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Unit III

Income from Business &


Profession

Section 28 to 44 of the IT act-

Income from Business & Profession

According to 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.
Essential
Essential features
features of
of a
a
business
business

trade
1 It means purchase
and sale of goods
carried on with
profit
Commerce
motive
2 It means trade
carried on a large
scale.
Manufacture
3 Making of new
and different
article out of
input material by
physical or
mechanical
labour.

Any
of
11 Regularity
adventure or
transactions
or
concern in
continuity of activities
the nature of trade,
4
commerce or
Objective of earning
2
manufacture
profits
A single isolated
transaction outside
Application of
3
the
labour and skill
assessees line of
business may
constitute adventure
in
nature
and
Whether
Whether of
an
antrade
activity
activity
is
is an
an adventure
adventure or
or
concern
concern
in
in
the
the
nature
nature
of
of
trade,
trade,
commerce
commerce
commerce.
or
or manufacture
manufacture is
is to
to be
be decided
decided on
on the
the
basis
basis of
of cumulative
cumulative effect
effect of
of the
the facts
facts and
and
circumstances
circumstances of
of each
each case.
case.

Income from Business & Profession

Types of Business
There are two types of business

Speculation Business Short term nature


Non-Speculation Business Long term nature

Income from Business & Profession

Profession
(2(36))
Profession refers to activities of earnings using
intellectual skills.

Profession may be defined as a vacation, or a job


requiring some thought, skill and special knowledge
like that of Chartered Accountant, Lawyer, Doctor,
Engineer, Architect etc.
So profession refers to those activities where the
livelihood is earned by the persons through their
intellectual or manual skill.

Income from Business & Profession

INCOMES CHARGEABLE TO TAX UNDER THE HEAD PROFITS


AND GAINS
OF
BUSINESS OR PROFESSION
[Section
28]
1

Profits and gains of any business or profession, on by assessee at any


time during previous year.

Income derived by trade, professional or other similar association


from specific services rendered to its members.

Profit on sale of import entitlement licences, incentives by way of cash


compensatory support and drawback of duty.

Value of any benefit or perquisite, whether convertible into money or


not arising from exercise of business or profession.

Any interest, salary, bonus, commission, or remuneration received by


a partner of a firm, from such a firm

Any sum received or receivable, in cash or in kind, under an


agreement, for Non-competition and Exclusivity.

Any sum (including bonus) received under Keyman Insurance


Policy

Income from Speculative Business- settled other than actual


delivery

Income from Business & Profession

METHOD OF ACCOUNTING

There are two main methods of


accounting
Cash Basis Accounting
1

Under cash basis


accounting revenues are
recognized and
earned only when cash is
received irrespective of
when and how the services
were performed or goods
delivered.

Accrual or Mercantile Basis


Accounting
22

Accrual or Mercantile Basis


Accounting Under accrual or
mercantile basis
accounting, revenues are
recognized and earned
when they are realized or
realizable irrespective of
when the cash is received.

Is it compulsory to maintain books of


accounts?

1. If the income of the person from the business is more


than 1.20 lacs or his total sales receipts are more than
10 lacs. in any of the last three years.
2. In case of newly started business if the expected income
or receipts are expected to exceed the above limits.
3. Information Technology i.e. people carrying on the
business of software and hardware service.

Income from Business & Profession

What books of account have been


prescribed to be maintained by a
person carrying on business under
the Income tax Act?

The Act does not prescribe any specific books of account for business.
However you are expected to maintain your accounts in such a fashion
that the net profit of the business can reasonably and easily be arrived
at by the department.

Do a small time trader need to maintain any


Any business or profession that has an annual turnover/gross receipts
accounts?

exceeding rupees 10 lakh and net profit of rupees one lakh twenty
thousand, must maintain such books of account and documents from
which its income can be reasonably ascertained by the department.

Is it compulsory to get the books audited?

(i) Every person carrying on business shall get his accounts audited if the total
sales, turnover or gross receipts in business exceed Rs 60 lakhs in the previous
year. (Now Rs. 1 Crore)
(ii) Every person carrying on profession shall get his accounts audited if his gross
receipts exceed Rs 15 lakhs in the previous year. (Now Rs. 15 Lakhs)

Income from Business & Profession

What is Deduction?
Any item or expenditure subtracted from gross
income to reduce the amount of income subject
to tax.

Admissible Deductions
Section 20 (1)

Expenses incurred for the purposes of business


Loss on animal used for business
Depreciation & amortization of assets
Amalgamation expenses incurred by an amalgamated
company

Depreciation U/S 32

1. Asset should be wholly or partly owned by assesse


2. Used for the purpose of business or profession
3. Block of assets: Means a group of assets falling in same
class
Building
Furniture and
Fittings
Machinery & Plant

Building
10%

Computer
& Software
60%

Furniture
and fittings
10%

Books and
publication
s
100%

Intangible
assets

Motar car
15%

Palnt &
Machinery
15%

Intangible
assets
25%

Important provision related to business and


professional income
Expenditure on scientific research
Any
expenditure incurred on scientific research
or any
1
contribution made to approved scientific research is admissible
to the extent of 150% of contribution made. In house research
(200%)
Preliminary expenses
To charged in 5 equal annual installment. (i.e. one fifth of
preliminary expense is allowed as deduction). Example of
preliminary expenses are market survey, Expenses for raising
initial share capital etc.
Depreciation
2

Depreciation should charged as per the rates prescribed by


income tax act on the basis of WDV method. If an asset has been
purchased during the previous year and put to use for less than
180days the only half amount should be charged.
Pooja expenses
3

Diwali pooja and lakshmi pooja and muhurat expenses are


allowed
Expense on income tax appeal is allowed

4
5

Preliminary expenses
6

Payment made to relatives is admissible provided it should not


be in excess of market rates.

BASIC PRINCIPLES GOVERNING ALLOWANCE


OF DEDUCTION UNDER SECTIONS 30 TO
44DA:

Expenditure
should have
been
incurred in
connection
with
assessees
own
Business.

Expenditure
should
relate to the
previous
year in
which
business
has been
carried on.

Onus to
prove the
admissibilit
y of
expenditure
lies on the
assessee.

No
allowance
in respect
of
expenditure
incurred
before date
of settingup of
4
business:

Computation of Income from


Profession
Particulars

Amt

Amt

Professional Incomes:
ADD:
1. Fees (All Professionals)

XXXX
X

2. Operation Fees, Visiting Fees for Doctors

XXXX
X

3. Institute Fees, Practicing Fees for Lawyers

XXXX
X

4. Gift from clients for all professionals, Gift from


patients(For doctors only)

XXXX
X

5. Examiner fees for all professionals


6. Any other professional receipts

XXXX
X
XXXX
X
Total

XXXX
X

LESS: Professional Expenses


1. Office and Administrative expenses for all

XXXX

Thank You

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