Income from Business or Profession Sections 28, 29, 30, 30A

Definition of Business u/s 2(14) Business includes Trade, commerce or manufacture or Adventure or concern in the nature of trade, commerce or manufacture Definition of Profession u/s 2(49) Profession includes a vocation.
Business Entities as Income Taxpayers Common forms of business entities: Sole-proprietorship Partnership Company Question regarding whether the entity itself and/or the owners of the entity is(are) taxable is explained on the basis of following two concepts: Pass-Through Entity Non-Pass-Through Entities Pass-Through vs. Non-Pass-Through Entities Pass-Through Entity: This entity is not taxable itself. The income of the entity will pass through the owners and is taxable after its accumulation with the owners other income. Non- Pass-Through Entity: This entity is taxable itself. The income of the entity may be distributed to the owners and is (or is not) again taxable after its accumulation with the owners other income. Checklist of queries: Whether the entity is taxable for its income? Whether the owners of the entity are taxable for the income of the entity, if not distributed to them? Whether the owners of the entity are taxable for the income of the entity, if distributed to them? SOLE-PROPRIETORSHIP: The entity is not taxable for its income [i.e., pass-through entity]. The owners of the entity are taxable for the income of the entity, if distributed to them or not.

PARTNERSHIP: The entity is taxable for its income in first instance [i.e., non-pass-through entity]. But if the entity fails to pay tax on its income, then the partners are individually and jointly liable to pay tax on its income [i.e., pass-through entity]. The owners of the entity are taxable for the income of the entity, if distributed to them. The partners of the firm are taxable for the share of income of the entity, if not distributed to them. Tax incentive given to the partners, if the firm has already paid tax on its income duly: The share of income (distributed or not) will be included in the income of partners, and will be treated as tax-free income subject to tax rebate at average tax rate (ATR) [Paragraph 16, Part-B, Sixth Schedule]. COMPANY: The entity is taxable for its income always [i.e., non-pass-through entity]. The shareholders of the company are taxable for the income of the entity, only if distributed to them (as dividend). The shareholders of the company are NOT taxable for the income of the company, if NOT distributed to them.

Scope of Income from Business or Profession: u/s 28 Profit or gains of any business or profession Income derived by any trade or professional association or other similar association Value of any benefit or perquisite arising from business or profession Deemed income from business or profession Partially income from business or profession Following incomes are to be included in Income from Business or Profession: (1) Profit or gains of any business or profession carried on or deemed to be carried on by the assessee [u/s 28(1)(a)]. (2) Income derived by any trade or professional association or other association of like nature on account of specific services performed for its members [u/s 28(1)(b)]. (3) Value of any benefit or perquisite, whether convertible into money or not, arising from business or profession [u/s 28(1)(c)]. (4) Deemed income from business or profession u/s 19: (i) Subsequent receipt back of any loss, bad debt or expenditure [u/s 19(15)(a) and 28(1)(d)].

Interest on loan from commercial or specialised banks or share of profit to Islamic bank unpaid for two years [u/s 19(15)(aa) and 28(1) (d)]. (iii) Benefit received from any trading liability [u/s 19(15)(b) and 28(1) (d)]. (iv) Trading liability unpaid for three years [u/s 19(15)(c) and 28(1)(d)]. (v) Revenue profit or depreciation recovery from disposal of any building, machinery or plant used for business or profession [u/s 19(16) and 28(1)(e)]; [if loss, considered as capital loss & not deductible] Maximum amount = Original Cost Written down value (WDV). (vi) Insurance, salvage or compensation money received on discarding, demolishing or destroying any building, machinery or plant used for business or profession [u/s 19(18) and 28(1)(f)]; [if loss, may be deductible as obsolescence allowance u/s 29(1)(xi)] Maximum amount = (Original Cost WDV) Scrap value. (vii) Sale proceeds of any capital expenditure on scientific research which is allowed as a deduction u/s 29(1)(xx) [u/s 19(20) and 28(1)(g)]. (viii) Export value of garments exportable against the export quota which has been transferred [u/s 19(23) and 28(1)(h)]. Under rule 30A, an amount equal to 3% of the export value of the garments exportable against the export quota transferred by the assessee shall be deemed to be his income u/ 19(23). (ix) Profits and gains from any insurance business carried on by a mutual insurance association the income of which is to be computed under paragraph-8 of Fourth Schedule [u/s 19(14)]. (5) Partially income from business or profession [u/s 26(3) and Rules 30, 31 and 32]: (i) 40% of income from sale of tea [under rule 31] (ii) 40% of income from sale of rubber [under rule 32] (iii) Tobacco, sugarcane or other agricultural produce used as raw materials in any industrial production process the income of which is to be computed under the head Income from Business or Profession as follows [under rule 30]: Business income = (Sale value of the concerned agricultural produce recorded in the accounts of the business) (Market value of the agricultural produce used as raw materials).

