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Contents

1. 2. 2.1. 2.2. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. INTRODUCTION........................................................................................................................... 2 PROFITS & GAINS from BUSINESS or PROFESSION .......................................................... 3 BUSINESS [Section 2(13)].............................................................................................................. 3 PROFESSION [Section 2(36)] ....................................................................................................... 4 UNDER THE INCOME TAX ACT, 1961 .................................................................................... 5 Explanation of Profit ...................................................................................................................... 5 Profits and gains of Business or Profession- Income Tax Act, 1961 ........................................... 6 Income Chargeable under the Head Section 28 ....................................................................... 9 Business Income NOT Taxable under the Head ........................................................................ 11 Computation of Profits and gains of Business or Profession Section 29 ........................... 12 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. 3.8. 4. 5. EXPENSES NOT DEDUCTABLE UNDER SECTION 40 ...................................................... 30 EXPENDITURE ALLOWED ONLY ON ACTUAL PAYMENT BASIS -SECTION 43B ... 33 ILLUSTRATIONS ........................................................................................................................ 36 BIBLIOGRAPHY ......................................................................................................................... 45

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. 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.

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 ones 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.

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 moneys 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 lawyers professional service to another would be assessable as a lawyers 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.

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 Profits and gains of business or profession chargeability/ scope of income under this head Income from profits and gains of business or profession, how computed? Rent, rates, taxes, repairs and insurance for buildings Repairs and insurance of machinery, plant and furniture Depreciation Treatment of unabsorbed depreciation Tea development account/Coffee development account and Rubber development account Site restoration fund 33ABA 29 30 31 32 32(2) 33AB Section No. 28

Expenditure on scientific research Expenditure for obtaining licence to operate telecommunication services Expenditure on eligible projects or schemes Deduction in respect of expenditure on specified business Expenditure by way of payment to association and institutions for rural development programmes Expenditure on agricultural extension project Expenditure on skill development project Amortisation of certain preliminary expenses Amortisation in case of amalgamation or demerger Amortisation of expenditure incurred under voluntary retirement scheme Other deductions Bonus or commission to employees Interest on borrowed capital Discount on zero coupon bonds Employers contribution to a recognised provident fund or approved superannuation fund Employers contribution to an approved gratuity fund Sums received from employees towards certain welfare schemes if credited to their accounts before the due date Bad debts Expenditure on promoting family planning amongst the employees General deductions Advertisement to political parties

35 35ABB 35AC 35AD 35CCA

35CCC 35CCD 35D/Rule 6AB 35DD 35DDA 36 36(1)(ii) 36(1)(iii) 36(1)(iiia) 36(1)(iv)

36(1)(v) 36(1)(va)

36(1)(vii) 36(1)(ix) 37(1) 37(2B)

Building, etc., partly used for business and partly for personal purpose. Amounts not deductible Expenses or payments not deductible in certain circumstances Payments to relatives/related persons Disallowance out of cash expenditure exceeding Rs.20,000

38 40 40A 40A(2) 40A(3)/ Rule 6DD

Disallowance in respect of provision for gratuity Disallowance in respect of contribution to non-statutory funds Deemed profits chargeable to tax Actual cost Written down value Certain deductions to be only on actual payment Maintenance of accounts by certain persons carrying on business or profession Compulsory audit of accounts Special provisions for computing profits and gains of business of civil construction Special provisions for computing profits and gains of business of plying, hiring or leasing goods carriage

40A(7) 40A(9) 41 43(1) 43(6) 43B 44AA/Rule 6F

44AB/Rule 6G 44AD

44AE

Special provisions for computing profits and gains of shipping business in 44B the case of non-residents Special provisions for computing profits and gains of business of operation of aircraft in the case of non-residents 44BBA

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.

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.

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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)

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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 Add : Expenses disallowed/Inadmissible Expenses [i.e. items already debited in P/L A/c but not eligible for deduction] Less : Incomes Credited in P/L A/c to be treated separately under difference heads of income Less : Expenses allowed as per Provisions Income from Business (xxx) Xxx (xxx) Xxx 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 Income from Business

(xxx) Xxx

Computation of Income from Profession Receipts relating to Profession (on Cash Basis) Less: Payment relating to profession (both cash and accrual basis) Income from Profession Xxx (xxx) Xxx

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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:
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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.
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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

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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.

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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 1 day of previous year
st

(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.

