Course Code: BAC304A

Course Title: Business Taxation

Course Leader: Chandrakala D P

E-mail: [email protected]

1
8. Calculation of Income from Business and Depreciation

At the end of this lecture, student will be able to

• Understand the format of computation of income from business

• Calculation of taxable income from business
• Understand the format of computation of depreciation
• Calculation of depreciation under sec 32

2
Format of Computation Taxable Income from
Business
Assesse: Previous Year: 2022-23
Status: Assessment Year: 2023-24
Net Profit or Loss per P&L A/c XXX
Add:
1. Inadmissible Expenses debited to P&L A/c XXX
2. Business Income not Credited to P&L A/c XXX
3. Over Valuation of opening stock XXX
4. Under valuation of closing stock XXX
5. Notional loss XXX XXX
XXX

Less:
1. Admissible Expenses not debited to P&L A/c XXX
2. Tax-free incomes credited to P&L A/c XXX
3. Non Business Income Credited to P&L A/c XXX
4. Under Valuation of Opening stock XXX
5. Over valuation of closing stock XXX
6. Notional Profit XXX XXX
3
Addition Items (To be added to Net Profit)

4
Deduction Items (To be deducted from Net Profit)

5
Problem 1: The following is the Profit and Loss Account of Mr. X for
the year ended on 31st March, 2019. Compute his taxable income
from business for that year
Profit and Loss Account
(For the year ended 31st March, 2019)
Particulars Rs Particulars Rs.
Salaries and wages 33,000 Gross Profit 3,34,725
Rent, etc. 1,600 Gifts received 275
from relatives
Household expenses 82,000
Income Tax 900
Advertisement 800
Postage expenses 600
Gifts to relatives 900
Fire Insurance Premium 400
Life Insurance Premium 2,100
Bad Debts Reserve 800
Audit Fees 400
Net profit 2,11,500
Total 3,35,000 Total 3,35,000
6
Solution

Computation of Income from PGBP

Assesse: Mr X Previous Year: 2018-19
Status: NA Assessment Year: 2019-20
Particulars Rs. Rs.
Profit as per P & L A/c 2,11,500
Add : Household expenses 82,000
Income Tax 900
Gifts to relatives 900
Life Insurance Premium 2,100
Bad Debts Reserve 800 86,700
2,98,200
Less Gifts received from relatives 275 275
Taxable income from Business 2,97,925

7
Problem 2 : The following is the Profit and Loss Account of the Raj
Oil Mills for the financial year 2018-19. Compute its business income
on the basis of additional information.

Profit and Loss Account

(For the year ended 31st March, 2019)
Particulars Rs Particulars Rs Additional information:
• General expenses include: Rs 2,500 as compensation
Office Salaries 15,000 Gross Profits 80,000
paid to an accountant who had to be removed from
General Expenses 7,000 Profit on Sale of car 15,000
service in the interest of business, and Rs 3,300 as
Bad Debts 1,000 Recovery of bad debts 5,000
contribution paid to the Govt. for laying electric cables
Advertising Expenses 3,700 Interest on Govt.
Securities 3,500 for the company’s plant.
Insurance Premium
(fire) 1,500 Dividends 3,500 • Depreciation as regards to the relevant blocks of
Depreciation 5,000 Gifts on the occasion assets under the Income Tax Act was Rs 3,500.
5,000
Reserve for bad debts 3,000 of Gruhapravesam • In the assessment year 2015-16 the Assessing Officer
Donation to a school 2,500 had refused to allow deduction for the bad debts of Rs
Car Expenses 2,000 5,000 now recovered.
Net Profit 71,300 • Car expenses include Rs 500 attributable to use of car
Total 1,12,000 Total 1,12,000
for personal work.

8
Solution
Computation of Income from Business
Assesse: Raj Oil Mills Previous Year: 2018-19
Status: NA Assessment Year: 2019-20
Particulars Rs. Rs.
Profit as per P & L A/c 71,300
Add : Disallowed Expenses
Depreciation 5,000
Reserve for bad debts 3,000
Donation to School 2,500
Car expenses 500 11,000
82,300
Less Profit of sale of car 15,000
Recovery of Bad debts 5,000
Interest on Govt. Securities 3,500
Dividends 3,500
Gifts on the occasion of Gruhapravesam 5,000
Depreciation 3,500 35,500
Taxable income from Business 46,800

9
 Illustration - 3

Following is the profit & loss A/c of Mr Sajib (resident) for the year ending 31-3-16

Particulars Amount Particulars Amount

To office expenses 4,500 By Gross profit 150000
To fire insurance premium 5600 By bad debts recovered but allowed earlier 5000
To Bad debts 800 By interest from securities 6000
To salary to staff 78000 By rent received from employees 12000
By interest from debtors for delayed
To audit fee (in cash) 22250 payments 3000
By amount received from LIC on maturity
To proprietors bonus 13000 of policy 3000
To interest on capital 3000
To income tax 1900
To depreciation 2500
To sales tax (due) 3000
To advance income tax paid 1200
To charities 900
To motor car expencess 750
To Muncipal taxes of quarters
let to employees 6000
To Net profit 35600