(ii)

Allowable Deductions to Determine Taxable Income from Business or Profession: 1. List of Deductions Allowable u/s 29 i) ii) Rent for the premises used for business or profession [u/s 29(1)(i)]. Repair expense incurred by the assessee: For the hired premises in which the business or profession is carried on [u/s 29(1)(ii)]. For the buildings, machinery, plant or furniture used for business or professional purposes [u/s 29(1)(vi)]. Interest payment or profit shared with an Islamic bank in respect of capital borrowed for business or profession [u/s 29(1)(iii)]. Amount credited to any persons profit sharing account or deposit with an Islamic bank by way of distribution of profit by that Islamic bank [u/s 29(1)(iv)]. Applicable for banks. Amount up to 5% (from AY 2007-08; previously 10%) of total income carried to any special reserve (the aggregate amount in which does not exceed the paid up share capital) created by Government approved financial institutions for any approved purposes [u/s 29(1)(v)]. Permanent difference with accounting income an appropriation of income. Insurance premium on buildings, machinery, plant or furniture, stocks or stores used for business or professional purposes [u/s 29(1)(vii)]. Depreciation on the assessees building, machinery, plant or furniture or
bridge or road or fly over owned by a physical infrastructure undertaking (from AY 2010-11) used for business or professional purposes as per Third Schedule

iii)
iv)

v)

vi)
vii)

viii)

[u/s 29(1)(viii)]: Initial depreciation allowance: From assessment year 2002-03, under paragraph 5A of the Third Schedule, initial depreciation allowance is allowed for the first year at 10% on the cost of building and 25% on the cost of machinery or plant (other than ships or motor vehicles not plying for hire or any machinery or plant which has previously been used in Bangladesh). Accelerated depreciation allowance: From assessment year 2006-07, under paragraph 7 of the Third Schedule, 50%, 30% and 20% of cost of machinery is admissible as accelerated depreciation allowance for first, second and third years respectively, for new industrial undertakings (set up between 01.07.1977 and 30.06.2012) in cases of prescribed sectors. Normal depreciation allowance: The normal depreciation allowance under paragraph 3 of the Third Schedule is allowed at the specified rates on written down value of the concerned asset. Obsolescence allowance [equal to excess of written down value (WDV) over sale proceeds or scrap value] :

For building, machinery or plant after having been used for business or professional purposes, discarded, demolished or destroyed or the assets sold/transferred by way of exchange or compulsorily acquired by a legally competent authority, or exported outside Bangladesh [u/s 29(1) (xi)]. Obsolescence allowance will be computed under Para-10(c) of Third Schedule. [see also sec. 19(18)] ix) Write-off allowance [equal to the difference between the original cost of the animal and the money from sale or other disposition of the carcass]: For dead or useless animal used for business or professional purposes otherwise than as stock-in-trade)[u/s 29(1)(xii)]. x) Land development tax or rent, local rates or municipal taxes for the premises used for business or professional purposes [u/s 29(1)(xiii)]. xi) Bonus including festival bonus and commission paid to employee (Bonus other than festival bonus and commission is reasonable with reference to general practice of similar business or profession, profit of the organization and the pay and other conditions of service of the employee) [u/s 29(1)(xiv)]. xii) Bad debts: a) Bad debts actually written off in the income year as an established irrecoverable item [u/s 29(1)(xv)]. b) Bad debts prematurely written off but allowed as a deduction in subsequent year when established to have been irrecoverable [u/s 29(1)(xvi)]. c) Bad debts actually written off in an income year but which became irrecoverable in earlier income year (not falling beyond 4 years immediately preceding the income year in which it has been written off) allowed as a deduction in such earlier income year [u/s 29(1) (xvii)]. xiii) Expenditure on Scientific research or for research institute : a) Revenue expenditure on scientific research in Bangladesh related business [u/s 29(1)(xix)]. b) Capital expenditure on Scientific research in Bangladesh related to business [u/s 29(1)(xx)]. Difference with accounting, where first asset, then depreciation/amortization. c) Amount paid to approved Scientific Research Institute, Association or other body or to approved University, College, Technical, School or other Institute for the purpose of Scientific research or technical training related to relevant business class [u/s 29(1)(xxi)]. xiv) Expenditure on Educational Institution or Hospital for employees : Expenditure laid out or expended on any Educational Institution or Hospital established for the benefit of assessees employees their families and dependents or on the training of industrial workers: (a) Revenue expenditure [u/s 29(1)(xxii)], and (b) Capital Expenditure [u/s

