Income from Profits of Business or Profession

1. Profit and Gains of
business or profession

2. Introduction
• Business – economic activity carried on for earning profit
• Profession-profession is an occupation requiring academic
qualification
• Vocation- activities which are performed for earning a lively
hood e.g. Music, dance etc

3. Chargeability (sec 28)
• Following incomes are included
• (i) the profits and gains of any business or profession which
was carried on by the assessee at any time during the
previous year ;
• (ii) any compensation received on termination of managing
agency or modifications of terms of agency
• (iii) income of trade, professional association from specific
services performed for its members ; - chamber of commerce
• (iiia) profits on sale of a licence for Imports & Exports
• (iiib) cash assistance received for exports from Government
of India ;

4. Chargeability (sec 28)
• (iiic) any duty drawback of export or excise repayment
• (iiid) any profit on the transfer of the Duty Entitlement Pass
Book Scheme,
• (iiie) any profit on the transfer of the Duty Free
Replenishment Certificate,
• (iv) the value of any benefit or perquisite, whether convertible
into money or not, arising from business or the exercise of a
profession
• (v) any interest, salary, bonus, commission or
remuneration, by whatever name called, due to, or received
by, a partner of a firm from such firm.

5. Chargeability (sec 28)
• (va) any sum, whether received or receivable, in cash or kind,
under an agreement for not carrying out any activity in relation
to any business;
• (vi) any sum received under a Key man insurance policy
including the sum allocated by way of bonus on such policy.
• (vii) any sum, whether received or receivable, in cash or kind,
on account of any capital asset (other than land or goodwill or
financial instrument) being demolished, destroyed, discarded
or transferred, if the whole of the expenditure on such
capital asset has been allowed as a deduction under
section 35AD.
• Speculative business income
• Illegal Business income

6. Chargeability (sec 28)
• "Speculative transaction" means a transaction in which a
contract
• for the purchase or sale of
• any commodity, including stocks and shares,
• is periodically or ultimately settled
• otherwise than by the actual delivery or transfer of the
commodity or scrips.

7. Not speculative transactions
• a) a contract in respect of raw materials or merchandise entered
into by a person in the course of his manufacturing or merchandising
business to guard against loss through future price fluctuations
in respect of his contracts for actual delivery of goods manufactured
by him or merchandise sold by him; or
• (b) a contract in respect of stocks and shares entered into by a
dealer or investor therein to guard against loss in his holdings of
stocks and shares through price fluctuations; or
• (c) a contract entered into by a member of a forward market or a
stock exchange in the course of any transaction in the nature of
jobbing or arbitrage to guard against loss which may arise in the
ordinary course of his business as such member; or

8. Chargeability (sec 28)
• (d) an eligible transaction in respect of trading in derivatives carried
out in a recognised stock exchange; or
• (e) an eligible transaction in respect of trading in commodity
derivatives carried out in a recognised association, which is
chargeable to commodities transaction tax
• shall not be deemed to be a speculative transaction

9. Computation of PGBP – General Commercial
principles1. Profit should be computed according to the method of accounting
followed.
2. Some essential expenses/losses deductible on the basis of general
commercial principles
3. Expenses of one business cannot be deducted from income of
another
4. Expenses in connection with & Loss incidental to or business only will
be allowed as deduction
5. Expenses & Loss incurred in relevant PY
6. Expenses of discontinued business before commencing PY cannot
be allowed as deduction
7. Any expenditure incurred in consideration of commercial expediency
is allowed as deduction

10. Important rules regarding assessment of PGBP
1. Business to be carried on by the assessee
2. Tax is levied on aggregate income of all businesses
3. Tax is levied on the business/ profession income of the PY
carried on by the assessee
4. Tax is levied on real owner – legal owner
5. Profit and losses of speculation business are kept separate
6. Profit on sale of assets on winding up of business
1. Sale in one lot including stock – under capital gains
2. Sale assets separately – stock under PGBP others under capital
gains
7. Tax payable on actual profits and not notional profits

11. Computation of PGBP – Points to be considered
8. Isolated transaction – expense to be deducted
9. Income from illegal business/ profession – expenses
deductible
10. expenses incurred before setting up business – capital
expenditure deductible u/s 35D
11.Deferred revenue expenditure – not allowed. Accounting
concept. Full deduction in the year of incurring.
12. deductible business losses – not of a capital nature,
sustained during PY, incidental to business, carried on by
assessee
13.Sums allowed as deduction earlier recovered now taxable as
income.

