Business and Profession

8/2/2019 Business and Profession

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INCOME FROM BUSINESS AND PROFESSION

SECTIONS UNDER THIS HEAD:-The Third Head of Income under which the total income is computed and assessed under

the Act is The Profits and Gains from Business or Profession it is also known as BusinessIncome or Income from Business. Among the five heads of Income, major portion of Income-

Tax revenue is generated from business or profession. In practical life this is the most

important head of income.

Under this head we are required to take into consideration the profits and gains of a business or

profession including vocation carried on by the assessee.

SECTION WISE SUMMARY:

Section 28: It deals with the charging provisions and enumerates the classes of income tobe included in the profits and gains of business or profession.

Section 29: It deals with the computation of income from profits and gains of business or

profession.Section 30: It gives the items of expenses which are allowed to be deducted from businessincome, such as rent, repairs, insurance of building.

Section 31: It gives the deductions for rent, repairs and insurance of plant and machineryand furniture.

Section 32: Read with Section 34 lays down the conditions for allowing depreciations.

Section 36: It enumerates certain other deductions in computing income from profits andgains of business.

Section 37: It regulates the allowance of business expenditure in general and entertainment

expenditure in particular.Section 40: It gives the items of expenses which are not deductible.

Section 40A: It gives the items of expenses which are not deductible under certaincircumstances.

DEFINITION OF BUSINESS AND PROFESSION

[A] BUSINESS UNDER SECTION 2(13);-

According to section 2(13) Business includes any trade, commerce or manufacture or

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

The above definition is an inclusive definition and not an exhaustive definition.

It covers all types of occupation carried by a person with a view to earn profit. In simple words

the term Business denotes some real, substantial and systematic activity or conduct with the

aim or object of earning profit.

However,


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(a) Trade means conducting trade in the form of buying and selling of goods for the

purpose of earning profit

(b) Commerce means holding trade on a large scale. Trade on large scale basis

includes buying and selling with the aid of aids to trade, banking, insurance,

transport, communication etc.

(c) Manufacture means the process of conversion of raw material into finishedgoods, by the processing of raw materials.

(d) The expression any adventure or concern in the nature of trade, commerce or

manufacture refers to a single and isolated transaction which may be held for the

purpose of earning profit since it is not necessary that business may be conducted

right through the year.

[B] PROFESSION UNDER SECTION 2(36):-

The term Profession means any occupation which requires the use of manual as well

as intellectual skills or both.

Examples of Profession: a chartered accountant, a lawyer, an engineer, a doctor.When in the case if any professional is employed or associated in any way with any other

association from where he receives monthly remuneration in the form of salary, such income is

taxed under the head Income from Salary and not under the head Business or Profession.

Basis of charge under section 28:

The following incomes are taxable under the head Profits and Gains of Business or

Profession:-

1) Profits and Gains of any business or profession which are carried on by the assesseeat any time during the previous year.

2) Any compensation or other payment due to or received by an assessee, for loss of

agency, due to termination or modification of terms and conditions of such agency.

3) Income derived by a trade professional or similar association by way of rendering

of specific services to its member.

4) Profits on sale of import license.

5) Export incentives available to exporters (cash assistance granted under any export

scheme).

6) Any Refund of Custom Duty or Excise Duty received or due as drawback to any

person against exports.

7) The value of any benefit or perquisite whether convertible in to money or notobtained in the course of business or exercise of a profession.

8) Interest, Salary, Bonus, Commission or Remuneration due to or received by a

partner of the firm from such firm.

9) Any sum whether received or receivable for not carrying out any activity in relation

to any business or profession.

This is not applicable to;

a) Sum received on account of transfer of rights to manufacture or produce or

process of any article.

b) Sum received as compensation from the multilateral fund of the Montreal

Environment Program.

10) Income from a speculative business.


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11) Any sum received under Key-man Insurance policy including the sum allocated by

way of bonus on such policy.

12) Profit on transfer of Duty Entitlement Pass Book Scheme.

13) Profit on transfer on Duty Free Replacement Certificate.

COMPUTATION OF BUSINESS INCOME:

Section 29 provides that the income referred in Section 28 above shall be computed in

accordance with the provisions contained in section 30 to 43D.

Thus, the profits have to be separately worked out as provided in the Income-tax Act; the net

profit shown by the profit and loss account of the assessee is not the amount of taxable income.

The book profit is just the starting point for computing the taxable income. For computing the

taxable income the accounting profits must be adjusted in the following manner;

a) Deduct amounts expressly allowed to be deducted from net profits vide section 30to 37 of the Act; if not already deducted in the profit and loss account, and

b) Add back amounts expressly disallowed vide sections 40 and 40A, if already

deducted in the profit and loss account.

The resulting figure will be the taxable income from business/profession. The deductions

expressly allowed and disallowed as well as the manner of computation from the accounts are

discussed in detail below.

Deductions allowed from Income from Business/Profession:

1] Rent, Rates, Repairs, Taxes and Insurance of Building (Section 30):

The following deductions are allowed under this provision:

a) 1) where these premises are occupied by the assessee as a tenant, the rent, and the cost

of its repairs, if he has undertaken to bear the same.

2) If the assessee has occupied the premises, otherwise than as a tenant, the amount of

current repairs.

b) Land revenue, local rates or municipal taxes.

c) Any premium paid in respect of insurance against risk of damage or destruction of suchbuildings.