179000 179000
10
Illustration 3

Additional information
i) Office expenses include Rs 3,000 paid as compensation to an old employee whose service were
terminated in the interest of the business and Rs 1,200 by way of help to a poor student

ii) WDV of plant and machinery Rs 10,000 a new machinery costing Rs 20,000 was purchased on
16-12-2015 and put into use on 16-01-2016

iii) 60% f motor car expenses are for proprietor’s personal use

Compute business income for the Annual year 2016-17

11
Solution

Assesses: Mr. Sajib P/year 2015-16

Status: Resident A/year 2016-17
Particulares Amount Amount
Net profit as per P& L A/c 35600
Add: inadmissible expenses debited to P&L A/c
1. Help to poor student 1200
2. Audit fees in cash 22250
3. Proprietors bonus 13000
4. Interest on capital 3000
5. Income tax 1900
6.Depreciation 2500
7. Sales tax (due) 3000
8. Advance income tax paid 1200
9. Charities 900
10. Motor expencess (60% personal use)
(750*60/100) 450 49400
85000

12
Solution 3

Less: Admissible expenses not debited to P & L A/c

WDV of plant and machinery (10000*15/100) = 1500

New plant machinery 20000*15/100*50/100) = 1500

(put into use for less than 180 days)
Additional depn.. On plant and machinery
(20000*20/100*50/100) =
2000 5000

Less: Non - business income credited to p&l A/c

Interest on securities 6000

Less: Taxfree income credited to p&l A/c

Amount received from LIC 3000 14000
Taxable income from business 71000

13
Problem 4 : From the Profit & Loss Account for the relevant
assessment year, compute income from business of Sri Babu Rao
Profit and Loss Account
(For the year ended 31st March, 2019)
Particulars Rs Particulars Rs
To Salaries 88,000 By Gross Profit 3,80,000
To Rent 42,000 By Sundry receipts 20,000
To General expenses 20,000 By dividends 40,000
To Advertisement 25,000 By Commission 30,000
To Legal expenses 15,000 By Bad debts recovered (earlier
10,000
To Sales-tax 10,000 allowed)
To Wealth-tax 20,000 By Rent of building let out 44,000
To Telephone expenses 12,000
To Gratuity paid 30,000
To Provision for bad debts 10,000
To Advance income-tax 20,000
To Depreciation 38,000
To Office expenses 12,000
To Municipal taxes of property let out 10,000
To Contribution to employees provident fund 6,000
To Net profit 1,66,000
Total 5,24,000 Total 5,24,000 14
Cont.…..

Other information:
• Legal expenses were found to have been incurred for the registration of a
business asset.
• 50% of the business premises were used for residential purposes.
• General expenses include a donation of Rs 10,000 towards A.P. Chief Minister’s
Relief Fund.
• Advertisement expenses were paid in Cash.
• Allowable depreciation as per income-tax rules, Rs 46,000.

15
Depreciation under Section 32 of the Income Tax
Act, 1961 (2023-24)

Section 32 of the Income Tax Act allows for depreciation deduction on assets that are used
for business or professional purposes. Depreciation is calculated on the Written Down
Value (WDV) of assets. This applies to both tangible and intangible assets.
Types of Depreciable Assets:
• Tangible Assets: Buildings, machinery, plant, furniture, and vehicles.
• Intangible Assets: Know-how, patents, copyrights, trademarks, licenses.Books
Methods of Depreciation:
• Straight Line Method (SLM): Depreciation is charged uniformly over the life of the asset.
• Written Down Value (WDV) Method: Depreciation is charged at a fixed percentage on
the reduced value of the asset every year. WDV is more commonly used.

16
Rates of Depreciation (as per Income Tax Rules for FY 2023-24)

17
Methods of Depreciation:

• Straight Line Method (SLM): Depreciation is uniformly distributed over the asset's
useful life.
• Written Down Value (WDV) Method: Depreciation is applied at a fixed percentage
on the WDV of the asset each year.

Additional Depreciation:

• Manufacturing businesses can claim additional depreciation of 20% (or 10%) on

new plant and machinery purchased and installed after April 1, 2005.
• Depreciation on assets used for less than 180 days in a year is allowed at 50% of
the applicable rate.

18
Key Rules and Notes (2023-24)

• Asset Use Condition: Depreciation is allowed only if the asset is used for business or
professional purposes during the financial year.
• Small Asset Depreciation: Assets with a WDV of ₹5,000 or less are eligible for 100%
depreciation in the year of purchase.
• Depreciation on Goodwill: Depreciation is not allowed on goodwill after the
amendments by the Finance Act, 2021.
• Block of Assets Concept: Similar assets are grouped into "blocks" for depreciation
calculation purposes, simplifying the depreciation process.
• Carry Forward of Unabsorbed Depreciation: Unabsorbed depreciation can be carried
forward indefinitely and set off against any form of income in subsequent years.
19
WDV Method Depreciation for Business or Professional Income

Particulars Amount

WDV of the block of assets at the beginning of the previous year XXX

Add:
Purchases of Assets during the year XXX
Less:
Sale of asset during the year XXX