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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 Add: P5 Less: P1

70 Lakhs 20 Lakhs (15 Lakhs) 75 Lakhs

Less: Depreciation @ 15% Closing WD.V. as on 31/3/2008 (11.25 Lakhs) 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 Add: P5 Less: P1 70 Lakhs 20 Lakhs (15 Lakhs) 75 Lakhs Less: Depreciation @ 15% on 55 Lakhs Less: Depreciation @ 7.5% on 20 Lakhs Closing W.D.V. as on 31/3/2008 (1.50 Lakhs) 65.25 Lakhs (8.25 Lakhs)

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Illustration : Compute the written down value from the following information for the assessment year 2006-07 Depreciated value on April 1, 2005 Rs. 10,40,000 2,60,000 70,000 10,90,600 7,10,200 16,90,000

Rate of depreciation Blocks of asset 1. Plant A, B and C 2. Plant D and E 3. Plant F 4. Building A, B, C and D 5. Building E, F and G 6. Building H, I, J and K (per cent) 15 40 50 10 5 100

After April 1, 2005 the company purchases the following assets Rate of depreciation Assets Plant G Plant H Furniture Car Building L Computer Copyright Date of purchase April 6, 2005 May 11, 2005 June 6, 2005 July 7, 2005 (percent) 50 15 10 15 Actual cost Rs. 6,000 18,000 56,000 2,56,000 7,28,700 90,000 17,50,000

September 26, 2005 5 September 27, 2005 60 September 30, 2005 25

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The following assets are transferred Assets Plant B Plant D Building L Date of sale December 20, 2005 January 31, 2006 March 6, 2006 Sale consideration (Rs.) 25,10,900 12,000 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 Add : Actual cost of Plant H and car Total 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] Written down value of the block consisting of Plants A, C and H on March 31, 2006 Nil ()13,14,000 10,40,000 (+)2,74,000 13,14,000

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

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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 Add : Cost of Plant G purchased during 2005-06 Written down value of the block consisting of Plants F and G on March 31, 2006 76,000 70,000 6,000

Block 4 - Building (rate of depreciation: 10%) Depreciated value of the block on April 1, 2005 consisting of Buildings A, B, C and D Written down value on March 31, 2006 Block 5 - Buildings (rate of depreciation: 5%) Depreciated value of the block consisting of Buildings E, F and G Rs. Less : Sale proceeds of Building L sold during 2005-06 Written down value of the block consisting of Buildings E, F and G on March 31, 2006 8,38,900 7,10,200 7,28,700 ()6,00,000 10,90,600 10,90,600

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

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Written down value Block 7 - Furniture (rate of depreciation: 10%) Depreciated value on April 1, 2005 Add : Cost of furniture purchased during 2005-06 Written down value on March 31, 2006 Block 8 - Plant (rate of depreciation: 60%) Depreciated value on April 1, 2005 Add : Cost of computer purchased during 2005-06 Written down value on March 31, 2006 Block 9 - Copyright (rate of depreciation: 25%) Depreciated value on April 1, 2005 Add : Cost of copyright purchased during 2005-06 Written down value on March 31, 2006

16,90,000

Nil 56,000 56,000

Nil 90,000 90,000

Nil 17,50,000 17,50,000

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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 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 1,10,000

Written down value of the block consisting of Plants B and C Less : Depreciation for the previous year 2005-06

Nil

Nil

Depreciated value of the block consisting of Plants Nil B and C on April 1, 2006 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.

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Illustration X Ltd. owns two plantsPlant A and Plant Bon 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 : Depreciated value of the block consisting of Plants A and B Add : Cost of Plant C Rs. 2,37,000 20,000

Total Less : Sale proceeds of Plants A, B and C

2,57,000 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 shortterm 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.

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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.

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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. Employers Contribution To Provident Fund / Gratuity Fund Etc. - Section 36(1)(iv)/(v) Employers Contribution to RPF, approved Gratuity fund or other similar funds is allowed but subject to the provision of Section 43B. Employees Contribution To Provident Fund Etc.- Section 36(i)(va) Employees 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.
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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 10% of 3000 Lakhs

75 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) 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.

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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.

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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.
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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 Nonmonetary 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).

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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: 1. In case of individual, any relative of individual.
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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] 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]
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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) Employers Contribution to RPF, SPF, Approved Superannuation Fund, Approved Gratuity fund or any other fund required under any other Act shall be allowed. Employers Contribution to URPF, Unapproved Superannuation Fund, Unapproved Gratuity fund etc. shall not be allowed. For Example: Employers 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. 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
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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) Employers Contribution to RPF, approved superannuation fund, statutory provident fund, approved gratuity fund or any other approved fund for employees 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: Excise Duty Allowed Excise Duty Disallowed

P.Y. 07-08 12 Lac 13 Lac

P.Y. 08-09 Nil Nil

P.Y. 09-10 13 Lac Nil

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.]

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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 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

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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 Salaries to paid staff Stipend to Articled Clerks Incentives to Articled Clerks Rent Printing and Stationery Contribution to Recognized PF Meeting, Seminar & Conference Rs Income Rs

12,75,000 Fees Earned: 31,500 15,000 72,000 16,800 90,000 Audit Taxation Service Consultancy 15,31,200 16,20,000 13,86,000 45,37,200 31,869 16,800 46,860

Dividends from Indian Companies Income from UTI

1,35,000 Profit on Sale of Shares Honorarium received from various

Interest on Loan Subscription and Periodicals Postage, Telephone and Fax Repairs, Maintenance & Petrol for Car Depreciation: Car Office Equipment Typewriter Furniture Travelling Expenses Municipal Tax paid on House Property Net Profit Total 22,500 45,000 13,500 7,500

1,68,000 institutes for 49,500 valuing answer papers 5,17,500 Rent recd. from residential flat letout 52,500

18,690

2,16,000

88,500 1,65,000 3,000 21,88,119 48,67,419 Total 48,67,419

Other Information -

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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 WDV

Particulars Car acquired on 1.4.2003 Typewriter acquired on 1.4.2005 Furniture acquired on 1.4.2005 245760 Office equipment acquired on 15.12.2011 cost Rs. 4,50,000 NIL 45000 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 Accountants Benevolent Fund (recognised under Section80G). The amount was debited to his drawings account.