12. Computation of PGBP – Points to be considered
14.Underwriting commission received is income and commission
on shares subscribed by himself reduces cost
15.Awards received by sportsmen – professional income

13. Deductions expressly allowed Sec 30-36
1. Rent of business premises
2. Repairs, insurance premium, ground rent, land revenue – w.r.t.
Premises
3. Repairs, insurance premium of all business assets

14. Depreciation 32
• Block of assets
"a group of assets falling within a class of assets, being building,
machinery, plant & furniture, in respect of which the same
percentage of depreciation is prescribed."
• Method of depreciation
1. Straight line method
2. WDV method

15. Depreciation 32- Points to remember
• DP is calculated on the value of assets in hand on the last day
of accounting year.
• In case of newly acquired assets, full depreciation if it is used
for more than 180 days.
• No depreciation allowed for those assets which are sold or
demolished

16. Depreciation 32
• Conditions for claiming depreciation
• Asset must be owned by the assessee
• Used or ready to use for business purpose
• Used in the previous year
• Both tangible and intangible assets

17. 50% of rate of depreciation
• If an asset acquired during the previous year.
• Put into use or ready to use for less than 180 days.

18. Additional Depreciation
• In case of new plant and machinery is acquired, an additional
depreciation at the rate of 20% of actual cost of plant &
machinery is also allowed, if assessee is engaged in the
manufacturing of any goods and the asset is used for more than
180 days. If below 180 days @ 10% (20%x 50%)
• The additional depreciation is allowed over and above the
normal rate of depreciation
• For new undertaking set up for mfg on or after 31.3.2015 in
Andhra/ Bihar/ Telangana/ WB – addl dep @ 35%
• If put to use for less than 180 days in a PY - @ 17.5%(
35%x50%)
• Balance 50% of additional depreciation in the next PY

19. Unabsorbed Depreciation
• When the total depreciation is more than available profit, the
excess is called unabsorbed depreciation.
• It can be set off first with other business income and balance
with any other income of the year and
• If there is still balance, it can be carried forward and added with
next years’ depreciation and treated like depreciation of current
year
Business profits before depreciation xxx
Less Current year depreciation (Xxx)
Balance Xxx
Less B/fd Business Loss (Xxx)
Balance Xxx
Less B/fd unabsorbed depn (Xxx)
Balance Xxx

20. Particulars Amount
1 Opening WDV 10,00,000
2 Add: New Assets Acquired 5,00,000
3 Ded: Assets sold/ discarded (2,00,000)
4 Balance (1+2-3) 13,00,000
Computation of Capital Gains
Special provision for computation of capital gains in case of depreciable
assets. Sec 50- case 1
on item 4 we compute depn - IF AN ASSET SOLD FORVALUE <(1+2)
20

21. Particulars Amount
1 Opening WDV 10,00,000
2 Add: New Assets Acquired 5,00,000
3 Ded: Assets sold/ discarded (17,00,000)
4 Balance (1+2-3) -
Computation of Capital Gains
Special provision for computation of capital gains in case of depreciable
assets. Sec 50-case 2
IF AN ASSET SOLD FOR VALUE >(1+2) THEN IT RESULTS IN STCGi.e. 3-(1+2)=
17L-(10L+5L)=2L
21

22. Particulars Amount
1 Opening WDV 10,00,000
2 Add: New Assets Acquired 5,00,000
3 Ded: All the Assets sold/ discarded (10,00,000)
4 Balance (1+2-3) - STCL 5,00,000
Computation of Capital Gains
Special provision for computation of capital gains in case of depreciable
assets. Sec 50- case 3
IF ALLTHE ASSETS ARE SOLD FORVALUE <(1+2) RESULTS IN STCL
22