Total Depreciable value of the block XXX

Less:
Depreciable value of the block (Rate at prescribed ) XXX

WDV of the block at the end of the previous year XXX

20
Depreciation on Tangible Assets (WDV Method)

Problem 1:
A business purchases machinery on 1st April 2023 for ₹10,00,000. The applicable
depreciation rate is 15%. The machinery is used for the full year.
Solution:
Particulars Amount (₹)
Cost of Machinery (Opening WDV) 10,00,000
Depreciation (15% of ₹10,00,000) 1,50,000
Closing WDV (after depreciation) 8,50,000
Depreciation for FY 2023-24 = ₹1,50,000

21
Depreciation for Asset Used Less than 180 Days
(WDV Method)
Problem 2:
A business purchases a vehicle on 1st December 2023 for ₹8,00,000. The
depreciation rate is 15%, but the vehicle was used for less than 180 days, so only
50% of the rate applies.
Solution:
Particulars Amount (₹)
Cost of Vehicle (Opening WDV) 8,00,000
Depreciation Rate for <180 Days 7.50%
Depreciation (7.5% of ₹8,00,000) 60,000
Closing WDV (after depreciation) 7,40,000
Depreciation for FY 2023-24 = ₹60,000
22
Depreciation on Books (100% Depreciation)

Problem 3:
An educational institution purchases books worth ₹1,50,000 in June 2023. Since
the books qualify for 100% depreciation, the entire value is written off.

Solution:
Particulars Amount (₹)
Cost of Books (Opening WDV) 1,50,000
Depreciation (100% of ₹1,50,000) 1,50,000
Closing WDV (after depreciation) 0
Depreciation for FY 2023-24 = ₹1,50,000

23
Additional Depreciation for New Machinery

Problem 4:
A manufacturing company buys new machinery on 1st April 2023 for ₹20,00,000. The normal
depreciation rate is 15%, and it qualifies for 20% additional depreciation.

Solution:
Particulars Amount (₹)
Cost of Machinery (Opening WDV) 20,00,000
Normal Depreciation (15% of ₹20,00,000) 3,00,000
Additional Depreciation (20%) 4,00,000
Total Depreciation 7,00,000
Closing WDV (after depreciation) 13,00,000
Total Depreciation for FY 2023-24 = ₹7,00,000

24
Depreciation on Intangible Assets (Patents)

Problem 5:
A company acquires a patent for ₹5,00,000 on 1st April 2023. The depreciation
rate for intangible assets is 25%.
Solution:
Particulars Amount (₹)
Cost of Patent (Opening WDV) 5,00,000
Depreciation (25% of ₹5,00,000) 1,25,000
Closing WDV (after depreciation) 3,75,000
Depreciation for FY 2023-24 = ₹1,25,000

25
 Course Code: BAC304A
Course Title: Business Taxation

Course Leader: Chandrakala D P

E-mail: [email protected]
Calculation on Income from Profession

At the end of this lecture, student will be able to

• Calculate income from Profession of CA, Doctor, Advocate

2
Chapter VI-A Deductions

Chapter VI-A deductions commonly allowable to Chartered Accountants (CAs), Advocates, and Doctors under the old tax
regime. Under the new tax regime (Section 115BAC), only Sections 80CCD(2) and 80JJAA deductions are allowed.

Applicability to CA, Advocate, Available in New Tax Regime

Section Description
Doctor (u/s 115BAC)
80C Investments in LIC, PPF, NSC, etc. Yes No
80D Medical insurance premiums Yes No
80DD Disabled dependent care Yes No
80DDB Medical expenses for specified diseases Yes No
80E Interest on education loan Yes No
80G Donations to charities Yes No
80GG Rent paid (if no HRA received) Yes No
80TTA Interest on savings account (individuals) Yes No
80TTB Interest on deposits (senior citizens) Yes (if senior citizen) No
80U Deduction for disabled individuals Yes No
80CCD(2) Employer's contribution to NPS Yes Yes
Deduction for employment of new
80JJAA Yes (if eligible) Yes
employees
These deductions, except Sections 80CCD(2) and 80JJAA, are not available under the new tax regime for individuals 3
practicing as CA, Advocate, or Doctor.
Important Sections

Section Description Applicability to Business Expenses for CA/Advocate/Doctor

Income from profits and gains of business Specifies taxable income from business/profession; allows for
Section 28
or profession expense deductions under relevant sections
Rent, rates, taxes, repairs, and insurance Allows deduction for office rent, property taxes, and repairs
Section 30
for buildings related to business property
Repairs and insurance of machinery, plant, Allows deduction for expenses on repairs and insurance of
Section 31
and furniture furniture and equipment used in business
Allows deduction for depreciation on assets like computers,
Section 32 Depreciation on assets used for business
office equipment, medical equipment, vehicles, etc.
Allows deduction for expenses on scientific research, applicable
Section 35 Expenditure on scientific research
to doctors if conducting research
Other business expenses (e.g., insurance, Allows deduction for various expenses, including insurance,
Section 36
employee benefits) employee welfare, and professional indemnity insurance
Allows deduction for expenses wholly and exclusively incurred
Section 37(1) General business expenses for business, including office expenses, professional fees,
utilities, etc.
4
Problem 1

