Computation of profits & gains of business or profession

05-09-2017 sanjaydessai@gmail.com 1
COMPUTATION OF PROFITS & GAINS OF BUSINESS OR
PROFESSION
For Assessment year 2017-18
Based Goa University B Com syllabus
Presented by
Dr. Sanjay p Sawant Dessai
Associate Professor
VVM Shree Damodar College of Com & Eco Margao Goa

UNIT III
COMPUTATION OF PROFITS & GAINS OF BUSINESS OR PROFESSION:
Sections: 28- Chargeability
Section: 29 -Computation of profits and gains from business or
profession
• Section: 30- Deduction of Rent, rates, taxes, repairs and insurance for
buildings
• Section 31 - Deductions of Repairs and insurance of machinery, plant
and furniture
Section: 32 Depreciation (excluding Depreciation Rates)

Section 36: Deductions (Restricted to following clauses)
Sec 36(1)
Insurance Premium
Bonus/Commission to employees.
 Interest on Borrowed Capital
Employer’s Contribution to recognized Provident Fund & Approved
Superannuation Fund.
Contribution towards Approved Gratuity Fund
Bad Debts

• Sec. 37 (1) – General Deduction.
• Sec. 37 (2B) – Advertisement Expenses in Souvenir etc. of a Political
Party.

Amount not deductible Sec 40
•Sec. 40 (a) Interest , Royalty, fees for technical
services payable outside India or payable to non-
resident in India is disallowed where TDS is not
deducted
•40A(2) Payments to relatives 40 A(2)
•40A(3) payment exceeding Rs 20,000 paid
otherwise than by account payee cheques or Bank
drafts
•43B – Disallowance of unpaid liabilities ( applicable
in case of mercantile system ).

Special provisions
• Sec. 44AA Provisions in relation to maintenance of books of accounts
• 44AB Audit of accounts of certain persons
• 44AD Computation of income on estimated basis in case of taxpayer
engaged in certain business
• 44AE computation of income on estimated basis in case of taxpayer engaged
in the business of plying, leasing or hiring trucks

Section 28 Chargeability :- Profits and gains of
business or profession
• Profits and gains of any business or profession
• Any compensation or other payments due to or received
• Income derived by a trade, profession
• The value of any benefit or perquisite, whether convertible into
money or not, arising from business/ profession
• Export incentive available to exporters

Income chargeable
• Any interest, salary, bonus, commission or remuneration received by
a partner from firm
• Any sum received for not carrying out any activity in relation to any
business or not to share any know-how, patent, copyright, trademark,
etc.
• Any sum received under a Key man insurance policy including bonus
• Profits and gains of managing agency
• Income from speculative transaction.

Methods of Accounting
• Mercantile system of accounting- accrual basis
• Cash system of accounting

Section 29:- Computation of profits and gains
from business or profession
• Determine profit from business or profession
• Adjustment in respect of expenses allowable or not allowable
• Expenses debited to profit and loss account but are not allowed as
per income tax Act, are to be added to profits
• Partly disallowed expenses to be added to profits
• Expenses which are admissible but not debited to profit and loss
account should be deducted from profits
• Income chargeable but not credited to profit and loss account
should be added to profits
• Income which are credited to profit and loss account but not taxable
under the head profits and gain of business or profession , should be
deducted

Deductions allowable
• Section 30 :- Rent, rates, taxes, repairs and insurance for
buildings (only revenue expenditure )
• Section 31:-Repairs and insurance of machinery, plant and
furniture

Section 32 - Depreciation
Conditions for depreciation
1. Asset must be owned by the assessee.
2. It must be used for the purpose of business or profession.
3. It should be used during the relevant previous year.

Depreciation
• Normal depreciation ( full year’s depreciation) is available if an asset
is put to use at least for sometime during the previous year.
• Depreciation allowance is limited to 50 per cent of normal
depreciation, if the following two conditions are satisfied—
1. where an asset is acquired during the previous year; and
2. it is put to use for the purpose of business or profession for less
than 180 days during that year.

