163Para 77.2 @ INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION Significance of profit motive - The word “business” is one of large and indefinite import and co, something which occupies attention and labour of a person for the purpose of profit. ‘¢ Business cannot be carried on with onesef- Business arises out of commercial transactions between tg, persons. One cannot enter into a business transaction with oneself. 77.2 Business income not taxable under the head “Profits and gains of | ates mt Protesia?. h following cases, income from trading or business is not taxable under section 28, we head “Proj gains of business or profession” Nature of come | Head under which its chargeable to tax — Rental income in | Rent of house property is taxable under the head “Income from house property”, the case of dealer | property constitutes stock-in-trade of recipient of rent or the recipient of rents engage) in property the business of letting properties on rent. = Dividend on shares | Dividends on shares are taxable under section 56(2)(), under the head "Income froma, inthecase ofa | sources”, even if they are derived from shares held as stock-In-trade or the recipieq, dealerin-shares | dividends isa dealer-in-shares. - Winnings from | Winnings from loteries, races, etc, are taxable under the head “Income from cj, lotteries ete. sources” (even if derived as a regular business activity) Tnterest reagived on | Such interest is always taxable under the head “Income from other sources” (even, compensation or | pertsins to a regular business activity. A deduction of 50 per cent is allowed x ced compen- | effectively only 50 per cent of such interest is taxable under the head “Income from ote sation sources” Profits derived from the aforesaid business activities are not taxable, under the head “Profits and gain, business of profession”. Profits and gains of any other business are taxable under “Profits and gains, business or profession”, unless such profits are exempt under sections 10 to 13A. ‘773 Taxation on certain incomes [Sec. 1458] - Section 145B provides mode of taxation of the follvi incomes = 1. Interest received by an assessee on compensation or on enhanced compensation, shall be deemed tote income of the year in which it is received (however, itis taxable under section 56 under the head “Income other sources”). 2. The claim for escalation of price in a contract or export incentives shall be deemed to be the income off b Previous year in which reasonable certainty of its realisation is achieved, 3. Assistance in the form of subsidy (or grant or cash incentive or duty drawback or waiver or concessions ; reimbursement) as referred to in section 2(24)(xvii) shall be deemed to be the income of the previous yeni which itis received, if not charged to income tax for any enelier previous year § § & & WHAT ARE THE BASIC PRINCIPLES FOR ARRIVING AT BUSINESS INCOME 78. One has to keep in mind the following general principles while computing, incom ‘under the be “Profitsand gens business or profession” * " Peng nesene anes 78.1 Business or profession carried on by the assessee- Business or profession should be carried on by assessee, It is the person carrying on a business or profession who is chargeable to lax, 78.2 Business or profession should be carried on during the previous sin furi = Income from busine any time during the previous year (not necessarily throughout the previous year). There are a few except 78.3 Income of previous year Is taxable during the following assessment e551 "ar profession carried on by the assessce during, the previoun yeas ia pre assessment year. There are, however, certain exceptions ta ths rule, 78.8 Tax incidence arises Ia respect of all businesses or prof Profit react tpn ts er rfeios at on aggregate income from al businesses or professions carried on by Whe aaa heh a eset eae a oto em het after setting off loss against