Dr. Vaikunta is a leading doctor who maintains his book of account on cash basis furnishes the following
receipts and payments A/c for the financial year 2022-23. (Ignore Alternative Tax Regime)
Receipts and Payments Account for the year ending 31st March 2023
Compute his gross total income for the
Receipts ₹ Payments ₹
relevant assessment year 2023-24 after
Balance b/d 10,000 Salaries, General expenses 25,000
taking into account the following
Professional fees 1,00,000Magazine Subscription 3,000
information:
Dividend from an Indian Co. 9,000 Motor Car expense 20,000
Share from HUF 11,000 Purchase of scanning machine 50,000
Share of Profits from partnership firm 15,000 Income tax 5,000
i) 30% of the car expenses are in
Professional tax 2,000
respect of personal use.
House property expenses:
Taxes 6,000 ii) Depreciate scanning machine @
Repairs 3,000 15% it was purchased on 10th Dec.
Interest on loan 9,000 2022.
Total House Property Expenses 18,000 iii) He stays in his house; One-third of the
Balance c/d 22,000 house is used as his clinic. The gross
Total 1,45,000 Total 1,45,000 annual value of the whole house is ₹
24,000.

5
 Solution 1: Computation of Taxable Income from profession
Assessee: Dr. Vaikunta (Doctor) Previous Year: 2022-23
Status: Resident Assessment Year: 2023-24

Particulars Amount Amount

I. Income From Profession:
Professional receipts
Professional fees 1,00,000
Less: Professional Payments:
Salaries and General expenses 25,000
Magazine subscription 3,000
Motor car expenses 14000
Depreciation on scanning machine 3750
Professional Tax 2,000
House Property expenses (1/3 for professional use)
Taxes 2000
Repairs 1000
Interest on loan 3000
Total Professional Payments 53,750
Income from profession 46,250
II. Income from House Property:
Self-occupied for residence (2/3)
Net Annual Value exempted as per section 23(2)(a)(i)
Less: Deduction U/S 24
Interest on Loan 6000 6000
6
Gross Total Income 40,250
 Problem 2: Mr. Nirmal (resident) lives in Delhi. He is an advocate, and his receipt and
payment accounts are as follows:

Receipts ₹ Payments ₹
To Balance b/d 1,892 By Books purchased (Annual 800
Publications) Additional Information:
To Sitting fee 40,000 By Repairs to Godown 1,200 a) 1/3 part of Godown is used for
To Salary as a part-time lecturer 3,600 By Municipal tax on Godown 600 profession and 2/3 for self-
To Exam remuneration from university 2,300 By Maintenance expenses of car 2,000 occupation.
To Interest on fixed Deposits 1,200 By Telephone installation charges 4,000 b) Car is used 50% for professional
under OYT scheme purpose.
To Sale proceeding of car 18,000 By Domestic expenses 20,000 c) He resides in his own house. 1/4
To Sale proceeds of shares 16,000 By Plant purchased for office 700 portion of the house is used for
To Dividend received 1,540 By Car purchased 25,000 office purpose.
By Life Insurance Premium 5,000
By Donation to Recognised institution 1,200
Compute Mr. Nirmal's professional
By Gift to father 400 income.
By Income Tax 3,500
By IT assessment expenses 200
By Installment of housing loan 17,000
(Principal amount 10,000)
By Balance c/d 2,932
Total 84,532 Total 84,532
7
Solution 2: Computation of Taxable Income from Profession

Assessee: Mr. Nirmal (Advocate) Previous Year 2022-23

Status: Resident Assessment Year 2023-24
Particulars Rs
Professional Receipts:
Sitting fee received 40,000
Less: Professional Expenses:
Depreciation on Books (800 - 200)(600 of 40%) 240 240

Repairs of Godown 1,200 × 1/3 400

Municipal tax on Godown 600 × 1/3 200
Car expenses 2,000 × 50/100 1,000
Telephone installation charges 4,000 4,000
Depreciation on plant 700 × 15/100 105
Depreciation on Car @ 15% 25,000 × 15 × 1,875
50/100
IT Assessment Expenses 200
Interest on housing loan (17,000-10,000 × 1/4) 1,750 1,750

