Contents

1. INTRODUCTION............................................................................................................................2

2. PROFITS & GAINS from BUSINESS or PROFESSION...........................................................3

2.1. BUSINESS [Section 2(13)]..............................................................................................................3

2.2. PROFESSION [Section 2(36)]........................................................................................................4

3. UNDER THE INCOME TAX ACT, 1961.....................................................................................5

3.1. Explanation of Profit.......................................................................................................................5

3.2. Profits and gains of Business or Profession- Income Tax Act, 1961...........................................6

3.3. Income Chargeable under the Head – Section 28........................................................................9

3.4. Business Income NOT Taxable under the Head.........................................................................11

3.5. Computation of “Profits and gains of Business or Profession” – Section 29............................12

3.6. EXPENSES ALLOWED AS A DEDUCTION- SECTION 30 – 38..........................................13

3.6.1. Rent, Rates, Taxes, Repairs and Insurance For Buildings- Section 30.....................................13

3.6.2. Repairs And Insurance Of Machinery, Plant And Furniture- Section 31...............................13

3.6.3. Depreciation – Section 32..............................................................................................................13

3.6.4. Deductions Allowed Under Section 36.........................................................................................25

3.6.5. General Expenditure Section 37(1)..............................................................................................29

3.6.6. Assets In Mix Use Section 38........................................................................................................29

3.7. EXPENSES NOT DEDUCTABLE UNDER SECTION 40.......................................................30

3.8. EXPENDITURE ALLOWED ONLY ON ACTUAL PAYMENT BASIS -SECTION 43B. . .33

4. ILLUSTRATIONS.........................................................................................................................36

5. BIBLIOGRAPHY..........................................................................................................................45

1

1. INTRODUCTION

The Central Government has been empowered by Entry 82 of the Union List of Schedule VII of

the Constitution of India to levy tax on all income other than agricultural income (subject to

Section 10(1)). The Income Tax Law comprises The Income Tax Act 1961, Income Tax Rules

1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual

Finance Acts and Judicial pronouncements by Supreme Court and High Courts.

The government of India imposes an income tax on taxable income of all persons including

individuals, Hindu Undivided Families (HUFs), companies, firms, association of persons, body

of individuals, local authority and any other artificial judicial person. Levy of tax is separate on

each of the persons. The levy is governed by the Indian Income Tax Act, 1961. The Indian

Income Tax Department is governed by CBDT and is part of the Department of Revenue under

the Ministry of Finance, Govt. of India. Income tax is a key source of funds that the government

uses to fund its activities and serve the public.

Every person or entity liable to pay tax has a different source of income. The tax rate applicable

for certain sources of income are different from the rest. The calculation for the income taxable

depends on the source of income.

For the purpose of Taxation, the total income of a person is segregated into five heads:-

Income from salaries

Income from house property

Profits and gains of business or profession

Capital gains and

Income from other sources

Based on the heads as mention above, the method of calculation of the source of income is

decided

This Project deals with Profits and gains of business or profession.

2

2. PROFITS & GAINS from BUSINESS or PROFESSION

2.1. BUSINESS [Section 2(13)]

The term business has been defined in section 2(13) to “include any trade, commerce or

manufacture or any adventure or concern in the nature of trade, commerce or manufacture”.

Definition of “Business” includes any trade, commerce or manufacture or any adventure or

concern in the nature of trade, commerce or manufacture.

Certain terms used in the definition can be understood as follows:

“Trade” is the activity of purchase and sale of goods with an object of making profit.

“Commerce” means trade repeated on a large scale.

“Manufacture” is said to have taken place when as a result of certain process(es) applied on a

product, a new and commercially different product comes into existence which is known to the

market as different from the raw material.

“Adventure or concern in the nature of trade, commerce or manufacture” has to be decided on

the basis of cumulative effect of the facts and circumstances of each case i.e. scale of activity,

time period covered by it, nature of the commodity etc. in order to decide whether the act is an

adventure or concern.

Business necessarily means a continuous activity with a profit motive by the application of

labour and skill. Under certain circumstances a single and isolated transaction may also

constitute business provided it bears clear indications of trade or is an adventure in the nature of

trade.

3

2.2. PROFESSION [Section 2(36)]

The term profession has not been defined in the act. It means an occupation requiring some

degree of learning. Thus a painter, sculptor, author, auditor, lawyer, doctor architect and even an

astrologer are persons who can be said to be carrying on a profession. The term profession

includes vocation as well.

Profession involves an exercise of intellect and skill based on learning and experience. It

includes “vocation”. Vocation refers to any work performed on the strength of one’s natural

ability for that work. Regularity and profit-motive are not necessary for an activity to be called a

vocation.

“Profession” may be defined as a vocation, or a job requiring some thought, skill and special

knowledge like that of C.A., Lawyer, Doctor, Engineer, Architect etc. So profession refers to

those activities where the livelihood is earned by the persons through their intellectual or manual

skill.

It is not material, whether a person is carrying on a “business”, “profession” or “vocation”

since for the purpose of assessment, profits from all these sources are treated and taxed

alike.

4

3. UNDER THE INCOME TAX ACT, 1961

The tax payable by an assessee on his income under this head is in respect of the profits and

gains of any business or profession carried on by him or on his behalf during the previous year.

3.1. Explanation of Profit

Profits may be realised in money or money’s worth i.e. in cash or kind. Where profit is realised

in any form other than cash, the cash equivalent receipt on the date of receipt must be taken as

the value of income received in kind. Capital receipts are not generally taken into account while

computing profits under this head. Payment made by persons who were under no obligation to

pay anything at all would be income in the hands of the recipient, if they were received in the

course of the business or by exercise of profession or vocation. For Eg. An amount paid to a

lawyer by a person who was not a client but who has been benefitted by the lawyer’s

professional service to another would be assessable as a lawyer’s income.

Applications of the gains of trade are immaterial. Gains made even for the benefit of the

community by a public body would be liable to tax.

The charge is not on the gross receipts but on the profits and gains in their natural and

proper sense. Profits are ascertained on ordinary principles of commercial trading and

commercial accounting. According to section 145 income has to be computed in

accordance with the method of accounting regularly and consistently employed by the

assesse. The receipts may be accounted for on cash or mercantile basis

This act contains certain provisions for determining how the income is to be assessed.

There must be followed in every case of business or profession. The illegality of the

business or profession or vocation does not exempt its profits from tax. The liability of

tax arises when income is received.

5

3.2. Profits and gains of Business or Profession- Income Tax Act, 1961

The income from business and profession is known as profit and gains. While calculating the

profit and gains, we deduct various expenses from it. The expenses to be deducted for calculating

the gain are defined in the Income Tax Act, 1961. Section 28 lays down the gross income that is

to be considered for the purpose of taxation. Sections 30 to 37 cover expenses, which are

expressly allowed as deduction while computing business income, sections 40, 40A and 43B

cover expenses which are not deductible. Expenses deductions under section 30 to 37 are of two

types. The first is specific deductions which are covered under section 30 to 35 and second is

general deductions which are covered under section 36 and 37. Specific deductions are allowed

only to some of the businesses while general deductions are allowed to all the businesses.