23. Computation of Capital Gains
Special provision for computation of capital gains in case of depreciable
assets depn under SLM. Sec 50A
• If an asset is sold, then COA shall be WDV adjusted ( cost- depn )
• i.e. COA is
• WDV+ BALANCING CHARGE OR
• WDV-TERMINAL DEPN
• The gain or loss can be either LTCG or STCG- Not specified.
23

24. Terminal depreciation
• If straight line depreciation method followed on power
generating units
• sold after the use of such asset for more than one year
Terminal depreciation=WDV> Net Sale
( Loss) consideration
Balancing charge = Cost>Net sale>WDV
(Profit in comparison to WDV)
Capital gain = Net sale>Cost

25. Particulars Amount Amount Amount
1 Cost 1,00,000 1,00,000 1,00,000
2 Less: Depn @ 7.84% for 2yrs
7,840 x 2
15,680 15,680 15,680
3 W.D.V on 1.4.2016 84,320 84,320 84,320
4 Selling Price 1,20,000 92,000 70,000
5 STCG (SP>COST): 1 Vs 4
BALANCING CHARGE: (WDV<SP<COST)
TERMINAL DEPN(SP<WDV):
+20,000
+15,680
CG& PGBP
+7,680
PGBP
-14,320
PGBP
Computation of Capital Gains
Power gen co purchased an asset in July 2014=1,00,000. Depn @ 7.84% in SLM.
Assessee sells the asset for
a) 1,20,000 b) 92,000 c) 70,000 25

26. Rate of depreciation
I. Buildings
a. Residential - 5%
b. Non residential others - 10%
c. Temporary buildings - 100%
II. Furniture, fittings fan - 10%
III. Machinery & Plant
a. Plant & machinery, motor car, AC, surgical equipments- 15%
b. Motor car for hire business - 30%
c. Computers & books - 60%
IV.Ship boat - 20%
V. Patent, copy rights, knowhow - 25%

27. Special deductions
• Investment allowance for new plant 32AC
• For manufacturers only
• Machines installed 1.4.2014 – 31.3.2017
• @ 15%
• investment more than 25 crores
• Deduction in the year of installation only
• If sold within 5 year- deduction allowed is fully taxable as
business income
• Does not include assets for which cost is fully allowed as
deduction

28. Special deductions
• Investment allowance for new plant 32AD
• For manufacturers only
• Machines installed 1.4.2015 – 31.3.2020
• @ 15%
• Set up in Andhra/Bihar/Telangana/WB
• Deduction in the year of installation only
• If sold within 5 year- deduction allowed is fully taxable as
business income
• Does not include assets for which cost is fully allowed as
deduction
• 32AC+32AD possible

29. Special deductions
• Deduction in respect Tea Coffee Rubber A/c 33AB
• Deduction for any sum deposited with NABARD - 40% of
profit or amount deposited WIL
• Site restoration fund[sec.33ABA]
• Production of Petroleum /Natural gas in India
• 20% of profit or actual amount deposited with SBI/account

30. Special deductions
• Scientific research[Sec.35]
• Revenue expenditure (given outside) -100%
• Capital expenditure on scientific research -100%
• Amount paid to company for scientific research -125%
• Amount paid for social research -125%
• Amount given to scientific research association -175%
• Amount paid to National Laboratory or University -200%
• In house research expenditure -200%

31. Expenditure for obtaining right to use
spectrum for telecommunication services
[35ABA] 2017-18
• Capital Expenditure incurred
• Acquiring any right to operate telecommunication services
• Incurred before or after commencement of Business
• Mainly incurred to obtain license.
• Cost can be written off equally in number of years for which the
license is paid.