income. However, profits and lonsen of a ayweulonis sss are kept separ 5 a 78.5 Legal ownership vs. Beneficial ownership - Unter section 24, itis not only the leyal ownership tS the beneficial ownership that has to be considered, The courts can gointe terre te eneatownest! fl rcome of busines“ the next fol ble to lax to the question of benefM,N dls who should bey tosses mere ro ane = Para 78 ants dienes eee come which ging at Me taking into account the question as to who is, in fact. in re 786 Real profit vs. Anticipated prof... Sqn cn ela rir hme in padi meres Notions pont on the basis of cost or. Titel value, whichever i lower. notional profits. For instance, no Tesoncar hk “a te ‘under section 28 are the real profits and not 8.8 Recovery of sun ke profit by trading with himself in another capacity. Fryar nea atta deacon: hyn ror ye ec ig business income of the year in which, Ititteereet ‘Which was earlier allowed as deduction, is taxable as 78.9 Mode of book entries no ° t substan character ofa tosesren, Ue!8RE = The mode or system of book-keeping cannot override the of vere natureincured in caving eet Brtepes for computing business income - Trading losses Business Thistle appcabe baa hoe stetare deuce tty ae net tote operstonet 4 Tastee of oss edutibe fom busines incong ee YR uPder the At 1. Loss of stock in-tade asa rest of enemy acti 2 Lasofslockinadeduetodsticontyanacar Ga 3. Loss arising on account of failure on the partof the assecsee to accept delivery of goods. 4. Depreciation in funds kept in foreign country for purchase of stock in take, 5. Loss due to exchange rate fluctuations of foreign currency held on revenue account. 6. Loss arising from sale of securities held in the regular course of business, 7. Loss of cash and securities ina banking company on account of dacoity (maybe ater banking hours) 8. Loss incurred on realisation of ammount advanced in connection with business, 9. Loss of security deposited! for the purposes of acquisition of stocksin-trade 10, Loss due to forfeiture of a deposit made by commodities. 11. Loss on account of embezzlement by an employee. 12. Loss incurred due to theft or burglary in factory premises during or after working hours. 13, Loss of precious stones ar watches of a dealer while bringing them from business premises to his house. 14, Loss arising from negligence or dishonesty of employees 15, Loss incurred onaccount of insolvency of banker with which current account is maintained by the assessee. 16. Loss incurred due to freezing of the stock-in-trade by enemy action 17. Loss incurted by a sugar manufacturing company by foregoing advance made to sugarcane growers who used to sell sugareane crop exclusively to the company. Jiatetunmses 18, Loss on account of nan-recovery of ahore aera somorminy (engaged in the business: anancing jes) to its 100 per cent subsidiary company. aa eo hnoneryrmanay 20 Loss arising asa result of ceizure and confiscation of legal stockin trae is allowable as a busines lass illegal business. , . # Instances of losses uot deductible rm te Fa srinton Cae 1. Loss which isnot incidental to tae ox profession, canindon Y 2.Loss incureed due to damage, destruction, etc, of

Write down value on Merch 1 2122 Depreition @ 15% a ae cpreition avllable to the Firm (2, 86/265 of Rs 7.500) < ae peat 179/365 of Rs. 7.50) ae Depreciation available to the company (2 is jon = Ean ling, within a beck soa ip to use for ss than 160 des he yor of euisition - any asset fling " ier en et pt ef sea ats palo oe forthe purpose of buses at ee od estan 190 days in that previous yer, the deduction in respect of such aes: Pret tod) percentof the amount calculated at the percentage prescribed in the case of block ose comprising such asst. “The following table highlights these provisions — HE Wc PE i yp WE me Depron (of the is yori Depreciation fey | [TRS age | Sinton | htt ea) | side No = ‘No