BLOCK OF ASSETS
• The term “block of assets” means a group of assets falling within a
class of assets comprising
• Tangible- Buildings, Machinery, plant, furniture, etc.
• Intangible - know-how, patents, copyrights, trade marks, licenses,
franchises, etc.

How to calculate
WRITTEN DOWN VALUE
• Step 1 -Find out the depreciated value of the block on the April 1
• Step 2 -To this value, add “actual cost” of the asset (falling in the
block) acquired during the previous year
• Step 3 From the resultant figure, deduct money received/ receivable
on sold, discarded, demolished or destroyed during the previous year
.
• Balance is written down value

No depreciation is provided
• If written down value of the block of asset is reduced to zero, though
the block is not empty.
• If the block of asset is empty

Problem (WDV is Nil )
• On 1/4/16 depreciated value of a block of asset is Rs. 80,000 it
consist of plant A and B. The assessee sold plant A on May 3, 2016
for Rs. 1,80,000 and purchased plant C on December 28, 2016 for Rs.
30,000.
• Rate of depreciation 15 percent
• Calculate depreciation on 31st march 2017

Solution
•Depreciated value of the block (A&B) 80,000
•Add – Purchases (C) 30,000
•Total 1,10,000
•Less-sale-(1,80,000) 1,10,000
•Written down value - NIL
•Depreciation Nil
•Depreciated value of the bloc consist of plant B and
C- Nil
•Difference is short term capital gain

Value of block of asset is empty
• WDV of plant A and B on 1st April 2016 Rs. 2,00,000. Purchased plant
C on 1st June 2016 Rs. 1,00,000 and sold Plant A, B and C on 1st
December 2016 for Rs. 1,00,000.

Value of block of asset is empty
• WDV of asset on 1st April 2016 (A&B) 2,00,000
• On 1st June purchased plant C 1,00,000
• Total 3,00,000
Sold plant A, B & C on 1st December for Rs. 1,00,000
• Written down value (block is empty) -----------
• Depreciation Nil

Problem
• X ltd owns 2 buildings A&B On 1/4/16 depreciated value of a block of
asset is Rs. 14,15,700. On 1, December 2016 he purchased Building C
for Rs. 3,10,000 and sold building A on 10th January 2017 for Rs.
8,70,000.
• Calculate depreciation for Financial year 2016-17.

Solution
• WDV of Block of asset on 1/4/16- 14,15,700
• Add – Purchases on 1/12/2016- 3,10,000
• 17,25,700
• Less sales A 8,70,000
• WDV on 31st March 2017 (B&C) 8,55,700
• Less -Depreciation
• Plant B (855700-310000)=545700 X10%= 54,570
• Plant C 3,10,00 X 10% X1/2= 15,500 70,070
• Written down value on 31/3/2017 7,85,630

Problem
• X ltd owns 2 buildings A&B On 1/4/16 depreciated value of a block of
asset is Rs. 14,15,700. On 1, December 2016 he purchased Building C
for Rs. 3,10,000 and sold building A on 10th January 2017 for Rs.
15,87,000.
• Calculate depreciation for Financial year 2016-17.

• WDV of Block of asset on 1/4/16- 14,15,700
• Add – Purchases on 1/12/2016- 3,10,000
• 17,25,700
• Less sales 15 87,000
• Value on 31st March 2017 1,38,700
• Less -Depreciation 1,38,700 X 10x ½ 6935
• Written down value on 31/3/2017 - 1,31,765

Section 36: Deductions (Restricted to following clauses)
• Sec. 36 (1) (i) – Insurance Premium (stock / stores )
• Sec. 36 (1) (ii) – Bonus/Commission to employees.
• Sec. 36 (1) (iii) – Interest on Borrowed Capital (for purpose of business / profession
• Sec. 36 (1) (iv) – Employer’s Contribution to Recognized Provident Fund & Approved
Superannuation Fund.
• Sec. 36 (1) (v) – Contribution towards Approved Gratuity Fund (not to exceed 8.33
percent of salary )
• Sec. 36 (1) (vii) Bad Debts (written off as irrecoverable )
• Sec. 37 (1) – General Deductions (Revenue expenditure related to business )
• Sec. 37 (2B) – Advertisement Expenses in Souvenir etc. published by Political
Party is not allowed as deduction.