32. Amortisation of telecom license fees[35ABB]
• Capital Expenditure
• Acquiring any right to operate telecommunication services
• Incurred before or after commencement of Business
• Mainly incurred to obtain license.
• Cost can be written off equally in number of years for which the
license is paid.

33. Expenditure on eligible projects 35AC
• Expenses incurred for promoting social and economic welfare-
100% will be allowed
• Conditions
• Paid to
• P S Company
• Local authority
• Approved association
• Institution carrying out eligible projects
• Certificate for deduction along with ROI
• Co’s incurring direct expenditure – Certificate from CA

34. Expenditure on specified business 35AD
Type of business Deduction
1 Cold chain
100%
2 Ware house for agri prod
3 Laying pipeline for cross country petrol/ natural gas
4 Building/ operating 2 star and above hotels 2011-12 AY
5 Building/ operating hospitals 100 beds above
6 Developing/ building housing projects 2012-13 AY
7 Fertiliser prodn
8 Building/ operating inland container depo 2013-14 AY
9 Bee keeping & prodn of honey & bee wax
10 Operating WH for sugar
If commenced operation on 1.4.2012 of 1,2,5,6,7 150%

35. Expenditure on specified business 35AD
• Conditions
• Not formed by splitting up or reconstruction or business already
in existence
• Not formed by t/f to specified business of machinery & plant (
exceeding 20%)
Type of business Deduction
11 Slurry pipeline – iron ore 2015-16 AY
100%12 Semi conductor water fabrication mfg unit

36. Expenditure on payment to rural development
fund 35CCA
• Deduction @ 100%
• Funds – notified by CG
• National Fund for Rural development
• National Poverty Eradication Fund

37. Expenditure on agriculture extension project
35CCC
• Deduction @ 150%

38. Expenditure on skill development project 35CCD
• Deduction @ 150%
• No deduction for L & B

39. Amortisation of preliminary expenses 35D
• Indian Company or resident non corporate assessee
• Legal charges on MOA, AOA, printing of MOA, & AOA,
Registration fees, expenses connected to issue of shares or
debentures
• Deduction @ 1/5 of amount incurred
Corporate assessee Non-Corporate assessee
5% of cost of project or
5% of capital employed
Whichever is More
5% of the cost of the project

40. Amortisation of expenditure incurred for
amalgamation/ demerger [35DD]
• Indian company
• Deductions in five successive installments
• i.e., 20% each year

41. Amortisation of expenditure under voluntary
retirement scheme[35DDA]
• Any assessee
• Deduction 1/5every year

42. Amortisation of expenditure on Prospecting etc. for
Development of certain minerals[35E]
• Indian companies and Resident assessee
•I/10 every year allowed

43. Other deductions S36
1. Insurance premium to protect the asset
2. Health insurance premium of employees
3. Bonus to employees
4. Interest on borrowed capital
5. Proportionate amount of Discount on Zero coupon Discount Bonds
6. Contribution to NPS/RPF/ Approved Super annuation/Gratuity etc.
7. Employees contribution to PF/Super annuation – to the extend cr to
employee’s a/c
8. Bad debts – actually written off as irrecoverable
9. STT/ Banking TT paid
10.CTT paid
11. Special reserve created by specified entity – 20% of profit or amt cr to
special reserve WIL

44. Expenditure on family planning
• Incurred by companies
• Revenue expenditure- Fully allowed
• Capital Expenditure - 1/5th every year
• Non-corporate assessee can claim u/s 32(Depreciation on
capital expenditure) and 37(1)(Revenue expenditure)

45. Other deductions S37
Conditions for allowing a deduction
1. It should not be a capital expenditure or
2. Not personal
3. Not prohibited by law such as fine, penalty
4. Not be an illegal expenditure
5. Relate to PY
6. Respect of assesee’s business
7. Exp incurred wholly for B/P
8. Exp in relation to CSR – no deduction
9. Exp in relation to IT proceedings – Full deduction