Any expenditure in the nature of capital expenditure shall not be included.

[2] Depreciation-Section 32and 34:

Depreciation means loss or fall in the value of an asset. This occurs because of wear tear

due to actual use. Depreciation is not visible like other expenses, till the time, the loss or fall in

the quality of an asset is physically noticed. However, under section 32 the assessee has to


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claim the deduction of depreciation in computing his income under the head profits and gains

from business or profession.

In order to claim depreciation, the assessee must fulfill the following conditions:-

I) CONDITIONS:

a) Assessee must be Owner of the Asset.

b) Asset should be a Specified Asset (Eligible Asset).

c) The asset must be used by the assessee for the purpose of business or profession.

d) Method of Depreciation: In accountancy depreciation can be provided either on straight

line basis or by the written down value method. However in income tax, only the

written down value method is allowed for charging depreciation.

e) Sale of an Asset: For income tax, no depreciation is allowed in the year of sale of the

asset. And also no profit or sale on sale of asset is calculated. The sale proceeds of the

asset concerned itself are deducted form the written down value of the asset and

depreciation is calculated on the balance remaining, in respect of the remaining assetsin the block.

f) Assets used for less than 180 days: Depreciation is allowed for the full year if the asset

is used for 180 days or more during the year. However, if the asset is used for less than

180 days, the depreciation allowance is restricted to 50% of the amount calculated at

the prescribed percentage of that block.

g) Foreign Car: No depreciation is allowed on motor car which is manufactured outside

India and is acquired on or after 1 st March, 1975 but before 1st April, 2001. This

condition does not apply when

1. If the assessee carries on a business of running the car on the hire for tourist, or

2. If the assessee using the car outside India in his business/profession in another

country.

COMPUTATION OF DEPRECIATION:

Depreciation is computed in respect of each Block of assets on the written down value

at the prescribed limits.

A) Block of assets:

1] Meaning: Block of assets means a group of assets in respect of which the same percentage

of depreciation has been prescribed [sec. 2(11)].

2] Types: All the assets are first divided into two main types: Tangible and Intangible.

3] Classes: Tangible assets are divided into following 3 classes: (1) Building, (2) Plant or

Machinery, and (3) furniture. Intangible assets (purchased after 01/04/1998.) are divided into

following 7 classes: (1) Know-how (2) Patents (3) Copyrights (4) Trade marks (5) Licenses (6)

Franchises and (7) other similar rights.


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4] Blocks: Different rates of depreciation are prescribed for different items even falling within

the same class. The items within a class eligible for the same rate of depreciation form a

separate group which is known as Block of Assets. For example, 4 rates of depreciation (5%,

10%, 20%, or 100 %.) are prescribed for assets falling under Building depending on use (*as

factory or as office etc.). So, there will be 4 Block of buildings for calculating depreciation.

B) Written Down Value of asset :The written down value of Block of assets for theprevious year 2007-08 will be calculated as shown below:

Step What is to be computed How it is to be computed

1) Opening written down value

(WDV)

Opening WDV of that block on 01/04/2007

2) Add: Assets added to Block Actual cost of asset of that block purchased from

01/04/2007 to 31/03/2008.

3) Less: Assets removed from the

Block

Sale proceeds on any asset of that block which is

sold, discarded etc during 01/04/2007 to

31/03/2008.

4) Closing written down value. Closing WDV as on 31/03/2008. [1+2-3].

C) Prescribed percentages of Depreciation:

Depreciation rates in respect of different categories of assets such as building, furniture, plant

and machinery, etc are prescribed in Income Tax Rules. These rates are applied to the closing

WDV of the assets computed as explained above to determine the amount of

depreciation allowable on following basis.

C) 50% depreciation for the assets used for less than 180 days during the year.

D) Depreciation is calculated in case of tangible assets according to straight line methodand not as per written down value method.

E) Depreciation will be deducted form total income, whether or not the assessee has madethe claim for such deduction in his return of income.

F) No depreciation is allowed on any motor car which is manufactured outside India.

G)No depreciation is allowed when the Block becomes empty through WDV is not zero.a. No depreciation can be claimed when WDV of a Block becomes negative

though block is not empty.

b. No depreciation is allowed when WDV of Block becomes Zero though the

Block is not empty.

D) Additional Depreciation of 20% on new Machinery and Plant (other than ships and

aircrafts)

Additional depreciation @20% of actual cost of such machinery of plant acquired and

installed after 31-03-2005 to.


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i) an assessee in the previous year in which it begins to manufacture or produce any article or

thing. However, no deduction shall be allowed if,

a) such machinery of plant is used earlier by any other person either within or outside India; or

b) such machinery or plant is installed in office or residence including guesthouse or

c) any such office appliances or road transport vehicles ord) Any such machinery or plant, the whole of actual cost of which is allowed as a deduction in

any one previous year.

E) UNABSORBED DEPRECIATION [U/S 32 (2)]

Where profit earned by a business or profession is not sufficient to absorb the amount of

depreciation allowance, then such amount of depreciation to the extent not absorbed is known

as unabsorbed depreciation. Then such amount of unabsorbed depreciation can be deducted

from the income of any other business or from the income chargeable to tax under different

heads of income of the assessee for the same assessment year. If carried forward to the

subsequent assessment years, to set off against the future taxable income. This is subject toprevious u/s 72 (2) and u/s 73(3).