Income from Profession 30,230 8

 Problem 3
The following is the Receipt and Payment Account of Mr. Ramki, a Chartered Accountant, for the P.Y. ended on 31-3-2023.
Debit Side ₹ Credit Side ₹
To Balance b/d 1,50,000 By Staff salary 3,00,000
To Audit fees 2,00,000 By Stipend to Audit Clerks 1,00,000
To Tax consultancy fees 2,50,000 By Office rent 90,000
To Project report fees 2,00,000 By Software development expenses 10,000
To Stipend to articled clerks 50,000 By Office expenses 1,25,000
To Accounting software charges 50,000 By Books: Annual 30,000
To Guest lectures in CA Institute 25,000 By Books: Non Annual 30,000
To Bank interest 20,000 By Car expenses 65,000
To Remuneration as member tax reforms
20,000 By CA institute membership fee 5,000
commission
To Bonus and Commission from firm 5,000 By Contribution to PPF 50,000
By Balance c/d 1,65,000
Total 9,70,000 Total 9,70,000
Other Information:
a) ¼ car usage is personal use,
b) Depreciation on car ₹ 10,000,
c) Depreciation on office furniture ₹ 7,000.
Compute income from profession taxable for the A.Y. 2023-24.
9
Solution 3: Computation of Taxable Income from Profession
Particulars ₹ ₹
Professional Receipts:
Audit fees 2,00,000
Tax consultancy fees 2,50,000
Project report fees 2,00,000
Accounting software charges 50,000
Guest lectures in CA Institute 25,000
Member tax reforms commission 20,000
Stipend to articled clerks 50,000
Total Professional Receipts 795000
Less: Professional Expenses
Staff salary 3,00,000
Stipend to Audit Clerks 1,00,000
Office rent 90,000
Software development expenses 10,000
Office expenses 1,25,000
Books:
- Annual (40%) 12,000
- Non-annual (40%) 12,000
Car expenses (65,000 × 3/4) 48,750
CA institute membership fee 5,000
Depreciation on car (75% of 10,000) 7,500
Depreciation on furniture 7,000
Total Professional Expenses 717250 10
Taxable Professional Income 77750
 Problem 4: Dr. Sharma is a renowned medical practitioner. He furnishes his
receipts and payments account for the financial year 2022-23. (Ignore
Alternative Tax Regime under Section 115BAC)

Receipts ₹ Payments ₹
To Balance b/d 35,000 By Rent of Clinic
To Consultation fee 2021-22 16,000
-2043 50,000 2022-23 14,800
-2045 70,000 2023-24 16,600
-2047 12,000 By Electricity & Water 12,000 Additional Information:
To Visiting fees 30,000 By Purchase of Professional Books 18,000 a) One-third of car expenses is for
To Loan from bank for professional purposes 1,75,000 By Household expenses 17,800
To Sale of medicines 70,000 By Municipal taxes paid on property 2,000 personal use.
To GST on medicine 3,000 By Sales tax on medicine 2,800 b) Depreciation on motor car is
To Gift from patient 50,000 By Purchase of motor car 1,45,000
To Remuneration from articles published in By Fire Insurance on property 2,000
15%, opening stock of medicines
16,000
professional magazine By Surgical equipment 37,000 is valued at ₹8,000.
To Rent from house property 11,000 By Advance Income tax 13,000
12,000
c) Remuneration from articles
To Interest on post office National Savings Certificate 7,000 By Salary to nurse
By Entertainment expenses 6,000 includes ₹3,000 received for
By Purchase X-ray machine 94,500 setting the QP.
By Expenses of income tax proceedings 15,000
By Life Insurance premium 15,000
By Gift to wife 5,000
By Interest on loan 2,000
By Loan a/c - instalment paid 15,000
By Donation to political party 500
By Car expenses 15,000
By Purchase of medicines 35,000
By Balance c/d 17,000
Total 529000 Total 529000 11
 Solution 4: Dr. Sharma keeps his books under the Cash system (i.e.,
receipt books).

Assessee: Dr. Sharma Less: Professional Expenses

Previous Year: 2022-23 1. Rent on Clinic -
Status: Resident - 2021-22 16,000
Assessment Year: 2023-24 - 2022-23 14,800
Particulars Amount (₹) Amount (₹) - 2023-24 16,600
Professional Receipts Total Rent on Clinic 47,400
1. Consultation fee: 2. Electricity and Water 12,000
3. Professional books (18,000 x 40%) 7,200
-2043 50,000
4. Sales tax on medicines 2,800
-2045 70,000 5. Depreciation on Motor car (1,45,000 x 15/100 x 2/3) 14,500
-2047 12,000 6. Depreciation on surgical equipment (37,000 x 15/100) 5,550
Total Consultation Fee 1,32,000 7. Salary to Nurse 12,000
2. Visiting fee 30,000 8. Entertainment expenses 6,000
9. Depreciation on X-ray machines (94,500 x 15/100) 14,175
3. Sale of medicines 70,000 10. Interest on loan 2,000
4. GST on medicine 3,000 11. Expenses of income tax proceeding 15,000
5. Gift from Patient 50,000 12. Car expenses (15,000 x 2/3) 10,000
13. Purchase of medicine 35,000
6. Remuneration from articles published in
13,000 Total Professional Expenses 1,83,625
professional magazines (16,000 - 3,000)
Professional Income 1,14,375
Total Professional Income 2,98,000
12
Problem 4: Mr Rama Rao is a Chartered Accountant in Bengaluru. He
has Submitted the following Receipts and payments account for the
year.Compute his income from Profession.

