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Income

from
Business and Profession
Submitted by:
Mannet Pal Singh
Varun Gupta
Corporate Taxation
Meaning of Business -Section 2 (13):
Business includes any (a) Trade, (b) Commerce,
(c) Manufacture, or (d) any adventure or concern
in the nature of trade, commerce or
manufacture.
The definition of the term is not exhaustive. It
covers every facet of an occupation carried on by
a person with a view to earn profits. Whether a
single transaction or a series of transaction.
Two crucial tests are Control and Profit Motive.

Meaning of Profession & Vocation
Section 2 (36):
Profession includes vocation. The word implies
professional attainments in special knowledge,
which is acquired after patient study and
application, e.g.: Tax Experts, Financial and Cost
Accountants, Lawyers, Engineers, Doctors, etc.
In Income tax no distinction is made between
Business, Profession and Vocation.
The income under these is chargeable to tax
under one head i.e. Profits & Gains of Business or
Profession.
Meaning of Profession & Vocation
Section 2 (36):
Following types of income are chargeable under this head:

Profits & Gains of any business or profession
Any compensation or other payments due or received by any person.
Income of trade professional or similar association from specific services
performed for its members.
Profit on sale of import entitlement licenses, incentives, cash
compensatory support and duty drawback.
The value of any benefit or perquisite in cash or kind arising from
business or profession.
Any interest, salary, bonus, commission or remuneration received by
partner from such firm.
Any sum received or receivable for not carrying out any activity in
relation to business, know-how, patent, copy right, etc.
Any sum received under key-man insurance policy (including bonus).
Income from speculative business.
General Principles governing
Assessment of Business Income:
Business or profession should be carried on by the assessee. The
emphasis is not on ownership but on the fact of carrying on of
business by the assessee. The assessee should have a right to carry
on the business and the business may be carried on by the assessee
himself or his agent/servant.
The business or profession should be carried on during the previous
year. It is not essential that the business should be carried out
throughout the year. It could be during any part of the year.
Exception to the above principle are:
Recovery/Excess Recovery against deduction already availed.
Sale of Asset used for scientific research.
Recovery/excess recovery against bad debts already availed.
Withdrawal from special reserve
Sums received after discontinuance of business or profession.

General Principles governing
Assessment of Business Income:
Incidence of tax arises in respect of all business and
profession carried on by the assessee, which is
aggregated and taxed as one item. However, profit and
loss of speculative business is kept separately. The loss
of a speculative nature can be set off against income from
speculative business only . Losses can be set off to the
maximum of 8 years except from capital gains.
Anticipated and potential profits or losses are not
considered for arriving taxable income. This is subject to
the exception of valuation of inventory, which is done on
the basis of cost or market price, whichever is lower.
Legality or illegality of business is not recognized by
Income Tax. All income whether legal or illegal will be
subject to tax.
Trading/Revenue Loss only is allowed

HEADS OF INCOME
As per Sec 14 the incomes earned by an assessee
are broadly classified as :-
Income from Salaries (Sec 15 17)
Income from House Property (Sec 22 27)
Profits and Gains of Business or Profession (Sec 28
44DB)
Capital Gains (Sec 45 55A)
Income from Other Sources (Sec 56 59)

Basic Principles for Admissibility of
Deductions u/s 30 to 44D:
Onus to prove is of the assessee.
Allowances are cumulative and not alternative
Expenditure should relate to previous year.
Business should have been carried on during
previous year.
Expenditure to be incurred in connection with
assessees own business.
No allowance is allowed on wasting assets.
Basic Principles for Admissibility of
Deductions u/s 30 to 44D:
No allowance is allowed in respect of non-
assessable business.
No allowance is allowed in respect of
expenditure tainted with illegality (penalty,
fines).
No allowance is admissible in respect of
contingent or non-existent liability.
No allowance in respect of expenditure on
items of capital nature is allowed.

Deductions Expressly allowed in respect
of Expenses/Allowanceu/s 30 to37:
Rent, rates, taxes, repairs and insurance of building
(Section 30).
In respect of premises taken on rent, actual rent paid by
assessee and cost of repairs not being of capital nature, if
undertaken and borne by him.
In respect of premises owned by the assessee no deduction
on account of rent is allowable.
Amount spent on current repairs not being of capital nature
is allowed.
Amount paid for land revenue, local taxes, insurance for risk
of damage or destruction is allowed.

Repairs & Insurance of machinery,
plant and furniture (Section 31):
Deduction of expenditure incurred towards
current repairs(not being of capital nature )
and insurance premium paid against risk of
damage and destruction of machinery, plant
and furniture is allowed only if the asset is
used for the purposes of assessees own
business or profession during the previous
year, the profits of which are subject to tax.