depreciation, No depredation Yes Less than 180 days Half of usual depreciation} Usual deprecation Yes 180 days or more Usual depreciation Usual depreciain Provisions Mustated ‘The above provisions are explained in the following examples — 1.X Ltd. purchases an oid plant (rate of deprecation : 15 per cent) on May 10, 2021. Iti 2 in tise, he plats acquit ding 221-22 alm 201-20 pt oe fo tes than 190 aye theneore qualified for half of he usa epeevaton (75 per a aera 2. Y Ltd. purchases.a plant (being an office appliance) (ate of d lepreciation : 15 per cent) on. is pate se rua 1 223. hea tha i agued ding 200-2 and 2000.2 ee 2223 For the pellet iA arate will be available. It is put to use in the previous BE rer pe en a a te al — ion will be available (as the asset is not acquired du Lid, owas two building Lieber i 1 re et rei which Rs. 310000 is paid by an account payee cheque ond Re Osage nO Percent for Rs. 410000 (8 A ‘and 4 the previous yea 2021-22 say on January 10,202) for Be 870,00y 00 is paid in cash. It sells building AC 2021-22 shall be determined as under ~ "In this case, depreciation for the previews! ‘It includes active use as well as passive use, It includes an; press ‘tet which s kept ready for use, even if itis not actualy webDePRECIATION ALLOWANCE = Para £23 jated value of the block pepreciated (Ge. buildings A an. Rs. (nal cost of bulla € (purchased on December aco Apel at 145,700 fier chee {purchased on December 1, 2021) (amount paid exceeding Rs: 10,0008 rol J ” 310,00 Fo sae proceeds of bling, 1725700 ter endow vate ofthe Blk "870,000 cation [a8 builling C i purchased 55700 ne a lig pct nde yea 201-22 ant pt un fore an 60a ere prtatin wil 10 perce of, 80 haa en remains grate vale ofthe Blak on Apel 1, 202 10.001 Derr aore~asl 638, buling A i sld for Rs, 1587000, depreciation wil be determine as under r tedl value on April 1, 2021 Bar. Cost of building © oul Fae gale proceeds of building A jrnteen down wale fas the written down value is lower than cost of building C which is put to use rectation [ ipreciation shall be 50 per cent of 10 per cent of Rs. 18,700] than 180 days, ds Bepreviated value of the lock on Apail 1, 2022 April 20220 for less AV yeaa Problems —— a eS : gua.sp1 x alos he llcing aston Ap 2021 | ie Assets Rawal est Fas of depreciation Ton ; Rs me (percent) Faiing s 30,00,000 13,50,000 10 i . 6,00,000 2.25,000 10 | c 8.00000 ae k Plant | 4 1,70.000 45.100 cat i . 310000 fio 5 | c 419.000 7080 Pa | D 50.000 34000 2 Teco mcguire the flog aves afr April 2021 Gat Dave of acquisition qa] | | me (percent) eonom yor 400000 une 8? 5.99 000 2 210000 pewter 18, 2021 150.000 Sucmber 19 2020 One 10 2021 200.000 Avy 10.2021 Atv 10 130.500 jeoszar | The compumy atla the followsng anscte afer Apri. 20 m1 ae ie “ela sg May 16.2 | December 18, 2021 |Pare 1.3 = INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & aa eee sR a A a Determine the amount of depreciation forte ass seca: Out of purchte prs 9) Pint Bf Re Solution : The written down value and amount of depreciation fF 8 First blk : Bung trate of depreciation 10% a gy apt 2084 (te Fe 78-80 13730, ae onan Ney gs ponarmpaes sung rea Tce amma Sct ten Does eter Grask cmataeaians Gaia ee ere siete eee Pe oral een See roman eS er 2) of 4 88080 cacti ; 10% of Re. 1079,000) Par at ae Aa Bon A ak 4 during the previous year 2021-22 {f-., RS. 4,90,000 + ae ee ee one dungmne vg er 28 cB o Bee te rae fal ryt en I at oe = Ree aang ts en san ior ea gana) is HR OCR 92) a ah tak Pfr AO ay Ap 2084 Re. 700+ seeming re aa dae: Coot of Plant @ acquired during the previous yoor 2021-22 Tee Ei rintncaion of Plans Cand Bagi during the previous year 2021-22 (shough the Fike SRS S37 too ae. e219 000 * Hs 38,000), the amount oF reduction cannot Evie as ates ae aan ni tment yen 302325) rer ee saa cette Ee) Four ok laa 81.3-5P2 X owns the following assets on April 1, 2021 : = [= | emen een aS Ga pana BaET | Raw af aopreiaton oer) a | busing 9.00300 eat mchnery 20.000 20 Plant and SeSooe cy 218,000 4DEPRECIATION ALLOWANCE = pore 81.3 Pe Mee HOY 20122 the fteving ees ae pnd by x Date when the ‘Asset Sepreciation | cet put Oise Sroei| Uae pete ne Seek 9300 Trade mark 15,000 3 eos Ban cnt andy 190.00 ” 1,202 orcign made car 140.00 | a Pecember 20.2020 | peter we | 2mm | ” Stn of eprcaos for the asec gear Solution : Depreciation will be determined as ster het] Scot] Ted] — Fear] pe | sea | Hock] ok! wot Nat! tea) Sat | Furniture) Boing) Pian] plent| —plae| art [Rae of depreciation 10x[ 0x | 95 | a) a a | Rey oe], | el mel ope Deprecated value on Apri, 2021 20270) 9.00300} 210000] e120.00| 205000; | Cont of assets acquired during the | previous year =| = |__| 1 s0006| 190700] r5000 | ‘Wrten down value Ma] 988500 20000] 6Sanoon| S97 en Tsp] Depreciation 207] $8050] 2000) "s70;00] 15450] ta73 | ‘Aisle depreciation forthe asessmeit yor 2020-25 First block Second block Third block, Fourth block ith block Sith Block. oval Bog COMPUTATION OF ADDITIONAL DEPRECIATION® -The prov below $ Cautions ~The following conditions should be satisfied to claim adel 1. Mamujacture/production of any article - Fyentubo thing or generation, transmission or distribution of cess Fj Neplant and machinery installed and acquired after March 3, 2006 Additional depreciation is available only ‘nsspect of new plant and machinery acquired and incillad sng March 31, 2005. However, the following Sch are not eligible for additional depreciation — & Shipsand aircrafts; or any machinery or plant whicl byany other person; or © any machinery or Plant which is installed in any office premises, Beesthouse; or 4 aay office appliances or road transport vehicles; or 4 EY machinery o plant, which is eligible for 100, {Be ofadistionel dap fnew plantand ions of ad ional depreciation are given tional depreciation — The assessee should be engaged in the manufacture or Production of before ts installation by theassessee, was used ether within or outside India any residential accommodation, or in a Per cent deduction in the first year, wecition- Additional depreciation shal be availableat the rate of 20 per cent ofthe actual ‘machinery acquired and installed after March’31,2005.1f, however, theasetispattonce Sac rehe duty an putnctraniegnenegtey “Aponeg 30% of normal depreciation ade oe Spreng Sg unt which lines Sepreciation on straight-line basis under section 32()() cannot cinim any "Addn p SPSL investment in new plant soe machinery. ren x sprecation under section 32(i) is not. available, if the option is exercised for the altemat ‘« FESSION & ITS Para 61.3 @ INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION vagueuenillon : of additional dey ich it ig acquired, the rate for loss than 180 days in the year in which itis acq) ion in the next year). Eos, lowed as deduction in th pics ap, (the remaining 10 per cent shall be allowed as. ect eopest of chap _ ee aeigh fe ribed electronic modety, Peg it (or through presc Where an assessee incurs any expenditure: fornequtstionl adage (or aggregate of payments made toa person ina day) ol Problem —— - ness of manufacture of compute BLS 672 Xd caged uth baie eet wef year 2021-22, the following assets are acqu Block 15% 1 Rate of depreciation ‘_ Number of assets in the Block oon 1 Depreciated watue of the Block on April 1, . ‘Aditons of plats re) daring the revisor 2021-22 - Plant A al Plant B = Plant © = enc block) Sale of old plants (one plant im ench oem Plants A, Band Care acquired during May 2021 and put to use during September 2021. However, Plant B is put y, Percy, s hardware in Rajasthan since 1995. During they, 10 055g fet ok of March 202, Payment is made trough NEFT/RIS. Horeve, x he cseof Plat A, Rs. 50,000 is pig Find out the amount of depreciation, additional depreciation and capital gains. Solution : Computation of additional depreciation Plant