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Profits and Gains of Business

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This document provides an overview of the taxation of profits and gains from business or profession under the Indian Income Tax Act. Some key points: - Profits from any business, profession, compensation payments, export incentives, benefits from business, interest from a partnership, and more are taxable under this head. - Deductions are allowed for expenses like rent, repairs, depreciation, research and development, acquiring telecom licenses, and more. - Depreciation can be claimed on buildings, machinery, vehicles and more. Additional depreciation is available for new machinery. - Certain payments must be on a paid basis per Section 43B, like taxes, contributions, bonuses to claim deductions.

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Profits and Gains of Business or Profession Lecture Notes
Basis of Charge (Section 28)  Following Incomes shall be charged to tax under this head  1. Profit and Gains of any business or Profession carried on by the assessee  2. Any Compensation or other payments due or received by assessee, for loss of agency, due to termination or modification in terms and conditions of such agency  3. Income derived by a trade, professional or similar association, for specific services performed; for its members.  4. Export Incentives received by Exporter such as Sale of licenses, Cash Assistance, Duty Drawback
Basis of Charge (contd.)  5. Value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession  6. Interest, Salary, Bonus, Commission or remuneration due o or received by, a partner of a firm from such firm.  7. Sum Received or receivable in cash or kind for  a) not carrying out any activity  b) not sharing any knowhows, patent etc.  8. Sum Received under Keyman Insurance Policy  9. Income from Speculative Business.
Business & Profession  Business includes any Trade, Commerce or Manufacture or any adventure in the nature of Trade, Commerce or Manufacture. Profession: means an occupation requiring specialised Knowledge and Skill. Vocation: is an activity in which an assessee has specialised skill for earning Income.
Deduction Allowable  1. Rent, Rates, Taxes and Insurance of Building ( u/s 30)  2. Repairs and Insurance of Machinery, Plant and Furniture (u/s 31)
Depreciation (u/s 32)  Following conditions are to be fulfilled.  a) Assessee must be owner of the Asset.  b) Asset must be used for the purpose of business or Profession.  c) Such use must be in the relevant previous year.
Depreciation  Deprecation is allowed in respect of  a) Building  b) Plant & Machinery  c) Furniture  d) Motor Vehicles  e) Computers  f) Intangibles
Depreciation  Depreciation is allowed on the Written Down Value of Block of Assets  Opening WDV XX  Add : Purchases during the year XX  Less : Sales during the year XX  Closing WDV XX  Note : If the Asset is put to use for less than 180 Days in the year, depreciation will be allowed at 50 % of the eligible rate.
Additional Depreciation  Additional Deprecation @ 20 % of Actual Cost of Machinery acquired after 31.03.2002 for  a) New Industrial Undertaking  b) Existing Industrial Undertaking Note : If the Asset is put to use for less than 180 Days in the year, depreciation will be allowed at 50 % of the eligible rate.
Expenditure of Scientific Research U/s 35  Any Expenditure (other than Cost of Land) expended on scientific research related to the business.  Contribution to  i) Association, university, college for the purpose of Scientific Research  ii) National Laboratory  eligible for 175 % Deduction  iii) Association, university, college for the purpose of research in social sciences or statistical research  eligible for 125 % Deduction  In House Research in specified industries eligible for  200 % Deduction
Expenditure for Obtaining License to operate Telecommunication Services U/s 35ABB  Allowed as Deduction equally over the number of years of Validity of Licenses
Other Expenditures  35AC : Expenditure on Eligible Projects  35CCA : Expenditure for carrying out rural development programmes  35 CCB : Expenditure for carrying out programmes of conservation of natural resources.