Depreciation: Sec.32
Depreciation means
loss or decline in value of useful life of physical
asset due to wear and tear, etc.
which cannot be restored by current repairs and
maintenance.
Sec 32 Depreciation
32(1)(i) Straight Line Method
32(1)(ii) WDV
32(1)(iia) Additional Depreciation
32(1)(iii) Terminal Depreciation
32(2) Carry forward of unabsorbed loss / allowance -
can be carried forward for any number of years

Assets, which qualify for Depreciation:
Tangible Asset: Building, Machinery,
Plant or Furniture

Intangible Asset Know-how, Patents,
acquired after 31-3-1998: copyrights, and
trademarks Licences, etc.

Building does not include land. It represents super
structure only and includes roads, bridges, culverts, wells
and tube wells.
The plant is defined to include ships, vehicles, books,
scientific apparatus and surgical equipment but does not
include tea bushes, livestock or building, furniture and
fittings.

Conditions for claiming Depreciation
Allowance:
Asset must be owned by the assessee.
Asset must be used for the purposes of business or profession
and
It should be used during the relevant previous year.
From the assessment year 2002-03, depreciation is allowable
whether the assessee has claimed it in his return or not

The concept of ownership would mean power of enjoyment and
disposal as he likes and right to exclude others, power to
alienate, power to make will, etc.
In the case of property taken on lease normally lessor is entitled
to depreciation. However, in the case of building with effect from
1st April 1970 the lessee who holds right of occupancy of a
building is entitled for depreciation in respect of capital
expenditure incurred by him for improvement, renovation or
extension

Conditions for claiming Depreciation
Allowance:
In respect of contract of hire purchase, the
economic ownership rests with the purchaser.
Accordingly, he will be entitled to depreciation
notwithstanding the fact that under civil law the
ownership passes only after the last installment
of hire purchase is paid.
The term use will embrace passive as well as
active use. The machine kept ready for use
would be deemed as used although in fact the
machine may not have worked at all during the
year, e.g. standby engines, etc.
For assets partly used for business or profession,
the deduction shall be restricted to a fair
proportionate part only

Depreciation on Additions during the
year:
From the assessment year 1992-93, when the
asset is acquired and put to use for less than
180 days during the previous year in which it
is acquired, the depreciation thereon shall be
allowed at 50% of the rate prescribed in
respect of block of assets.


Block Asset Section 2 (11):
The term block asset means group of assets falling within a
class comprising of -
Tangible assets Building, Machinery, Plant or Furniture;
Intangible assets Know-how, patents, copyrights, trademarks,
licence, etc.
Depreciation is allowed on written down value method under
Income tax for all business and professions except in the case of
generation and distribution of power.
For generation and distribution of power, depreciation is allowed
on straight-line method.
The term actual cost is defined u/s 43(1) & WDV u/s 43 (6).

Rate of Depreciation
Rate of Depreciation
Illustrattion
When Written Down Value of the block assets is
reduced to zero, no depreciation is admissible. For
instance: -
On 1st April 2005 depreciated value of block of assets
(rate of depreciation 15%) is Rs.80,000/-. It consists of
Plant-A and B. The Assessee purchases Plant-C (rate of
depreciation 15%) during the previous year, 2005-06
for Rs.30,000/- and sells Plant-A on 3rd May 2005 for
Rs.1,80,000/-.
In this case, on 31st March 2006, the Assessee has
Plant-B and C in the block of assets though the WDV of
the block is zero. No depreciation is admissible for the
previous year 2005-06(A.Y 2006-07) as will be from the
following computation:

Solution
Rupees
Written Down Value of the Block consisting
of Plant-A & B as on 1st April 2005 80,000
Add: Cost of Plant-C purchased
30,000

1,10,000
Less: Sale consideration for Plant-A
(Though plant is sold for Rs.180000, the amount of
deduction cannot exceed Rs.110000/-. The difference of
Rs.70, 000/- of sale consideration is short-term capital
Gain)
110,000
Written Down Value of Plant-B & C on 31.3.2006 Nil
Less: Depreciation for P.Y. 2005-06 Nil
WDV of the block consisting of Plant-B & C
as on 1st April 2006
Nil
Illustration
If the block of assets ceases to exist If all the assets of
the block are transferred and the block of assets is
empty on the last day of the previous year, no
depreciation is admissible in such a case, e.g.:
X Ltd. owns two Plants i.e. Plant A & Plant B on 1st
April 2005 (rate of depreciation 15%, WDV
Rs.2,37,000/-). The company purchases Plant C on 31st
May 2005 for Rs.20,000/- and sells Plant A on 10th
April 2005 and Plant B on 12th December 2005 and
Plant C on 1st March 2006 for Rs.10,000/-, Rs.15,000/-
and 24,000/- respectively.
Solution
The WDV of the block of assets will be determined as under:

