00,000 during the year for in-house research, which has been charged against profits. The other details are:

1. The company paid Rs. 50,000 to X Ltd. as compensation for not honouring a contract for
purchasing a new machine, which is debited to P&L a/c.
2. Trade expenses include Rs. 40,000 being the cost of goods seized by customs authorities.
3. Unabsorbed depreciation for the year 2020-21 Rs. 1,25,000 has been debited to P&L ac. The
company is eligible for depreciation of 3,00,000 for the year 2021-22 but only 2,50,000 was
debited to P&L a/c.
4. The company suffered a loss from export business which was compensated by the Govt. in
the form of subsidy Rs. 3,00,000 which has not been credited to P&L a/c.
5. Under Voluntary Retirement Scheme, the company paid compensation of Rs. 12,00,000 to
four employees, during the year, which has been debited to P&L A/c.
6. The company paid Rs. 15,000 in cash to a broker for obtaining an export order which has
been debited to P&L a/c. All the documents in this respect are genuine.

Compute income u/h business or profession

Hint: Compensation paid on VRS is allowable in five equal instalments.

Case 3:

Mr. Babu Lal prepared the following trading and P&L for the year 31.03.2022

Trading and P&L a/c for the year ended 31.03.2022

Opening stock 3,00,000 Sales 5,10,000

Purchases 1,25,000 Closing stock 2,75,000
Wages 2,82,000
Audit fee 1,000
Local taxes (House property) 4,000
General charges 11,500
Commission (House property) 1,000
Bad debts reserve 5,00
Bad debts 2,000
Interest on capital 1,500
Trade expenses 2,500
Provision for income tax 10,500
Depreciation 2,500
Net profit 41,000
7,85,000 7,85,000

Mr. Babu Lal is a part-time employee of a company which gives him monthly pay of Rs. 5,000 per month
and D.A at the rate of 50%. He was also given festival allowance Rs. 1,000 during the year.

He has taken a loan for constructing the let out house two years back, annual interest being Rs. 1,75,000.
Nothing has been paid so far. The standard rent of the house is Rs. 12,000 per month and the actual rent
received was Rs. 1,40,000.

You are required to ascertain his gross total income for the year 2021-22.
Case 4:

Dr. Rajan is a medical practitioner. He gives you the following summary of cash book for the previous year
2021-22.

Receipts and Payments A/c for the year ended 31.03.2022

Receipts Amount Payments Amount

Balance (opening) 1,00,000 Rent of clinic 1,80,000
Consultation fee 6,00,000 Purchase of medicines 3,80,000
Visiting fees 4,50,000 Staff salaries 2,80,000
Gifts and presents 80,000 Surgical equipments 4,00,000
Sale of medicines 4,20,000 Motor car expenses 80,000
Dividends from UTI 60,000 Purchase of car 10,00,000
Insurance maturity sum 10,00,000 Household expenses 70,000
Dividend on shares 60,000 Balance (closing) 3,80,000
27,70,000 27,70,000
Other information:

1) 50% of the motor car expenses are incurred in connection with profession. The car was purchased in
December 2021.
2) Household expenses include Rs. 6,800 life insurance premium.
3) Gift and presents include Rs. 30,000 from close relatives.
4) Closing stock for medicines Rs. 1,20,000, Opening stock on 1-4-2021 was Rs. 40,000.
5) Depreciation of car and surgical equipment at 15%.

Compute his taxable income from profession.

Case 5:

Mr. Elhance a British citizen in India is engaged in electronic equipment business in Delhi.

Particulars Amount Particulars Amount

Bad debts 40,000 Income from trading 6,54,000
Provision for bad debts 10,000 Bad debts recovered 10,000
Loss on sale of car (personal) 1,40,000 Other income
Interest on Own capital 68,000 Profit on sale –
Charity and donations 50,000 In India: 2,80,000
Loss by theft 24,500 In USA: 10,00,000 12,80,000
Depreciation 91,000
General expenses 2,15,500
Advertisement 74,000
Entertainment allowance 42,000
Profit 11,95,000
19,50,000 19,50,000

General expenses include Rs. 15,000 being advance paid for purchasing a computer. Depreciation allowable
Rs. 70,000. Advertising expense of Rs. 14,000 is not supported by documents.
Case 6:

Mr. Nambiar a lawyer in Chennai gives the following details of income and expenditure.

Particulars Amount Particulars Amount

Household expenses 79,500 Legal 1,26,030
Office expenses 7,300 Special commission 400
Charity 500 Agricultural income 3,600
Income tax 900 Dividend on sahres 1,600
Loss on sale of furniture 2,800 Share from a partnership firm 1,010
Gratuity 600 Interest on advances 890
Surplus 44,995 Presents from client 1,000
Directors fees 300
Bank interest 335
Interest on post office savings 430
Dividend from co-operative society 1,000
1,36,595 1,36,595

Mr. Nambiar is employed as a consultant in a company on part-time basis on a monthly salary of Rs. 10,000
plus DA Rs. 10,000 (annual). The company provided him rent free furnished accommodation.

Compute his income under the heads salary and also PGBP.

Case 7:

Ms. Indira, a ready-made garment manufacturer in Chennai, gives you the following particulars for the
financial year 2021-22. Compute the income from business.

Net profit as per P&L a/c 5,10,000 after debiting the following expenses.

1) Contribution to unrecognised provident fund: 1,20,000

2) Consideration paid on 10.06.2021 for acquiring know-how: 2,00,000

3) Provision for income tax: 3,00,000

4) Provision for bad debt: 75,000

5) Provision for discount: 35,000

6) Holiday home expenses: 25,000

7) Health insurance premium paid for employees of the concern: 40,000

5) Penalty for violation of GST law: 30,000

9) Interest on late payment of GST: 10,000

10) Interest on late payment of income tax: 5,000

11) Amount spent on acquisition of patent right: 2,00,000

12) Guest house expenses: 20,000

13) Amount paid to Madras University for scientific research not related to the business: 60,000

14) Advertisement in the souvenir of a political party: 50,000

15) On 30.3.2022 she purchased a car for business use at a cost of 12 lakh

Answer

Income from business of Ms. Indira for the year 2021-22

Net profit as per P&L. a/c

Add:

Items not deductible

Contribution to unrecognised provident fund

1,20,000

Consideration for know-how (75% disallowed)

1,50,000

Provision for income tax

Advertisement in the souvenir of a political party

50,000

Provision for bad debt and discount Penalty for violation of GST law

(75,000+35,000) 1,10,000
30,000

Interest on late payment of income tax Amount spent on patent right (75% disallowed)

5,000

150,000

60000

50,000

5,10,000

9.15,000

14.25,000 90,000

13.35,000

Laur: Depreciation (12,00,000 x 15/100) x 1/2 (Less than 180 days) Income from business

Points to remember

Provisions are not deductible.

2 Interest on late payment of GST is an allowable expense. to get deduction

Holiday home expenses are fully deductible. 1 Scientific research need not be related to business
5. Advertisement in the souvenir of a political party is not deductible. Penalty for violation of any law is
disallowed.

Income

ReplyForward