The Balance of Unabsorbed Depreciation shall be carried forward the following

assessment year to be set off. No time limit has been fixed for the purpose of carrying forward

of unabsorbed depreciation. It can be carried forward for indefinite period, and can be set off

against any income whether chargeable under the head Profits and gains of Business or

Profession or under any other head. From assessment year 2001-02, set off would be allowed

in subsequent years even if the business of profession, for which the depreciation allowance

was originally computed, ceased to exist in the relevant previous year.

4. Insurance under section 36(1)(i):

The amount of insurance premium paid by cheque, through electronic mode, credit card

etc., other than cash to cover the risk of damage or destruction of stocks, stores, cattle and on

health of employees under anapproved scheme is allowable as deduction in computation of the

income from business of profession.

5. Bonus or Commission Paid to Employee [U/S 36 (1) (ii)]

Any amount of bonus and commission for services rendered paid to the employee is an

allowable deduction. However, such bonus and commission would not have been paid to himas profits or dividend.

6. Interest on Borrowed Capital [U/S 36(1) (iii)]

Deduction is allowed in respect of respect of interest paid on borrowed capital for the

purpose of business or profession. But, interest paid by the firm to its partners will be a

permissible deduction within limits specified u/s 40 (b). however, in case of extension of

existing business/profession, the interest on capital borrowed for the purchase of asset, the

interest paid from the data on which capital was borrowed up to the date such asset was first

put to use shall not be allowed as deduction u/s 36 (i) (iii). Thus the interest would be added to

the cost of acquisition of the said asset and depreciation and would be allowed thereon.


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7. Discount on Zero Coupon Bond (ZCBs) on prorate basis having regard to the period

of life of such ZCBs [U/S 36(1)(iiia)]

If a company, fund or Public Sector Co. issues such ZCBs the discount will be allowed

as a deduction on prorate basis subject to the rules prescribed there in.

8. Contribution to Recognized Provident Fund or an Approved Super annuation Fund

[U/S 36 (1) (iv)]

The contribution to Recognised Provident Fund or an Approved Superannuation Fund

within the limits as specified under the Act will be an allowable deduction.

9. Contribution to an Approved Gratuity Fund [U/S 36 (1) (V)]

Any amount which is contributed by an assessee being the employer to an approved

gratuity fund will be allowed as deduction. Such fund must be created by the employer for the

exclusive benefit of his employees under an irrecoverable trust.

10. Animals used for Business [U/S 36 (1) (vi)]

Deduction is allowable in respect of animals used for the purpose of business or

Profession, if such animals have died or have become permanently useless. The amount of

deduction will be the difference between the actual cost to the assessee of the animals and the

amount realized, if any, in respect of carcasses or animals.

11. Y2K Expenditure [U/s (1) (xi)]

Any expenditure incurred between 1st April, 99 to 31st March, 2000, wholly and

exclusively in respect of a non-Y2K complaint computer system used in the business or

profession of the assessee, so as to make it Y2K complaint, would be allowed as revenue

expenditure while computing income from business and profession of the assessee for A.Y.

2000-01.

12. Any Amount of Banking Cash Transaction tax paid [U/s 36 (1) (xiii)]

Any amount of BCPTT paid during the year on taxable banking transactions entered in by the

assessee would be allowed as expenditure.

GENERAL EXPENDITURE FOR THE PURPOSE OF BUSINESS OR

PROFESSION [U/S 37]

Any other expenditure, not specifically covered by the provisions of the Act, but incurred for

the purposes of business or profession, shall be allowed as deduction, if it satisfies the

following conditions:

a) Such expenditure is not of the nature described u/s 30 to 36.

b) Such expenditure is not in the nature of capital expenditure of personal expenses of the

assessee.


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c) Such expenses are wholly and exclusively incurred for the purpose of business or

profession.

d) It should be in respect of business carried on by the assessee.

e) If such expenditure incurred for the purpose which is an offence or which is prohibited

by law, shall notbe deemed to have been incurred for the purpose of business orprofession and hence shall not be allowed.

Expenses Allowable:

1. Purchase of Materials.

2. Royalties

3. Freight and carriage

4. Wages

5. Salaries.

6. Pension paid to employees on retirement

7. Premium for insurance against loss of profit

8. Technical fees.9. Legal expenses

10. Loss due to theft

11. Loss on sale of investments

12. Embezzlement of cash etc

13. Discounts

14. Staff welfare expenses

15. Traveling expenses

16. Fees and subscription

17. Telephone expenses including deposit under OYT scheme.

18. Damages

19. Commission and Brokerage

20. Audit fees

21. Directors remuneration

22. Profession tax

23. Expenses on local festivals such as Diwali, Muhurta, etc.

24. Provision for sales tax payable

25. Expenses on registration of trade marks.

Expenses not deductible

1. Donations

2. Charity and Presents3. Income tax, advance income tax, wealth tax, estate duty.

4. Legal expenses incurred to defend criminal liability

5. Fines, penalty, resulting from contravention of any law.

6. Drawings by the proprietor including self use of goods

7. Depreciation of excess of the prescribed limits

8. Fines paid for violation of the provisions of Factories Act or P.F. Act or any

other law.