Rupees
WDV of Plant A & B as on 1.4.2005
2,37,000
Add: cost of Plant C
20,000

2,57,000
Less: Sale proceeds of Plant A, B & C- 49,000
Written down Value of the Block (which is empty) as
On 31st March 2006
2,08,000
In the aforesaid case, no depreciation is admissible as the block ceases to
exist on the last day of the previous year. Rs.2,08,000/- will be treated as
the short-term capital loss on sale of Plant A, B & C. Depreciated value of
the block on the 1st day of the next previous year, i.e. 1st April 2006 will
be taken as Nil.

Illustration
When the asset is put to use for less than 180 days in the
year of acquisition If any asset falling within a block is
acquired by the assessee during the previous year and is
put to use for a period less than 180 days in that previous
year, the deduction in respect of such asset shall be
restricted to 50% of the amount calculated at percentage
prescribed for such block of assets. For instance:-

X Ltd. owns two buildings A & B on 1st April 2005 (rate of
depreciation 10%, WDV Rs.14, 15,700/-). He purchases on
1st December 2005 Building C for Rs. 3,10,000/- (Rate of
depreciation 10%) and sells building A during the previous
year 2005-06 (say January 10,2006) for Rs.8,70,000/-. The
depreciation claim for the previous year 2005-06 shall be
computed as under:

Solution
Rupees
WDV of the block (A and B) on 1st April 2005 14,15,700
Add: cost of Building C purchased in December
2005 3,10,000
17,25,700
Less: Sale proceeds of Building A 8,70,000
WDV of the block as at the end of the year 8,55,700
Depreciation:
Building C Rs.3,10,000 @ 5% 15,500
Building B Rs.5,45,700 @ 10% 54,570
70,070
Depreciated value as on 1st April 2006 7,85,630

Additional Depreciation:
To claim additional depreciation following conditions should be satisfied:
Manufacture/ Production of any article.
New plant and machinery acquired and installed after 31st March, 2005.
No additional depreciation is available in respect of building, furniture or old plant
and machinery.

Eligibility An assessee engaged in business of manufacture / production of any
article or thing.
Qualifying Assets Any Plant & Machinery acquired or installed after 31st March
2005 but does not include:
Ships and aircrafts.
Power Generating Units
Plant & Machinery already used either in India or outside India by any other person.
Plant & Machinery installed in office, residential accommodation including
guesthouse.
Buildings, Furniture, Office appliances and road transport vehicles.
Any Plant & Machinery where whole of the actual cost is allowed as deduction
under income tax act.

Additional Depreciation:
Rate - @ 20% of the actual cost of the new
machinery acquired and installed after 31st
March, 2005. However, if the asset is put to
use less than 180 days then 10%. Additional
depreciation is available only in the year in
which the asset is first put to use.

Expenditure on Scientific Research
(Section-35):
Capital (Other than On Land) and Revenue expenditure
incurred by assessee for carrying scientific research is allowed
if it relates to his business.
Further, expenditure incurred within 3 years immediately
preceding the commencement of the business is also allowed
in the previous year when business is commenced, provided
the same is certified by the prescribed authority.
If the asset is sold without being used for the said purposes, the
surplus or deduction allowed whichever is less is chargeable to
tax in the previous year of sale of asset.
Deduction is admissible in respect of asset either in the year
when the capital expenditure is incurred or subsequent year.
Expenditure on Scientific Research
(Section-35):
Contribution to outsiders:
Where the Assessee does not himself carry on
scientific research but makes contribution to other
institutions for this purpose a weighted deduction is
allowed on one and one fourth times of payment if
Payment is made to an approved scientific research
association which has object of undertaking scientific
research related to or not related to assesses business.
Payment to approved university, college, institution for
scientific research.
Payment to an approved university, college, or institution for
the use of research in social science or statistical research.
Payment to National Laboratory, University, IIT, or specified
person as approved by prescribed authority
Expenditure on Scientific Research
(Section-35):
Expenses on In-House R&D.
The tax payer is a company.
Engaged in business of biotechnology or manufacture of
production of any drugs, pharmaceuticals, electronic
equipments, computers, telecommunication equipments,
chemicals or any article or thing notified by board.
Incurs R&D expenditure of capital or revenue nature (other
than on any land and building) upto 31st March 2012.
The facility is approved DSIR-Govt. of India.
The accounts are maintained and audited by the prescribed
authority.
Amount of Deduction :-
A sum equal to one and one half times of the expenditure
incurred shall be allowed

Expenditure on acquisition of Patent
Rights & Copyrights (Sec. 35A):
Capital expenditure incurred before 1.4.1998
and used for Business or Profession is
allowable in equal installments for a period
of 14 years commencing from the year of
acquisition.
The profit or loss on sale of patent rights is
adjusted in the year of sale.
In respect of capital expenditure incurred on
or after 1st April 1998, depreciation is
allowable under section 32.