There are certain provisions which allow an assessee to calculate the profit on the presumptive

basis, i.e., the profit is presumed on certain basis. These provisions are contained under section

44.

Following table gives a summary of all the sections that govern the calculation of income taxable

by means of profits and gains of business or profession:

Particulars Section No.

Profits and gains of business or profession chargeability/ scope of income

under this head

28

Income from profits and gains of business or profession, how computed? 29

Rent, rates, taxes, repairs and insurance for buildings 30

Repairs and insurance of machinery, plant and furniture 31

Depreciation 32

Treatment of unabsorbed depreciation 32(2)

Tea development account/Coffee development account and Rubber

development account

33AB

Site restoration fund 33ABA

6

Expenditure on scientific research 35

Expenditure for obtaining licence to operate telecommunication services 35ABB

Expenditure on eligible projects or schemes 35AC

Deduction in respect of expenditure on specified business 35AD

Expenditure by way of payment to association and institutions for rural

development programmes

35CCA

Expenditure on agricultural extension project 35CCC

Expenditure on skill development project 35CCD

Amortisation of certain preliminary expenses 35D/Rule 6AB

Amortisation in case of amalgamation or demerger 35DD

Amortisation of expenditure incurred under voluntary retirement scheme 35DDA

Other deductions 36

Bonus or commission to employees 36(1)(ii)

Interest on borrowed capital 36(1)(iii)

Discount on zero coupon bonds 36(1)(iiia)

Employer’s contribution to a recognised provident fund or approved

superannuation fund

36(1)(iv)

Employer’s contribution to an approved gratuity fund 36(1)(v)

Sums received from employees towards certain welfare schemes if

credited to their accounts before the due date

36(1)(va)

Bad debts 36(1)(vii)

Expenditure on promoting family planning amongst the employees 36(1)(ix)

General deductions 37(1)

Advertisement to political parties 37(2B)

Building, etc., partly used for business and partly for personal purpose. 38

7

Amounts not deductible 40

Expenses or payments not deductible in certain circumstances 40A

Payments to relatives/related persons 40A(2)

Disallowance out of cash expenditure exceeding Rs.20,000 40A(3)/ Rule

6DD

Disallowance in respect of provision for gratuity 40A(7)

Disallowance in respect of contribution to non-statutory funds 40A(9)

Deemed profits chargeable to tax 41

Actual cost 43(1)

Written down value 43(6)

Certain deductions to be only on actual payment 43B

Maintenance of accounts by certain persons carrying on business or

profession

44AA/Rule 6F

Compulsory audit of accounts 44AB/Rule 6G

Special provisions for computing profits and gains of business of civil

construction

44AD

Special provisions for computing profits and gains of business of plying,

hiring or leasing goods carriage

44AE

Special provisions for computing profits and gains of shipping business in

the case of non-residents

44B

Special provisions for computing profits and gains of business of

operation of aircraft in the case of non-residents

44BBA

8

3.3. Income Chargeable under the Head – Section 28

Profits and gains of any business or profession carried on by assessee at any time during

previous year.

Compensation or other payment due to or received by any person –

o Managing whole or substantially whole of affairs of an Indian company or any

other company in India at or in connection with the termination of his

management or modification of the terms and conditions relating thereto;

o On termination or modification of contract of his agency in India;

o For vesting the management of any property or business in Government or any

corporation owned or controlled by the Government.

Income derived by trade, professional or other similar association from specific services

rendered to its members. This clause is an exception to general rule that income from

mutual activity is not chargeable to tax.

Profits on sale of import licence; or Profits on transfer of Duty Entitlement Pass Book

(DEPB) or Duty Free Replenishment Certificate (DFRC) under EXIM Policy;

Cash assistance against exports from Government of India and Duty Drawback;

Value of any benefit or perquisite, whether convertible into money or not arising from

exercise of business or profession;

Interest, salary, bonus, commission or remuneration due to or received by partner from

the firm. Such income is taxable in hands of partners to the extent it is allowed as

deduction in hands of firm. Any amount not allowed as deduction to firm under Section

40(b), is not taxable in the hands of partner.

Any sum received or receivable, in cash or in kind, under an agreement for

o Non-competition i.e. not carrying out any activity in relation to any business;

o Exclusivity i.e. not sharing any know-how, patent, copyright, trademark, licence,

franchise or any other business or commercial right of similar nature or

information or technique likely to assist in the manufacture or processing of goods

or provision of services.

9

o Exceptions : However, sum received for transfer of business, or transfer of right

to manufacture, produce or process any article/thing, which is chargeable under

‘Capital Gains’ is not taxable under this Section.

o For Example: If Pepsi Food Ltd. has paid Rs. 100 Crores to Campa Cola for not

pursuing business activity, it will be considered to be the income of Campa Cola under

the head Business / Profession. Similarly, if any payment has been given for not sharing

any patent right, technical know-how, copy right etc., the amount received is income

under the head Business / Profession.

Any sum (including bonus) received under Keyman Insurance Policy

Speculative Business: Where speculative transactions carried on by an assessee are of

such a nature as to constitute a business, the business (hereinafter referred to as

“speculation business”) shall be deemed to be distinct and separate from any other

business.

10

3.4. Business Income NOT Taxable under the Head

In the following cases, income from trading or business is not taxable under Section 28, under

the head “Profits and Gains of Business or Professions”:

Rental income in the case of dealer in property

Rent of house property is taxable under Section 22 under the head “Income from House

Property” even if property constitutes Stock-in-trade of recipient of rent or the recipient of rent

is engaged in the business of letting properties on rent.

Dividend on shares in the case of a dealer-in-shares.

Dividend on shares are taxable under section 56(2)(i), under the head “Income from other

sources” , even if they are derived from shares held as stock in trade or the recipient of

dividends is a dealer-in-shares. However, dividend received from an Indian company is not

chargeable to tax in the hands of shareholders.

Winning from Lotteries etc.

Winning form Lotteries, races, etc. are taxable under the head “Income from Other Sources”

( even if derived as a regular business activity)

11

3.5. Computation of “Profits and gains of Business or Profession” – Section 29

Computation of Income from Business

Net Profit as per Profit & Loss Account Xxx

Add : Expenses disallowed/Inadmissible Expenses [i.e. items already

debited in P/L A/c but not eligible for deduction]

Xxx

Less : Incomes Credited in P/L A/c to be treated separately under

difference heads of income

(xxx)

Less : Expenses allowed as per Provisions (xxx)

Income from Business Xxx

Or

Incomes taxable under Section 28( Picked out from Profit and Loss

Account or Receipts and Payments Account)

Xxx

Less : Expenses allowed under section 30-37 (xxx)

Income from Business Xxx

Computation of Income from Profession

Receipts relating to Profession (on Cash Basis) Xxx

Less: Payment relating to profession (both cash and accrual basis) (xxx)

Income from Profession Xxx

12

3.6. EXPENSES ALLOWED AS A DEDUCTION- SECTION 30 – 38

As mentioned in Section 29 the gross income is subject to certain permissible deductions to

arrive at the profit or gain from the business or profession. Following is a summary of the

deductions permissible under various sections:

3.6.1. Rent, Rates, Taxes, Repairs and Insurance For Buildings- Section 30

In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the

business or profession, the following deductions shall be allowed—

Where the premises are occupied by the assessee—

o as a tenant, the rent paid for such premises ; and further if he has undertaken to

bear the cost of repairs to the premises, the amount paid on account of such

repairs;

o otherwise than as a tenant, the amount paid by him on account of current repairs

to the premises

Any sums paid on account of land revenue, local rates or municipal taxes ;

The amount of any premium paid in respect of insurance against risk of damage or

destruction of the premises.

