Computation of Profits & Gains of Business or Profession

13/04/2023 sanjaydessai@gmail.com 1

COMPUTATION OF PROFITS & GAINS OF BUSINESS OR PROFESSION:

for B Com ( taxation) Students of Goa University

Presented By

Dr. Sanjay P S Dessai Associate Professor

VVMS Shree Damodar College of Com and Eco Margao Goa

Sections: 28- Chargeability :-Under head Profits and gains of business or profession

Section: 29 -Computation of profits and gains from business or profession ( Permits deductions/ allowances )

Sections 30 to section 37 : deductions expressly allowed in respect of expenses and allowances

Sections / Contents

• Section: 30- Deduction of Rent, rates, taxes, repairs and insurance for buildings

• Section 31 - Deductions of Repairs and insurance of machinery, plant and furniture

• Section: 32 Depreciation (excluding Depreciation Rates)

Section 36: Deductions (Restricted to following clauses).

Sec. 36 (1) (i) – Insurance Premium Sec. 36 (1) (ii) – Bonus/Commission to employees.Sec. 36 (1) (iii) – Interest on Borrowed CapitalSec. 36 (1) (iv) – Employer’s Contribution to

recognized Provident Fund & Approved Superannuation Fund.

Sec. 36 (1) (v) – Contribution towards Approved Gratuity Fund

Sec. 36 (1) (vii) – Bad Debts

General deductions

• Sec. 37 (1) – General Deduction.• Sec. 37 (2B) – Advertisement Expenses in

Souvenir etc. of a Political Party.

Amount not deductible Sec 40

• Sec. 40 (a) Interest , Royalty, fees for technical services payable outside India or payable to non- resident in India is disallowed where TDS is not deducted

• 40A(2) Payments to relatives 40 A(2)• 40A(3) payment exceeding Rs 20,000 paid otherwise

than by account payee cheques or Bank drafts• 43B – Disallowance of unpaid liabilities

( applicable in case of mercantile system ).

Special provisions

• Sec. 44AA Provisions in relation to maintenance of books of accounts

• 44AB Audit of accounts of certain persons • 44AD Computation of income on estimated basis

in case of taxpayer engaged in certain business • 44AE computation of income on estimated basis

in case of taxpayer engaged in the business of plying, leasing or hiring trucks

Section 28 Chargeability :- Profits and gains of business or profession

• Profits and gains of any business or profession• Any compensation or other payments due to or

received by any person specified in section • Income derived by a trade, professional 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 business or the exercise of a profession

• Export incentive available to exporters

Income chargeable

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

• Any sum received for not carrying out any activity in relation to any business or not to share any know-how, patent, copyright, trademark, etc.

• Any sum received under a Key man insurance policy including bonus

• Profits and gains of managing agency• Income from speculative transaction.

Methods of Accounting

• Mercantile system of accounting- accrual basis

• Cash system of accounting

Section 29:- Computation of profits and gains from business or profession

• Determine profit from business or profession • Adjustment in respect of expenses allowable or not allowable • Expenses debited to profit and loss account but are not allowed

as per income tax Act, are to be added to profits • Partly disallowed expenses to be added to profits • Expenses which are admissible but not debited to profit and loss

account should be deducted from profits• Income chargeable but not credited to profit and loss account

should be added to profits • Income which are credited to profit and loss account but not

taxable under the head profits and gain of business or profession , should be deducted

Deductions allowable Section 30 :- Rent, rates, taxes, repairs and insurance for buildings

• Rent, Rates, taxes, Repairs and insurance of Buildings (sec 30) (only revenue expenditure )

Section 31:-Repairs and insurance of machinery, plant and furniture

• Repairs and insurance of machinery, plant and furniture

• (only revenue expenditure )

Section 32 - Depreciation

In order to avail depreciation, following conditions are to be satisfied 1. Asset must be owned by the assessee.2. It must be used for the purpose of business or

profession.3. It should be used during the relevant previous

year.4. Depreciation is available on tangible as well as

intangible assets

Depreciation

• Normal depreciation ( full year’s depreciation) is available if an asset is put to use at least for sometime during the previous year.

