Meaning of Business and Profession
Business simply means any economic activity carried on for earning profits. According to Sec 2(3) business is “any trade, commerce, manufacture or any adventure in the nature of trade commerce and manufacture”. Any transaction with a motive of selling at profits included under this concept. It is not necessary that there should be a series of transaction in a business and it should be carried on permanently.
Profession is an occupation requiring purely intellectual skills or manual skills controlled by the intellectual skill of the operator. e.g. Lawyer, doctor, engineer etc. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill.
The following income shall be chargeable to income-tax under the head Profits and gains of business or profession,
1) The profits and gains of any business or profession which was carried on by the assessee at any time during the previous year
2) Any compensation or other payment due to or received by any person in connection with a business or profession
3) Income derived by a trade, professional or similar association from specific services performed for its members
4) Profits on sale of a license granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947) ;]
5) Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India ;]
6) Any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971 ;]
7) Value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;
8) Any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm:
9) Any sum received under a Key man insurance policy including the sum allocated by way of bonus on such policy.
10) Interest on securities held as stock in trade
Computation of income from business or profession
The following are the general principles to be followed while computing income of business or profession.
1) Profit should be computed according to an accepted method of accounting regularly employed by the assessee. E.g. cash system or mercantile system
2) Only expenses incurred in connection with the business or profession of the assessee will be allowed.
3) Losses, if any should be incidental to the operation of the business
4) Profit and losses of speculation business should be kept separate.
5) If any sum is allowed as deduction in any previous year and subsequently recovered, it will be taxable in the previous year in which it is received.
6) Any amount allowed as expenses in the earlier years if recovered during the current
Expenses expressly allowed
1. Rent, rates, taxes, repairs and insurance for buildings[Sec 30]
Rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession is allowed as a deduction. If the business premises are owned by the assessee, no notional rent will be allowed.
2. Repairs and insurance of machinery, plant and furniture[Sec 31]
The amount paid on account of current repairs and the amount of any premium paid in respect of insurance against risk of damage or destruction of machinery, plant and furniture used in business or profession will be allowed as deduction
3. Depreciation [Sec32]
Depreciation is allowed in respect of tangible assets like buildings, machinery, plant or furniture and intangible assets acquired on or after the 1st day of April, 1998, like know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature, owned wholly or partly, by the assessee and used for the purposes of the business or profession.
Depreciation is allowed on block of assets at the prescribed rates on the written down value of such block of asset. Block of assets means the group of assets falling within a same class of assets for which same rate of depreciation is prescribed.
Depreciation will be allowed only when the assets are owned wholly or partly by the assessee. If an asset is used partly for business purpose and partly for personal purpose, depreciation shall be allowed only for that part which is used in business or profession.
Calculation of WDV
|Value of asset at the beginning of the previous year||XXXX|
|Add: value of assets acquired during the previous year||XXXX|
|Less: scrap value received on the sale of assets in the PY||XXXX|
|W.D.V of the asset||XXXX|
In the case of an asset acquired by the assessee during the previous year and is put to use for the purpose of business or profession for a period less than 180 days in that previous year , the depreciation of such asset shall be restricted to 50% of the amount calculated at the prescribed rate.
Treatment of depreciation
a. If depreciation given P&L A/c and adjustment
i. Add depreciation given in the P&L a/c to Net profit
ii. Subtract depreciation given in the adjustment to net profit
b. If depreciation is given only in P&L a/c[ and not in the adjustment
i. Ignore depreciation given in P&L a/c
c. If the depreciation is given only in the adjustment [ and not in the P&L a/c
i. Subtract depreciation from the net profit
Unabsorbed depreciation[Sec 32(2)]
If the full amount of depreciation cannot be charged due to absence or inadequacy of profit, the balance amount of depreciation which cannot be so allowed is called unabsorbed depreciation. Unabsorbed depreciation relating to the previous year can be set off against profit of other business and balance, if any can be set off against his income chargeable under any other head for that year. If still some part of such allowance remains unabsorbed, it can be carried forward. No time limit is fixed for the purpose of carrying forward of unabsorbed depreciation. It can beset off against any income. In the matter of set off, the order of priority is , first, current depreciation, second brought forward business losses and last ,unabsorbed depreciation.
