Profit and Gain From Business

Computation of Income
Income & Gains from Business

Sec. 2(13) defines Business as purchase and sale or manufacture of a
commodity with a view to make profit. It includes any trade, commerce or
manufacture or any adventure (Doing activity for the first time without knowing
the outcome) or concern in the nature of trade, commerce and manufacture.
To judge a transaction as business transaction, following points should be
considered -
1. Nature of commodity
2. Nature of transaction (Whether incidental to a business or not)
3. Intention of the related party
4. Duration of transaction
5. Effort applied in transaction
Income & Gains from Business
Sec. 2(36) defines Profession as the activities for earning livelihood which require
intellectual skill or manual skill, e.g. the work of a lawyer, doctor, auditor, engineer and
so on are in the nature of profession. Profession includes vocation.
Vocation : Vocation implies natural ability of a person to do some particular work e.g.
singing, dancing, etc. Here, no training or no qualification is required but having
natural ability.
Profits : Excess income over expenditure.
Gains : Any incidental revenue from business.
As the rules for the assessment of business, profession or vocation are the same, there
is no importance of making any distinction between them for income tax purposes
Incomes Chargeable under PGBP
• Revenue Profits from Business or Profession
• Any Compensation due to or received by an agent
• Income of trade association, etc.
• Receipts in connection with foreign trade
• Amount received or receivable for certain agreement
• Interest on securities
• Recovery against certain capital assets covered u/s 35AD
• Income from speculative transaction (a transaction in which a contract for the purchase
or sale of any commodity, including stocks and shares, is periodically or ultimately
settled otherwise than by the actual delivery or transfer of the commodity
Computation of Incomes Chargeable under PGBP
• Section 29 clarifies the methods contained in sec. 30 to 48 for computation of income
chargeable under the head of profit and gain from business and profession.
• Admissible Deductions (Sec. 30 to 37)
• Inadmissible Deduction (Sec. 40)
• Expenses or payments not deductible in certain circumstances (Sec. 40A)
• Profit Chargeable to Tax (Sec. 41)
• Other Provisions
Adjustment in P&L Account
• The P&L account prepared by assessee might not be correct for the computation of income
for tax purpose and thus, adjustment is required.
a) Several expenses are charged to it which are wholly or partly inadmissible.
b) Some admissible expenses are omitted.
c) Some taxable income are not credit
d) Some such incomes are credited which are either not taxable under the head PGBP or are not taxable at
all Particulars ₹ ₹
Profit as per P & L A/c XXX
Add Expenses or losses disallowed but charged in P & L A/c XXX
Incomes taxable as business income but not credited to the P & L A/c XXX
Expenses in excess of the allowed amount charged to P & L A/c XXX
Under valuation of closing stock or over valuation of opening stock XXX XXX
Less Expenses or losses allowed but not debited to P & L A/c XXX
Incomes not taxable as business income but credited to the P & L A/c XXX
Income exempt from tax but credited in P & L A/c XXX
Over valuation of closing stock and under valuation of opening stock XXX
Taxable income from Business XXX

Deductions Allowed
• Section 30 to 37 permits deductions for computation of income under PGBP.
• Business Premises (Section 30):
• If occupied as tenant: Rent, repair, insurance and Tax
• If occupied as owner: Repair, insurance, and Tax
• If assessee is a partnership firm, rent paid to a partner is deductible
• Plant and Machinery / Furniture and Fixture (Section 31):
• Revenue expenditure on plant and Machinery/ Furniture & Fixtures
• Repair (Current)
• Insurance Premiums
• Rent and taxes are allowed u/s 37
• Capital Expenditures not deductible under repair
Deductions Allowed
• Depreciation (Section 32): Differences exist between accounting practices for depreciation and tax rules
Accounting Rule Taxation Rule
Charges against profit Allowances in nature
WDV / SLM method is allowed Only WDV method is allowed.
Depreciation is charged on Individual Asset Depreciation is charged on Block of Asset
On the basis of number of days asset used 50% of normal Depreciation (If asset is used below 180 days) or Normal Depreciation
Only on Tangible Asset Tangible and Intangible asset
Life of the asset Prescribed rate
Five categories of asset (Building, Furniture and Fittings, Machinery and Plant, Ships, Intangible Asset [Know-how,
Patents, Copyrights, Trademarks, Licenses, Franchises or Commercial rights]).
Block of Assets Falls under the same category on which same rate of depreciation is applied.
Conditions of Allowance of depreciation: 1. Asset should be owned, wholly or partly by the assessee and 2. It should be
used for the purpose of assessee’s business or profession.
50% of normal Depreciation : If any asset is acquired and put to use not to excess of 180 days during same previous year
then assessee can get the benefit of depreciation only 50% of normal depreciation.
Deductions Allowed
Format for computing Depreciation
Opening WDV XXX
Add Actual Cost of asset acquired during P.Y. XXX
Less Money payable in respect of asset sold / discarded / damaged, etc. XXX
WDV for Depreciation XXX
Less Depreciation at prescribed rate XXX
Closing WDV XXX
Deductions Allowed
Rates of Depreciation
Residential Purpose 5%
Building
Personal Purpose 10%
Installing Plant and Machinery /Temporary Building. 40%
Furniture and Fittings 10%

General 15%
Plant and
Motor Car used on Hire 15%
Machinery
Motor Car used for own business 30%
Remaining Assets [Computers etc.] 40%
Ships 20%
Intangible Assets 25%
Deductions Allowed
• Section 33: Tea, coffee, Rubber Development A/C, Site Restoration
• Section 34: Abolished
• Section 35: Scientific Research, 35D: Amortization (preliminary expenses)
• Section 36:Other deduction:
1. Insurance premium paid for stock which is used for purpose of business / profession.
2. Insurance premium for cattle, Paid by federal milk co-operative society.
3. Insurance premium paid (any mode other than cash) for the health of employees.
4. Bonus or commission to employee. (On actual payment basis)
5. Interest paid on borrowed capital for purpose of business / profession (On actual payment basis). No
deduction of ‘interest paid’ for acquisition of asset from the date of borrowing till the date of ‘put to use’.
(It would be added to cost of asset).
6. Discount on Zero Coupon Bond allowed as deduction on pro-rata basis.
7. Bad debts – The debt should be incidental to the business.
8. Loss regarding animals (Not for stock in trade) – allowed as deduction. [Cost of animal – carcasses of
animals]
9. Employers contribution to provident Fund – only Recognized provident fund or approved
superannuation fund.
10. Employees contribution to provident fund or superannuation fund etc.
Deductions Allowed
• Sec. 37 : General Deduction (Residuary section) :
Conditions should be fulfilled –
• Expenses not covered under section 30 to 36.
• Revenue nature expenditure.
• Not of capital nature or personal nature
• Expenses incurred for running of business / profession.
• Expenditure shall be made during the previous year

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Profit and Gain From Business

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Computation of Income

Income & Gains from Business

Profit as per P & L A/c XXX

Add Expenses or losses disallowed but charged in P & L A/c XXX

Expenses in excess of the allowed amount charged to P & L A/c XXX

Income exempt from tax but credited in P & L A/c XXX

Taxable income from Business XXX

Furniture and Fittings 10%

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