• However, depreciation allowance is limited to 50 per cent of normal depreciation, if the following two conditions are satisfied—

1. where an asset is acquired during the previous year; and

2. it is put to use for the purpose of business or profession for less than 180 days during that year.

BLOCK OF ASSETS

• The term “block of assets” means a group of assets falling within a class of assets comprising

• Tangible- Buildings, Machinery, plant, furniture, etc.

• Intangible - know-how, patents, copyrights, trade marks, licenses, franchises, etc.

Computation of written down value

• Step 1 -Find out the depreciated value of the block on the April 1

• Step 2 -To this value, add “actual cost” of the asset (falling in the block) acquired during the previous year

• Step 3 From the resultant figure, deduct money received/receivable (together with scrap value) in respect of that asset (falling within the block of assets) which is sold, discarded, demolished or destroyed during the previous year .

No depreciation is provided ---• If written down value of the block of asset is

reduced to zero, though the block is not empty.

• If the block of asset is empty

Problem (WDV is Nil )

• On 1/4/13 depreciated value of a block of asset is Rs. 80,000 it consist of plant A and B. The assessee sold plant A on May 3, 2013 for Rs. 1,80,000 and purchased plant C on December 28, 2013 for Rs. 30,000.

• Rate of depreciation 15 percent • Calculate depreciation on 31st march 2014

Solution

• Depreciated value of the block (A&B) 80,000• Add – Purchases (C) 30,000• Total 1,10,000• Less-sale-(1,80,000) 1,10,000• Written down value - NIL• Depreciation Nil• Depreciated value of the bloc consist of plant B and

C- Nil • Difference is short term capital gain

Value of block of asset is empty

• WDV of plant A and B on 1st April 2013 Rs. 2,00,000. Purchased plant C on 1st June 2013 Rs. 1,00,000 and sold Plant A, B and C on 1st December 2013 for Rs. 1,00,000.

Value of block of asset is empty

• WDV of asset on 1st April 2013 (A&B) 2,00,000• On 1st June purchased plant C 1,00,000• 3,00,000Sold plant A, B & C on 1st December for Rs. 1,00,000• Written down value (block is empty) 2,00,000• Depreciation Nil

Problem

• X ltd owns 2 buildings A&B On 1/4/13 depreciated value of a block of asset is Rs. 14,15,700. On 1, December 2013 he purchased Building C for Rs. 3,10,000 and sold building A on 10th January 2014 for Rs. 8,70,000.

• Rate of depreciation 10 percent • Calculate depreciation for previous year 2013-

Solution

• WDV of Block of asset on 1/4/12- 14,15,700• Add – Purchases on 1/12/2012- 3,10,000• 17,25,700• Less sales A 8,70,000• WDV on 31st March 2013 (B&C) 8,55,700• Less -Depreciation • Plant B (855700-310000)=545700 X10%= 54,570

• Plant C 3,10,00 X 10% X1/2= 15,500 70,070

• Written down value on 31/3/2013 785630

Problem

• X ltd owns 2 buildings A&B On 1/4/12 depreciated value of a block of asset is Rs. 14,15,700. On 1, December 2012 he purchased Building C for Rs. 3,10,000 and sold building A on 10th January 2013 for Rs. 15,87,000.

• Rate of depreciation 10 percent • Calculate depreciation for previous year 2012-

• WDV of Block of asset on 1/4/12- 14,15,700• Add – Purchases on 1/12/2012- 3,10,000• 17,25,700• Less sales 15 87,000• Value on 31st March 2013 1,38,700• Less -Depreciation 1,38,700 X 10x ½ 6935

• Written down value on 31/3/2013 - 1,31,765

Section 36: Deductions (Restricted to following clauses)

– Sec. 36 (1) (i) – Insurance Premium (stock / stores )– Sec. 36 (1) (ii) – Bonus/Commission to employees.– Sec. 36 (1) (iii) – Interest on Borrowed Capital (for

purpose of business / profession – Sec. 36 (1) (iv) – Employer’s Contribution to Recognized

Provident Fund & Approved Superannuation Fund.– Sec. 36 (1) (v) – Contribution towards Approved

Gratuity Fund (not to exceed 8.33 percent of salary )– Sec. 36 (1) (vii) Bad Debts (written off as irrecoverable )

• Sec. 37 (1) – General Deductions (Revenue expenditure related to business )

• Sec. 37 (2B) – Advertisement Expenses in Souvenir etc. published by Political Party is not allowed as deduction.