A | "Plant B | Plane Whether additional depreciation is available Yes Yes Ye Rate of additional depreciation 20% 10% a Rs, Rs. % Actual cost (Plant A; Re. 57.50,000 ~ cash payment of Rs, 50,000) 537,00,000/ 4,00,000| 47,090 Additional depreciation (Lotal Rs. 15,20,000) 11,40,000 40,000) 34000 Conpulation of normal depreciation = Block 1 Block 2 Rate of depreciation 15% oO: Rs. Rs, 18,00,000] _25,00,000 ind C acquited during the previous year 57,00,000] _4,00,000 Deprecated value ofthe block on April 1, 2021 Add: Actual cost of Plants A, B a Total (a) 75,00,000 Less: Sale proceeds of old plants (8.000 ee Written down value ofthe block on March 31, 2022 | 752,000” ao,a00| Less : Normal depreciation 11,234 oan Less : Additional depreciation as computed earlier Tage 4,500 aaa Depreciated value ofthe block on April 1, 2022 os ee Computation of capital gains 52,28,200 Ni Sale proceeds of old plants 8,000) 28,70,000) 42,0000 1 As perrule GABBA, prescribed. ‘modes of electronic paym Payment Service), (e) UPI (United Payment Interfact), 7 RTGS) Pediteard, ()debitcara, i ps lane Transfer) and (H) BHIM Bharat Interface for Money) tae fieelTine Gross 0 OEP Mr Fe—___DEPRECIATION ALLOWANCE = Para 81.3 whether pi gain is toxable he bck is do not exceed the openi Loes nat Less: Costof acquisition fie, (a) addition, te, (a) Not Not Yes short-term capital gain 7 “\, soon i il} 20,00,000 1oe-X Ltd. can claim normal depreciation of Ra by ae fergie cpresatonof a eau SO Ke 11200» Fo 4300). Besides ts alo eligible gees SION ALUISDAD alitonal depreciation nate X Eed-opes forthe alternative tax reine Plant A | Plant B_ | Plant G 13-7 MEANING OF “ACTUAL COST E6-44)-"Acha oe, al cos is consi value of a block of asset to find out normal depreciation. “Actual cost” of a new plant and machinery is taken ‘consideration to find out th into.consi te quantum of additional de bs asgiven in section 43(2) and other related issues inal depreciation Meaning of the expression “actual cost” 2 epee araounting rile for determining cost ofthe feed oret i to include all expenses directly relatable to acquisition oftheasset ci, east prneaene et pai cost price of the asset, interest on money borrowed for of asset, bank charges), exp co necessary to bring the asset ost, naa itand Soke helene ea i inwards, loading and unloading charges, installatins het est csol pat changed oft cst bore hun ep eee onal abe ange cooling tou ere) and expenses on insurance, power and fue, incurred beforscommencement ef earn, rizatio Cost at Enessee towards violation of certain regulations in construction of a building topos ot of ding arcana gen buon incnton ug ¢ If an assessee incurs any expenditure for acquisition of any asset in respect of which a aggregate of payments made ta person ina day), atherwise tan by acco Pee he ae of electronic clearing system through a bank account (or through prescribed electronic mode), exceeds Rs. 10,000, such payment shall be ignored for the purposes of determination of actual cost of such seset, Consequently, normal depreciation/additional depreciation under section 32 and investment allowance under section 32AD will not be available pertaining to a payment (excceding Ks, 10,000) which is made otherwise than by an account payee cheque/ draft or use of electronic clearing system through a bank account (or through prescribed electronic mode). +# Interest pertaining to the period till the asset is put to use should be added to the “actual cost” of the asset However, interest relatable to any period after the asset is first put to use cannot be included in actual cost. + Expenditure on travelling incurred for acquiring depreciable assets is part of actual cost “Actual cost” of an asset for the purpose of depreciation is zero if it is used in business after it ceases to be used for scientific research related to that business. ¢ Ifinventory is converted into capital asset, “actual