Question bank income tax Chapter PROFIT AND GAIN OF BUSINESS AND PROFESSION

INTRODUCTION 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. 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. Qus. Discuss the expenses which are allowed while computing income chargeable under the head profit and gain of business and profession Ans. 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. Sections 30 to 37 cover expenses, which are expressly allowed as deduction while computing business income 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 Following are some deduction under section 30 to 37. 1. Rent, rates, taxes, repairs and insurance, etc. For buildings: Under section 30, the following deductions are allowed A. the rent of premises[if the building is owned by assessee the rent is not allowed to Dr] B. the amount of current repairs (not being capital expenditure) C. any sum on account of land revenue, local rates or municipal taxes D. amount of any premium in respect of insurance against risk of damage E. Rent, rates, taxes, repairs and insurance, etc. For buildings [section 30] Note: if building is partly use for business and partly for resident then these expenses are allowed to the ratio of area used by business 2. Repairs and insurance of machinery, plant and furniture: The expenditure incurred on current repairs (not being capital expenditure) and insurance in respect of plant, machinery and furniture used for business purposes is allowable as deduction under section 31. 3. Depreciation: under section 32, the deductions for depreciation is allowed following conditions must fulfil for claiming deduction

4. Deduction in relation to tea, coffee and rubber development a/c [section 33ab]:The following conditions must fulfil for claiming deduction 1. Assessee should do the business of Growing and manufacturing tea or coffee or rubber in India

2. Deposited the amount for 6 month with Special Account with NABARD; or(ii) Deposit Account (framed by Tea, Coffee or Rubber Board 3. The assessee must audit his accounts from chartered accountant 5. DEDUCTION IN RELATION TO SITE RESTORATION FUND [Section 33ABA] The following conditions must fulfil for claiming deduction 1. Assessee should do the business of Prospecting for or extraction/production of petroleum/natural gas in India, as per his agreement with Central Government 2. Deposited the amount Before the end of the previous year with Special account opened with SBI; or (ii) Site Restoration Account, opened in accordance with relevant scheme 3. The assessee must audit his accounts from chartered accountant 6. SCIENTIFIC RESEARCH AND DEDUCTION u/s 35 : Scientific Research: As per Section 43(4), scientific research means activities carried for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries. Deduction in relation to expenditure incurred on scientific research [Sec. 35]

7. Deduction in relation to expenditure on obtaining licence to operate telecommunication services [Section 35ABB] Conditions to be fulfilled for allowing of deduction under this section:1. The expenditure should be of capital nature; 2. it is incurred for acquiring any right to operate telecommunications services; 3. it can be incurred either before or after commencement of the business; 4. it must have been actually paid during the year, irrespective of method of accounting employed 8. Deduction in relation to expenditure on eligible projects/Schemes [section 35ac] 9. Deduction in respect of payment to association & institution for carrying out rural development programme [section 35cca]: 10. Deduction in relation to preliminary expenses [section 35d] 11. Deductions for expenditure incurred on amalgamation/Demerger [section 35dd] 12. Deduction for expenditure incurred on voluntary retirement [section 35dda]: 13. Deduction for expenditure on prospecting, etc. for minerals [section 35e] 14. OTHER DEDUCTIONS ALLOWABLE UNDER SECTION 36(1)

15. security transaction tax (STT) 16. Commodities transaction tax 17. Deductions in relation to bad debts and provision for bad and doubtful debts [section 36(1) (vii)/ (viia) and section 36(2)]

GENERAL DEDUCTION [Section 37] Deduction under this Section is permissible only if following conditions are satisfied: A. B. C. D. E. F. The expenditure should not be of the nature described under Section 30 to 36. It should not be personal expenditure of the assessee It should not be in the nature of capital expenditure. It should have been incurred in the previous year. It should be in respect of the business carried on by the assessee It should have been expended wholly or exclusively for purpose of such business or profession

Qus. . Discuss the expenses which are disallowed while computing income chargeable under the head profit and gain of business and profession Ans section 37, 40,40A and40B income tax act 1961 express the expenses which should be disallowed while calculated the profit and gain of business and profession. Following are some expenses.

A. Advertising expenses u/s 37[2b]: Expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. Such expenses are disallowed. B. Payment outside India u/s 40[a][i]:any type of expenditure payment is made to non resident without deducted the tax deducted at sources or if deducted but not deposited to income tax department the previous year such expenses are not allowed for deduction . Payment to resident u/s 40[a][ia]: any type of expenditure payment is made to resident without deducted the tax deducted at sources or if deducted but not deposited to income tax department in the such expenses are not allowed for deduction C. Payment of security transaction tax u/s 40[a][ib]: any amount pay by the assessee related to securities transaction tax. Such amount is not allowed for deduction D. Payment of fringe benefit tax u/s 40[a][ic]: E. Payment of income tax u/s 40[a][ii]: F. Payment of wealth tax u/s 40[a][iia]: G. Payment of salary to any person outside India u/s 40[a][iii] H. Payment of salary to a Non resident of India 40[a][iii] I. Employers contribution to provident fund 40[a][iv] J. Tax paid by employer on the value of non-monetary perquisite provided to his employee u/s 40[v] K. Payment made to relative u/s 40A[2] L. Payment exceeding Rs 20000 to be made by account payee cheques u/s 40A[3] M. Payment to partner u/s 40[b] Qus. What is DEEMED PROFITS? Ans. it is the profit which is earn by the business not from ordinary course of business. It is the benefit which is earned in the previous year against the expenditure or deduction is claimed for e.g. bad debts allowed as deduction in 2011-2012 but these were recovered in 2012 -2013. This is a deemed income and is taxable. According to section 41 of income tax act 1961 following receipts are deemed profit and are taxable 1. Recovery of any deduction u/s 41[1]. Any deduction is claimed in earlier assessment year in respect of any loss, expenditure. And in previous year benefit or cash is received related to loss or expenditure. Such benefit is deemed income. For e.g. loss by fire Rs 2000 in 2010-2011 and assessee Dr it in profit and loss account . in 2012-2013 assessee receive insurance claim against such loss Rs 1300. Therefore Rs 1300 is a deemed profit and is taxable 2. Recover of depreciation u/s 41[2]. When depreciation is charge on asset as per the provision of section31 [1][i]. If such assets is discarded or sold in the previous year and money is received against it. Such receipt should not be more then written down value of asset. Any amount excess to WDV is deemed profit and it is taxable 3. Sale of an asset used for scientific research u/s 41[3] : receipt from the sale of asset which is used for the scientific research is taxable . the taxable amount is calculated in the following manner Taxable amount = sale price of asset + total deduction allowed up-to date cost of the asset Or = the amount of total deduction allowed up-to date {whichever is less} 4. Recovery of bad debts u/s41 [4]: Any deduction is claimed in earlier assessment year in respect of bad debts. . And in previous year benefit or cash is received related to those bad debts such benefit is deemed income. For e.g. Bad debts allowed as deduction in 2011-2012 but these were recovered in 2012 -2013. 5. Amount withdrawn from special reserve u/s41 [4A] in earlier year assessee has take the deduction in respect of any special reserve u/s 36[1][viii]. And in the previous year assessee withdraw some money from the these reserve .such amount is deemed income and is taxable