3.6.2. Repairs And Insurance Of Machinery, Plant And Furniture- Section 31

In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the

business or profession, the following deductions shall be allowed—

the amount paid on account of current repairs thereto ;

the amount of any premium paid in respect of insurance against risk of damage or

destruction thereof

3.6.3. Depreciation – Section 32

Section 32 allows a deduction in respect of depreciation resulting from the diminution or

exhaustion in the value of certain capital assets

The allowance of depreciation is regulated by rule 5 of the IT Rules and is subject to the

following conditions:

Assets on which depreciation can be charged:

13

o Buildings, machinery, plant or furniture being tangible assets

o Knowhow , patents, copyrights, trademarks, licenses, franchises or any other

business commercial rights of similar nature being intangible assets acquired on

or after 1st April 1998

Assets should have been put to use by the assesse for the purpose of his business during

the previous year

Assessee must own the assets wholly or partly

Calculation of Depreciation

The expression building does not include land because the land does not depreciate.

As per Section 43(3), Plant includes ships, vehicles, books, scientific apparatus and surgical

equipment used for the purpose of the business or profession but does not include tea bushes or

livestock. Basically, the tangible assets, which cannot be classified as Building or Furniture, will

come under the category of plants e.g. calculators, typing machines, vehicles, Mobiles, EPBX

system etc.

In Accounts, we calculate depreciation asset wise, but in Income Tax, depreciation is calculated

block-wise i.e. as a first step, all assets are classified in few blocks and then depreciation is

calculated for the each block separately.

Subject to exceptions, depreciation is calculated as per “Written down value method” in Income

tax.

Block of assets- Section 2(11) – The term “block of assets” means a group of assets falling

within a class of assets comprising –

(a) Tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being known-how, patents, copy rights, trademarks, licences, franchises or

any other business or commercial rights of similar nature.

In respect of which the same percentage of depreciation is prescribed.

14

Thus we can see that same type of assets which are eligible for same rate of depreciation form

part of same block.

For example say a person have five assets, Plant A (eligible for 10%), Plant B (eligible for

15%), Building A (eligible for 10%), Building B (eligible for 10%) and Furniture A (eligible for

10%). In this case there are four blocks as follows;

Block 1 – Plant A (10%). (In this case Building 10% or Furniture 10% will not be considered as

they are different type of assets).

Block 2 – Plant 15%

Block 3 - Building A & B (both will come under the same block as they are same assets as well

as eligible for same rate of depreciation).

Block 4 - Furniture 10%.

Following is a table giving the rates of depreciation permissible on different assets

Illustration: Following is a list of assets which would have different rates of depreciation in

account books and for income tax purpose

15

Solution:

Depreciation – Calculation basis on Period

Purchased and “Put to use” for less than 180 days: Depreciation shall be allowed at half the

normal rate.

Purchased and “Put to use” for more than 180 days: Depreciation shall be allowed at full rate.

Purchased and is not “Put to use” at all: No depreciation is allowed and if the asset is put to use

in the subsequent year full depreciation shall be allowed without calculation of days.

16

For example: Mr. X has purchased one asset on 1-4-2007 and has put to use on 31-3-2009 in

that case, no depreciation shall be allowed in the P.Y. 07-08, however in the P.Y. 08-09 full

depreciation is allowed even it is used for a single day.

Asset sold During the year: No depreciation is allowed on such particular asset.

NOTE: “Put to use” do not mean actual use rather it means making an asset ready for use.

Steps For Computing WDV & Depreciation

(i) Take Opening WDV (written down value) as on 1st day of previous year

(ii) Add cost of acquisition of assets acquired during the year in this block.

(iii) Deduct the money payable [by buyers of such assets] along with scrap value, if any, in

respect of the assets of the same block, which are sold, discarded or destroyed during the year

(iv) Balance is the written down value of the block as on last day of previous year

(v) On WDV, apply the relevant rate of depreciation.

(vi) WDV (-) Depreciation is the closing WDV for the current previous year & opening WDV

for next previous year.

If sale price of assets is more than the [opening + purchases during the year], then WDV shall be

NIL. Similarly, if all assets in a particular block are transferred, then block is empty and WDV

shall be taken as NIL.

17

Illustration:

ABC Ltd. has Plant P1, P2, P3, and P4 as on 1/4/2007 and the combined W.D.V. is. Rs.70

Lakhs. The company has purchased Plant P5 on 1/7/2007 and it was put to use on the same date

& it was purchased for Rs. 20lakhs & the company has sold Plant P1 on 1/1/2008 for Rs. 15

Lakhs.

W.D.V. as on 1/4/2007 70 Lakhs

Add: P5 20 Lakhs

Less: P1 (15 Lakhs)

75 Lakhs

Less: Depreciation

@ 15% (11.25 Lakhs)

Closing WD.V. as on 31/3/2008 63.75 Lakhs

Illustration:

ABC Ltd. has Plant P1, P2, P3, and P4 as on 1/4/2007 and the combined W.D.V. is. Rs.70

Lakhs. The company has purchased Plant P5 on 1/7/2007 and it was put to use on 1/11/2007 & it

was purchased for Rs. 20lakhs & the company has sold Plant P1 on 1/1/2008 for Rs. 15 Lakhs.

W.D.V. as on 1/4/2007 70 Lakhs

Add: P5 20 Lakhs

Less: P1 (15 Lakhs)

75 Lakhs

Less: Depreciation

@ 15% on 55 Lakhs (8.25 Lakhs)

Less: Depreciation

@ 7.5% on 20 Lakhs (1.50 Lakhs)

Closing W.D.V. as on 31/3/2008 65.25 Lakhs

18

Illustration :

Compute the written down value from the following information for the assessment year 2006-

07—

Blocks of asset

Rate of depreciation

(per cent)

Depreciated value on

April 1, 2005

Rs.

1. Plant A, B and C 15 10,40,000

2. Plant D and E 40 2,60,000

3. Plant F 50 70,000

4. Building A, B, C and D 10 10,90,600

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

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

After April 1, 2005 the company purchases the following assets

Assets Date of purchase

Rate of depreciation

(percent)

Actual cost

Rs.

Plant G April 6, 2005 50 6,000

Plant H May 11, 2005 15 18,000

Furniture June 6, 2005 10 56,000

Car July 7, 2005 15 2,56,000

Building L September 26, 2005 5 7,28,700

Computer September 27, 2005 60 90,000

Copyright September 30, 2005 25 17,50,000

19

The following assets are transferred —

Assets Date of sale Sale consideration (Rs.)