Particulars Rs Particulars Rs
To Balance b/d 56,000 By Salary 1,00,000
To Dividend 64,000 By Rent 60,000
To Professional Income 5,60,000 By telephone charges 24,000
To house rent 90,000 By professional 20,000
Additional Information: expenses
1.1/3rd of Car expenses relates to personal To Race Course income (net) 24,000 By Motor car expenses 48,000
Use.
To Lottery Prize (net) 1,20,000 By misc. expenses 30,000
2.Depreciation of motor car allowed is 15%
3.Rent includes Rs 30000 paid for residential By purchase of car 1,80,000
accommodation (31.09.2022)
By Advance income tax 1,00,000
4.Misc. expenses include donation paid to a By personal Expenses 1,80,000
notified temple Rs 20000 By Purchase of 8,000
Professional Books
By electricity 4,000
By LIC Premium 16,000
By Balance c/d 1,44,000
9,14,000 9,14,000

13
Solution 4:

Particulars Amount (₹)

Professional Receipts:
Professional Income 5,60,000
Less: Professional Expenses:
Salary 1,00,000
Rent (60,000 - 30,000) 30,000
Telephone charges 24,000
Professional expenses 20,000
Motor Car expenses (48,000 × 2/3) 32,000
Depreciation on Car (1,80,000 × 2/3 × 15%) 18,000
Misc. expenses (30,000 - 20,000) 10,000
Purchase of professional books (8,000 × 40%) 3,200
Electricity 4,000
Total Professional Expenses 2,41,200
Income from profession 3,18,800

14
 Course Code: BAC304A
Course Title: Business Taxation

Course Leader: Chandrakala D P

E-mail: [email protected]
6. Income from Business and Profession

At the end of this lecture, student will be able to

• Explain the concept of Inadmissible and admissible

expenses

2
Content

• Concept of Inadmissible expenses and admissible expenses

3
Scheme of business deduction

Business (Section 2(13))

According to 2(13) of the income tax act the term business means any
trade commerce or manufacturer or any adventure or concern in the
nature of trade commerce of manufacture
Profession (Section 2(36))
According to section 2(36) profession refers to an occupation where
intellectual skill and technical expertise in a specified field is acquired
for earning a livelihood lawyer doctor auditor are the some of the
examples of profession further profession includes vocation

4
Tax Treatment

• Inadmissible expenses
Inadmissible expenses are those expenses which are not allowed
under the act if such expenses are debited to profit & loss
account by the assesse they should be added back to the net
profit following are some of the examples of Inadmissible
expenses
• Any business expense pain in cash exceeding Rs 20000 100% of
such payment shall be disallowed (the monetary limit 20000
has been raised to Rs 35000 in the case of payment made for
plying, hiring, or leasing goods carriages) 5
Tax Treatment Cont.……

• Bad debts still recoverable

• Betterment charges paid to corporation under town
planning act
• Capital losses like loss on sale machinery, loss on sale of
car etc.
• Charities and donation
• Capital expenses like purchase of machinery extension of
building cost of permanent sign board fixed on office
premises
• Contribution to staff welfare fund
• Difference in trial balance

6
Tax Treatment Cont.……

• Contribution to unapproved or unrecognized fund or political party

• Expenses relating to the other heads of income like municipal taxes

of house property let out

• Expenses incurred to earn tax-free income like cultivation expenses

• Excess depreciation

• Excessive and unreasonable payment made to the relatives

• Fines and penalties

• Fringe benefit tax

7
Tax Treatment Cont.……

• Family planning expenses

• Gifts and presents (non publicity)

• Interest on capital

• Illegal expenses

• Loss from discontinued business

• Personal expenses or losses like life/medical insurance premium paid

on own life or any member of assesses family amount invested in NSS
NSC PPF Proprietors salary proprietor bonus drawings theft from
residence rent paid for self casual help house hold expenses etc
8
Tax Treatment Cont.……

• Preliminary expenses
• Patents/copy rights/ technical know-how purchased assesse
can claim depreciation u/s 32 @25% for patents/ copy right/
technical know – how purchased during the previous year
• Provisions and reserves like reserve for future losses provision
for bad and doubtful debts etc
• Provident fund payments without TDS
• Salary or interest on loan payable outside India without TSD
• Speculation losses
9
Business income

If business income are not credited to P/L account such incomes

should be added to net profit to get income taxable under the
head income from business following are some of the examples
of business income
• Amount of liability foregone by the creditor
• Bad debts recovered but allowed earlier
• Cash assistance received by the assesse against exports under
any scheme of Government of India or export incentives
• Interest from debtors for delayed payments
• Profit on sale of import license
10
Business income Conti…

• Sales/commission/sundry receipts/discount received

• Rent received from employees

• Speculation income

• Custom/excise duties recovered but earlier allowed as

deduction

11
Admissible expenses

Admissible expenses are those expenses which are allowed under the
act if such expenses are not debited to P/L account by the assesse they
should be deducted from the net profit
Following are the some examples of admissible expenses
• advertisement expenses (advertisement given in magazines or
souvenir of a political party is inadmissible
• Audit fees
• Bank commission
• Bad debts

• Bank transaction etc 12

Admissible expenses Cont…

• Commodity transaction tax

• Demurrage paid to railways
• Discount and allowance as per IT act
• Depreciation allowable
• Establishment expenses
• Expenditure on campaign against nationalization
• Expenditure on scientific research
i. Revenue expenditure on research carried on by the assesse
is fully deductible if such research results to the assessee’s
business
13
 Admissible expenses Cont….