9. Expenses of a capital nature.

10.Expenses incurred for the purpose of which is an offence or which is prohibited

by any law.


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EXPENSES EXPRESSLY DISALLOWED:

The following expenses are expressly disallowed while computing business income.

Thus if these expenses are debited to the Profit and Loss A/c, they should be added back to the

net profit to arrive at taxable income.

1. Advertisements in Political Souvenir Sec 37(2B): Expenses on advertisements in

any souvenir, brochure, tract, pamphlet or the like published by a political party are to

be entirely disallowed.

2. Certain Payments Sec 40(a): Any interest, royalty, fees for technical services or

other sum taxable under the Act and payable outside India on which no tax is paid or

deducted at source, will not be allowed as a deduction.

However, if the tax in respect of such payment is paid or deducted in a subsequent

year, it will be allowed as deduction in such subsequent year.

3. Rate or Taxes Based on Profit Sec 40(a) (ii): Any rate or tax, levied on the profits

or gains of any business or the profession is not allowed as a deduction (e.g. Income

Tax. Similarly any interest/penalty/fine for non-payment or late payment of Income Tax

is not deductible.)

4. Wealth Tax Sec 40(a) (iia): Any amount paid as Wealth Tax, charged under the

wealth tax, Act 1957, or tax of a similar nature chargeable under any law outside India

is not allowed as a deduction.

5. Salary Payable Outside India Without Tax Deduction Sec 40(a) (iii): Any salaries

payable outside India or in India to a honour resident on which no tax has been paid or

deducted there from will not be allowed as a deduction.

6. Provident Fund Payment Without Tax Deduction at Source Sec 40(a)(iv): Any

payment to a provident fund (or other fund established for the benefit of employees of

the assessee) is not deductible if the assessee has not made effective arrangements to

secure that tax shall be deducted at source from any payment made from the fund which

are chargeable to tax under the head Salaries.

7. Tax on Perquisites Paid by the Employer Sec 40(a)(v): Tax on perquisites of

employee actually paid by an employer referred to in section 10 (10CC) is not allowed

as deduction.

8. Remuneration Paid by Firm to partner Sec 40(b):

a) Non-Working Partner: Non working partner means the partner who is not actively

engaged in conducting the affairs of the business/profession of the firm concerned.

Remuneration (salary, bonus, commission etc) paid by a firm to a non-working partner

is disallowed while computing the income of the firm.

b) Working Partner: Working partner means the partner who is actively engaged in

conducting the affairs of the business/profession of the firm concerned.

Professional Firms:


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Professional firms means firms carrying on professions like legal medical, engineering,

architectural, accounting, technical consultancy, interior decoration or any other notified

profession (e.g. authorized representative or firm artist).

Book Profit:

Book profit means the net profit, as per the profit and loss account, computed in the manner

laid down under sections 28 to 44D of the Income Tax Act. The remuneration paid or due to

partners if debited to the profit and loss account, will have to be added back to the net profit for

computing the book profits.

a) Interest Paid by Firm to Partners Sec 40(b): While computing the income of the firm by

any payment of interest to the partners on their capital shall be allowed as deduction provided

such payment of interest is authorized by the partnership deed and such amount of interest does

not exceed the amount calculated at the rate of 12% (18% till 31

st

May 2002) simple interest. Ifsuch payment exceeds the limit specified, by the amount it exceeds is disallowed U/S 40.

Similarly such payment of interest if not authorized by the partnership deed, the whole amount

of such amount of interest is disallowed U/S 40(b).

b) Interest, Salary etc, paid by AOP/BOP to its Members Sec 40(ba): In case of Association

of Persons or Body of Individuals any payment by way of interest, salary, bonus, commission

or remuneration paid by it to its member is not allowed as deduction from the profits of

AOP/BOI.

9. Payments to Certain Persons which are Unreasonable or Excessive Expenditure

Section 40A(2):Any expenditure by way of payments which are made to the Specified Persons and if

in the opinion of the Income Tax officer such payments amount to be excessive or

unreasonable, then the payment/expenses to the extent treated as unreasonable or

excessive will not be allowed as deduction in computing the business income. The

specified persons for the purpose of the provision are:

i. Relative of the assessee who is an individual, or

ii. Director, partner, member or their relatives, if the assessee is a company, or a

firm, or AOP or HUF, or.

iii. Any other person who is having substantial interest in the business or profession

of the assessee or the relative of such substantially interested person.

10. Expenses Exceeding Rs.20,000 paid in Cash, Section40A(3) and 40A(4): Where the

assessee incurs any revenue expenditure in respect of which payment is made of a sum

exceeding Rs.20,000 in cash or by bearer cheque (not crossed cheque or a crossed bank

draft) 100% of such expenditure shall not be allowed as a deduction. Even if the

expenditure is bonafide for the business, the same will be disallowed to the extent of

100% if payment thereof exceeding Rs.20, 000 is made by cash. However, this

provision is related under certain conditions and circumstances which are prescribed

having regarded to the available banking facilities and over relevant factors.

11. Provision for Gratuity Section 40A (7):No deduction is to be allowed in respect of

any provision for the payment of gratuity to employees by whatever name called.


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However, this provision does not apply to any provision for making a contribution to an

approved gratuity for or for the payment of gratuity which has become payable during

the year.

