Profits and Gains of Business

or Profession
Basis of Charge (Section 28)
 Following Incomes shall be charged to tax under this
head
 1. Profit and Gains of any business or Profession
carried on by the assessee
 2. Any Compensation or other payments due or
received by assessee, for loss of agency, due to
termination or modification in terms and conditions of
such agency
 3. Income derived by a trade, professional or similar
association, for specific services performed; for its
members.
 4. Export Incentives received by Exporter such as
Sale of licenses, Cash Assistance, Duty Drawback
Basis of Charge (contd.)
 5. Value of any benefit or perquisite, whether
convertible into money or not, arising from
business or the exercise of a profession
 6. Interest, Salary, Bonus, Commission or
remuneration due o or received by, a partner of a
firm from such firm.
 7. Sum Received or receivable in cash or kind for
 a) not carrying out any activity
 b) not sharing any knowhows, patent etc.
 8. Sum Received under Keyman Insurance Policy
 9. Income from Speculative Business.
Business & Profession
 Business
includes any Trade, Commerce or Manufacture
or any adventure in the nature of Trade,
Commerce or Manufacture.

Profession:
means an occupation requiring specialised
Knowledge and Skill.

Vocation:
is an activity in which an assessee has
specialised skill for earning Income.
Deduction Allowable
 1. Rent, Rates, Taxes and Insurance of
Building ( u/s 30)

 2. Repairs and Insurance of Machinery, Plant

and Furniture
(u/s 31)
Depreciation (u/s 32)
 Following conditions are to be fulfilled.

 a) Assessee must be owner of the Asset.

 b) Asset must be used for the purpose of

business or Profession.

 c) Such use must be in the relevant previous

year.
Depreciation
 Deprecation is allowed in respect of
 a) Building
For Residential Purpose 5%
For Official Purpose 10%
 b) Plant & Machinery* 15%
 c) Furniture & Fittings 10%
 d) Motor Vehicles
Motor cars other than used in
business running them on hire 15%
Motor Buses/Taxies/Lorries 30%
 e) Computers 60%
 f) Intangibles 25%
 g) Books:
Other Than Annual Publication 60%
Annual Publication 100%
*Additional Depreciation
 Additional Deprecation @ 20 % of Actual Cost
of Machinery acquired after 31.03.2005 for
 a) New Industrial Undertaking
 b) Existing Industrial Undertaking

Note : If the Asset is put to use for less than

180 Days in the year, depreciation will be
allowed at 50 % of the eligible rate.
Depreciation
 Depreciation is allowed on the Written Down
Value of Block of Assets
 Opening WDV XX
 Add : Purchases during the year XX
 Less : Sales during the year XX
 Closing WDV XX

 Note : If the Asset is put to use for less than

180 Days in the year, depreciation will be
allowed at 50 % of the eligible rate.
Expenditure of Scientific Research U/s 35
 Any Expenditure (other than Cost of Land) expended on
scientific research related to the business.
 Contribution to
 i) Association, university, college for the purpose of
Scientific Research
 ii) National Laboratory
 eligible for 175 % Deduction

 iii) Association, university, college for the purpose of

research in social sciences or statistical research
 eligible for 125 % Deduction

 In House Research in specified industries eligible for

 200 % Deduction
Expenditure for Obtaining License to operate
Telecommunication Services U/s 35ABB

 Allowed as Deduction equally over the

number of years of Validity of
Licenses
Other Expenditures
 35AC : Expenditure on Eligible Projects

 35CCA : Expenditure for carrying out rural

development programmes

 35 CCB : Expenditure for carrying out

programmes of conservation of natural
resources.
Amortisation of
 Preliminary Exp deduction is allowed in 5
Years ( Section 35D)

 Amortisation of Amalgamation or Demerger

in 5 Years (Section 35DD)
 Amortisation of VRS Expenses in 5 Years
 ( Section 35DDA)

 Expenditure on Minerals Prospecting in 10

Years (Section 35E)
Other Deduction u/s 36
 i) Insurance premium paid to cover the risk
of damage or destruction of Stock
 Ii) Bonus or Commission paid to Employees
 Iii) Interest on Borrowed Capital
 iii) Contribution to Recognised Provident
Fund
 iv) Contribution to Approved Gratuity Fund
 V) Write off of useless or Dead Animals
 Vi) Bad Debts
 Vii) Expenditure on promotion of Family
Planning among employees
General Expenses u/s 37
 Conditions to be fulfilled
 i) Expenditure should not be in the
nature prescribed u/s 30 to 36
 ii) Not a Capital Expenditure
 iii) Not Personal Expenditure
 iv) for the purpose of Business
Advertisement Expenses
( Section 37(2B)
 Deduction is not allowed in respect of
expenditure incurred by an assessee
on advertisement in any souvenir,
brochure, tract, pamplet or like
published by a political party.
Disallowance u/s 40a
 Interest Royalty Fees for Professional
Services paid outside India without
deducting TDS
Disallowance us/s 40 a
 Payment to Resident without deducting TDs
 Following payments are covered
 I) Interest
 II) commission or Brokerage
 III) Rent
 Iv) Fees for Technical or Professional Services
 V) royalty
 VI) Payment to Contractor
Disallowance us/s 40 a
 Securities Transaction Tax
 Fringe Benefit Tax
 Income Tax
 Wealth Tax
 Salary paid outside India without deducting
TDS
 Provident Fund payment without deducting
TDS
 Tax on Prequisites paid by the employer
Disallowance u./s 40 (b)
 Amount not Deductible in case of
Partnership Firm
 I) Interest exceeding the rate
specified in the Partnership Deed or
12 % whichever is lower