Amortisation of  Preliminary Exp deduction is allowed in 5 Years ( Section 35D)  Amortisation of Amalgamation or Demerger in 5 Years (Section 35DD)  Amortisation of VRS Expenses in 5 Years  ( Section 35DDA)  Expenditure on Minerals Prospecting in 10 Years (Section 35E)
Other Deduction u/s 36  i) Insurance premium paid to cover the risk of damage or destruction of Stock  Ii) Bonus or Commission paid to Employees  Iii) Interest on Borrowed Capital  iii) Contribution to Recognised Provident Fund  iv) Contribution to Approved Gratuity Fund  V) Write off of useless or Dead Animals  Vi) Bad Debts  Vii) Expenditure on promotion of Family Planning among employees
General Expenses u/s 37  Conditions to be fulfilled  i) Expenditure should not be in the nature prescribed u/s 30 to 36  ii) Not a Capital Expenditure  iii) Not Personal Expenditure  iv) for the purpose of Business
Advertisement Expenses ( Section 37(2B)  Deduction is not allowed in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamplet or like published by a political party.
Disallowance u/s 40a  Interest Royalty Fees for Professional Services paid outside India without deducting TDS
Disallowance us/s 40 a  Payment to Resident without deducting TDs  Following payments are covered  I) Interest  II) commission or Brokerage  III) Rent  Iv) Fees for Technical or Professional Services  V) royalty  VI) Payment to Contractor
Disallowance us/s 40 a  Securities Transaction Tax  Fringe Benefit Tax  Income Tax  Wealth Tax  Salary paid outside India without deducting TDS  Provident Fund payment without deducting TDS  Tax on Prequisites paid by the employer
Disallowance u./s 40 (b)  Amount not Deductible in case of Partnership Firm  I) Interest exceeding the rate specified in the Partnership Deed or 12 % whichever is lower  II) Remuneration to Partner
Remuneration to Partner  Is allowed upto the following limits  First Rs 3,00,000 - 90 % or Rs 1,50000  which ever is high  Balance - 60 %
Disallowance u/s 40 A  Excessive Payment to Relatives  Payment exceeding Rs 20,000 in mode otherwise than Crossed cheque  (Entire amount is disallowed)
 Contribution to Non Statutory Funds  Provision for Unapproved Gratuity Fund
Section 43 B : Deduction on Payment Basis  Following will be allowed as Deduction on actual paid basis.  Outstanding amount has to be paid before Due Date of Filing of Return of Income.  i) Any Tax, Duty paid to government  ii) Contribution to PF  iii) Bonus or Commission  iv) Interest on Loans from financial  institution  V) Interest on Loans from Scheduled Bank  Vi) Leave Salary to Employees

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Profits and Gains of Business

  • 1. Profits and Gains of Business or Profession Lecture Notes
  • 2. Basis of Charge (Section 28)  Following Incomes shall be charged to tax under this head  1. Profit and Gains of any business or Profession carried on by the assessee  2. Any Compensation or other payments due or received by assessee, for loss of agency, due to termination or modification in terms and conditions of such agency  3. Income derived by a trade, professional or similar association, for specific services performed; for its members.  4. Export Incentives received by Exporter such as Sale of licenses, Cash Assistance, Duty Drawback
  • 3. Basis of Charge (contd.)  5. Value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession  6. Interest, Salary, Bonus, Commission or remuneration due o or received by, a partner of a firm from such firm.  7. Sum Received or receivable in cash or kind for  a) not carrying out any activity  b) not sharing any knowhows, patent etc.  8. Sum Received under Keyman Insurance Policy  9. Income from Speculative Business.
  • 4. Business & Profession  Business includes any Trade, Commerce or Manufacture or any adventure in the nature of Trade, Commerce or Manufacture. Profession: means an occupation requiring specialised Knowledge and Skill. Vocation: is an activity in which an assessee has specialised skill for earning Income.
  • 5. Deduction Allowable  1. Rent, Rates, Taxes and Insurance of Building ( u/s 30)  2. Repairs and Insurance of Machinery, Plant and Furniture (u/s 31)
  • 6. Depreciation (u/s 32)  Following conditions are to be fulfilled.  a) Assessee must be owner of the Asset.  b) Asset must be used for the purpose of business or Profession.  c) Such use must be in the relevant previous year.
  • 7. Depreciation  Deprecation is allowed in respect of  a) Building  b) Plant & Machinery  c) Furniture  d) Motor Vehicles  e) Computers  f) Intangibles
  • 8. Depreciation  Depreciation is allowed on the Written Down Value of Block of Assets  Opening WDV XX  Add : Purchases during the year XX  Less : Sales during the year XX  Closing WDV XX  Note : If the Asset is put to use for less than 180 Days in the year, depreciation will be allowed at 50 % of the eligible rate.