Other Deductions
Amortization of Telecom Licence Fees (Section 35ABB)
The expenditure is of capital nature
Incurred for acquiring any right to operate
Telecommunication services
Incurred before or after commencement of business
Payment has been actually made to obtain a licence

Amount of deduction:-The payment will be allowed in
equal installments over the period starting from the year in
which payment is made and ending in the year in which
licence comes to an end

Profit or loss on sale of licence is taken in to account while
computing business in the year of sale

Other Deductions
Expenditure on Eligible Projects or Schemes
(Section 35AC)
for promoting social and economic welfare or
uplift of public.
Who can claim:
Company or a person other than a company.
Expenditure to be incurred by Assessee or public
sector company or local authority or institution
approved for carrying out the project

Other Deductions
Amortization of Preliminary Expenses
(Section 35D)
Preliminary expenses incurred after 31
st
March 1970 by an Indian
company or a resident non-corporate before commencement of
business or after commencement of business in connection with
extension of business or setting of new industrial undertaking etc
will qualify for amortization
Amount of Deduction: The aggregate amount cannot
exceed 5%on cost of project to all assessees and for Indian
companies up to 5% of capital employed
1/5 of qualifying amount allowed as deduction in each 5
consequtive years in which business commences business

Other Deductions
Expenditure on amalgamation / de-merger (Sec 35 DD)
- Deduction is 1/5
th
of such expenses (only for
companies)
Amortization of Expenditure on Voluntary Retirement
(Sec. 35DDA)- Deduction is 1/5
th
of such expenditure
Any sum incurred by an assessee by way of payment to
an employee in connection VRS,1/5 of the amount so
paid shall be allowed as deduction in computing the
income from business and the balance in four
immediately succeeding years

General Deductions - Section 37(1):
This is a residuary section to enable assessee to claim
deduction in respect of expenditure not specifically dealt
with. Following conditions should be satisfied for claiming
deduction under this section:
The expenditure is not covered under section 30 to 36.
It is not capital expenditure.
It is not personal expenditure of assessee.
It is incurred in the previous year.
The expenditure is wholly and exclusively and necessarily
incurred for the purposes of business or profession.
It is incurred for purpose, which is not an offence or prohibited
in law.
Sec 37(2B) Any advertisement in a journal, pamphlet, tract,
souvenir, belonging to a political party shall not be allowed.


Specific Deductions (Sec 36)
36(1)(i) Insurance premium paid on stock of goods.
36(1)(ia) Insurance premium on the cattle belonging to
the members of federal milk co operative society paid by
the society (Deduction to society)
36(1)(ib) Health insurance premium paid by employer, by
way of A/c Payee cheque, on health of employees.
36(1)(ii) Bonus or commission payable to employees
subject to Sec 43B.
36(1)(iii) Interest on borrowed capital
Sec 36(2) Conditions for claiming bad debts. Treatment of
bad debts recovered Sec 41(4) It should be treated as
business income to the extent allowed earlier.


Amount Not Deductible (Sec 40(a))
(i)Any interest, royalty, technical fees etc
(ia) Any interest, rent, commission, brokerage,
technical fees, professional fees, contract amount
etc.
(ib) Security transaction tax. (AY 2009-10 allowed
(ic) FBT
(ii) Any amount of income tax or any other sum
charged under this Act..
(iia) Wealth Tax
(iii) Salary payable



Expenses disallowed in certain
circumstances (Sec 40A )
Sec 40A(2) Payment to relatives Unreasonable
amount is disallowed.
Sec 40A(3) Payment made in excess of
Rs.20,000 otherwise than by account payee
cheque or Demand Draft 100% of such
expenditure is disallowed.
Sec 40A(7) Provision for gratuity is disallowed.
Following be allowed:
Gratuity actually paid during the year.
Provision that has become payable during current
financial year.