12. Payment to Non-Statutory Funds- Section 40 A (9): No deduction is allowedcomputing income from business in respect of any sum paid by the assessee as

employer towards setting up or formation of or of as contribution to any fund, trust or

other institution, etc. for any purpose, except the payment to recognized provident fund,

approved gratuity fund or approved super annuation fund or for other legal

requirements.

13. Unpaid Statutory Liability Section 43(B): Deduction in respect of the following

sums is allowed only on payment basis (not on due basis even if books of accounts

are maintained on the basis of Mercantile System of Accounting).

i. Any sum payable by6 way of tax or duty, or fees etc. under any law for the time

being in force.

ii. Any sum payable by6 an employer by way of contribution to any provident fund

or super annuation fund or any other fund for the welfare of employees.

iii. Any sum payable as bonus or commission to employees for service rendered.

iv. Any sum payable as interest on any loan from any Public Financial Institution

(i.e. ICICI, IFCI, IDBI, LIC and UTI) a State Financial Corporation or State

Industrial Corporation.

14. Securities Transaction Tax section 40(a) (ib): Shile computing income from

business or profession, no deduction is allowed for any sum paid on account of

securities transaction tax.

15. Fringe Benefit Tax Section 40(a) (ic): No deduction is allowed for any sum paid on

account of fringe benefit tax. It is payable on certain expenses which are deemed to be

benefits provided to employees.

INCOME FROM OTHER SOURCES (SECTIONS 56 TO 59)

INTRODUCTION TO SECTION 56 TO 59:-Income from other sources is the fifth and the last head of the income. As the name only

suggests, it is a residuary head and covers all the income which are not covered under the

earlier 4 heads of Income.

SECTION WISE SUMMARY:-

Section 56:- Lays down what incomes are taxable under this head.

Section 57:- Lays down the deductions which are allowable.

Section 58:- Lays down amounts which are not deductible.

Section 59:- Recovery against earlier deductions.


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INCOMES CHARGEABLE UNDER HEAD INCOME FROM

OTHER SOURCES:-Income of every kind which is not exempt from Income Tax under the Act and which does

not fall under any other head is taxed under the head Income from Other Sources.

Income from other sources is a residuary head of income which includes all incomes whichare not covered by other heads of income and which are not exempt from tax.

As per Section 56 following incomes are specifically taxable under this head:-

1) Dividend: - Dividend received from a domestic company or from UTI or any other

recognized Mutual fund is exempt U/S 10(33). Dividends from a foreign company or from a

co-operative society or deemed dividend are taxed under this head.

The following points should be noted in this regard:-

i) Dividends are taxable under this head even if the shares are held on stock-in-trade.

ii) As per section 8, final dividend is taxable in the year in which it is declared whereas interim

dividend is taxable in the hands of shareholders when it is made unconditionally available

them.

iii) Gross amount of dividend i.e. net dividend received plus the tax deducted at source if any,is included in taxable income.

iv) Dividend is taxable even if it is paid out of the exempt income of the company e.g. out of

agricultural income of the company or out of capital profits or paid in kind.

v) The following shall not be treated as dividends:-

a) Any payment made by a company on purchase of its own shares in accordance with the

provisions of section 77A of the companies Act.

b) Any distribution of shares under the scheme of demerger by the resulting company to the

shareholder of the demerged company whether or not there is a reduction of capital in the

demerged company.

2) Winnings from lotteries etc:-

The amount of winnings from lotteries, crossword puzzles, card games, gambling is taxed U/S56. Lottery includes prizes awarded to any person by draw of lots or by chance or in any

other manner whatsoever, under any scheme or arrangement by whatever name called (e.g.

prizes under play win). Card game includes any game show, an entertainment programme

on television or electronic mode; in which people compete to win prizes (e.g. Kaun Banega

crorepati).

3) Employees Contribution to Staff Welfare Schemes:-

Any sum received by the assessee from his employees as the contribution to any staff welfare

scheme such as Provident Fund, Super annuation fund etc. is taxable under this head, if it

cannot be charged to tax under the head Profits and Gains of Business or Profession

4) Interest on securities:-

Income by way of Interest on securities, if it is not chargeable under this head Profits and

Gains of Business/ Profession.

5) Income from Machinery, Plant or Furniture Let Out:-

Income from machinery, plant or furniture let on hire is taxable under this head, if not taxable

as income from business.

6) Income from Machinery etc. with Building Let Out:-

When an assessee lets on hire machinery, plant or furniture and also building and the letting of

the building is inseparable from letting of machinery, plant or furniture, the income is taxable

under this head, if not taxable as income from business e.g. an auditorium or cinema theatre let

along with seating facilities, air-conditioners, equipments, security etc.

7) Key man Insurance Policy:-


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Any sum received under a Key man Insurance Policy including any bonus on such policy, is

taxable under this head, if not charged as Income from Salaries or Income from Business.

8) Any sum of money exceeding Rs.50, 000 received without consideration by any individual

or a HUF from any other person on or after 1st April, 2006, in such cases, the whole of such

sum is taxable under this head.

This clause however, does not apply to any sum of money received:-i) From any Relatives.

ii) On the occasion of the marriage of the individual.

iii) Under a will or by way of inheritance.

iv) In contemplation of death of the prayer.

v) From a local authority or

vi) From any fund, foundation or university or educational institution or hospital or trust.