Plant B December 20, 2005 25,10,900

Plant D January 31, 2006 12,000

Building L March 6, 2006 6,00,000

Solution:

Block 1 - Plant and machinery (rate of depreciation 15%)

Depreciated value of the block consisting of Plants A, B and C 10,40,000

Add : Actual cost of Plant H and car (+)2,74,000

Total 13,14,000

Less : Sale proceeds of Plant B [although sale proceeds of Plant B is more

than

Rs. 13,14,000, amount to be deducted is restricted to Rs. 13,14,000] (–)13,14,000

Written down value of the block consisting of Plants A, C and H on March 31,

2006 Nil

Block 2 - Plant and machinery (rate of depreciation: 40%)

Depreciated value of the block consisting of Plants D and E on April 1, 2005 2,60,000

Less : Sale proceeds of Plant D sold during 2005-06 Rs. 12,000

20

Written down value of the block consisting Plant E on March 31, 2006 2,48,000

Block 3 - Plant and machinery (rate of depreciation: 50%)

Depreciated value of the block consisting of Plant F on April 1, 2005 70,000

Add : Cost of Plant G purchased during 2005-06 6,000

Written down value of the block consisting of Plants F and G on March 31,

2006 76,000

Block 4 - Building (rate of depreciation: 10%)

Depreciated value of the block on April 1, 2005 consisting of Buildings A, B,

C and D 10,90,600

Written down value on March 31, 2006 10,90,600

Block 5 - Buildings (rate of depreciation: 5%)

Depreciated value of the block consisting of Buildings E, F and G 7,10,200

Rs. 7,28,700

Less : Sale proceeds of Building L sold during 2005-06 (–)6,00,000

Written down value of the block consisting of Buildings E, F and G on March

31, 2006 8,38,900

Block 6- Building (Rate of depreciation: 100%)

Depreciated value of the block consisting of Buildings H, I, J and K on

April 1, 2005 16,90,000

Written down value 16,90,000

21

Block 7 - Furniture (rate of depreciation: 10%)

Depreciated value on April 1, 2005 Nil

Add : Cost of furniture purchased during 2005-06 56,000

Written down value on March 31, 2006 56,000

Block 8 - Plant (rate of depreciation: 60%)

Depreciated value on April 1, 2005 Nil

Add : Cost of computer purchased during 2005-06 90,000

Written down value on March 31, 2006 90,000

Block 9 - Copyright (rate of depreciation: 25%)

Depreciated value on April 1, 2005 Nil

Add : Cost of copyright purchased during 2005-06 17,50,000

Written down value on March 31, 2006 17,50,000

22

Illustration:

On April 1, 2005, depreciated value of a block of assets (rate of depreciation: 15 per cent) is Rs.

80,000. It consists of Plants A and B. The assessee purchases Plant C (rate of depreciation: 15

per cent) during the previous year 2005-06 for Rs. 30,000 and sells Plant A on May 3, 2005 for

Rs. 1,80,000. In this case on March 31, 2006, the assessee has Plant B and Plant C in the block of

the assets, though the written down value of the block is zero. No depreciation will be admissible

for the previous year 2005-06 (i.e., the assessment year 2006-07) as is evident from the

computations given below:

Depreciated value of the block consisting of

Plants A and B

80,000

Add : Actual cost of Plant C 30,000

Total 1,10,000

Less : Sale consideration of Plant A [though the

plant is sold for Rs. 1,80,000, the amount of

reduction cannot exceed Rs. 1,10,000 ; the

difference of Rs. 70,000 is short-term capital gain

under section 50(1)]

1,10,000

Written down value of the block consisting of

Plants B and C

Nil

Less : Depreciation for the previous year 2005-06 Nil

Depreciated value of the block consisting of Plants

B and C on April 1, 2006

Nil

If block of assets ceases to exist - If a block of assets ceases to exist or if all assets of the block

have been transferred and the block of assets are empty on the last day of the previous year, no

depreciation is admissible in such case.

23

Illustration

X Ltd. owns two plants—Plant A and Plant B—on April 1, 2005 (rate of depreciation: 15 per

cent, depreciated value on April 1, 2005: Rs. 2, 37,000). The company purchases Plant C on May

31, 2005 for Rs. 20,000 and sells Plant A (on April 10, 2005), Plant B (on December 12, 2005)

and Plant C (on March 1, 2006) for Rs. 10,000, Rs. 15,000 and Rs. 24,000, respectively.

Written down value of the block of assets will be determined as

under : Rs.

Depreciated value of the block consisting of Plants A and B 2,37,000

Add : Cost of Plant C 20,000

Total 2,57,000

Less : Sale proceeds of Plants A, B and C 49,000

Written down value of the block (which is empty) 2,08,000

In the aforesaid case, no depreciation is admissible, as the block of assets ceases to exist on the

last day of the previous year. Rs. 2,08,000 will be treated as short-term capital loss on sale of

Plants A, B and C. Depreciated value of the block on the first day of the next previous year (i.e.,

on April 1, 2006) will be taken as nil (i.e., written down value on March 31, 2006 : Rs. 2,08,000

minus short-term capital loss : Rs. 2,08,000)

In the case study given above if Plants A, B and C are transferred for a consideration which is

higher than Rs. 2,57,000 (say, Rs. 3,57,000), then no depreciation will be available and Rs.

1,00,000 shall be taken as short-term capital gain on sale of Plants A, B and C.

24

3.6.4. Deductions Allowed Under Section 36

Premium For Insurance Of Cattle - Section 36(1)(ia)

If any Cooperative Society has paid premium for insurance of cattle owned by the members of

society, such premium shall be allowed to be taken as an expense

Premium For Mediclaim Policy - Section 36(1)(ib)

If any assessee has paid premium in connection with Mediclaim Policy taken in the name of

employees, premium shall be allowed to be debited. However payment should be made other

than in cash or cash equivalent.

Payment Of Bonus / Commission To Employees Section 36(1)(ii)

Bonus / Commission to the employees is allowed but subject to the provision of Section 43B.

Such Bonus / Commission should not have been payable to the employees otherwise as share out

of profits.

Interest On Loan Taken For Business / Profession -Section 36(1)(iii)

If any assessee has taken a loan for the purpose of Business / Profession, in such case interest is

allowed without any restriction. [No interest is allowed to the proprietor on his capital]

If the loan has been taken for the purpose of capital asset, interest up to the date of putting the

asset to use shall be capitalized & depreciation shall be allowed on capitalized amount & interest

for the subsequent period shall be debited to the P&L Account as per Section 43(1).

Discount On Zero Coupon Bond - Section 36(1)(iiia)

Discount on Zero Coupon Bond shall be allowed on pro-rata basis taking into consideration life

of such bond in months.

“Zero Coupon Bonds” means such bonds for which no return is allowed till the maturity of

such bond.

“Discount” means difference between the amount received and the amount paid.

