Profits & gains of Business or profession (u/s 28-44D)

Charging Section S. 28 under section 28 the following income is chargeable to tax under the head business or profession:Profits and gains of any business or

profession;Any compensation or other payment

due to or received by any person specified in section 28(ii)

Income derived by trade, profession or similar association from specific services performed for its members;

The value of any benefit or perquisite whether convertible into money or not arising from the business or the exercise of a profession

Any profit on transfer of duty Entitlement Pass Book Scheme;

Any profit on the transfer of any duty free replenishment certificate

Export incentives available to exporters

Any interest, salary ,bnus, commission or remuneration received by a partner from firm

Any sum received for not carrying out any activity in relation to business or not to share any know how, patent, copy right, trade mark, etc.,

Any sum received under a Keyman insurance policy including bonus;

Any sum received in cash or in kind or on account of any capital asset(other than the land or Goodwill or financial instrument ) being demolished, destroyed or discarded or transferred if the whole of the expenditure on such capital asset has been allowed as deduction under section 35D

Profits and gains of managing agency; and

Income from speculative transaction

Business Sec. 2(13) Business includes any trade , commerce, manufacture, or any adventure or concern in the nature of trade , commerce or manufacture.

This definition covers every facet of an occupation carried on by a person with a view to earning profit. Production of goods from raw-material , buying and selling of business and selling of goods to make profits and providing services to others are different forms of business.

Activity for making profit Activities of rendering services to others

falls under business

Business income not taxable under this head

Rental income in the case of a dealer of a property even if property constitutes stock-

in-trade of recipient of rent the recipient of rent engaged in business of letting properties on rent

Dividend on shares are taxable under the head income from other source even if they are derived from shares held as stock-in-trade or recipient of dividend is dealer in shares

Winning from lotteries, races etc., are taxable under “income from other source” even if it is received from regular business activities

Basic principles for arriving at Business income

Business or profession carried on by the assesseeIt is not the ownership of the business

but the business must be carried on by the assessee . If he has the right to carry on the business , even though he is not physically carry on a business

Business or profession must be carried on during the previous yearIt is not essential that the business to be conducted throughout the previous year or up to the end of the previous year

Tax is chargeable to all business

or professionTax incidence is on the aggregate of all business income and not separately chargeable to tax. If an assessee earns income from one business and loss from other business, income chargeable to tax is the net income that is after setting off loss against income

Profits and losses from speculative business is treated separately

Legal ownership and beneficial ownership.Legal ownership and beneficial ownership is to be considered for taxation. Whoever really receive the income will be held liable for the tax

Real Profit & Anticipated profitTaxable profit is the profit accrued or arising in the accounting year. Anticipated profit or potential profit or losses which may arise in future is not considered for arriving at the taxable income of a previous year

Recovery of sum already allowed as deductionAny sum recovered from a deduction

already allowed as deduction is taxable as business income

Mode of book entries not relevant The mode of transaction is irrelevant for

taxation. For example a trading receipt even though it was not recorded in the accounts does not prevent the assessing officer to treat it as a trading receipt

Illegal business Income tax is not considered whether

the income is from a legal or illegal business . Income is taxable

Commercial principles for computing business incomeProfit arising from trading receipts only

is taxable not the capital receipt

Trading losses of revenue nature are allowed to be deductible if they are incidental to the operation . The business losses can be allowed as deduction if only the following conditions are satisfied : Losses should be of revenue nature

Losses shoul d be incurred during the previous year

Losses should be incidental to the business or profession carried on by the assessee

Trading losses

It should not be notional or fictitious

it should have been actually incured and not merely anticipated to incur in future

it should not be an item restricted under the act

Loss which is not incidental to trade or profession , carried on by the assessee is not allowed as deduction

Losses of advances made for setting up of new business which ultimately couldnot be started

Rent, rates, taxes repairs and insurance for building used for business purpose(sec 30)Not being capital expenditure

repairs only if there is an agreement to bear the repair expenses, if the assessee is a tenant

any sum on account of rent, land revenue , municipal taxes

if the assessee pays rent of the previous tenant cannot e deductible

Specific deductions

Repairs and insurance of machinery plant and

furniture Sec 31Expenditure incurred on current repairs other than the capital expenditure and insurance premium in respect of plant, machinery and furniture used for business purpose is allowed as deduction under section 31

Depreciation Sec. 32 Conditions for claiming

depreciation deductions Assets must be owned by the assessee it must be used for the purpose of

business or profession It must be used during the previous year Deprecation is available on Specified

tangible as well as intangible assets Tangible assets

Buildings – includes roads, bridges, wells and tubewells etc

Machinery – includes any mechanical appliances

Plant –includes ships, vehicles, books, scientific apparatus etc.,

furniture –includes articles of convenience or decorations used to furnish a place of business

Intangible assets:Know-how –means industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well etc.,