Other Incomes which are chargeable under this head:-1) Directors Fees.

2) Interest on: Bank Deposits; Private Loans; National Saving Certificates; Deposits with

companies;3) Income from sub-letting of property.

4) Ground Rent.

5) Royalty received by an author.

6) Annuity deposit refund.

7) Salary payable to M.Ps and M.L.As.

8) Casual Income.

9) Interest on Income Tax Refund.

10) Family Pension received by legal heirs after death of an employee.

11) Rent from a vacant plot of land.

12) Agricultural Income from a place outside India.

13) Winnings from Races.14) Examination fees received by a teacher from University, honorarium for lectures as visiting

lecturer.

15) Income from undisclosed sources.

16) Gratuity paid to a director who is not an employee of the company.

17) Royalty and rent from mining.

18) Refund of deposit under National Savings Scheme 1987.

19) Income from investments under various schemes of UTI.

ALLOWABLE DEDUCTIONS WHILE COMPUTING

INCOME FROM OTHER SOURCES (SECTION 57):-

1) In case of Income by way of Dividend and Interest on securities: - Any reasonable sum

paid for the collection or realization of dividend or interest.

2) Deduction in respect of employees contribution towards staff welfare schemes: -

Deduction in respect of any sum received by an assessee as contribution from his employees

towards any welfare fund of such employees is allowable only if such sum is credited by the

assessee to the employees account in the relevant fund before the due date.

3) In the case of Income from Hire: - In case of hire income, the following deductions are

allowable:-i) Rent, rates and taxes in respect of Buildings.


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ii) Current repairs to building and plant, machinery or furniture.

iii) Premium for insurance of building, plant, machinery or furniture.

iv) Depreciation..

v) Any other expenditure incurred wholly and solely for earning such income, provided it is

not a capital expenditure.

4) Standard Deduction in the case of family pension: - In the case of Income in the nature of

family pension, the amount deductible is

i) Rs.15, 000/- or

ii) 331/3 percent or 1/3rd of such income, whichever is less?

For this purpose Family Pension means a regular monthly amount payable by the employer

to a person belonging to the family of an employee in the event of his death.

5) Any Other Expenses for Earning Income: - Any other expenditure is deductible U/S 57

if the following three basic conditions are satisfied:-

i) The expenditure must be incurred wholly and exclusively for the purpose of earning the

income.ii) The expenditure must not be in nature of capital expenditure.

iii) It must not be in the nature of personal expenses of the assessee.

AMOUNT NOT DEDUCTIBLE SECTION 58:-The following expenses are not allowed to be deducted while computing, Income from Other

Sources.

i) Personal expenses of the assessee.

ii) Any interest which is payable outside India, on which tax has not been paid or deducted.

iii) Any salaries if it is payable outside India, unless tax has been paid thereon or deducted

there from.iv) Wealth Tax paid.

v) Disallowances under Section 40A

.

RECOVERY AGAINST EARLIER DEDUCTIONS (SECTION 59):If any amount is recovered against any Loss, Expenditure or Liability deducted earlier

(e.g. recovery of bad debts deducted earlier), it is taxed as income under this head in the year of

recovery. This is similar to provisions of Section 41(1) applicable in respect of such recoveries

to be included in computing income from business

BASIC CONCEPTS OF VAT

What is VAT?Value Added Tax (VAT) is a modern and progressive form of sales tax. It is charged and

collected by dealers on the price paid by the customer. VAT paid by dealers on their purchases

is usually available for set off against the VAT collected on sales. VAT in the form of

CENVAT (Excise) is already in force in India for quite some time.

Is VAT yet another Tax?No, it will replace the following four existing taxes:* The Bombay Sales Tax Act, 1959


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* The Maharashtra Sales Tax on the Transfer of Right to Use Any Goods For Any Purpose Act,

1985.

* The Maharashtra Sales Tax on the Transfer of Property in Goods Involved in the Execution

of Works Contract (re-enacted) Act, 1989

* The Bombay Sales of Motor Spirit Taxation Act, 1958.

WHY CHANGE TO VAT?VAT is a modern and progressive tax system now used in over 130 other countries. Most of

the States in India have agreed to change over to a VAT system providing uniformity. A few

remaining States have agreed to VAT in principle and are likely to join it later.

HOW VAT IS CHARGED:All registered dealers regardless of where they are in the chain of manufacture and production

must change VAT on their sales of taxable goods and collect it from their customers.

Registered dealers must issue a tax invoice to other registered dealers showing the VAT

amount being charged as a separate amount.Registered dealers who pay VAT on their purchases can normally claim a Set-Off for

the VAT paid to their supplier. As a result, VAT is not a cost to the dealers. Dealers must

ensure that tax is charged separately in their purchase invoice in order to be eligible to claim

set-off.

Certain dealers who sell mainly to consumers at retail level can opt for a simplified

system of VAT calculation and payment under a composition scheme. Under the composition

scheme, dealers will not issue a tax invoice or show VAT as a separate amount on a bill or cash

memorandum.

WHAT IS THE RATE OF VAT:Under the VAT, the tax rates have been simplified. There are only two main rates of VAT:-* 4% for items consisting mainly of raw materials used in the manufacturing process, IT

products and some goods of common consumption.

* 12.5% for all goods unless they are listed under the other rates.