25

For Example: ABC Ltd. has issued Zero Coupon Bond of Rs. 20 Lakhs and the maturity shall

be after 15 years & amount payable on maturity is Rs. 50 Lakhs, in this case amount of Discount

shall be Rs. 2 Lakhs (30 Lakhs / 15 yrs) and the company shall be allowed Rs. 20 Lakhs every

year under Section 36(1)(iiia).

In the hands of the holder of such bond, additional amount received shall not be considered to be

interest income rather there will be capital gains of Rs. 30 Lakhs.

Employer’s Contribution To Provident Fund / Gratuity Fund Etc. - Section 36(1)(iv)/(v)

Employer’s Contribution to RPF, approved Gratuity fund or other similar funds is allowed but

subject to the provision of Section 43B.

Employee’s Contribution To Provident Fund Etc.- Section 36(i)(va)

Employee’s contribution received by the employer shall be considered to be the income of the

employer. However, subsequently the employer shall be allowed to debit the amount to the P&L

Account provided the amount has been credited to the PF account latest by the due date.

Expenditure On Purchase Of Animals -Section 36(1)(vi)

If any assessee has incurred any expenditure on purchase of animals for the purpose of Business /

Profession, the expenditure shall be allowed to be debited at the time of death of animal or when

the animal has been discarded.

If the animals are Stock-in-trade, the amount shall be allowed to be debited.

Bad Debts / Provision For Bad Debts - Section – 36(1)(vii), 36(1)(viia) and 41(4)

If any assessee has incurred any bad debt in connection with Business / Profession, such bad

debt shall be allowed to be debited. If the bad debts debited by an assessee are recovered

subsequently, in this case any deficiency shall be allowed as bad debt and any excess shall be

considered to be Income under the head Business / Profession under Section 41(4). However, if

the bad debt were not allowed, in that case recovery shall not be considered to be income under

the head Business / Profession.

26

For Example: Mr. X has sold goods on credit amounting to Rs. 3,00,000 and has debited Rs.

50,000 as bad debts and subsequently but in final settlement he has received Rs. 2,10,000, in this

case deficiency of Rs. 40,000 shall be allowed as bad debt and if amount received is Rs.

2,60,000, excess of Rs. 10,000 shall be considered to be the income under Section 41(4)

Provision for bad debt is not allowed (provision or reserve even for any other purpose is not

allowed) , but as a special case provision is allowed as per Section 36(1)(viia) in the cases given

below:

a. In case of Indian Banks, provision is allowed maximum up to 7.5% of G.T.I + 10% of

average monthly advances of the rural branches of the bank.

For Example: PNB bank has GTI of Rs. 1000 Lakhs and monthly advances of the rural

branches of the bank is Rs. 3000 Lakhs, in this case maximum provision allowed shall be,

7.5% of 1000 Lakhs 75 Lakhs

10% of 3000 Lakhs 300 Lakhs

375 Lakhs

b. In case of Foreign Banks, Indian Financial Institutions, State Financial Corporation,

State Industrial Investment Corporation provision shall be allowed maximum up to 5% of

G.T.I.

If any assessee was allowed provision for bad debt under Section 36(1)(viia), bad debt shall be

first debited to the provision for bad debts and only after that balance amount shall be allowed to

the P&L Account.

For Example: If a particular Bank has provision for Bad debts Rs. 20 Lakhs and actual Bad

debts are Rs. 21 Lakhs, in this case only Rs. 1 Lakhs can be debited to P&L Account as Bad

debt.

Expenditure On Promotion Of Family Planning Norms - Section 36(1)(ix)

27

Expenditure is allowed only to the company assessee who is promoting family planning among

its employees & further revenue expenditure is allowed to be debited in the same year.

Capital expenditure is allowed in 5 annual instalments. Expenditure is allowed to be debited

only to the extent income is available under the Business / Profession & unadjusted

expenditure shall be allowed to be set-off and carried forward just like unabsorbed depreciation.

If any capital asset has been purchased for the purpose of promotion of family planning norms

among the employees and subsequently the asset was sold, the sale proceeds shall be

considered to be the income under the head Business / Profession as per Section 41(3) but

maximum to the extent of the amount debited to the P&L Account. If the business is not in

existence at that time, even then it will be considered to be income under the head Business /

Profession.

If subsequently there is amalgamation or de merger, the above provisions shall apply in case of

resulting company as they would have applied to the amalgamating company or the parent

company.

Commodities Transaction Tax- Section 36(1)(xv)

If any assessee has paid CTT in connection with Sale/Purchase of various commodities, it will be

allow to be debited to the P&L Account.

28

3.6.5. General Expenditure Section 37(1)

If any expenditure is neither allowed nor disallowed specifically, such expenditure is allowed

under Section 37(1), provided it is revenue in nature & is related to the Business / Profession of

the assessee.

The expenses which may be allowed under Section 37(1) are as given below:-

Expenditure being payment of salary to employees.

Expenditure in connection with advertisement (like diaries, calendars etc.) but if the

assessee has incurred capital expenditure, depreciation shall be allowed

For Example: ABC Ltd has incurred Rs. 20,000 on Sign Board, in this case depreciation

shall be allowed.

Expenditure incurred in connection with traveling relating to Business / Profession of the

assessee including expenditure incurred on stay in hotels etc.

Expenditure incurred in connection with opening economy

Expenditure incurred on the occasion of Diwali provided the expense is not personal

nature or religious nature i.e. it should be in the nature of Business / Profession.

Security Deposit under Own Your Telephone Scheme (OYT) or Tatkal Telephone

Scheme or Telex Connection shall be allowed to be debited.

Expenditure being loss due to embezzlement of funds by the employees.

Expenditure due to theft.

Expenditure in connection with legal proceedings.

Any other expenditure relating to the Business / Profession & is revenue in nature.

If the assessee has incurred any illegal expense, it will not be allowed. ANY FINE OR

PENALTY IS NOT ALLOWED.

Advertisement In Newspaper Etc. Of A Political Party Section 37(2B)

If any assessee has incurred any expenditure in connection with advertisement in newspaper of a

political party is disallowed.

3.6.6. Assets In Mix Use Section 38

If any assessee has any asset in the use of Business / Profession & also in personal use, in such

cases, expenses shall be allowed only to the extent the asset is in the use of Business / Profession.

29

3.7. EXPENSES NOT DEDUCTABLE UNDER SECTION 40

Payment Of Income Tax Or Wealth Tax etc. , -Section 40(a)

If any assessee has paid Income tax, Wealth Tax, FBT, Additional Income tax(CDT), it will not

be allowed to be debited to the P&L Account, but if any person has paid Sales Tax, Excise Duty,

Custom Duty, Service Tax etc. it will be allowed to be debited to the P&L Account but subject to

the provisions of Section 43B

If any person has taken any loan for payment of Income Tax etc., interest is not allowed but if

loan has been take for the payment of sales tax etc., interest is allowed.

If any person has paid interest for late payment of Income Tax etc., interest is not allowed but if

any person has paid interest for late payment of sales tax etc., interest is allowed.