Shares sold were held for 8 months before sale.

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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 Income chargeable under Income from Other Sources Dividend Income Income from UTI
Honorarium received for valuation of papers

21,88,119

31,869 16,800 18,690 46,860 2,16,000

Profits from sale of Shares taxable under Capital Gains Rent taxable under Income from House Property

Municipal tax on House Property considered under Income from House Property 3,000

Disallowance of 1/4th of repair expense for use of car for personal use Rs. 52,500 13,125

of Interest on loan in respect of construction of house property to be considered under Income from House Property Rs. 1,68,000 84,000

Depreciation as per Books of Account Depreciation as per Incometax Rules:

88,500

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Car Furniture Typewriter Office Equipment

(Rs. 2,45,760 15% ) (Rs. 75,000 10%) (Rs. 45,000 15%)

27,648 7,500 6,750

(Rs. 4,50,000 15% 50%)

33,750

Disallowance u/s 40A(3) for payment exceeding Rs. 20,000 in cash Printing Bill for Accounting Year 20102011 not claimed earlier Profits and Gains of Profession 6,000 26925 405867 2051877 75,000

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Illustration: Mr. Nathan, a businessman, submits the following Profit and Loss Account for the year ended 31.3.2012 Particulars To Salaries To Travelling Expenses To Rent and Rates To Interest on Capital To Administrative Charges To Depreciation To IncomeTax To Net Profit Total Rs. Particulars Rs. 10,50,000 25,500 4,500

3,00,000 By Gross Profit b/d 77,400 9,000 15,000 1,80,000 75,000 1,50,000 2,73,600 10,80,000 Total By Dividend from Indian Cos. By Discount Received

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.

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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 Profits and Gains of Business or Profession: Net Profit as per Profit and Loss Account Incometax paid not an allowable expenditure Interest on Proprietors Capital Dividend Income from Indian Co. Taxable under Income from Other Sources Personal Expenses on Foreign Tour 3/15 Rs. 60,000 12,000 Depreciation as per Books of Account Depreciation as per Incometax Rules Interest on borrowing for the purpose of business not debited in P&L A/c 2,52,000 7,500 1,68,000 (+) 2,52,000 () 1,68,000 Profits and Gains of Business or Profession 3,57,600 75,000 1,35,000 25,500 1,50,000 15,000 Add Deduct 2,73,600 Amount Rs.

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Illustration: The Following is the Receipts and Payments A/c of a medical Practitioner for the year ended 31.3.2012 Receipts To Balance b/d To Visiting Fees To Consultation Fees To Sale of Medicines To Operation Theatre Rent To Interest and Dividends Rs. 3,30,000 1,95,000 1,95,000 75,000 45,000 60,000 Payments By Clinic Rent By Staff Salaries By Rent and Rates By Electricity & Water By Purchase of Medical Books By Purchase of Surgical Equipment By MotorCar Expenses By Medical Association Membership Fees By Audit Fees By Staff Welfare Expenses By Diwali Expenses By Medicine Purchase By Entertainment By Balance c/d Total 9,00,000 Total Rs. 45,000 2,40,000 15,000 12,000 12,000 90,000 45,000 15,000 60,000 6,000 3,000 90,000 18,000 2,49,000 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. Onethird of Motorcar expenses relate to his personal use. Depreciation on Motorcar 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
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Interest on Bank Deposit Rs. 12,000 Dividends from U.T.I. Rs. 12,000

Interest on National Deposit Scheme Rs. 15,000 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 Computation of Income from Business or Profession Particulars Profits and Gains of Business or Profession: Visiting fees received Consultation fees received Sale of medicines Operation theatre rent Clinic rent Staff Salaries Rent and Rates Electricity and Water Charges Subscription and Periodicals MotorCar Expenses relating to profession (2/3 Rs. 45,000) Membership fees paid to medical association Audit fees Staff Welfare Expenses Purchase of Medicine Diwali Expenses allowable as per CBDT Circular Entertainment Expenditure Depreciation on Motorcar 30,000 15,000 60,000 6,000 90,000 3,000 18,000 18,000 Add 1,95,000 1,95,000 75,000 45,000 45,000 2,40,000 15,000 12,000 12,000 Deduct Amount Rs. Assessment Year: 2012-13

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Depreciation on Surgical Equipment [(Opening WDV + Purchase Sale) 15%] = (69,000 + 90,000 24,000) 15% Cash received from a patient not accounted in books 15,000 (+)5,25,000 Profits and Gains of Business or Profession Notes Surgical Equipment is included in Plant u/s 43(3). Hence the Depreciation Rate is 15%. 5,25,000 5,84,250 () 5,84,250 (59,250) 20,250

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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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