 II) Remuneration to Partner

Remuneration to Partner
 Is allowed upto the following limits
 First Rs 3,00,000 - 90 % or Rs 1,50000
 which ever is high
 Balance - 60 %
Disallowance u/s 40 A
 Excessive Payment to Relatives

 Payment exceeding Rs 20,000 in

mode otherwise than Crossed cheque
 (Entire amount is disallowed)
 Contribution to Non Statutory Funds

 Provision for Unapproved Gratuity

Fund
Section 43 B : Deduction on
Payment Basis
 Following will be allowed as Deduction on actual paid
basis.
 Outstanding amount has to be paid before Due Date
of Filing of Return of Income.
 i) Any Tax, Duty paid to government
 ii) Contribution to PF
 iii) Bonus or Commission
 iv) Interest on Loans from financial
 institution
 V) Interest on Loans from Scheduled Bank
 Vi) Leave Salary to Employees
 Profit as per P & L A/C xxxx
Add: Expenses or losses disallowed but charged in P & L xxxx
Incomes Taxable as business income but not credited to P & L xxxx
Expenses in excess of the allowed amount charged in P & L xxxx
Under Valuation of closing stock xxxx
Over Valuation of Opening Stock xxxx xxxx
xxxx

Less: Expenses or losses allowed but not charged in P & L xxxx

Incomes not Taxable as business income but credited to P & L xxxx
Incomes exempt from tax but credited to P & L xxxx
Over valuation of Closing Stock xxxx
Under Valuation of Opening Stock xxxx xxxx
Taxable Income from Business xxxx
Q. The following is the P & L A/c of Mr. Vivek for the year ended on 31 March, 2016. Compute his
taxable income from business for that year:
Dr. Profit & Loss A/c Cr.
Opening Stock 15000 Sales 80000
Purchases 40000 Closing Stock 20000
Wages 20000 Gift from Father 10000
Rent 6000 Sale of Car 17000
Repairs of Car 3000 Income Tax Refund 3000
Wealth-tax paid 2000
Medical Expenses 3000
General Expenses 10000
Depreciation on Car 3000
Advance Income Tax paid 1000
Profit for the year 27000
130000 130000

Following further informations are given:

1. Mr. Vivek carries on his business in rented premises, half of which is used as his residence.
2. Mr. Vivek bought a car during the year for Rs. 20,000. He charged 15% depreciation on the value
of car. The car was sold during the year for Rs. 17,000. The use of the car was 1/4th for personal
purposes.
3. Medical Expenses were incurred during sickness of Mr. Vivek for his treatment.
4. Wages include Rs. 250 per month on account of Mr. Vivek's driver for 10 months.
 Computation of Income from Business
(For the assessment year 2016-17)
Profit as per P & L A/c 27,000
Add: Items Disallowed:
1/4 Wages regarding driver's salary for personal
use of car 625
1/2 Rent regarding personal use of house 3000
1/4 repairs of Car regarding personal use 750
Wealth Tax 2000
Medical Expenses 3000
Depreciation 3000
Advance Income Tax 1000 13,375
40,375
Less: Items not taxable:
Income tax refund 3000
Gift from father 10000
Sale of Car (Capital Receipt) 17000 30,000
Taxable Income from Business 10,375
Compute the income from Business of Shri Lal from the following P & L:
Trade Expenses 450Gross Profit 235900
Establishment Charges 2200Dividens from Cooperative Society 2600
Rent and Rates 1400Rent from Property 500
Discount 200Bad Debts Recovered
Income Tax 700(allowed as deduction earlier) 2000
Advertisement Expenses 1450
Postage 100
Gifts for Publicity 125
Fire Insurance Premium 250
Charities 375
Donations 400
Repairs and Renewals 250
Audit Fees 250
Net Profit 232850
241000 241000
 Net Profit 232850
Add: Items not allowed:
Income Tax 700
Charities 375
Donations 400 1475
234325
Less: Income from Property 500
Dividend 2600 3100