• Contribution to national laboratory is deductible at the rate

200% of actual contribution
• Festival expenses
• General expenses
• Gifts and presents not made in personal capacity
• Income tax expenses( IT proceeding expenses, expenses on
filling IT returns)
• Loss of stock due to theft by an employee
• Legal expenses for filing income tax appeal
• Legal expenses to defend an existing title to capital asset
14
Admissible expenses Cont…..

• Postage and telegrams

• Printing and stationary
• Professional tax paid
• Railway freight and octroy expenses
• Service charges
• Staff welfare expenses
• Security transaction expenses
• Welfare expenses
• Travelling expenses relating to travel 15
Tax free incomes

If incomes, which are excepted from tax, are credited to P/L

account such incomes should be deducted from net profit to get
income taxable under the head income from business
Following are some of the examples of tax free incomes:
• Agriculture income
• Bad debts recovered but disallowed earlier
• Dividend from an Indian company / UTI
• Gift from father/ on occasion
• Interest from PO savings bank account
• Income tax refund
16
Tax free incomes Cont…

• Refund from LIC

• Withdrawal from PPF

17
Business Income not taxable under the
head profits and gains of business or
profession

• Rental income in the case of dealer in property

• Dividend on shares in the case of a dealer in shares

• Winnings from lotteries etc

• Interest received on compensation or enhanced

compensation

18
 Summary
• Business : defined under shorter oxford English dictionary as
“the practice of some occupation- business or profession
habitually carried on- especially when it is practiced as a means
of livelihood or gain”
• Profession : Section 2 (36) occupation requiring purely
intellectual skills or manual skills controlled by the intellectual
skill of the operator refers to activities where the livelihood is
earned by the person through their intellectual and manual
skills also includes vocation E-g- lawyer- accountant- engineer-
surgeon- author etc
• Vocation : Way of living for which one has special fitness- Does
not involve any organized or systematic activity like business E-g-
: Religion may also amount to vocation - Writing of articles in
the magazines also a vocation
19
 Course Code: BAC304A
Course Title: Business Taxation

Course Leader: Chandrakala D P

E-mail: [email protected]

1
5. Income from Business and Profession

At the end of this lecture, student will be able to

• Explain the concept of general deductions and provisions

2
Content

• Concept of general deduction

• Special provisions under section 44

3
 General Deductions

1. Such expenditure should not be specifically covered u/s 30 to 36

(i.e. Point no -1 to 14 of allowable expenses)
2. Should be incurred for the purpose of business or profession
3. Should be revenue exp. & not capital expenses
4. Should not be personal expenses
5. Should not be in the nature of interest or penalties for breaking
any laws
6. Such business or profession should be continues in current year
7. Expense incurred by the assesee in the previous year
8. Illegal expenditure

4
Faculty of Management Commerce
Expenses Not Deductible [section 37(1)]

1. Damages and penalty paid for disobeying the terms of

agreement with the State

2. Penalty and damages paid in connection with infringement

of law

3. Litigation expenditure incurred for curing any defect in the

title of assets or completing that title
4. Litigation expenses for registration of shares

5. Fees paid for increase of authorized capital

5
Expenses Not Deductible [section 37(1)]
Contd…

6. Expenditure on raising equity share capital and preference share capital

7. Amount paid for acquiring technical know-how which is to be utilized

for the purpose of manufacturing any new article and such know-how is
to become the property of the assessee at the end of the stipulated
period

8. Amount expended for acquiring a business or a right of permanent

character or an asset which generates income or for avoiding
compensation in business

6
Expenses Not Deductible [section 37(1)]
Contd…

9. Payments made for acquisition of good will

10. Expenditure incurred for acquiring right over or in land to

win minerals

11. Fees paid to obtain license to investigate and search minerals

12. Payment made in consideration of acquiring a monopoly

right to manufacturer a producer (royalty payable on the
basis of goods produced under the same arrangement is,
however, deductible)

7
 Expenses Not Deductible [section 37(1)]
Contd…

13. Tax paid by the assessee (who is defaulter by not deducting tax at source
under section 195) on behalf of non-resident

14. Compensation paid to contracting party with the object of avoiding an

unnecessary investment in capital assets

15. Expenditure on shifting of registered office

16. Insurance premia paid by a firm on life insurance policies of its partners

17. Amount paid by liquor contractor to police staff and other officer to
enable it to make unauthorized purchases and sales of liquor

8
Expenses Not Deductible [section 37(1)]
Contd…

6. Expenditure on raising equity share capital and preference share capital

7. Amount paid for acquiring technical know-how which is to be utilized

for the purpose of manufacturing any new article and such know-how is
to become the property of the assessee at the end of the stipulated
period

8. Amount expended for acquiring a business or a right of permanent

character or an asset which generates income or for avoiding
compensation in business

9
 Books of Accounts to be maintained [Section 44AA]
• The persons carrying on specified professions are required to maintain
specified books of account only if the gross receipts of their profession
have exceeded Rs. 1,50,000
• Every other person carrying on business or profession shall keep and
maintain such books of account and other documents as may enable the
Assessing Officer to compute his total income in accordance with the
provisions of this Act.
• If his income from business or profession exceeds Rs. 1,20,000;
• Total sales/turnover/gross receipts thereof exceeds Rs.10,00,000
• the assessee has claimed his income lower than deemed profits
10
Faculty of Management Commerce
 Tax Audit u/s 44AB
This section applies to following :-
Person carrying on - Accounts are to be audited for previous year in which
-
Business Total sales, turnover or gross receipts exceed Rs.
40,00,000
Profession Gross receipts exceed Rs. 10,00,000

Business covered u/s He has claimed his income to be lower than the
44AB, 44AE, 44AF, 4BB profits or gains so deemed under the respective
and 44BBB section.