Additional depreciation is available from the assessment year 2003-04, subject to the following conditions
- It is available only in respect of plant and machinery acquired and installed after 31-3-2005
- additional depreciation is available at the rate of 20% of the actual cost. If however, the asset is put to use for less than 180 days in the year in which it is acquired, the rate of depreciation will be 10%
4. Tea development account[Sec 33AB]
If an assessee , who carrying on the business of growing and manufacturing tea, coffee or rubber , deposits an amount in the tea development account , he can avail this deduction . The amount of deduction least of the following
(a) a sum equal to the amount or the aggregate of the amounts so deposited ; or
(b) a sum equal to 40% per cent of the profits of such business
Withdrawal from deposits will not be allowed except for the specified purposes specified below. They are:
(a) closure of business ;
(b) death of an assessee ;
(c) partition of a Hindu undivided family ;
(d) dissolution of a firm ;
(e) liquidation of a company.
5. Expenditure on scientific research[Sec 35]
The following deductions shall be allowed, in respect of expenditure on scientific research
a) Any revenue expenditure laid out or expended on scientific research related to the business.
b) An amount equal to 125% of any sum paid to a scientific research association which has as its object the undertaking of scientific research or to a university, college or other institution to be used for scientific research :
c) an amount equal to 125% of any sum paid] to a university, college or other institution to be used for research in social science or statistical research :
d) capital expenditure incurred, other than acquisition of a land, on scientific research related to the business carried on by the assessee. Where any deduction is allowed in respect of any capital expenditure represented by an asset, no depreciation will be provided on that asset under [Sec 32]
e) Where the assessee pays any sum to a National Laboratory University or an Indian Institute of Technology or a specified person with a specific direction that the said sum shall be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority, then a deduction of a sum equal to one and one- fourth times the sum so paid is allowable. No deduction in respect of such sum shall be allowed under any other provision of this Act
f) Where a company engaged in the business of bio-technology or manufacture or production of any drugs, pharmaceuticals, electronic equipments, computers, telecommunication equipments, chemicals or any other article, incurs any expenditure on scientific research on in-house research and development facility a sum equal to 150% of the expenditure is allowed as deduction
6. Expenditure on know-how[Sec 35AB]
If the assessee has paid any lump sum amount for acquiring any know-how for the purposes of his business, the amount shall be allowable as deduction in 6 equal instalments commencing from the year in which such an expenditure in incurred. If such know-how is developed in a laboratory owned or financed by the government or university , deduction is allowable in 3 equal installments
7.Amortisation of certain preliminary expenses[Sec 35D]
Preliminary expenses incurred by an Indian company or a person (other than a company) who is resident in India will be allowed as a deduction. If the expenses are incurred before 1st April 1998, it will be allowed in 10 equal installments and if such expenditure is incurred on or after 1st April 1998 the deduction will be allowable in 5 equal installments. Maximum amount eligible for this deduction is an amount equal to 5% ( if expenditure incurred before 1st April 1998 , it is 2.5%) of the cost of the project or in the case of an Indian company , at the option of the company, the amount of capital employed in the business .
Preliminary expenses includes the following
- expenditure in connection with preparation of feasibility report, preparation of project report, conducting market survey or any other survey necessary for the business of the assessee, engineering services relating to the business of the assessee
- legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee;
- legal charges for drafting the Memorandum and Articles of Association of the company;
- printing charges of the Memorandum and Articles of Association
- registration fee etc.
- shares and debentures issue expenses
- underwriting commission
- brokerage and charges for drafting, typing, printing and advertisement of the prospectus;
8. General Deduction [Sec 37]
The following general deductions are allowable from business or professional income;
- Legal expenses
- Customs duty, excise duty and sales tax paid
- Sales tax appeal expenses
- Day to day expenses to carry on the business
- Gift to employees
- Workmen compensation fund
EXPENSES EXPRESSLY ALLOWED
The following expenses are expressly disallowed from business or professional income.
- Guest house expenses
- Wealth tax
- Income tax
- Tax penalty
- Advance income tax
- Salary to proprietor
- Interest on capital
- Life Insurance Premium
- Expenses for family members
- Provision like provision for bad debts, provision for taxation etc
- Donations, gift and charity
- Depreciation allowed above the prescribed limit
- All expenses of capital nature
- All expenses relating to other heads of income
- Amount exceeding Rs.20,000 paid in cash
- Medical insurance premium paid in cash
SCHEME OF TAXATION OF INCOME FROM BUSINESS
|Net profit as per P&L A/c|
Add: Non business expenses
Add: Business income not credited in P&L A/c
Less: Non-business Income credited in P&L A/c
Less: Business expenses not debited in P&L A/c
Income from Businessxxxx
SCHEME OF TAXATION OF INCOME FROM BUSINESS
Less: professional expenses
Income from professionxxx
All rules of business income is applicable in the case of professional income