Expenses allowed only on payment
basis (Sec 43B)
Any tax, duty, cess, fees by whatever name called
payable to Govt.
Employers contribution to PF, ESI, Super
Annuation Fund, Gratuity Fund or any other
employee welfare fund.
Bonus or commission as referred in Sec 36(1)(ii).
Any interest on loan or borrowings from Public
Financial Institution, SFC, State Industrial
Investment Corporation.
Any amount payable by employer towards
earned leave.

Deduction in case of partnership firm
Partnership firm can be assessed as:-
PFAS (Sec 184)(Partnership Firm Assessed as Such)
PFAS If the following conditions are satisfied then firm is assessed as
PFAS
1. certified true copy of partnership deed has to be filed along with the
first year of return of income or every subsequent year of changes in
terms of deed.
2. deed should be in writing
3. individual shares of partners are specified in deed
Deduction of interest, salary etc allowed u/s 40(b). Share of profit is
exempt in the hands of partner u/s 10(2A)

PFAOP (Partnership firms assessed as association of persons)
PFAOP If any of the condition prescribed in sec 184 are not satisfied.
Sec 40(ba) no deduction is allowed towards interest, salary etc paid
to partner of PFAOP. Further, share of profit received by a partner of
PFAOP is not exempt u/s 10(2A).

Deduction towards interest & salary to
the partners of PFAS (Sec 40(b))
Interest :
it should be mentioned in the deed
interest allowed is interest as per deed or 12% p.a., WEL.
this interest is applicable on any amount given by the
partner (capital or loan).
Remuneration to partners
It should be mentioned in the deed.
It is allowed only to the working partners. Working partner
means a partner who is actively engaged in the affairs of
the firm.
Remuneration allowed is amount prescribed in deed or
amount prescribed in Sec 40(b) whichever is less.

Amount prescribed in Sec 40(b)
Non-Professional Firm
Book Profit upto 1
st
Rs.75,000 Remuneration
allowed is 90% of book profit or Rs.50,000
whichever is higher.
On next Rs.75,000 60% of book profit
On balance of book profit 40% of book profit.
Professional Firm
Substitute Rs.1,00,000 in place of Rs.75,000 in the
above format

Tax Audit (Sec 44AB)
Business Turnover / Gross receipts in the current previous
year exceed Rs.40 lacs
Profession Gross receipts exceed Rs.10 lac in current
previous year.
Presumptive Tax - 44AD, 44AE, 44AF, 44BB, 44BBB and
claiming lower income than prescribed.
In all the 3 cases, assessees have to get their accounts
audited by a CA and submit the report within the specified
date i.e. 31st October of AY.
If there is a default under this section the penalty is 0.5% of
turnover or Rs.1lac which ever is less.
Audit report has to submitted in Form No. 3CA or 3CB
along with statement of particulars in Form No. 3CD.

Presumptive Taxation Sec 44AD, Sec
44AE and Sec 44AF.
Sec 44AD Profits and gains from civil construction including works
contract
Income = Turnover or Gross receipts x 8%
44AD is applicable if and only if turnover does not exceed Rs.40 lacs.
Sec 44AE Profits and gains from goods carriage vehicles
For heavy goods vehicle Rs.3,500 per month or part of the month. Other
vehicles Rs.3,150 per month or part of the month
Assessee should not own more than 10 vehicles at any time during the
previous year.
Asset taken on hire purchase or installment are deemed to be owned.
Gross receipts may be over Rs.40 lakhs
Sec 44AF Profits and gains of retail business
Minimum income = Turnover x 5%.
Turnover should not exceed Rs.40 lacs.
It should be pure retail business.

Example
X Ltd engaged in the business of growing and manufacturing tea in India has derived a total income from growing and
manufacturing tea of Rs.200 lakhs for PY 31.3.2011. The said income is computed before allowing deductions u/s 33AB. The
company has deposited Rs.60 lakhs with NABARD on 25.5.2011 for claiming deductions under section 33AB. The company has
also bought forward business losses of Rs.12 lakhs.

Answer
The total income of an assesse in the business of growing and manufacturing tea in India shall be calculated after allowing all
deductions under the PGBD, Thereafter, 40% of such income shall be taxable.

Total income before deduction under section 33AB 200 Lakhs
Less: Deduction u/s 33AB

Lower of the following:

(i) 40% of Rs.200 Lakhs 80 lakhs
(ii) Amount deposited with NABARD 60 lakhs
TOTAL INCOME 140 lakhs

As per Income Tax Rules, 40% of Rs.140 lakh is taxable i.e. (40% of 140) 56 lakhs

Less: Bought forward Business Losses 12 lakhs

TAXABLE INCOME 44 Lakhs