* Food grains including pulses, milk, vegetables and books are not subject to VAT.

In addition, there are two other rates for specific items:-

* 1% for gold, silver, other precious metals, precious and semi precious stones and their

jewellery.

* 20% for liquor.

The only exception to these rates is for the sale of motor spirits, which have special tax rates

based on the existing Bombay Sales of Motor Spirit Taxation Act, 1958, subject to a floor rateof 20%.

DEFINITIONS UNDER MVAT:-

Section 2 of the MVAT Act defines some important words like Goods, Business, Manufacture,

Dealer, Sale, Sale Price, Purchase Price and Re-sale. Section 2, we can say, contains a mini-

dictionary. It defines and explains the words frequently used in the MVAT Act, at one place, in

the beginning itself. Once defined, these words carry the same meaning throughout the Act.

The definitions also help us to understand the basic elements of the liability for sales tax. Let us

study these definitions one by one:-


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1) BUSINESS U/S 2(4):-

Business includes,-

(a) Any service;

(b) Any trade, commerce or manufacture;

(c) Any adventure or concern in the nature of service, trade, commerce or manufacture;Whether or not the engagement in such service, trade, commerce, manufacture, adventure

or concern is with a motive to make gain or profit and whether or not any gain or profit

accrues from such service, trade, commerce, manufacture, adventure or concern.

Explanation:For the purpose of this clause:-

1) The activity of rising of manmade forest or rearing of seeding or plants shall be deemed to

be business.

2) Any transaction of sale or purchase of capital assets pertaining to such service, trade,

commerce, manufacture, adventure or concern shall be deemed to be transaction comprised inbusiness.

3) Sale or Purchases of any goods, the price of which would be credited or, as the case may be,

debited to the profit and loss account of the business under the double entry system of

accounting shall be deemed to be transactions comprised in business.

4) Any transaction in connection with the commencement or closure of business shall be

deemed to be a transaction comprised in business.

Following activities and transaction shall be deemed to be business:-

I) Raising of manmade forest or rearing of seeding or plants.

II) Sale or Purchase of capital assets pertaining to service, trade, commerce, manufacture,

adventure or concern.

III) Sale or Purchase of any goods the price of which would be credited or, as the case may be

debited to profit and loss account.

IV) Any transaction in connection with the commencement or closure of business.

EXAMPLES OF BUSINESS:Activities Business or Not Reasons

1) Sale of Machinery part by Machinery

Manufactures

Business Trade and Commerce

2) Sale of Building Not a Business Building is not goods

3) Research activity Not a Business Not dealing in Goods

4) Sale of Scrap Business Amount credit to the

business

5) Sale of tender form by MSEB Ltd. Not a Business Non Sales Transaction

2) DEALERS U/S 2(8):-


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PROVISION:Dealer means any person who, for the purposes of or consequential to his engagement in or,

in connection with or incidental to or in the course of, his business buys or sells, goods in the

state whether for commission, remuneration or otherwise and includes:-

a) a factor, broker, commission agent, delcredere agent or any other mercantile agent, by

whatever name called, who for the purposes of or consequential to his engagement in or in

connection with or incidental to or in the course of the business, buys or sells any goods on

behalf of any principal or principals whether disclosed or not;

b) an auctioneer who sells or auctions goods whether acting as an agent or otherwise or, who

organizes the sale of goods or conducts the goods belonging to any principal whether

disclosed or not and whether the offer of the intending purchaser is accepted by him or by the

principal or a nominee of principal;

c) a non-resident dealer or as the case may be, an agent, residing in the state of a non resident

dealer, who buys or sells goods in the state for the purposes of or consequential to his

engagement in or in connection with or incidental to or in the course of the business;

d) any society, club or other association of persons which buys goods from, or sells goods to,

its members.

EXCEPTIONS:

Exception I:-

Any agriculturist who sells exclusively agricultural produce grown on land cultivatedby him personally shall not be deemed to be a dealer within the meaning of this clause;

Exception II:-

An educational institution carrying on the activity of Manufacturing, buying or selling

goods, in the performance of its functions for achieving its objects, shall not be deemed to be a

dealer within the meaning of this clause;

Exception III:-

A transporter holding permit for transport vehicles (including cranes granted under

Motor Vehicles Act, 1988 (59 of 1988), which are used or adopted to be used for hire or reward

shall not be deemed to be a dealer within the meaning of this clause in respect of sale purchase

of such transport vehicles or parts, components or accessories thereof.

Comments:-Dealer means any person in the course of business who:-

1) Buy or Sells goods in the state.

2) For valuable considerations. It includes:-

i) A factor, broker, commission agent, del-credere agent or any other mercantile agent by

whatever name called.ii) An auctioneer.


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iii) A non-resident dealer or an agent of a non-resident dealer.

iv) Any Society, Club or other association of persons who buys goods or sells goods to its

members.

Following persons, bodies and entitles who sell any goods directly or by auction or

otherwise for consideration are deemed to be dealers under the act.

a) Customs department of the government of India;b) Department of union government and any state government;

c) Local authorities;

d) Port Trusts;

e) Public Charitable Trust;

f) Railway Administration;

g) Konkan Railway Corporation Ltd;

h) Incorporated or Unincorporated Society, clubs or other Association of persons;

i) Insurance and Financial Corporations, Institution or Companies and Schedule Banks;

j) Maharashtra State Road Transport Corporation;

k) Shipping, Construction and Air Transport Companies Airlines and Advertising Agency.

i) Any other corporation, company, body or authority owned or constituted by, or subject toadministrative control of the Central Government or any State Government or any local

authority.