46. Other deductions S37
• Litigation expenses to protect the trade or business /asset/or to
retain title of asset.
• Legal expenses to receive loan.
• Litigation expenses in restoring trade mark.
• Legal expenses to alter the AOA in conformity with the changes
brought about.
in the companies ACT
Damages paid to workers/fulfil the contract Damages for breach
of contract

47. Other deductions S37
• Contribution to the union formed to oppose the nationalisation
of assessee’s business
• Expenses incurred during festival
• Premium paid for loss of profit
• Professional tax paid
• All maintenance expenditure
• Expenses incurred to register trade marks
• Entertainment expenses
• Periodical payment for the use of goodwill

48. Allowable losses
1. Embezzlement or theft
2. Loss due to non recovery of advance
3. Robbery or dacoity

49. Expenses allowable on actual payment
1. Excise duty, Sale tax, land revenue and local taxes
2. Any sum payable as bonus or commission
3. Employees contribution to PF/SF/GF
4. Interest on loan from bank or PFI
5. Any sum payable in lieu of earned leave
6. Any sum payable by assessee for use of Railway’s assets
(AY 2017-18 )
ACTUAL PAYMENT ON OR BEFORE 139(1) RETURN

50. Expenses Expressly disallowed
1. Expenditure on advertisement in souvenir of political party
2. Payment outside India- interest without TDS
3. Payments to residents - any payment without TDS on which
TDS to be deducted – 30% not allowed as deduction #
1. If recipient has furnished ROI u/s 139 and
2. Taken such income for computation of income and
3. Paid tax on TI then no disallowance #
4. Tax on profit &gains
5. Wealth Tax
6. Salary payable outside India without TDS
7. Tax on perks of employees which is exempt
8. Penalty, fine & interest on penalty

51. Expenses disallowed in certain cases
1. Excessive on unreasonable payments to relatives
2. Cash payment exceeding 20,000- full amount expense
incurred disallowed (Exception – up to 35,000 for payments for
plying, hiring or leasing of goods carriage – cash payments
allowed ) 40A(3)
3. Payment to unapproved funds by employer.
4. Provision for unapproved gratuity.
5. Contribution to staff welfare fund.

52. Expenses disallowed in certain cases - Exceptions
1. payment is made to— (i) RBI , BANKS, LIC
2. payment is made to the Government for legal tender
3. payment is made by— any mode through a bank
4. Payment is made by way of adjustment against the amount of any
liability incurred by the payee for any goods supplied or services
rendered by the assessee to such payee;
5. Payment is made to the cultivator, grower or producer for the purchase
of—
1. (i) agricultural or forest produce; or
2. (ii) the produce of animal husbandry
3. (iii) fish or fish products; or
4. (iv) the products of horticulture or apiculture,

53. Expenses disallowed in certain cases - Exceptions
6. payment is made for the purchase of the products manufactured or
processed without the aid of power in a cottage industry, to the producer
of such products;
7. payment is made in a village or town, which on the date of such payment
is not served by any bank
8. Payment is made to an employee of the assessee or family – gratuity,
retrenchment compensation or similar terminal benefit < 50,000
9. Payment was required to be made on a day on which the banks were
closed
10.Payment is made by an authorised dealer or a money changer against
purchase of foreign currency or travellers cheques in the normal course
of his business.

54. Deemed incomes u/s 41
• Any losses/ exp prev written off recovered
• Sale of assets on which exemption claimed u/s 35
• (to the extend of deduction – taxable as profits, excess over
cost is capital gains)
• Bad debts recovered
• Any recovery of any income even after discontinuance of
business taxable in the hands of recipient
• Profit on sale of assets under SLM depn method ( amount less
than cost of asset)

55. Maintenance of books compulsory[Sec.44AA]
• Specified professionals
• Legal, medical, engineering, architectural, accountancy,
technical consultancy, or interior decoration and other notified
professions [authorised representative, film artist, IT ]
• If gross receipts exceed 1,50,000 in any of the three years
preceding the previous year- maintain books
• Non-specified professional- Income exceed Rs. 1,20,000 and
total gross receipts/sales exceed 10,00,000 in any 3 Preceding
PY – maintain books
• Business under 44AD/AE – declaring lower than deemed profits
– maintain books