29(1)(xxiii), Temporary difference with accounting, where first asset, then depreciation]. xv) Expenditure on training of Bangladeshi citizens in connection with a scheme approved by NBR [u/s 29(1)(xxiv)]. xvi) Expenditure (not being capital or personal) on visits abroad as a member of a trade delegation sponsored by the Government [u/s 29(1)(xxv)]. xvii) Annual membership subscription to a registered trade organization or to a professional institution [u/s 29(1)(xxvi)]. xviii) Residuary / Omnibus Clause : Any expenditure (not being capital or personal) made exclusively for business or professional purposes [u/s 29(1)(xxvii)]. (1) Cost of raw materials, stores and spare parts consumed, (2) Printing and stationery, (3) Postage, telegrams and telephones, (4) Traveling and conveyance, (5) Law charges and expenses, (6) Audit fees, (7) Losses arising in the regular course of business, (8) Loss of stock due to fire, flood etc. (9) Provision for retirement benefits to employees, (10) Exchange loss, etc. Limitations on deduction [u/s 29(2)]: Where any premises, building, machinery, plant (where plant includes ships, vehicles, books, scientific apparatus and surgical and other instruments or equipments used for business or professional purposes), or furniture is not wholly used for business or professional purposes, the deduction allowable from Income from Business or Profession is the fair proportional part of the amount which would be allowable if such premises, building, machinery, plant or furniture was wholly so used.

2. List of Deductions Inadmissible u/s 30

i)

ii) iii)
iv)

[(1) Payment to owners; (2) Payment without TDS; and (3) Payment beyond prescribed limit] Payment of salary, if tax thereon has not been deducted at source u/s 50 [vide u/s 30(a)]. Any payment subject to deduction of income tax or VAT (value added tax), but these taxes are not deducted at the time of payment [u/s 30(aa)]. Payment of interest, salary, commission or remuneration made by a firm or an AOP (association of persons) to its partners or members [u/s 30(b)]. Payment of brokerage or commission to a non-resident person without deduction of tax at source u/s 56 [vide u/s 30(c)].

v)

Payment to employees provident fund or other funds unless effective arrangement has been made for deduction of tax at source while making the payments from the fund which are taxable under the head Salaries [u/s 30(d)]. vi) Payment of perquisites or other benefits to an employee in excess of Tk. 2,50,000 [u/s 30(e)]. But this provision is not applicable to employer where perquisites or other benefits were paid to an employee according to Government decision published in the official Gazette to implement the recommendation of a Wage Board constituted by the Government [Proviso to sec. 30(e)]. vii) Entertainment expenditure exceeding the limits specified below as per Rule 65 [vide u/s 30(f)(i)]:* Profits, income and gains Admissible deduction before considering entertainment expenditure a) First Tk. 10 lakh 4% of the above profit, income and gains b) On the balance 2% of the above profit, income and gains viii) Expenditure on foreign travels of employees and their dependents (spouse and minor children including step and adopted children) for holidaying and recreation exceeding the limit under Rule 65A [vide u/s 30(f)(ii)]: 3 months basic salary, or th of the actual expenditure, whichever is less and the foreign travels shall not be oftener than once in every 2 years. ix) Publicity and advertisement (illegal and capital type) [u/s 30(f)(iii)]. x) Distribution of free samples exceeding the following limit as per Rule 65C [vide u/s 30(f)(iv)]: Deduction for expenses for free sample Turnover as % of turnover Pharmaceutical Other Industry Industry Up to Tk. 5 crore 2% 1.5% Exceeding Tk. 5 crore, but up to 1% 0.75% Tk. 10 crore Exceeding Tk. 10 crore 0.5% 0.375%
xi)

xii)