  • 9. Additional Depreciation  Additional Deprecation @ 20 % of Actual Cost of Machinery acquired after 31.03.2002 for  a) New Industrial Undertaking  b) Existing Industrial Undertaking Note : If the Asset is put to use for less than 180 Days in the year, depreciation will be allowed at 50 % of the eligible rate.
  • 10. Expenditure of Scientific Research U/s 35  Any Expenditure (other than Cost of Land) expended on scientific research related to the business.  Contribution to  i) Association, university, college for the purpose of Scientific Research  ii) National Laboratory  eligible for 175 % Deduction  iii) Association, university, college for the purpose of research in social sciences or statistical research  eligible for 125 % Deduction  In House Research in specified industries eligible for  200 % Deduction
  • 11. Expenditure for Obtaining License to operate Telecommunication Services U/s 35ABB  Allowed as Deduction equally over the number of years of Validity of Licenses
  • 12. Other Expenditures  35AC : Expenditure on Eligible Projects  35CCA : Expenditure for carrying out rural development programmes  35 CCB : Expenditure for carrying out programmes of conservation of natural resources.
  • 13. Amortisation of  Preliminary Exp deduction is allowed in 5 Years ( Section 35D)  Amortisation of Amalgamation or Demerger in 5 Years (Section 35DD)  Amortisation of VRS Expenses in 5 Years  ( Section 35DDA)  Expenditure on Minerals Prospecting in 10 Years (Section 35E)
  • 14. Other Deduction u/s 36  i) Insurance premium paid to cover the risk of damage or destruction of Stock  Ii) Bonus or Commission paid to Employees  Iii) Interest on Borrowed Capital  iii) Contribution to Recognised Provident Fund  iv) Contribution to Approved Gratuity Fund  V) Write off of useless or Dead Animals  Vi) Bad Debts  Vii) Expenditure on promotion of Family Planning among employees
  • 15. General Expenses u/s 37  Conditions to be fulfilled  i) Expenditure should not be in the nature prescribed u/s 30 to 36  ii) Not a Capital Expenditure  iii) Not Personal Expenditure  iv) for the purpose of Business
  • 16. Advertisement Expenses ( Section 37(2B)  Deduction is not allowed in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamplet or like published by a political party.
  • 17. Disallowance u/s 40a  Interest Royalty Fees for Professional Services paid outside India without deducting TDS
  • 18. Disallowance us/s 40 a  Payment to Resident without deducting TDs  Following payments are covered  I) Interest  II) commission or Brokerage  III) Rent  Iv) Fees for Technical or Professional Services  V) royalty  VI) Payment to Contractor
  • 19. Disallowance us/s 40 a  Securities Transaction Tax  Fringe Benefit Tax  Income Tax  Wealth Tax  Salary paid outside India without deducting TDS  Provident Fund payment without deducting TDS  Tax on Prequisites paid by the employer
  • 20. Disallowance u./s 40 (b)  Amount not Deductible in case of Partnership Firm  I) Interest exceeding the rate specified in the Partnership Deed or 12 % whichever is lower  II) Remuneration to Partner
  • 21. Remuneration to Partner  Is allowed upto the following limits  First Rs 3,00,000 - 90 % or Rs 1,50000  which ever is high  Balance - 60 %
  • 22. Disallowance u/s 40 A  Excessive Payment to Relatives  Payment exceeding Rs 20,000 in mode otherwise than Crossed cheque  (Entire amount is disallowed)
  • 23.  Contribution to Non Statutory Funds  Provision for Unapproved Gratuity Fund
  • 24. Section 43 B : Deduction on Payment Basis  Following will be allowed as Deduction on actual paid basis.  Outstanding amount has to be paid before Due Date of Filing of Return of Income.  i) Any Tax, Duty paid to government  ii) Contribution to PF  iii) Bonus or Commission  iv) Interest on Loans from financial  institution  V) Interest on Loans from Scheduled Bank  Vi) Leave Salary to Employees