If there is any income tax refund or wealth tax refund etc., it will not be considered to be income

of the assessee. If there is sales tax refund et., it will be considered to be income under head

Business / Profession.

If there is interest on refund of income tax etc., it will be income under the head Other Sources,

but if the interest is on the refund of sales tax etc., it is income under the head Business /

Profession.

If any assessee has incurred expenditure in connection with filing of return of income the

expense is allowed. Similarly, if salary has been paid to an employee who is looking after

income tax matters, salary is allowed. Similarly if there is any expenditure in connection with

audit, it is allowed.

Payment of Income Tax by the employer on behalf of employee in connection with Non-

monetary perquisite

If the employer has paid Income Tax on behalf of the employee in connection with Non-

monetary perquisite, such Income tax shall not be considered to be Income of the employee

under Section 10(10CC) and the employer shall not be allowed to debit the amount to the P&L

Account.

If the employer has paid Income Tax on behalf of the employee in general(i.e. not for Non-

monetary perquisite), such Income tax is shall be considered to be the income in the hands of the

employee under Section 17(2)(iv) & employer shall be allowed to debit the amount to the P&L

Account as salary to the employees under Section 37(1).

30

31

Payments Outside India Without Deducting Tax At Source - Section 40(a)(i)

If any assessee has made payment of interest, technical fees etc. outside India or to any NR or

any foreign company in India without deducting tax at source, in such cases expenditure is

disallowed.

If the assessee has deducted the tax at source & payment was made till the last day of the

relevant previous year or it was paid in the subsequent year but within the time allowed under

Section 200, in such cases expenditure shall be allowed otherwise expenditure shall be allowed

in the year in which the payment has been made.

For Example: ABC Ltd has paid interest outside India on 10/01/2008 after deducting tax at

source but payment was made by the company to the Government on 07/04/2008, in this case,

interest is allowed but if the tax was paid to the Government on 08/04/2008, expenditure shall be

allowed in the Previous Year 08-09.

Similarly, if in the above case payment was made and tax has been deducted on 31/03/2008 &

tax was paid to the Government on 31/05/2008, interest is allowed in Previous Year 07-08.

Payments In India To Any Resident Without Deducting Tax At Source -Section 40(a)(ia)

If any assessee has made payment in India to any resident person and tax has been deducted at

source up to the end of February of the relevant Previous year, in such cases amount of TDS

shall be paid to the Government up to 31 march of such P.Y.. If the TDS is deducted during

month of march, tax should be deposited up to the last date of filing of return of income.

Payment Of Salary Outside India Without TDS Section 40(a)(iii)

If any assessee has paid salary outside India or salary has been paid in India to any NR and the

assessee has neither deducted tax at source nor the tax has been paid to government, in such

cases salary is disallowed. But if either the TDS has been deducted or TDS has been paid to the

Government, in such cases salary is allowed to be debited.

Payments To Relatives / Related Party Section 40A(2)

If any person has made payment whether revenue or capital and such payment has been made to

any relative / related person and it is unreasonable / excessive, in such cases it is disallowed to

the extent the payment is unreasonable / excessive.

The term “Relative” shall include:

32

1. In case of individual, any relative of individual.

2. If the assessee is company, firm etc. it will include their directors, partners etc. & also their

relatives.

3. If the assessee has made payment to any person who has substantial interest in the business of

the assessee or the assessee has substantial interest in the business of such person.

4. If the payment is being made to any company or firm etc. holding 20% of equity shares, in that

case it will include the directors or partners etc. also and also their relative and if the person

having substantial interest is a director or partner etc. in some company or firm etc., it will

include such company or firm etc. and their other directors ad partners etc. and also their

relatives.

Payment In Excess Of Rs. 20,000 - Section 40a (3) Rule 6DD

If any assessee has incurred Revenue Expenditure (i.e. these provisions are not applicable in

case of capital expenditure) & payment with regard to such expenditure has been made in a sum

exceeding Rs. 20,000 & such payment was made otherwise than through account payee cheque

or account payee bank overdraft, in such cases entire expenditure is disallowed & further amount

shall be disallowed only if the individual expenditure as well as individual payment is

exceeding Rs. 20,000.

[w.e.f. A.Y. 09-10, aggregate payments during a particular day to a particular person shall be

taken into account.]

Examples:

1. ABC Ltd. has incurred an expenditure of Rs. 15000 on 01/10/07 & payment is given in cash to

Mr. X & on the same day the company has incurred one more expenditure of Rs. 18000 &

payment was given to Mr. X in cash, in this case, entire expenditure is allowed.[For A.Y. 09-10

disallowed]

2. One assessee has incurred Rs. 35000 & payments were made in two instalments of Rs. 17500

each & the payment was made in cash & the payments were made on the same day, amount

disallowed in A.Y. 08-09 shall be NIL [Amount disallowed in A.Y. 09-10 shall be Rs. 35000.]

3. ABC Ltd. has incurred an expenditure of Rs. 40000 out of which 27000 paid in cash & Rs.

13000 by account payee cheque, in this case amount disallowed shall be Rs. 27000 in A.Y. 08-

09.[Same in A.Y. 09-10]

33

4. Mr. X has incurred one expenditure of Rs. 150000 & payment was given in cash in 10

instalments of Rs. 15000 each & payment were made in a single day, in this case expenditure

disallowed in A.Y. 08-09 shall be NIL [Amount disallowed in A.Y. 09-10 shall be Rs. 150000]

5. ABC Ltd. has purchased one plant for Rs. 100000 and the payment was made in cash, in this

case nothing is disallowed because Section 40A(3) is not applicable in case of Capital

Expenditure.

Provision For Gratuity - Section 40A(7)

In general provision or reserve is not allowed. However, provision for Gratuity is allowed

provided the amount has become due for payment.

For Example: Mr. X is retired from ABC Ltd on 28/03/2008 and gratuity of Rs. 3 Lac has

become due for payment. The employee has not completed formalities till 31/03/2008 and the

company has created a provision for Gratuity, such provision is allowed.

Contribution To Various Funds - Section 40A(9)

Employer’s Contribution to RPF, SPF, Approved Superannuation Fund, Approved Gratuity fund

or any other fund required under any other Act shall be allowed.

Employer’s Contribution to URPF, Unapproved Superannuation Fund, Unapproved Gratuity

fund etc. shall not be allowed.

For Example: Employer’s Contribution to Staff welfare Fund or other similar fund is not

allowed.

3.8. EXPENDITURE ALLOWED ONLY ON ACTUAL PAYMENT BASIS -SECTION 43B

Method of accounting as per Section 145

As per Section 145 every assessee has the option to maintain the books of accounts either on the

basis of mercantile system of accounting or on the cash basis.

If the books are maintained on the basis of mercantile basis of accounting, all the expenses are

allowed on due basis and all incomes are taxable on accrual basis. If the books are maintained on

cash basis, all expenditures are allowed on actual payment basis & all incomes are taxable on

actual receipt basis.

34

Any system of accounting once adopted has to be followed consistently & it can be changed with

the permission of assessing officer.

If any assessee has violated the provisions of Section 145, in such cases assessing officer may

complete assessment in the manner given under Section 144.