Head Office expenses: Expenditure exceeding 10% of the profit under the head of Head Office expenses by a company, not incorporated in Bangladesh under the Companies Act 1994 [u/s 30(g), inserted by the FA 2003]. Here, the profit will be profit before charging this expenditure.* Royalty or technical expenses: Payment by way of royalty, technical services fee, technical know how fee or technical assistance fee

exceeding 8% of the profit [u/s 30(h), inserted by the FA 2003, 5% up to AY 2009-10]. xiii) Salary not through bank: Payment by way of salary or remuneration made otherwise than by crossed cheque or bank transfer by a person to an employee having gross monthly salary of Taka 15,000 or more [u/s 30(i), inserted by the FA 2006]. xiv) Incentive bonus: Expenditure by way of incentive bonus exceeding 10% of the disclosed net profit [u/s 30(j), inserted by the FA 2006]. xv) Overseas traveling: Expenditure by way of overseas travelling exceeding 1% of the disclosed turnover [u/s 30(k), inserted by the FA 2006]. xvi) Other non-deducible allowances : (a) Personal gifts to employees (but not gratuity) (b) Fines for violation or non-compliance of any law of the land (c) Income tax (including fines and penalties etc.) (d) Expenditure on inland leave or travel of employees when provided beyond the terms and conditions of service of employees (e) Law charges incurred for defending or in connection with violation or non-compliance of any law or Government policy or in connection with the criminal cases, mortgage suits, capital reduction and winding up of company (f) Loss on speculation (g) Transfer to reserves [except as allowed u/s 29 (1)(v) for Government approved financial institutions] (h) Provision for bad and doubtful debts [excepts as allowed u/s 29(1) (xviiia) and 29(1)(xviiiaa) for commercial banks and specialised banks] (i) Contribution to sinking fund.
Ambiguity on Turnover: Distribution of free samples based on turnover u/r 65C & u/s 30(f)(iv) Overseas traveling based on disclosed turnover u/s 30(k) Guideline: Use the turnover as net sales [Sales excluding VAT less Sales returns and allowances less Sales discount] shown in trading account or income statement. Ambiguity on Profit: Entertainment expenditure based on profits, income and gains before considering entertainment expenditure u/r 65 & u/s 30(f)(i) Head Office expenses based on profit u/s 30(g) Royalty or technical expenses based on profit u/s 30(h) Incentive bonus based on disclosed net profit u/s 30(j) Guideline: Starting with pretax accounting net profit and adjusting for other disallowances Incentive bonus: If actual amount 1% of pretax net profit disclosed in profit & loss account or income statement, no adjustment required; if actual amount > 1% of

pretax net profit, add extra amount Add actual Entertainment expenditure, Head Office expenses and Royalty or technical expenses, then obtain A [= the profit before charging these expenses] If actual amount of Head Office expenses 10% of A, deduct actual amount; if actual amount > 10% of A, deduct 10% of A If actual amount Royalty or technical expenses 8% of A, deduct actual amount; if actual amount > 8% of A, deduct 8% of A Obtain B [= the profit after charging Head Office expenses and Royalty or technical expenses but before charging Entertainment expenditure] If actual amount of Entertainment expenditure (4% of first Tk. 10 lakh of B + 2% of balance of B), deduct actual amount; if actual amount > (4% of first Tk. 10 lakh of B + 2% of balance of B), deduct (4% of first Tk. 10 lakh of B + 2% of balance of B)

Provision for Disallowance u/s 30A: Notwithstanding contained in sections 28, 29, and 30, the Deputy Commissioner of Taxes (DCT) shall not make any disallowance or deduction for any year from any claim made by an assessee in the trading account or profit or loss account without specifying reason for such disallowance or deduction [inserted by FA 2002].