Patents – means exclusive right granted by the government to the first inventor of a new product for making and selling such product

copyright – is the exclusive right given under law for a certain number of years to an author, composer, etc, to print, publish and sell copies of his original work

Intangible assets:Trademark – is a mark, secured by legal registration, used by a businessman to distinguish his goods from the goods of other business concerns

License – a legal permission for any business operation eg., license for digging n oil well

Franchise – is a license from the owner of trade –mark permitting another to use that trade –mark for business

Block of AssetsMeans a group of assets in respect of which the same percentage of depreciation has been prescribedDifferent rates of depreciation are prescribed for different items even falling within the same class. For eg., Building having 5% depreciation is one block and depreciation having 10% is another block , furniture having 10% depreciation is one block and furniture having 20 % depreciation is another group

Computation of Depreciation

Computation of written down valueOpening WDV

xxxAdd cost of Assets purchased form

the same block during the previous year xxx

Less sale proceeds of assets sold from

the Blockxxx

Closing Written Down Valuexxx

Cost of Asset includes expenses to acquire the asset(purchase price; interest on loan taken for purchase of assets)

Expenses to bring the asset to the site

Expenses to bring the asset to working condition

depreciation is charged at the prescribed rates on the written down value but if an asset is used for less than 180 days in the year of acquisition, the depreciation rate will be only 50% of the normal rate

this is applicable only for the year of acquisition

Question Find out the depreciation for the following information for the

assessment year 2014-15

After April 1,2013, the company purchases the following assets

Block of Assets Rate of depreciation

WDV on 1/4/2013

Plant A,B & C 15 10,40,000

Plant D and E 40 2,60,000

Plant F 50 70,000

Building A, B, C, and D 10 10,90,000

Building E, F, and G 5 7,10,200

Building H,I,J and K 100 16,90,000

Assets Date of purchase Rate of depreciation

Cost of Purchase

Plant G April, 6, 2013 50 6000

Plant H May 11, 2013 15 18000

Furniture June 6,2013 10 56000

Car July 7,2013 15 2,56,000

Building L Sept 26,2013 5 7,28,700

Computer Sep 27,2013 60 90,000

Copyright Sep 30,2013 25 17,50,000

The following assets are transferred

Asset Date of Sale Sale Consideration

Plant B Dec 20, 2013 25,10,900

Plant D January 31,2014 12,000

Building L March 6, 2014 6,00,000

Answer

Block -1 plant & Machinery (dep 15%)

Opening wdv10,40,000

Add purchases(car + plant H) 2,74,000

13,14,000 Less Sale proceeds (plant B) 13,14,000

NilSale proceed of plant B is Rs. 25,10,900 that is more than Rs. 13,14000 therefore wdV is taken as Zero

Answer

Block -2 plant & Machinery (dep 40%)

Opening wdv2,60,000

Add purchases Nil 2,60,000

Less Sale proceeds 12,000

2,48000

Answer

Block -3 plant & Machinery (dep 50%)

Opening wdv70,000

Add purchases Plant G) 6,000 76,000

Less Sale proceeds NIL

76,000

Answer

Block -4 Building A,B,C (dep. 10%)

Opening wdv10,90,000

Add purchases NIL 10,90,000

Less Sale proceeds NIL

10,90,000

Answer

Block -5 Building E,F,G(dep. 5%)

Opening wdv7,10,200

Add purchases Buil L7,28,700

14,38,900 Less Sale proceeds Buil F 6,00,000

Closing WDV8,38,900

Answer

Block -6 Building H,I,J,K(dep. 100%)

Opening wdv16,90,000

Add purchases Nil 16,90,000

Less Sale proceeds Nil

Closing WDV16,90,000

Answer

Block -7 Furniture (dep. 10%) Opening wdvNil

Add purchases 56,000 56,000

Less Sale proceeds Nil

Closing WDV 56,000

Answer

Block -8 Computer (dep. 60%) Opening wdvNil

Add purchases 90,000 90,000

Less Sale proceeds Nil

Closing WDV 90,000

Answer

Block -9 Pcopyright (dep. 25%)

Opening wdvNil

Add purchases 17,50,000

17,50,000 Less Sale proceeds Nil

Closing WDV17,50,000

Deductions allowable under section 35:

Expenditure on Scientific researchAny activity for the extension of knowledge in the

fields of natural or applied science including agriculture, animal husbandry or fisheries.