The assessee is required to get his accounts of such previous year audited by a
Chartered Accountant before 30th September of the assessment year

11
Special Provisions for Computing Income
on Estimated Basis 44AD, 44AE & 44AF
Not withstanding anything contained in Sections 28 to 43C, the following
provisions will apply
Sec. 44 AD Sec. 44 AE Sec. 44AF
Business of Civil construction or Plying, hiring or leasing Retail trade in any
Assessee supply of labour for it goods carriages owned by goods or merchandise
him
This Section Gross receipts of such Goods carriages owned by Total business turnover
applies if business during the assessee at any time during in that previous year
previous year do not previous year doesn’t doesn’t exceed Rs. 40
exceed Rs. 40 lacs. exceed 10 lacs lacs.

Deemed 8% of Gross receipts (No. of heavy goods 5% of Gross receipts or

Profits vehicle x Rs. 3500 x NM) + such higher sum as
(No. of other vehicles x Rs. declared by him in his
3150 x NM) Return of Income
NM = No. of months

12
 Course Code: BAC304A
Course Title: Business Taxation

Course Leader: Chandrakala D P

E-mail: [email protected]
4. Income from Business and Profession

At the end of this lecture, student will be able to

• Explain the concept of business, profession and vocation

• Describe the basis charge for business and profession
• Explain the basic principles of business and profession

2
Content

• Concept of Profession Vocation

• Basis of Charge

• Basic Principles

3
 Income
from Business or Profession

4
 Business

• Section 23 (13)
• Includes any;
• Trade
• Commerce
• Manufacture
• Adventure or concern in the nature of trade or
commerce or manufacture
• Significance of profit motive

5
 Business includes Trade

• Defined under Shorter Oxford English Dictionary as “the

practice of some occupation, business or profession
habitually carried on, especially when it is practiced as a
means of livelihood or gain”

6
 Business includes Commerce

• Person purchases goods with a view to sell them at Profit –

Trade
• Such transaction repeated on a large scale – Commerce

Business includes Manufacture

• Making articles or materials by physical laborer or mechanical
power
• Process results in an alteration or change in goods]
• Should be in commercial sense i.e. different from raw material

7
 Business includes any Adventure

• Any adventure or concern in nature of trade or commerce or

manufacture

• Profit arising from an isolated transactions are taxable as business

profits

• Depends upon facts and circumstances of each case

• Supreme court has summed different principles to decide the cases

8
 Business includes any Adventure

• Any adventure or concern in nature of trade or commerce or

manufacture

• Profit arising from an isolated transactions are taxable as business

profits

• Depends upon facts and circumstances of each case

• Supreme court has summed different principles to decide the

cases

9
1
0
 Export Incentives
• Exporters are given export incentives by way of:

• Cash Compensatory Support (CCS)

• Drawback of Duty

• Import Entitlement Licenses

• These incentives are taxable as revenue receipts under the head

“ Profit and Gains from Business or Profession”

10
 Profession
• Section 2 (36)

• Occupation requiring purely intellectual skills or manual skills

• Controlled by the intellectual skill of the operator

• Refers to activities where the livelihood is earned by the person

through their intellectual and manual skills

• Also includes vocation

• Eg: Lawyer, accountant, engineer, surgeon, author etc

11
 Vocation
• Way of living for which one has special fitness

• Does not involve any organised or systematic activity

like business

• E.g.:

• Religion may also amount to vocation

• Writing of articles in the magazines also a

vocation

12
 Basis of Charge
Section 28
• Profit and gains of any business or profession
• Income derived by a trade, professional or similar association
from specific services
• Export incentives available to exporters
• Any interest, salary, bonus, commission or remuneration received
by a partner from firm
• Any sum received for not carrying out any activity in relation to
any business
• Income from speculative transaction
13
 Basic Principles
• Business or profession carried on by the Assessee
• Business or profession should be carried on during the previous
year
• Income of previous year is taxable during the following assessment
year
• Recovery of sum already allowed as deductions
• Illegal business

14
14
Video

https://www.youtube.com/watch?v=S6HEH23W_bM

15
 Summary
• Business : defined under shorter oxford English dictionary as
“the practice of some occupation, business or profession
habitually carried on, especially when it is practiced as a means
of livelihood or gain”
• Profession : Section 2 (36) occupation requiring purely
intellectual skills or manual skills controlled by the intellectual
skill of the operator refers to activities where the livelihood is
earned by the person through their intellectual and manual
skills also includes vocation E.g. lawyer, accountant, engineer,
surgeon, author etc
• Vocation : Way of living for which one has special fitness, Does
not involve any organized or systematic activity like business
E.g.: Religion may also amount to vocation , Writing of articles in
the magazines also a vocation

16