Section 43B

If any assessee is maintaining books of accounts on the basis of mercantile system of accounting,

all expenditures are allowed on due basis, however expenses listed below shall be allowed only

on actual payment basis: -

b) Sales tax, Custom Duty, Excise Duty, Service Tax, Municipal tax or License Fee Etc.

c) Employer’s Contribution to RPF, approved superannuation fund, statutory provident fund,

approved gratuity fund or any other approved fund for employee’s welfare.

d) Bonus or Commission to the employees.

e) Leave salary to the employees.

f) Interest on loan taken from Public Financial Institutions, State Financial Corporations, State

Industrial Investment Corporation.

g) Interest on loan or advance from Banks.

The expenses listed above shall be allowed only on actual payment basis. However payment can

be made till the last date of filing of return of income, otherwise expenditure shall be allowed in

the year in which the payment has been made.

For Example: ABC Ltd. has incurred excise duty of Rs. 25 Lac during the P.Y. 07-08 & entire

amount was debited to the P&L account & Net Profit is Rs. 11 Lac. The company has paid

excise duty of Rs. 12 Lac on 29/09/2008 & balance on 10/05/2009. Determine the amount

allowed to be debited in different years.

Solution: P.Y. 07-08 P.Y. 08-09 P.Y. 09-10

Excise Duty Allowed 12 Lac Nil 13 Lac

Excise Duty Disallowed 13 Lac Nil Nil

35

Expenditure listed under Section 43B shall be allowed only if the assessee has made the actual

payment, further proof of having made the payment should be enclosed.

If any assessee has not paid interest on a particular loan and such interest has been converted into

fresh loan, in such cases, it will not be considered to be payment of interest & deduction shall not

allowed, but whenever, such converted loan has been repaid, deduction shall be allowed in that

year.

[Some of the state government have a scheme to permit the assessee to retain the amount of sales

tax etc. for some period, in such cases, deduction shall be allowed on due basis.]

CERTAIN DEDUCTIONS TO BE ALLOWED ON ACTUAL PAYMENT -Section 43B

Notwithstanding anything contained in any other provision of the Act, the following sums shall

be allowed as deduction only on actual payment irrespective of the previous year in which the

liability arose:

(a) Any tax, duty, cess or fee, for which assessee incurred liability in the previous year, under

any law; or

(b) Contribution by assessee-employer to any Provident Fund or Superannuation or gratuity or

other employee-welfare fund; or

(c) Bonus or commission to employees for services rendered, as referred under Section 36(1)(ii);

or

(d) Sum in lieu of any leave at the credit of his employee (Leave Encashment); or

(e) Interest on any loan or borrowing or advances from –

(i) Any Public Financial Institution (e.g. ICICI, IFCI, IDBI, LIC, UTI, etc.); or

(ii) State Financial Corporation, or State Industrial Investment Corporation;

(iii) Scheduled Bank

No deduction for interest converted into loan/borrowing/advance: Any interest falling under (e)

above, which has been converted into a loan or borrowing or advance shall not be regarded as

actually paid and shall not be allowed as deduction. (Amendment by Finance Act, 2006)

Manner of Deduction: The expenditure shall be allowed as deduction in the following manner:

Case Year of Allowance

36

If the sum relates to any previous year for which payment has been made on or before the due

date of furnishing the Return of Income of that year- In the previous year to which it relates

In any other case- In the year of payment

37

4. ILLUSTRATIONS

Illustration:

Roopen is a Chartered Accountant in practice. He is a resident and ordinarily resident in India.

His Profit and Loss Account for the year ended 31.3.2012 reads as follows –

Expenses Rs Income Rs

Salaries to paid staff 12,75,000 Fees Earned:

Stipend to Articled Clerks 31,500 Audit 15,31,200

Incentives to Articled Clerks 15,000 Taxation Service 16,20,000

Rent 72,000 Consultancy 13,86,000 45,37,200

Printing and Stationery 16,800 Dividends from Indian Companies 31,869

Contribution to Recognized PF 90,000 Income from UTI 16,800

Meeting, Seminar & Conference 1,35,000 Profit on Sale of Shares 46,860

Interest on Loan 1,68,000

Honorarium received from various

institutes for 18,690

Subscription and Periodicals 49,500 valuing answer papers

Postage, Telephone and Fax 5,17,500 Rent recd. from residential flat let–out 2,16,000

Repairs, Maintenance & Petrol for Car 52,500

Depreciation:

Car 22,500

Office Equipment 45,000

Typewriter 13,500

Furniture 7,500 88,500

Travelling Expenses 1,65,000

Municipal Tax paid on House Property 3,000

Net Profit 21,88,119

Total 48,67,419 Total 48,67,419

Other Information -

38

Fees from Consultancy Services include 4,20,000 received in US Dollar from one

Company in Singapore for rendering professional service there. (Assume that the entire

convertible foreign exchange was received within permitted period)

Travelling expenses include 60,000 incurred in connection with his visit to Singapore for

rendering service as indicated in above.

Incentives to Articled Clerks represents amount paid to two Articled Clerks for passing

Intermediate Examination at first attempt.

1/4th of use of car is attributable to personal purposes.

50% of Loan was used for the purpose of construction of the House Property and 50% of

Loan was used for purchasing Office Equipment.

Roopen follows accrual basis of accounting. Printing and Stationery include Rs. 6,000

being cost of some stationery

The written down values of various assets as on 31.3.2011 are as follows –

ParticularsWDV

Car – acquired on 1.4.2003 245760

Office equipment – acquired on 15.12.2011 – cost Rs. 4,50,000 NIL

Typewriter – acquired on 1.4.2005 45000

Furniture – acquired on 1.4.2005 75000

Salaries include 75,000 paid to a computer specialist in cash for assisting Roopen in one

professional assignment

Roopen paid life membership subscription of Rs. 1,500 to Chartered Accountant’s

Benevolent Fund (recognised under Section80G). The amount was debited to his

drawings account.

Shares sold were held for 8 months before sale.

39

Solution:

Assessee: Roopen Previous Year: 11-12 Assessment Year: 12-13

Computation of Total Income

Profits and Gains of Business or Profession: Add Deduct

Net Profit as per Profit and Loss Account 21,88,119

Income chargeable under “Income from Other Sources”

Dividend Income 31,869

Income from UTI 16,800

Honorarium received for valuation of papers 18,690

Profits from sale of Shares taxable under Capital Gains 46,860

Rent taxable under Income from House Property 2,16,000

Municipal tax on House Property considered under Income

from House Property3,000

Disallowance of 1/4th of repair expense for use of car for

personal use –

Rs. 52,500 × ¼ 13,125

½ of Interest on loan in respect of construction of house

property – to be

considered under “Income from House Property” – Rs.