DeductionAny expenditure incurred on scientific research related to

the assessee’s business-any salary, purchase on materials such scientific research during the period of three years immediately preceding the commencement of the business will be deemed to have pent in the year of commencement of the business

Any expenditure of capital nature except the purchase of Land

Weighted DeductionAny sum paid to an approved research association which

undertake research for a university, college or other institution deductible amount is one and three-fourth of the amount paid

Sum paid to a company registered in India, or has the main object of the development of scientific research , or approved by the prescribed authority , or which fulfills such conditions prescribed

– one and one-fourth of the amount paidSum paid to a research association for social science or

statistical research - one and one-fourth of the amount paid

National Laboratory or a university or IIT or specific person

- 200 % of the amount so donatedIn-house research and development (other than land &

Building

Deductions allowable under section 35D:

Amortisation of preliminary expensesAn Indian co or a resdent non-corporate

assessee can claim deduction u/s 35 D in respect of preliminary exp such exp may be incurred before the commencement of the business or in connection with extension of an undertaking or connection with setting up of a new unit.

The aggregate expenditure cannot exceed the following

5% of the cost of project or

U/s 35D………. In case of an Indian co or at the option of the co, 5% of the cost

of capital employed in the business of the co, which ever is higher.

Deduction: Preliminary expenses incurred shall be amortised over a period

of 5 years Eligible expenses:

Expenses relating to:Preparation of feasibility reportPreparation of project report conducting market surveyEngineering services Legal charges for drafting any agreement

Deductions allowable under section 35D:

Deductions allowable under section 36:

Insurance expenses [section 36(1)(i) Insurance premium on health of

employees [section 36(1)(ib) Bonus or commission to employees

[section 36(1)(ii) Interest on borrowed capital [section

36(1)(iii)

Deductions allowable under section 36:

Contributions towards approved provident fund, superannuation fund and gratuity fund [section 36(1)(iv) and 36(1)(v)

Bad debts in respect of income considered in previous years can be written off and allowable as deduction [section 36(1)(viii)

Banking cash transaction tax [section 36(1)(xiii)

Deductions allowable under section 36:

Advertisement expenditure is fully allowed as deduction. However, expenditure incurred on advertisement in any souvenir, brochure, pamphlet etc. of a political party is not allowed as a deduction [section 37(2B)

Expenditure in maintenance of guest house is permissible as deduction [section 36(1)(i)

Deduction allowable under section 37:

Any other expenditure which is not of capital nature or personal expenses of the assessee is allowed if it is expended wholly and exclusively for the purposes of business or profession. However, it should not have been for purpose which is an offence or is prohibited by any law

Deduction allowable under section 37:

Conditions to be satisfied: It should not be in the nature of capital

expenditure It should not be personal expenditure of the

assessee It should be expanded wholly and exclusively

for the purposes of business or profession It should not have been incurred for any

purpose, which is an offence or is prohibited by any law

Totally disallow Expenditure (s 40(a) Interest, royalty, fees for technical services payable to

non-resident if TDS is deductible but has not been deducted or deducted but not properly deposited with the Government (S 40(b)

In case of residents, any expenditure where:Tax is deductible but has not been deductedTax has been deducted but after deduction it has

not been paid to the Government

totally disallow ExpenditureSecurities Transaction Tax paid by the assesseeFringe Benefit Tax paid by the assesseeAny Income Tax paid by the assesseeWealth Tax paid by the assesseeSalary payable outside India without deduction of

TDSProvident Fund payment without tax deduction at

sourceTax on perquisites paid by the employer

totally disallow ExpenditureAny amount paid to the relatives of the

assessee to the extent such expenditure is considered to be excessive or unreasonable (S40A(3)

Employer’s contribution to non-statutory fund (unrecognized provident fund etc.) (S 40A(9)

Provision for Gratuity on retirement (S 40A(7)

totally disallow Expenditure100% of the amount of expenses exceeding

Rs.20000.00(S 40A(3)) if the following conditions are satisfied:The amount of expenditure exceeds Rs.20000.00A payment in respect of the above expenditure (or

part thereof) exceeds Rs.20000.00The payment mentioned above has been made

otherwise than by a crossed bank cheque or bank draft.

totally disallow ExpenditurePayment over Rs 20,000 should be made by

cheque or demand draft. This restriction is not applicable in case of payments to RBI, other banks and financial institutions, LIC Government payments, payment by book adjustment, railway freight, Payment for agricultural produce, poultry, fish etc. to the cultivator, grower or producer (i.e. Payments to middlemen are not excluded from this provision) [rule 6DD

Computation of Profit/gain or LossNet Profit

xxxAdd Disallowed expenses

xxxAdd incomes taxable but not

credited xxx xxxLess expenses not debited in profit

& loss a/c but are allowedxxx

Incomes credited in Profit & LossAccount but not taxble

xxx xxx Taxable Profit & gain

XXX

Ded. Only on payment(s43B) The following expenses are allowed only if it is

paid within the prescribed period, i.e., during the relevant previous year or on or before the due date for filing return of income under se 139(1)

Tax, duty, cess or fee under any law bonus or commission paid to employeesInterest on loan to any public financial

institution or a state financial corporation Interest on any loan or advance from a

schedule bank sum due to employee in lieu of leave balance contribution payable by an employer to a

provident/superanuation