Amount not deductible
• Section 40(a)- Interest , Royalty, fees for technical services payable
outside India or payable to non- resident in India is disallowed where
TDS is not deducted
• (Aforesaid amount is chargeable to tax )

Payments to relatives 40 A(2)
• 40A(2) Any expenditure by way of Payment to relatives is liable to be
disallowed to the extent such expenditure is considered as excessive
or unreasonable having regard to fair market value of goods and
services or facilities.
• Relative – husband , wife , brother , sister or any lineal ascendant or
descendent of that individual
Lineal Ascendant means father, grandfather, great grand father... Lineal
Descendant means son, grand son, great grand son....

Amount not deductible
• 40A(3) payment exceeding Rs 20,000 paid otherwise than by account
payee cheques or Bank drafts.

Sec. 43(B) – Disallowance of unpaid liabilities.
• Applicable when accounts are maintained under mercantile system
• The following expenses are deductible on payment basis
• Sum payable by way of tax, duty , cess
• Contribution to employees PF or superannuation fund for welfare of
employee
• Bonus / commission paid to employees for service rendered
• Interest on loan payable
• Salary in lieu of leave payable

Maintenance of accounts by certain persons (Section 44AA)
Specified professionals:
Profession of law, medicine, accountancy, architecture, technical
consultancy, interior decoration, authorized representative, film artist,
information technology professionals
Whose gross receipts in the profession exceed Rs.1,50,000 in all the
three years immediately preceding the previous year or( for newly
setup profession during current previous year in which business is
commenced)
Mandatory to maintain books of accounts
Back

Specified books of accounts issued to him,
payment vouchers
• Cash book
• Journal
• Ledger
• Carbon copies of bills
• Original bills issued to him
• Payment vouchers

Maintenance of accounts
by other Persons covered
u/s 44AA (2):
• Any other persons engaged in any other profession or
carrying on any business other than section 44AA (1)
• The requirement of compulsory maintenance of books of
accounts applies if-
• Either the income from business or profession exceeds Rs
1,20,000
or
• The turnover or gross receipts exceed Rs 10 Lakhs in any of
the three years immediately preceding the previous year.

Section 44AB compulsory audit
• 44AB section stipulates that every person carrying on business
or profession is required to get his accounts audited by a CA
• In case of Business - if the total sales, turnover or gross receipts
exceed Rs.1 crore
• In the case of profession gross receipts exceed Rs.25 lakhs
Back

44AD computation of income on estimated
basis in the case of tax payer engaged on
certain business
• Taxpayer can assume income as 8 percent of turnover and
pay tax ( presumptive taxation)
• Section will be applicable to any business ( whether it is
Retail trade, or Civil construction or any other business).
Applicable if the following conditions are satisfied:
• Assessee eligible for the purpose of this Section has to be an
Individual / HUF/ Partnership Firm
• The assessee has not claimed any deduction
u/s.10A,10AA,10B,10BA,80HHto 80RRB in the relevant
Assessment Year;

• Income from the eligible business is estimated at 8 percent of the
gross receipts or total turnover .
• Exempted from payment of advance tax
• Exempted from maintenance of books of account
• Total Turnover/ Gross Receipt of the Assessee in the previous year
should not exceed Rs. 2 crore .

Following persons are not eligible to avail any
benefit under this section
• A person carrying of profession as referred under section 44AA(1)
• Earning income in the nature of commission or brokerage
• Carrying of any agency business
• A person who is in the business of plying, hiring or leasing goods
carriages
•

44AE computing profits and gains of business of
plying, hiring or leasing goods carriages
• Income Calculation:
the profits and gains from each goods carriage shall be an amount
equal to seven thousand five hundred rupees for every month or part
of a month during which the goods carriage is owned by the assessee
in the previous year
• or an amount claimed to have been actually earned from the vehicle,
whichever is higher
• "Goods Carriage means as described in the Motor Vehicles Act
• "Eligible Assessee" is one who has NOT MORE THAN TEN goods
carriages .
• Maintenance of books of account is not required

Computation of profits & gains of business or profession

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