Amount not deductible • Section 40(a)- Interest , Royalty, fees for

technical services payable outside India or payable to non- resident in India is disallowed where TDS is not deducted

• (Aforesaid amount is chargeable to tax )

Payments to relatives 40 A(2)

• 40A(2) Any expenditure by way of Payment to relatives is liable to be disallowed in computing business profit to the extent such expenditure is considered as excessive or unreasonable having regard to fair market value of goods and services or facilities.

• Relative – husband , wife , brother , sister or any lineal ascendant or descendent of that individual

Lineal Ascendant means father, grandfather, great grand father... Lineal Descendant means son, grand son, great grand son....

Amount not deductible

• 40A(3) payment exceeding Rs 20,000 paid otherwise than by account payee cheques or Bank drafts.

• Expenditure incurred is otherwise deductible under provisions of the act for computing business income.

Sec. 43(B) – Disallowance of unpaid liabilities.

• Applicable when accounts are maintained under mercantile system

• The following expenses are deductible on payment basis • Sum payable by way of tax, duty , cess • Contribution to employees PF or superannuation fund

for welfare of employee• Bonus / commission paid to employees for service

rendered• Interest on loan payable • Salary in lieu of leave payable

Maintenance of accounts by certain person s(Sec 44AA)

• Specified professionals:Assessee carrying on profession of law, medicine, accountancy, architecture, technical consultancy, interior decoration, authorized representative, film artist, information technology professionalsWhose gross receipts in the profession exceed Rs.1,50,000 in all the three years immediately preceding the previous year or( for newly setup profession during current previous year in which business is commenced)

Maintenance of accounts by other Persons covered

u/s 44AA (2):• Any other persons engaged in any other profession or carrying

on any business other than section 44AA (1)• The requirement of compulsory maintenance of books of

accounts applies if-• Either the income from business or profession exceeds Rs

120000 or • The turnover or gross receipts exceed Rs 10 Lakhs in any one

of the three years immediately preceding the previous year.

Section 44AB compulsory audit

• 44AB section stipulates that every person carrying on business or profession is required to get his accounts audited by a CA

• In case of Business - if the total sales, turnover or gross receipts exceed Rs.1 crore

• In the case of profession gross receipts exceed Rs.25 lakhs

44AD computation of income on estimated basis in the case of tax payer engaged on certain

business• Section will be applicable to any business ( whether it is Retail

trade, or Civil construction or any other business).Applicable if the following conditions are satisfied:

• Assessee eligible for the purpose of this Section has to be an Individual / HUF/ Partnership Firm

• The assessee has not claimed any deduction u/s.10A,10AA,10B,10BA,80HHto 80RRB in the relevant Assessment Year;

• Income from the eligible business is estimated at 8 percent of the gross receipts or total turnover .

• Exempted from payment of advance tax • Exempted from maintenance of books of

account • Total Turnover/ Gross Receipt of the Assessee

in the previous year should not exceed Rs. 1 crore .

Following persons are not eligible to avail any benefit under this section

• A person carrying of profession as referred under section 44AA(1)

• Earning income in the nature of commission or brokerage

• Carrying of any agency business • A person who is in the business of plying,

hiring or leasing goods carriages•

44AE computation of income on estimated basis in the case of taxpayers engaged in business of

plying, leasing or hiring trucks

• Income Calculation:In case of Heavy Vehicle, Rs.5000/- per month per truckIn case of others, Rs.4500/- per month per truck

• "Goods Carriage and Heavy Vehicles" means as described in the Motor Vehicles Act

• "Eligible Assessee" is one who has NOT MORE THAN TEN TRUCKS.

• Maintenance of books of account is not

Computation of Profits & Gains of Business or Profession

Education

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