Income from Business 231325

On the basis of trading and P & L A/c of Mr. H calculate his income from Business:
Salary 100000 Gross Profit 396260
Advertising 45500 Rent on Property 48000
Office Expenses 92500 Refund of Income Tax 3000
Insurance Expenses (Goods) 8600 Bad Debts Recovered 7800
Fire Insurance (HP) 3400
Life insurance Premium 5000
Dep. on Car 13000
Tax provision 26000
Entertainment Expenses 18500
Cost of Patent 21000
Motor Car expenses 12000
Bad debts 2500
General Expenses 3000
Net Profit 104060
455060 455060
Other informations:
Advertising includes : (i) Goods presented to customers (30 articles @ Rs. 800 each) (ii) TV prizes to
Customers (two TV @ Rs. 4500 per set) (iii) Diaries/Calendars Rs. 3000 (iv) balance amount
newspapers advertisement
Recovery of Bad Debts includes Rs. 6000 which was not accepted by ITO for deduction in 2015-16
Cost of Motor Car is Rs. 100000 on which depreciation allowed @ 15% p.a.
 Net Profit 104060
Add: Items Disallowed:
Life Insurance Premium 5000
Tax Provision 26000
Fire Insurance (HP) 3400
Patents 21000 55400
159460
Less: Items allowed and not taxable under this head
Rent 48000
Refund of Income Tax 3000
Bad Debts Recovered 6000
Depreciation on Car (15000-13000) 2000
Depreciation on Patents 5250 64250
Income from Business 95210
Ms. Q is a medical practitioner. She keeps her books on cash basis and for the year ended 31 March
2016 her summarized Cash A/c is as under:
Opening Balance 2700 Cost of Medicine 20000
Bank Loan 6000 Surgical Equipment 6000
Sale of Medicine 30500 Motor Car 12000
Consultation fees 10000 Car Expenses 1800
Visiting fees 8000 Salary 1200
Interest on Investments 9000 Rent of Dispensary 1200
Rent from Property 7200 General Expenses 600
Sale of Building 15000 Personal Expenses 3600
Sale of Furniture 5000 Life Insurance Premium 2000
93400 Interest on Bank Loan 360
Property Insurance 400
Fixed Deposit in Bank 30000
Closing Balance 14240
93400 93400
Keeping in view the following additional information, compute her income from profession
1/3rd car expenses are for personal use
Written-down value of the house property on 1st April 2015 was Rs. 20000 and that of furniture
was Rs. 4000. There were no other assets in these blocks.
Rate of Dep. on Car and surgical equipments is 15%
 Incomes
Sale of Medicines 30500
Consultation Fees 10000
Visiting Fees 8000 48500
Less: Expenses Allowed
Cost of Medicines 20000
Car Expenses (2/3) 1200
Salary 1200
Rent 1200
General Expenses 600
Interest on Bank Loan 360
Depreciation on Car (1800 x 2/3) 1200
Depreciation on Surgical Equipments 900 26600
Income from Profession 21840
Dr. Gupta is a medical practioner of Ludhiana. From the following, calculate his income
from profession
Gross Receipts from Dispensary 235000
Gross Receipts from Consultation 165000
Operation fees 250000
Visiting Fees 50000
Gifts from Patients 30000
Medicines purchased 125000
Closing Stock of Medicine 35000
Salaries paid to employee 150000
Surgical equipments purchased 48000
Dr. Gupta went to attend a medical seminar in Germany to update the knowledge and
spent Rs. 25000 on it
He owns a house whose municipal value is Rs. 50000. Half portion of the house is used
for profession. Expenses paid on the house: Municipal Taxes 10% of M.V., Repairs Rs.
10000, Renovation expenditure Rs. 30000
Medical books purchased 20000
 Income
Receipts from dispensary 235000
Receipts from consultation 165000
Operation fees 250000
Visiting Fees 50000
Gifts from patients 30000 730000

Less: Expenses
Medicines(125000-35000) 90000
Salaries 150000
Dep. on Surgical Euipments @ 15% 7200
Visit to Germany 25000
Dep. on books @ 60% (other than annual publication) 12000
Expenses on building:
Municipal Tax 50% 2500
Repairs 50% 5000 291700
Income from Profession 438300
A Banking company has prepared the following P & L A/c for the year ended 31 March
2016:
Interest paid on deposits 200000Interest on Overdraft 60000
Salaries and Allowances 150000Interest on cash credits 100000
Rent and Taxes 20000Interest on Loans 300000
Postage and Telegrams 10000Interest on securities 120000
Stationery and Printing 8000Commission 40000
Depriciation 40000Rent of Buildings
Other Expenses 20000(mortagaged with the bank) 60000
Proposed Dividends 80000Underwriting commission 30000
Provision for Incoome for Tax 150000Profit on sale of shares 70000
Bad Debts Provision 40000
Net Profit 62000
780000 780000
Compute the Business income of Banking Company for the relevant A.Y.
 Computation of Business Income

Net Profit 62000

Add: Items Disallowed: 80000

Proposed dividends 150000

Excess bad debts provision 15100 245100

Business Income 307100

Note: Excess Bad Debts provision allowed 7.5% of

(62000+80000+150000+40000)

7.5% of 332000 = 24900

40000- 24900 = 15100