56. Specified Books to be maintained
• Cash book
• A Journal on mercantile basis
• Ledger
• Carbon copies of machine numbered bills exceeding Rs. 25
issued by the person
• Original bills if exceed Rs. 50. If bills are not issued payment
vouchers signed by the person

57. Compulsory Audit [Sec.44AB]
• An assessee has to audit his books of accounts before specified
date
• in case of business – Turnover/ gross receipts > 1Cr
• In case of profession – Gross receipts > 50L ( AY 2017-18)
• In case of 44AD assessee he need to audit his accounts only if
• his turnover exceeds 2 Cr or
• Declares profits below deemed profits of 6%/8% as the case may be
• 44AD/ADA/AE/BB/BBB – declaring profits below deemed profits
• 33AB/ABA, 35AD/D/E

58. Presumptive taxation 44AD
• Applicable to : resident (individual, HUF, Firm) & who has not
claimed deduction under 10AA, 80IA-IE, 80JJA,JJAA,LA,QQB,RRB
• Not applicable to : 44AA business, commission/ brokerage income,
agency business
• Business :any business except plying hiring or leasing goods carriage
u/s 44AE
• Turnover : ≤ 2 Crore (AY 2017-18)
• Income = 6% on total turnover received in other than cash before
139(1) due date + 8% on balance
• No deduction under 30-38, it is deemed as allowed
• Deduction for salary & interest on capital of partners allowed
• It is an optional scheme

59. Presumptive taxation 44ADA
• Applicable to : resident44 AA professionals and
• Gross Receipts : ≤ 50 lakhs (AY 2017-18)
• Income = 50% of gross receipts
• No deduction under 30-38, it is deemed as allowed including depn
• Deduction for salary & interest on capital of partners allowed
• It is an optional scheme

60. Computing profits for business of plying, hiring
goods carriages 44AE
• Applicable to : assessee conducting business of plying, hiring
leasing goods carriages not owning more than 10 vehicles
• Income = 7,500 per goods carriage per month or part of month
• No deduction under 30-38, it is deemed as allowed
• Deduction for salary & interest on capital of partners allowed
• It is an optional scheme

61. Computation of profits of business
Particulars Amount
Net Profit as per P&L A/c Xxxx
Add Expenses claimed but not allowed Xxxx
Less Expenses allowable but not debited in P&L a/c (Xxxx)
Less Incomes exempt or not taxable under this head (Xxxx)
Income from Business Xxxx

62. Computation of Professional Income
Particulars Amount
Professional Receipt Xxxx
Less Professional Expenses (Xxxx)
Income from Profession Xxxx

63. Computation of Firm’s income
• The incomes from different heads of income shall be added
and deductions for respective heads to be claimed
accordingly.
• While computing income from PGBP the following points shall
be considered.

64. Computation of Firm’s income
1. Salary/ bonus or any remuneration paid/payable to working
partners only can be deducted
2. Payment of remuneration/ interest shall be authorised by
the deed otherwise not deductible.
3. Payment of remuneration/ interest for the period falling
after the date of deed only shall be allowed as deduction.
i.e., No retrospective effect
4. Interest of 12% p.a. Maximum shall be allowed as deduction

65. Computation of Remuneration of
working partners
On the first 3,00,000 of
book profit or
Loss
1,50,000 or Whichever is
90% of Book profit More
Balance book Profit 60%

66. Proforma of computation of book profit
Sl Particulars Amount
Net Profit xxx
Add Inadmissible items xxx
Add Remuneration to partners xxx
Add Disallowance of interest paid in excess of 12% p.a. Xxx xxx
xxx
Less Admissible items Xxx
Less Income from all other heads credited to P&L xxx
Book Profit xxx

67. Terms associated
1. Book profit – net profit as per P&L computed in accordance
with provisions 30 to 44D
2. Working partner – an individual who is actively engaged in
conducting the affairs of business or profession