1,68,000 × ½ 84,000

Depreciation as per Books of Account 88,500

Depreciation as per Income–tax Rules:

40

Car (Rs. 2,45,760 × 15% × ¾) 27,648

Furniture (Rs. 75,000 × 10%) 7,500

Typewriter (Rs. 45,000 × 15%) 6,750

Office

Equipment (Rs. 4,50,000 × 15% × 50%) 33,750

Disallowance u/s 40A(3) for payment exceeding Rs. 20,000

in cash 75,000

Printing Bill for Accounting Year 2010–2011 not claimed

earlier 6,000

Profits and Gains of Profession 26925 405867 2051877

41

Illustration:

Mr. Nathan, a businessman, submits the following Profit and Loss Account for the year

ended 31.3.2012 –

Particulars Rs. Particulars Rs.

To Salaries 3,00,000 By Gross Profit b/d 10,50,000

To Travelling Expenses 77,400 By Dividend from Indian Cos. 25,500

To Rent and Rates 9,000 By Discount Received 4,500

To Interest on Capital 15,000

To Administrative Charges 1,80,000

To Depreciation 75,000

To Income–Tax 1,50,000

To Net Profit 2,73,600

Total 10,80,000 Total 10,80,000

The following additional information is furnished —

1. Salaries include payment of Rs. 48,000 to Mrs. Nathan, who is holding technical

qualification in Quality Control and acting as supervisor of the Quality Control

Department. She does not have any other income during this year. Till February 2011, she

was employed in M/s. Sanvats Ltd in a similar post for 10 years and was drawing a

monthly salary of Rs. 4,500.

2. Mr. Nathan had gone on a foreign tour in connection with the business. The journey was

for 15 days in which he spent 3 days on visiting tourist spots. Total expenses incurred,

which were within RBI norms also, in respect of this foreign tour was Rs. 60,000.

3. Administrative Charges include expenses in respect of donation of Rs. 3,000 to the trade

association for the purpose of an advertisement in the souvenir.

4. Depreciation allowance as per the Income Tax Rules, 1962 is Rs. 1,35,000.

5. Mr. Nathan raised a loan from LIC of India on the security of his Life Insurance Policy and

uses the same for the payment of expenses relating to repairs of machinery. Interest of Rs.

7,500 in respect of this loan was paid out of his drawings.

42

6. Birthday gifts presented to his minor son includes cash of Rs. 40,000, which was deposited

in a Nationalised Bank. Interest accrued up to 31.3.2012 was Rs. 7,500.

7. Mr. Srinivasan, brother of Mr. Nathan is suffering from heart disease. Since he could not

earn money for his livelihood, Mr. Nathan takes care of him, in respect of all expenses.

Expenses incurred during the year in this connection are Rs. 45,000.

8. During the previous year, Mr. Nathan has paid Rs. 30,000 by way of cheque towards

Medical Insurance Premia of himself, his wife and minor son.

From the above, prepare a statement showing Profits and Gains under Business or Profession

(Ignored the other sources of Income and Deductions)

Solution:

Particulars Amount Rs.

Profits and Gains of Business or Profession: Add Deduct

Net Profit as per Profit and Loss Account 2,73,600

Income–tax paid not an allowable expenditure 1,50,000

Interest on Proprietors Capital 15,000

Dividend Income from Indian Co. – Taxable under

“Income from Other Sources” 25,500

Personal Expenses on Foreign Tour – 3/15 × Rs. 60,000 12,000

Depreciation as per Books of Account 75,000

Depreciation as per Income–tax Rules 1,35,000

Interest on borrowing for the purpose of business not

debited in P&L A/c 7,500

Profits and Gains of Business or Profession

2,52,000 1,68,000 (+) 2,52,000

(–) 1,68,000

3,57,600

43

Illustration:

The Following is the Receipts and Payments A/c of a medical Practitioner for the year ended

31.3.2012

Receipts Rs. Payments Rs.

To Balance b/d 3,30,000 By Clinic Rent 45,000

To Visiting Fees 1,95,000 By Staff Salaries 2,40,000

To Consultation Fees 1,95,000 By Rent and Rates 15,000

To Sale of Medicines 75,000 By Electricity & Water 12,000

To Operation Theatre Rent 45,000 By Purchase of Medical Books 12,000

To Interest and Dividends 60,000 By Purchase of Surgical Equipment 90,000

By Motor–Car Expenses 45,000

By Medical Association Membership Fees 15,000

By Audit Fees 60,000

By Staff Welfare Expenses 6,000

By Diwali Expenses 3,000

By Medicine Purchase 90,000

By Entertainment 18,000

By Balance c/d 2,49,000

Total 9,00,000 Total 9,00,000

Additional Information –

1.A cash payment of Rs. 15,000 was given to him by a patient in appreciation of his medical service but

was not accounted for in the books of account.

2. One–third of Motor–car expenses relate to his personal use. Depreciation on Motor–car allowable

under the Income Tax Act, 1961 was Rs. 18,000 for professional use.

3. The rate of depreciation on surgical equipment is 15%. The written down value of equipments brought

forward from earlier year was Rs. 69,000. He sold equipment for Rs. 24,000/– during the current year.

Equipment purchases included two items for Rs. 27,000 the value of each being Rs. 13,500.

4. Interest and dividends include –

Interest on Bank Deposit Rs. 12,000 Interest on National Deposit Scheme Rs. 15,000

44

Dividends from U.T.I. Rs. 12,000 Dividends from Indian Companies Rs. 21,000

Compute his net income from profession and his taxable income for the Assessment year 2012–

2013.

Solution:

Assessee: A Medical Practitioner

Previous Year: 2011-12 Assessment Year: 2012-13

Computation of Income from Business or Profession

Particulars Amount Rs.

Profits and Gains of Business or Profession: Add Deduct

Visiting fees received 1,95,000

Consultation fees received 1,95,000

Sale of medicines 75,000

Operation theatre rent 45,000

Clinic rent 45,000

Staff Salaries 2,40,000

Rent and Rates 15,000

Electricity and Water Charges 12,000

Subscription and Periodicals 12,000

Motor–Car Expenses relating to profession (2/3 × Rs.

45,000) 30,000

Membership fees paid to medical association 15,000

Audit fees 60,000

Staff Welfare Expenses 6,000

Purchase of Medicine 90,000

Diwali Expenses allowable as per CBDT Circular 3,000

Entertainment Expenditure 18,000

Depreciation on Motor–car 18,000

45

Depreciation on Surgical Equipment [(Opening WDV +

Purchase– Sale) ×

15%] = (69,000 + 90,000 – 24,000) × 15% 20,250

Cash received from a patient not accounted in books 15,000

Profits and Gains of Business or Profession 5,25,000 5,84,250

(+)5,25,000

(–) 5,84,250 (59,250)

Notes

Surgical Equipment is included in Plant u/s 43(3). Hence the Depreciation Rate is 15%.

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5. BIBLIOGRAPHY

Neeraj Gupta- CA IPCC TAX Classes- Chapter 5

ICAI - Profits and Gains of Business and Profession- Final CA- Chapter 6

Mensa Commerce Classes – Profits and Gains of Business and Profession Theory

www.tybcom.com – Taxation – Profits and Gains of Business and Profession

Shree Guru Kripas institute of Management – Chennai – Taxation of Individuals

Ms. Monica Singhania – Profits and Gains of Business or Profession – Lesson 7

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