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INCOME FROM BUSINESS & PROFESSION

1STMethod :- Reverse method/ Indirect method (P&L A/C, Income & Expenditure A/C)

Net profit as per P&L A/C (Question) XX

Add : Dissallowable Expenses (P&L A/CDr.) XX

XX

Less : Allowable Expenses (Adjustment) (XX)

XX

Add : Income Chargable (Adjustment) XX

XXLess : Income not Chargable (P&L A/CCr.) (XX)

Income From Business XX

2ndMethod :- Pick-N-Choose method/ Direct method (Cash book, Bank book, Receipt &

Payment A/C, Pointwise, Paragraphwise )

Income Chargable XX

Less : Allowable Expenses (XX)

Income From Profession XX

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Allowable Expenses :

1. Rent, Rates, Repairs, Insurance &

Taxes of Building u/s 30

2. Repairs and Insurance of Plant,Machinery & Furniture u/s 31

3. Depreciation u/s 32

4. Insurance premium on stock in trade

u/s 36(1)(i)

5. Insurance premium paid by Fedral milk

co-op society u/s 36(1)(ia)

6. Premium paid by employer for medical

insurance on the health of his

employees u/s 36(1)(ib) { if paid by

cheque }

7. Bonus & commission to employees u/s

36(1)(ii) { on actual payment basis }

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10. Contribution to approved gratuity fund

u/s 36(1)(v) { on actual payment basis }

11.Employees contribution to providend

fund u/s 36(1)(va)

12.Write off allowance for animals u/s

36(1)(vi)

13.Baddebts u/s 36(1)(vii)

14.Family plannings expenditure u/s

36(1)(ix)

15.General Deduction u/s 37(1)

8. Interest on borrowed capital (i.e, loan)

u/s 36(1)(iii) { paid or payable }

9. Employers contribution to recognised

providend fund or approved

superannuation Fund u/s 36(1)(iv) { onactual payment basis }

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Dissallowable Expenses :

1. Advertisement expenses in relation to

a political party u/s 37(2B)

2. Building, plant & machinery or furniture

not used for business u/s 383. Taxes & TDS u/s 40(a)

4. Any remuneration, salary, bonus,

commission paid to partner by his

partnership firm u/s 40(b)

5. Excessive payment made to specified

person u/s 40A(2)

{Relative or Person having substantial

interest i.e, holding at least 20% voting

power}

5. Expenses paid is cash in excess of Rs.

20,000 u/s 40A(3) {100% Disallowed}

6. Provision for gratuity u/s 40A(7)

7. Contribution to URPF &

Superannuation fund u/s 40A(9,10,11)

8. Deduction on Actual payment basis u/s

43B

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A) Depreciation u/s 32 :-

under the income tax act, depreciation is calculated on the

concept of Block of

Assets. Block of Asset is defined as a group of assets

following within the

same class of asset in respect of which same rate ofdepreciation is charged.

This bocks can be for building, machinery, furniture &

fixture etc. Depreciation

has to be calculated on the following format :

Opening wdv as on 1stApril XX

Add : Asset purchased during the year XX

Combined wdv XX

Less: Asset sold during the year (XX)

Amount available for depreciation XX

Depreciation of the year (XX)

Closing wdv as on 31stMarch XX

f f

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4. Deduct the full sale value of the asset sold from the block of assets

5. Any profit (STCG) or (STCL) can arise in the following

2 cases :-

Case IAll assets in a block are soldSTCG = sale revenue > combined wdv

STCL = sale revenue < combined wdv

Case IIAll assets in a block are not sold

STCG = sale revenue of part of the block > combined

wdv of full blockSTCL = does not arise in this case

The following rules are to be applied in case of calculating

depreciation as per income tax act,

1. In the year of purchase, if the asset purchased is used for 180

days or more then the full rate of dep is charged. However if it is

used for less then 180 days then only half rate of depreciation is

allowed.

2. In the year of sale do not calculate depreciation on the asset sold.

3. Do not calculate individual profit or loss on sale of a particular

asset.

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B) General Deduction u/s 37(1) :-

1. Such expenditure should not be

specifically covered u/s 30 to 36 (ie. Point

no -1 to 14 of allowable expenses)

2. It should be incurred for the purpose of

business or profession

3. It should be revenue exp. & not capital

exp.

4. It should not be personal exp.

5. It should not be in the nature of penalties

for breaking any laws.

6. Such business or profession should becontinues in current year.

7. Expense incurred by the assesee in the

previous year.

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C) Taxes & TDS u/s 40(a) :-

Any income tax, wealth tax, advance tax, surcharge tax and any salary, commi-

-ssion, royalty, interest if paid outside india without deduciton of TDS then such

amount is not allowed as deduction.

D) Any remuneration, salary, bonus, commision paid to partner by his partnership firmu/s 40(b)

Partner

Working partner Sleeping partner Interest rate

Allowable expense

Book Profit/Loss % of amount of deduct ion

loss or profit upto Rs. 3,00,000 Rs. 1,50,000/- or 90% of Book Profit

whichever is more

on the balance 60% of book profit

No Remuneration Exceeding 12%

Disallowed