cost” of such asset shall be the fait market value of such asset on the date of conversion. ¢ Ifan asset is acquired by gift of inheritance, written down value in the hands of previous owner will be considered as cost acquisition. ¢ Ifanasset is acquired from 100 per cent subsidiary company, of from 100 percent holding company, written down value in the hands of transferor will be considered acquisition, # anasset is acquired in a scheme of amalgamation or demerger by an Indian company, inthe hands of transferor will be considered as cost acquisition. ¢ Where any portion of cost is met by Government (or any other person) in the form of subsidy, grant or Teimbursement, the amount met by the Government (or any other person) shall be desluctedt from the cost ¢ lf deduction is claimed under section 35AD, actual cost is zero}. 81.3.8 UNARSORBED DEPRECIATION - While dealing with unatsorteal depre the following points : idered for calculating the written down ritten down value jon. one should keep in mind 1 pote te inn of the anes Loe shall fe te asta ot Where any capital asst in respect of which diction allows water ston SSAD ish ae halt etn sche with the provisions of sub-sction (70) ofthe sisi. the tal oe tthe we Aare Muced hy an amount equa othe amount of depreciation cast atte asset ben use for the purposes of business since the date of its aquisitionMPUTATION Paro 81.3 = INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COM Sh fhe income chargeable g-~ ist deductible from the i u Depreciation allowance of the previous year is first deduct the head “Profits and gains of business or profession’ “Profits and gains of Busines e under the head S tont income een Step too | depreciation allowance isnot flly deductible under the ead Por i charger Befriend fal i some cee ‘under other heads of income [except income under year. ‘Step three |” If depreciation allowance f= i ment year(s) by the same assessee [se also the Step one i eds Ir can be carried forward to the subsequent a> see Pa atso the points given below. Notes depreciation: it can be cans, 1. No time-limit is fixed for the purpose of carrying. forward of unabsorbed dep “a Prrrarlforndefiie period ifmecesay, cet of against ny Income whether charge, 2. In the subsequent year(s), aa rcincater profession” or ander any otter head ret meas fen Sala] Tao att ce off the fllowing order of pririy is follow “st 4. Current depreciation. b. Brought forward business loss. c. Unabsorbed depreciation, saveton business loss, unal WE lady besa en Hite subsequent year(s), there is no brought forward sorte imi iction. ‘depreciation can be added to current depreciation for the pepe ein dedi . uity of busines is not relevant fr the purpose of above set off me 4 Deprectonean bean onan ese een Thai however, not applicable some cg seem Problems BP X submits the following particulars: . 81.3-8P2 X submits the flowing pa eee 22-2 | mm Rs, Rs Income from salary (after standard deduction) 7,00,000. | 2,00,007 Business profits (fore depreciation) 16,000 | 75,00 Current depreciation 1,34,000 | 132.00 Income fons other sources 10,000 | 80.00 Determine the taxable income of X for tne assesment years 2022-23 an 2028-24, Solution : ASSESSMENT YEAR 2022-23 (PREVIOUS YEAR 2021.23) Frofits and gains of business or profession Business profits 16,000 Less : Depreciation 134,000 Ni Depreciation not deductible against business profits 1,18,000 Iecome from salary —— c.000 Income from other sources Less: Depreciation tee Net income — ji Note: Unabserbed depreciation of Rs. 108,000 will be ‘carried forward = ASSESSMENT YEAR 202521 PREVIOUS YEAR 20.25 Profits and gains of business or profession ; Business income Jats, Depreciation (iy cumtent depreciation Rs. 1.32,009 ¢ 18,000 Depreciation not deductible against business income 240,000 i Income from salary 200 Income from other sources : 000 Less : Depreciation a Net income Nil a 2