Income under the head profits and gains of business of profession and its computation

PROVISIONS IN BRIEF

Significance of method
of accounting
Income from a business or profession is calculated on the basis of method of
accounting regularly employed by the assessee.
If the assessee has adopted mercantile system of accounting, income is
calculated on receipt basis. Admissible expenses will be deducted only on
payment basis.

Specific deductions Sections 30 to 37 cover expenses, which are expressly allowed as deduction
while computing business income

Specific disallowances Sections 40, 40A and 43B cover expenses which are not deductible.

MAINTENANCE OF ACCOUNTS
For the purpose of provisions relating to maintenance of accounts, the business or profession has been
classified into the following three categories:

(1)Specified professions, (2)Non-specified profession or business, (3)Business under section 44AD and 44AE.

(1) Specified Professions. The following professions are specified professions:

(a) Legal; (e)Accountancy;

(b) Medical; (f) Technical Consultancy;

(c) Engineering; (g) Interior Decoration;

(d) Architectural; (h) Such other profession as may be notified by the Central Board of Direct
Taxes.

The Board has notified the following professions for the purposes of this section:

(i) The profession of authorized representative;

(ii) The profession of film artists; and

(iii) The profession of information technology.

Such persons are required to maintain prescribed books of account if their gross receipts in the profession
exceeds Rs. 1,50,000 in any one of the three years immediately preceding the previous year, or where the
profession has been newly set-u[ in the p;revious year, his gross receipts in the profession for that year are likely to
exceed the said amount.

[Notification, No. 11319 dated 6.4.2000]

Prescribed books:

(i) Cash Book;

(ii) Journal(if accounts are maintained on the basis of mercantile system);

(iii) A ledger:

(iv) Carbon copies of bills issued exceeding Rs. 25;

(v) Original bills; and

(vi) Receipts regarding expenses exceeding Rs. 50.

(2) Non-Specified Professions or Business: (i) Whose income from such profession or business exceeds Rs.
1,20,000[In case of an individual or a HUF the amount of income has been incread from Rs.1,20,000 to 2,50,000
w.e.f. Ayear 2018-19]; or

(ii) Total sales, turnover or gross receipts exceed Rs. 10,00,000 in any one of the three years immediately preceding
the previous year [In case of an individual or a HUF the amount of sales etc. has been incread from Rs. 10,00,000 to
Rs. 25,00,000 w.e.f. Assessment Year 2018-19]; or

(iii) In the case of newly set-up profession or business income/total sales/turnover/gorss receipts are likely to
exceed the aforesaid amounts.

They are required to maintain such books of account and other documents as may enable the Assessing
Officer to compute their total income. No books are prescribed for them.

(3) Businesses under sections 444AD and 44AE. Where the assessee claims that the profits and gains of eligible
business (Sec.44AD) or plying, hiring or leasing goods carriage (Sec. 44AE) are lower than the deemed profits under
these sections, he has to maintain the books of account of such business.

COMPULSORY AUDIT OF ACCOUNTS

(1)Turnover/gross receipts exceed prescribed limit. It is obligatory for a person carrying on business to get
his accounts audited upto specifi4ed date, if the total sales, turnover or grossreceipts in business for the previous
year exceed one crore rupees.

However, if an eligible assessee opts for presumptive taxation as per section 44AD, he shall not be required
to get his accounts audited if total turnover or gross receipts of the relevant previous year does not exceed two
crorre rupees.

A person carrying on profession has also to get his accounts audited upto specified date if his gross receipts
in profession for the previous year exceed Rs. 50 Lakh (w.e.f Assessment Year 2017-18).
 Such person are required to obtain upto specified date a report of the audit in the prescribed form and
submit it alongwith the return of income.

“Specified date” means the due date of furnishing the return of income specified in Sec. 139(1).

For details see chaptere on “Procedure for Assessment”.

(2) Business or profession ounder sections 44AD and 44AE. Where the assessee claims that the profits and gains of
eligible business (Sec. 44AD) or profession (Sec. 44ADA) or playing, hiring or leasing goods carriage (Sec. 44AE) are
lower than the deemed profits under these sections, he has, to get his accounts audited and furnishing by specified
date a report of the audit in the prescribed form.

(3) Assessee clains deduction undersections 33AD, 33ABA, 35AD, 35 D or 35E. Where the assessee claims deduction
under “The development account, ‘Srestoration fund’, Specified business’, ‘Preliminary expenses’ or ‘Expenditure on
prospecting, etc’, for certain minerals’, he has to get his accounts audited and furhnish by specified date a report of
the audit in the prescribed form.

Where such person is required by or under any othere law to get his accounts audited, he need not get
them audited again; but he should get the audit done before the specified date and get its report as well as another
report in the form prescribed under this section.

VALUATION OF STOCK-IN-HAND

There are no provisions in the Income Tax Act regarding the valuation of stock-in-hand in a
business. Hence, it is valued according to the general principles of accounting. Generally, the valuation of stock is
done as under:

(i) on the basis of cost; or

(ii) on the basis of market price; or

(iii) on the basis of cost or market price, whichever is less.

The assessee is free to adopt any method, but once a method is adopted it has got to be adhered to year to
year. It means that once a particular basis of valuation is adopted, it cannot be changed by the assessee at his own
sweet will; but only with the previous approval of the Assessing Officer.

Sec. 145A provides that the value of the inventory on the first and the last day of the previous year shall be
determined according to the method of accounting regularly employed by the assessee. It shall also include the
amount of any tax, duty, cess or fees paid or liability incurr3ed for the same under any law in force.

Where an assessee converts his capital assets into stock-in-trade and starts dealing in them the value of
such stock will be the market value as on the date of their conversion into stock-in-trade and not original cost.

However, such conversion shall be a transfer u/s 2(47) and liable to tax under the head ‘Capital gains’.
 Bank valuing stock-in-trade (investments) at cost in balance sheet in accordance with Banking Regulation Act
and valuing same investments at cost or market price, whichever is less, for income tax purposes. The method is
valid and cannot be rejected.