However, as per exception I, II, III added to this section, it excludes the following from the

definition of Dealer and as such shall not be a dealer.

i) An Agriculturalist who sells exclusively agricultural products grown on land cultivated by

him personally.

ii) An Educational Institution carrying on the activity of manufacturing, buying or selling

goods in the performance of its function for achieving its objects.

iii) A Transporter holding permit for transport vehicles including cranes, used or adopted to be

used for hire or reward in respect of sales or purchase of such transport vehicles or parts,

components or accessories thereof.

Mere buying or selling the goods is not enough. There must be intention and purpose of

person to carry on business of buying and selling goods. The intention of carrying on business

must be clear. Mere buying or selling would not constitute a person as dealer.

EXAMPLES OF DEALER:PERSON WHETHER

A DEALER

REASONS

1) Chartered Accountants No He gives services not deals in goods.

2) Educational Institutions No Specifically Excluded

3) Hospitals(sale of old Machinery) Yes To extent of sale of old Machinery

4) Transporter No Specifically Excluded

5) Auction on behalf of custom Yes Sale of Confiscated Goods

6) Sale of Vehicle by State transport

corporation

Yes Sale of Transport vehicles.

7) Carrying of passengers No Service


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3) GOODS U/S 2(12):-

PROVISON:

Goods means every kind of moveable property not being newspapers, actionable claims,

money stocks, shares securities or lottery tickets and includes live stocks, growing crop, grass

and trees and Plants including the produce thereof including property in such goods attachedto or forming part of the land which are agreed to be severed before sale or under the contract

of sale.

COMMENTS:-Goods have been defined as any kind of moveable property. Goods includes live stock,

growing crops, grass and trees and plants, includes property in such goods and all other things

attached to or forming part of the land which are agreed to be cut before sale. However, goods

does not include Newspapers, Actionable Claims, money, stocks, shares and securities and

Lottery tickets.

Goods should be marketable. It is not necessary that goods should be generally available inthe market. What is required is that goods should be marketable i.e. which could be bought and

sold in the market. Even one purchase is enough to make it marketable.

EXAMPLES:-Commodities Whether goods under MVAT Tax Act.

a) Electric Equipment Yes

b) Purchase of Electric Meter Yes

c) Livestock No

d) Stock & Shares No

e) Television Set Yes

f) Machinery Yesg) Land No

h) Motor Car Yes

i) Chicks Yes

j) Newspaper No

5) SERVICE U/S 2(27):-Service means any service as may be notified by the State Government, from time to time, in

the Official Gazette.

COMMENTS:-

Basically, services involve use of labour or skills and hence not liable to VAT which is a tax on

goods. Section 2(4) (a) treats service as business and hence liable to VAT. However, only

those services notified by the Government will covered. This is an enabling provision to cover

services under VAT, in future

4) MANUFACTURE U/S 2(15):-

PROVISIONS:


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Manufacture, with all its grammatical variations and cognate expressions, includes,

producing, making, extracting, altering, ornamenting finishing or otherwise processing,

treating or adapting any goods.

COMMENTS:

The term Manufacturing means producing, making, extracting, altering, ornamenting and

finishing. The term manufacture also includes processing, treating or adapting any goods,

having any regard to impact thereof on the goods to the extent of alteration in the nature,

character or utility of any goods brought about by such process.

Following tests can be applied to find out whether particular activity is manufacturing or not:-

a) There should be some process on goods.

b) The process may be carried out by dealer or any other person employed by the dealer.

c) The original goods must be changed in substance or physical, and

d) The change must result in to new, different commercial commodity.

EXAMPLES:-Activities Manufacturing / not

Manufacturing

a) Cutting and Polishing of Marbles

b) Making Vessels from Copper

c) Refining of Crude Oil

d) Polishing of Furniture

e) Making of Furniture from Wood

f) Sewing Of Shirts

g) Labeling

h) Dispensing of medicines

i) Assembling car from various parts

j) Assembling Computer for customers

household

k) Manufacturing of Ball Bearings

l) Assembly of TV sets from various parts

m) Processing shrimps and prawns

n) The cutting of paper from reel into reams

o) Making wooden boxes for packing

p) Fitting of Glasses into frames

q) Repairing & removing leakage from

empty drum

r) Polishing of stainless steel utensils

Not Manufacturing

Manufacturing

Manufacturing

Not Manufacturing

Manufacturing

Manufacturing

Not Manufacturing

Not Manufacturing

Manufacturing

Manufacturing

Manufacturing

Manufacturing

Not Manufacturing

Not Manufacturing

Manufacturing

Not Manufacturing

Not Manufacturing

Not Manufacturing


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s) Extracting oil and purification

t) Preparation of Accounts Books from

Papers

u) Making utensils from steels

v) The rolling of biddies by hand

w) Polishing Gold Ornaments

x) Cutting iron sheets into small sheets

y) Preparing Accounts Papers

Manufacturing

Manufacturing

Manufacturing

Not Manufacturing

Not Manufacturing

Not Manufacturing

Manufacturing

Business and Profession

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