TAXATION OF INCOME FROM BUSINESS OR

PROFESSION
Posted By G.S. Bansal, On August 11, 2012

What is business: In brief, Business includes any trade, commerce and manufacturing of goods with a purpose of
making profit within the permissible laws of country.
What is a Profession: It includes services provided by the professionally qualified or technically qualified person
according to their qualification.
Income from Business/Profession: means any income which is shown in profit and loss account after considering
all allowed expenditures.
INCOME CHARGEABLE UNDER BUSINESS/PROFESSION
The following are few examples of incomes which are chargeable under this head:-

1.

Normal Profit from general activities as per profit and loss account of business entity.

2.

Profit from speculation business should be kept separate from business income and shown separately.

3.

Any profit other than regular activities of a business should be shown as casual income and will be shown
under income from other sources head.

4.

Profit earned on sale of REP License/Exim scrip, cash assistance against export or duty drawback of
custom or excise.

5.

The value of any benefits whether convertible into money or no from business/profession activities.

6.

Any interest, salary, commission etc. received by the partner of a firm will be treated as
business/professional income in hand of partner. However, the share of profit from partnership firm is exempt in hand
of partner.

7.

Amount recovered on account of bad debts which were already adjusted in profit in earlier years etc.
EXPENSES DEDUCTIBLE FROM INCOME FROM BUSINESS/PROFESSION
All the expenses relating to business and profession are allowed against income. Following are few examples of
expenditures which are allowed against income:-

Rent rates and insurance of building.

Payment for know-how, patents, copy rights, trade mark, licenses.

Depreciation on fixed assets.

Payment for professional services.

Expenditures on scientific research for business purposes.

Preliminary Expenses in case of Limited companies.

Salary, bonus, commission to employees.

Salary, interest and remuneration to working partners subject to certain conditions.

Communication expenses.

Traveling and conveyance expenses.

Membership fees etc.

Advertisement expenses in respect of promotion of business products.

Discount allowed to customers.

Interest on loans (Whether Private of Institutional).

Bank Charges/Bank Commission expenses.

Entertainment/Business Promotion expenses

Staff Welfare expenses.

Festival Expenses.

Printing and stationery expenses

Postage expenses.

All other expenses relating to business/profession

Note: The above expenditures are allowed on the basis of actual payment as well as on accrual basis at the date of
finalization accounts.
EXPENSES WHICH ARE DEDUCTIBLE ON ACTUAL PAYMENT ONLY
Following expenses will be allowed if these expenses have been paid before or on due date or before filing of income
tax return:-

1.

Any tax, duty, cess or fees by whatever name called.

2.

Contribution to provident fund, ESI premium, gratuity fund or other funds for welfare of employees.

3.

Bonus or commission or leave encashment payable to employees.

4.

Interest on loan from public financial institutions, state financial corporation or from scheduled bank.
EXPENSES NOT DEDUCTIBLE FROM BUSINESS/PROFESSION INCOME

1.

Expenditure on any type of advertisement of political party.

2.

Any interest, royalty, fees for technical services or other sums chargeable under this act, which is payable
out side India or in India to non-resident or a foreign company on which tax has not been deducted or after deduction,
not deposited in prescribed time.

3.

Any interest, commission, rent, royalty, professional or technical fees paid or payable to any resident of India
or payment to contractor or sub-contractor on which TDS is not deducted, or if deducted then not deposited before
the due date of filing the return.

4.

Any tax calculated on the basis of profit of business.

5.

Any amount of Wealth Tax paid.

6.

Any payment of salaries payable outside India or to a non-resident on which tax is not deducted.

7.

Any tax actually paid by an employer on any income by way of perquisites, on behalf of the employee.

8.

Any remuneration paid to non working partner.

9.

Any remuneration paid to working partner other than specified in agreement or as per the specified limits by
income tax act.

10.

Any interest to partner if not specified in agreement and not more than 12%.

11.

Any payment in cash exceeding Rs.20000/=. (Rs.35000/= in case of payment made for plying, hiring or
leasing goods carriages) except when payments are made under circumstance specified in Rule 6DD of Indian
income tax act.

12.

Where a deduction has been claimed on accrual basis during an assessment year and the payment is made
in a subsequent year, and the payment or aggregate of payments made to a person in a day otherwise than by way
of an account payee cheque/DD, exceeds Rs.20000/= (Rs.35000/= in case of goods carriages), such payments shall
be deemed as profit of the assessee for the year in which the payment is made.

13.

Any provision for the payment of gratuity to the employees.

14.

Any personal expenditures.

15.

Expenses on defending in any proceedings for breach of any law relating to sales tax etc.
Notes:

Restriction on acceptance of loans or accept a deposits of Rs.20000/= or more from any other person
except by an account payee cheque/draft. This restriction shall not apply if the loan or deposit is taken or accepted
from government, bank, post office, co-operative bank, government undertaking etc.

Restriction on repayment of loans or deposits: No person can repay loan along with interest except by
way of account payee cheque/draft if the amount is Rs.20000/= or more.
COMPULSORY AUDIT OF ACCOUNTS
During Finance Year 2016-17 (assessment year 2017-18), if the gross turnover of business exceeds Rs. One Crore
or receipts of a profession exceeds Rs.50 lacs then audit of accounts is compulsory under section 44AB of Indian
income tax act. In financial year 2015-16, the limit of gross receipts from profession was Rs.25 lacs and gross
turnover of business firm was Rs.one crore for tax audit purpose.
The audit report by a chartered accountant, alongwith a statement of particulars, should be furnished in the
prescribed form as under:
Form for
Audit
Report

Form for
Statement of
Particulars

Where accounts have been audited under any other law

3CA

3CD

Where accounts have been audited under Income Tax Act

3CB

3CD

Category

Note:

1.

Failure to get the accounts audited or to furnish audit report, in time attracts penalty u/s 271B up to % of
turnover or gross receipts or Rs.1,50,000/= which ever is less.

2.

From Assessment Year 2007-08 (Financial Year 2006-07), with the introduction of annexureless return
forms, the audit report is neither required to be attached with the return nor furnished separately before or after the
due date and no penalty u/s 271B shall be imposed for this. However, an audit report must be obtained by the

assessee before the due date of furnishing the return and the relevant columns in the return should be filled in based
on such report.
Illustration:
As per Profit & Loss Account of M/s XYZ Limited as on 31.03.17, the amount of net profit is Rs.5,50,560/=. Following
information also available with profit and loss account:-

1.

Rs. 20000/= paid as Advance Income Tax had been debited to profit and loss account.

2.

Rs.10000/= spent for printing of brochures of a political party were also shown in profit and loss account.

3.

Amount or provident fund for Rs.55000/= did not deposit till the date of filing of return.
Compute the taxable income of M/s XYZ Limited.
Solution
COMPUTATION OF TOTAL INCOME
PARTICULARS

AMOUNT
(IN RUPEES)

Net Profit as per Profit and Loss Account

550560

Add: Amount of Advance Income Tax

20000

Add: Expenses Incurred for Political Parties

10000

Add: Provident Fund not deposited till filing of return

55000

NET TAXABLE INCOME

635560

Clarification:

1.

Payment of advance tax is not expenditure.

2.

Expenses for political parties are not allowed as business expenditure.

3.

Provident fund must be deposited before filing of income tax returns otherwise it will not be allowed as
business expenditure.